As filed with the Securities and Exchange Commission on July 2, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
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
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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 185,590 shares(1)(2) $NA (2) $2,381,000 (2) $702
===========================================================================================================================
</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.
<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
185,590 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 $1,530,000 and $2,070,000.
Subject to regulatory approval, First Independence Corporation may sell up to
$2,380,500 of its common stock. The actual purchase price per share cannot
currently be determined because it will be equal to 95% of the average market
price of First Independence Corporation 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 this offering. On June 9, 1998,
the average of the closing bid and ask quotations for a share of Company common
stock on the Nasdaq SmallCap Market was $13.81. If that price was the average
market price for the ten trading days ending on the expiration date of this
offering, the actual purchase price per share would be $13.12. 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: $11.15 to $15.09
o Estimated Expenses: $450,000
o Net Proceeds to First Independence Corporation
Minimum/Maximum/Maximum,
as adjusted: $1,080,000 to $1,620,000 to $1,930,500
o Net Proceeds per Share (based on midpoint price per share)
Minimum/Maximum/Maximum,
as adjusted: $9.26 to $10.27 to $10.64
-------------------
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 March 31, 1998, the Company had total assets of $124.5 million,
deposits of $84.2 million and stockholders' equity of $11.6 million. For the six
months ended March 31, 1998, the Company recorded net earnings of $375,000.
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 March 31, 1998, Neodesha had total assets of $13.7 million,
deposits of $12.1 million and retained earnings of $1.1 million. For the six
months ended March 31, 1998, Neodesha recorded net earnings of $30,000.
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.
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
1
<PAGE>
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 185,590 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 of the market price of the Company'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 Subscription Offering or Direct Community Offering, whichever is later (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 $11.15 or above $15.09, 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. All subscribers will be instructed to
mail 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 May 22, 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."
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
3
<PAGE>
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
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------------------------------------------------
1998 1997 1996 1995 1994 1993(1)
---- ---- ---- ---- ---- -------
(In Thousands)
Selected Financial Condition Data:
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets ................................... $124,494 $112,523 $108,539 $101,904 $ 94,593 $ 96,166
Cash, cash equivalents and interest-
bearing deposits .............................. 6,377 3,151 1,763 2,115 1,415 20,146
Loans receivable, net .......................... 85,264 74,559 67,683 60,370 56,895 58,089
Mortgage-backed securities - at cost ........... 20,902 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 .................. 3,346 4,783 5,894 7,358 12 --
Real estate acquired through
foreclosure, net .............................. 15 12 12 62 234 1,409
Deposits ....................................... 84,172 76,229 69,356 67,927 64,384 84,941
Borrowings ..................................... 27,300 23,700 24,300 18,800 15,400 3,000
Stockholders' equity ........................... 11,554 11,529 13,003 13,600 13,351 6,103
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended March 31, 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 ................... $ 4,377 $ 3,970 $ 8,069 $ 7,773 $ 7,186 $ 6,296 $ 6,570
Total interest expense .................. 2,680 2,488 5,059 4,669 3,852 2,857 3,490
------- ------- ------- ------- ------- ------- -------
Net interest income ................... 1,697 1,482 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 .............. 1,697 1,482 3,010 3,104 3,334 3,394 2,748
Other income ............................ 113 106 281 331 267 216 217
Gain on sale of investments ............. -- -- -- 251 -- -- 326
General, administrative and
other expense .......................... (1,147) (1,050) (2,111) (2,384) (1,820) (1,653) (1,506)
------- ------- ------- ------- ------- ------- -------
Earnings before income tax
expense and cumulative
effect of change in
accounting principle ................ 663 538 1,180 1,302 1,781 1,957 1,785
Income tax expense ...................... 288 206 468 487 694 750 465
------- ------- ------- ------- ------- ------- -------
Earnings before cumulative
effect of change in
accounting principle ................ 375 332 712 815 1,087 1,207 1,320
Cumulative effect of change
in accounting principle ............... -- -- -- -- -- 241 --
------- ------- ------- ------- ------- ------- -------
Net earnings ............................ $ 375 $ 332 $ 712 $ 815 $ 1,087 $ 1,448 $ 1,320
------- ======= ======= ======= ======= ======= =======
Basic earnings per share ................ $ .41 $ .33 $ .73 $ .72 $ .87 $ .99 N/A
======= ======= ======= ======= ======= ======= =======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended March 31, 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) .......................... 0.64% 0.61% 0.65% 0.78% 1.12% 1.61% 1.50%
Interest rate spread information:
Average during period ............................ 2.52 2.26 2.31 2.36 2.87 3.38 3.45
End of period .................................... 2.25 2.17 2.19 2.17 2.36 3.34 2.94
Net interest margin(2) ........................... 2.99 2.79 2.81 3.02 3.52 3.91 3.64
Ratio of operating expense to average
total assets ...................................... 1.97 1.93 1.92 2.28 1.88 1.82 1.61
Return on equity (ratio of net earnings
to average equity) ................................ 6.53 5.60 6.09 6.21 8.16 11.21 24.63
Quality Ratios:
Non-performing assets to total assets at
end of period(3) .................................. .51 .91 1.25 0.57 0.77 1.27 2.81
Allowance for loan losses to non-performing
assets at end of period(3) ........................ 102.97 69.83 47.64 112.36 87.45 55.31 24.72
Allowance for loan losses to non-performing
loans at end of period ............................ 105.50 70.46 48.05 114.62 94.91 68.62 51.66
Capital Ratios:
Equity to total assets, at end of period ........... 9.28 10.50 10.25 11.98 13.35 14.11 6.35
Average equity to average assets ................... 9.86 10.90 10.62 12.57 13.78 14.38 6.08
Ratio of average interest-earning assets
to average interest-bearing liabilities ........... 109.90 111.25 110.64 114.50 115.83 116.42 104.66
Dividend payout ratio(4) ........................... 36.18 36.29 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.
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(In Thousands)
Selected Financial Condition Data:
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets ......................................... $13,679 $14,155 $14,411 $13,799 $14,477 $13,943
Cash, cash equivalents and interest-bearing
deposits ......................................... 650 635 772 559 796 1,319
Loans receivable, net ................................ 9,088 9,468 9,489 9,049 8,940 9,116
Mortgage-backed securities -- at cost: ............... 238 253 253 253 253 627
Investment securities -- at cost:
U.S. Treasury .................................... 898 897 1,097 1,098 1,099 806
Agency ........................................... 1,517 1,617 1,516 1,516 1,817 1,105
Municipal ......................................... 603 603 602 602 602 --
Deposits ............................................. 12,065 12,854 12,698 11,673 12,742 12,904
Borrowings ........................................... 400 100 500 950 650 --
Retained earnings - substantially restricted ......... 1,122 1,092 1,015 1,012 941 854
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended March 31, 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 .......................... $ 507 $ 519 $ 1,046 $ 1,045 $ 1,009 $ 1,013 $ 1,122
Total interest expense ......................... 271 274 560 571 496 461 548
------- ------- ------- ------- ------- ------- -------
Net interest income ......................... 236 245 486 474 513 552 573
Provision for losses on loans .................. 3 3 6 6 6 36 24
------- ------- ------- ------- ------- ------- -------
Net interest income after provision for
loan losses ................................. 233 242 480 468 507 516 549
Other income ................................... 61 64 135 140 124 104 112
General, administrative and
other expense ............................... (253) (255) (510) (604) (538) (538) (520)
------- ------- ------- ------- ------- ------- -------
Earnings before income tax expense
and cumulative effect of change
in accounting principle ..................... 41 51 105 4 91 82 141
Income tax expense ............................. 11 13 28 1 20 18 46
------- ------- ------- ------- ------- ------- -------
Earnings before cumulative effect of
change in accounting principle .............. 30 38 77 3 71 64 95
Cumulative effect of change in
accounting principle ........................ -- -- -- -- -- 23 --
------- ------- ------- ------- ------- ------- -------
Net earnings ................................... $ 30 $ 38 $ 77 $ 3 $ 71 $ 87 $ 95
======= ======= ======= ======= ======= ======= =======
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended March 31, 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) .................................................. 0.43% 0.53% 0.54% 0.02% 0.51% 0.60% 0.66%
Interest rate spread information:
Average during period ..................................... 3.49 3.54 3.48 3.40 3.86 4.16 4.27
End of period ............................................. 3.44 3.45 3.73 3.49 3.61 4.32 4.46
Net interest margin(1) .................................... 3.63 3.66 3.61 3.52 3.94 4.15 4.26
Ratio of operating expense to average total assets .......... 3.68 3.62 3.58 4.22 3.88 3.73 3.59
Return on equity (ratio of net earnings to average equity) .. 5.37 7.21 7.25 .29 7.30 9.67 11.54
Quality Ratios:
Non-performing assets to total assets at end of period(2) ... 1.43 1.41 1.29 0.91 1.59 4.41 5.06
Allowance for loan losses to non-performing assets
at end of period(2) .................................... 43.59 45.75 48.90 77.10 48.64 23.66 21.82
Allowance for loan losses to non-performing loans
at end of period ....................................... 49.13 52.67 56.69 77.10 57.53 30.92 31.14
Capital Ratios:
Equity to total assets, at end of period .................... 8.20 7.28 7.71 7.04 7.34 6.50 6.12
Average equity to average assets ............................ 8.09 7.37 7.45 7.26 7.00 6.25 5.69
Ratio of average interest-earning assets to average
interest-bearing liabilities ........................... 103.49 103.02 103.12 102.88 102.13 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>
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 March 31, 1998, the Association's net portfolio value would have
declined by 18% 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 March 31, 1998, the Company
had a balance of $13.3 million in residential construction 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. See "Business of the Company -- Lending Activities -
Construction Lending."
9
<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
10
<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.
11
<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 March 31, 1998, Neodesha had total assets of $13.7 million,
deposits of $12.1 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 $1,080,000 and $1,620,000. 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 and ask quotations of the Company's Common Stock on
the Nasdaq SmallCap Market on June 9, 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 5.44%, the one-year treasury bill rate on June 9, 1998 less applicable
federal and state taxes at 38.0% of such return resulting in a pro forma after
tax return of 3.37%; 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 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.
12
<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:
$11.15 per share ............. 137,176 161,383 185,590 213,429
$13.12 per share ............. 116,599 137,176 157,752 181,415
$15.09 per share ............. 101,391 119,283 137,176 157,752
Gross proceeds ......................... $1,530 $1,800 $2,070 $2,381
Less offering expenses.................. 450 450 450 450
-------- -------- -------- --------
Estimated net proceeds............. $1,080 $1,350 $1,620 $1,931
====== ====== ====== ======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended At or For the Year Ended
March 31, 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 ...... $ 375 $ 375 $ 375 $ 375 $ 712 $ 712 $ 712 $ 712
Historical-- Neodesha ..... 30 30 30 30 77 77 77 77
-------- -------- -------- -------- -------- -------- -------- --------
Historical -- Combined .... 405 405 405 405 789 789 789 789
Pro forma earnings from
proceeds ................. 18 22 27 32 36 45 54 65
ESOP ...................... (10) (12) (14) (16) (21) (24) (28) (33)
Purchase accounting
effect on earnings ....... 54 54 54 54 108 108 108 108
-------- -------- -------- -------- -------- -------- -------- --------
Pro forma combined net
earnings ................ $ 467 $ 469 $ 472 $ 475 $ 912 $ 918 $ 923 $ 929
======== ======== ======== ======== ======== ======== ======== ========
Per Share:
Historical-- Company ...... $ 0.41 $ 0.41 $ 0.41 $ 0.41 $ 0.73 $ 0.73 $ 0.73 $ 0.73
Pro forma combined basic
net earnings per share at
the following assumed
prices:
$11.15 per share...... $ 0.44 $ 0.44 $ 0.43 $ 0.42 $ 0.82 $ 0.81 $ 0.80 $ 0.79
$13.12 per share...... $ 0.45 $ 0.45 $ 0.44 $ 0.44 $ 0.84 $ 0.83 $ 0.82 $ 0.81
$15.09 per share...... $ 0.46 $ 0.46 $ 0.45 $ 0.45 $ 0.85 $ 0.84 $ 0.84 $ 0.83
Total stockholders' equity
(net worth):
Historical-- Company ..... $ 11,554 $ 11,554 $ 11,554 $ 11,554 $ 11,529 $ 11,529 $ 11,529 $ 11,529
Historical-- Neodesha .... 1,122 1,122 1,122 1,122 1,092 1,092 1,092 1,092
-------- -------- -------- -------- -------- -------- -------- --------
Historical-- Combined .... 12,676 12,676 12,676 12,676 12,621 12,621 12,621 12,621
Estimated net offering
proceeds ................ 1,080 1,350 1,620 1,930 1,080 1,350 1,620 1,931
Common stock acquired
by ESOP ................. (153) (180) (207) (238) (153) (180) (207) (238)
Purchase accounting
effect on equity ........ (1,122) (1,122) (1,122) (1,122) (1,092) (1,092) (1,092) (1,092)
-------- -------- -------- -------- -------- -------- -------- --------
Pro forma combined
stockholders' equity ... $ 12,481 $ 12,724 $ 12,967 $ 13,246 $ 12,456 $ 12,699 $ 12,942 $ 13,222
======== ======== ======== ======== ======== ======== ======== ========
Per share:
Historical-- Company ...... $ 12.09 $ 12.09 $ 12.09 $ 12.09 $ 11.78 $ 11.78 $ 11.78 $ 11.78
Pro forma combined net
stockholders' equity per
share at the following
assumed prices:
$11.15 per share...... $ 11.42 $ 11.39 $ 11.36 $ 11.33 $ 11.17 $ 11.14 $ 11.12 $ 11.09
$13.12 per share...... 11.64 11.64 11.65 11.65 11.38 11.38 11.39 11.40
$15.09 per share...... 11.81 11.84 11.86 11.90 11.54 11.57 11.60 11.64
</TABLE>
14
<PAGE>
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma combined condensed balance sheets as
of March 31, 1998 and the unaudited combined condensed statements of earnings
for the six months ended March 31, 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.
15
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
March 31, 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 ................................. $ 6,337 $ 650 $ 1,170(a) $ -- $ 8,197
Investment securities held to maturity ............ 5,000 3,018 -- -- 8,018
Investment securities available for sale .......... 3,346 -- -- -- 3,346
Mortgage-backed securities held to
maturity ..................................... 20,902 238 -- -- 21,140
Loans receivable .................................. 85,264 9,088 -- -- 94,352
Premises and equipment ............................ 1,308 376 -- (376)(b) 1,308
Federal Home Loan Bank stock ...................... 1,423 140 -- -- 1,563
Real estate acquired through foreclosure .......... 15 22 -- -- 37
Other assets ...................................... 859 147 -- -- 1,006
--------- --------- --------- --------- ---------
Total assets ............................ $ 124,494 $ 13,679 $ 1,170 $ (376) $ 138,967
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .......................................... $ 84,172 $ 12,065 $ -- $ -- $ 96,237
Advances from Federal Home Loan Bank .............. 27,300 400 -- -- 27,700
Negative goodwill ................................. -- -- -- 889 (d) 778
Other liabilities ................................. 1,468 92 -- (143)(c) 1,417
--------- --------- --------- --------- ---------
Total liabilities ....................... 112,940 12,557 -- 746 (b) 126,243
Stockholders' equity .............................. 11,554 1,122 1,170(a) (1,122)(c)(d) 12,724
--------- --------- --------- --------- ---------
$ 124,494 $ 13,679 $ 1,170 $ (376) $ 138,967
========= ========= ========= ========= =========
</TABLE>
See notes to Pro Forma Unaudited Combined Condensed Financial Statements.
16
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
STATEMENT OF EARNINGS
Six months ended March 31, 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............... $ 4,377 $ 507 $ 37 (e) $ -- $ 4,921
Total interest expense.............. 2,680 271 -- -- 2,951
------------ ------------- ------------- ------------- -----------
Net interest income............ 1,697 236 37 (e) -- 1,970
Provision for losses on loans....... --- 3 -- -- 3
------------ ------------ ------------ ------------- -----------
Net interest income after provision for
losses on loans................ 1,697 233 37 (e) -- 1,967
Other income........................ 113 61 -- 44 (f) 218
Other expenses...................... (1,147) (253) (20)(g) 15 (h) (1,405)
------------ ------------ ------------ ------------- -----------
Earnings before income taxes........ 663 41 17 59 780
Income tax expense.................. (288) (11) (7)(i) (5)(j) (311)
------------ ------------ ----------- ------------- -----------
Net earnings........................ $ 375 $ 30 $ 10 $ 54 $ 469
============ ============ =========== ============= ===========
Earnings per share
Basic.......................... $ .41 $ .45
Diluted........................ .38 .42
Average common shares
Basic........................... 924,407 1,048,355
Diluted........................ 995,600 1,119,548
</TABLE>
See notes to Pro Forma Unaudited Combined Condensed Financial Statements.
17
<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 $ 73 (e) $ -- $ 9,188
Total interest expense.............. 5,059 560 -- -- 5,619
------------ ------------ --------- ----------- -----------
Net interest income............ 3,010 486 73 (e) -- 3,569
Provision for losses on loans....... -- 6 -- -- 6
------------ ------------ --------- ----------- -----------
Net interest income after provision
for losses on loans............ 3,010 480 73 (e) -- 3,563
Other income........................ 281 135 -- 89 (f) 505
Other expense....................... (2,111) (510) (39)(g) 30 (h) (2,630)
------------ ------------ --------- ----------- -----------
Earnings before income taxes........ 1,180 105 34 119 1,438
Income tax expense.................. (468) (28) (13)(i) (11)(j) (520)
------------ ------------ --------- ----------- -----------
Net earnings........................ $ 712 $ 77 $ 21 $ 108 $ 918
============ ============ ========= =========== ===========
Earnings per share
Basic............................ $ .73 $ .83
Diluted.......................... .68 .77
Average common shares
Basic............................ 980,858 1,118,034
Diluted.......................... 1,051,516 1,188,692
</TABLE>
See notes to Pro Forma Unaudited Combined Condensed Financial Statements.
NOTES TO PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS
General
The pro forma unaudited combined condensed balance sheet as of March
31, 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 six-month
period ended March 31, 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 ($1,350,000 at midpoint of the Valuation Range),
after deducting amount of stock purchased by ESOP ($180,000).
(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.
(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).
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization, including deposit
accounts, of the Company and Neodesha as of March 31, 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>
March 31, 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 .......................... $ 84,172 $ 12,065 $ 96,237 $ 96,237 $ 96,237 $ 96,237
======== ======== ======== ======== ======== ========
Borrowings:
FHLB advances .......................... $ 27,300 $ 400 $ 27,700 $ 27,700 $ 27,700 $ 27,700
======== ======== ======== ======== ======== ========
Stockholders' equity
Preferred stock ........................ $ -- $ -- $ -- $ -- $ -- $ --
Common stock ........................... 15 -- 16 16 17 17
Additional paid-in capital ............. 7,188 -- 8,267 8,537 8,807 9,117
Retained earnings ...................... 9,689 1,122 9,689 9,689 9,689 9,689
Unrealized gain on securities
available for sale, net ............ 20 -- 20 20 20 20
Treasury stock at cost
(542,699 shares) ................... (5,155) -- (5,155) (5,155) (5,155) (5,155)
Required ESOP contribution ............. (181) -- (334) (361) (389) (420)
Unearned stock compensation ............ (22) -- (22) (22) (22) (22)
-------- -------- -------- -------- -------- --------
Total stockholders' equity ............. $ 11,554 $ 1,122 $ 12,481 $ 12,724 $ 12,967 $ 13,246
======== ======== ======== ======== ======== ========
</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.
19
<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
(through ________, 1998) _____ _____ _____
On June 9, 1998, the average of the closing bid and ask quotations of
the Common Stock as reported on the Nasdaq SmallCap Market was $13.81. 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 March 31, 1998, the Company had 955,693 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 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."
20
<PAGE>
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.
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.
21
<PAGE>
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
22
<PAGE>
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
23
<PAGE>
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
24
<PAGE>
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.
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
25
<PAGE>
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 $2,380,500 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 June 15, 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 $1,530,000 to
$2,070,000 or 15% above and below the $1,800,000 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 June 15, 1998, the aggregate pro
forma market value of Neodesha upon Merger Conversion would be within the
Valuation Range of $1,530,000 to $2,070,000 with a midpoint of $1,800,000. 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
$2,380,500 (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 and ask quotations on the Nasdaq SmallCap Market) for the ten
trading days ending on the Pricing Date. Assuming a price per share of $13.81,
which was the average of the closing bid and ask quotations for the Company's
Common Stock as of June 9, 1998, a minimum of 101,391 shares and a maximum of
185,590 shares (or 213,429 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 4.5%
of the aggregate Purchase Price of shares of Common Stock sold in the Direct
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
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 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 (June 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 March 31, 1998 and September 30, 1997 for
the Company
The Company's total assets increased $12.0 million, or 10.64%, from
$112.5 million at September 30, 1997 to $124.5 million at March 31, 1998. This
increase was primarily a result of an increase of $10.7 million in net loans
receivable, $3.2 million in cash and cash equivalents, and $1.0 million in
investment securities. These increases in assets were funded by increases in
savings deposits of $8.0 million, advances from the Federal Home Loan Bank of
Topeka of $3.6 million, checks issued in excess of cash items of $300,000, and a
decrease in mortgage-backed securities of $3.1 million.
Loans receivable increased $10.7 million from $74.6 million at
September 30, 1997, to $85.3 million at March 31, 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 six months or less and interest rates tied to the prime rate plus a
margin. 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 .77% of total loans
at March 31, 1998, which represented a $12,000 decrease from the $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 105.50% at March 31, 1998. At March 31, 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 $8.0 million from $76.2 million at September
30, 1997, to $84.2 million at March 31, 1998. Deposits increased primarily as a
result of public units depositing short-term funds into the "Platinum" money
fund account. 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 $3.6 million from $23.7 million at
September 30, 1997 to $27.3 million at March 31, 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 $25,000 from $11,529,000 at
September 30, 1997 to $11,554,000 at March 31, 1998. The increase was primarily
due to the Company's net earnings from operations of $375,000, fair value
adjustment of $68,000 on ESOP shares committed for release, the repayment of
employee stock ownership debt of $36,000, the amortization of unearned stock
compensation of $22,000, common stock options exercised of $9,300, and
unrealized gains on securities available for sale of $5,000. These increases
were partially offset by the Company's use of $364,000 to repurchase 24,500
shares of common stock and dividends of $127,000 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.
These increases in assets, along with reductions in advances from the Federal
Home Loan Bank of Topeka of $600,000, checks issued in excess of cash items of
$500,000 and other accrued expenses and liabilities of $400,000 were funded by
increases in deposits of $6.8 million and decreases in mortgage-backed
securities of $4.7 million.
Total loans receivable increased $6.9 million from $67.7 million at
September 30, 1996, to $74.6 million at September 30, 1997. Increased economic
activity in the Company's lending area resulted in loan originations exceeding
loan repayments. The loan portfolio is comprised primarily of first mortgage
loans secured by one- to four-family residential real estate located in the
Company's market area. The increase in one- to four-family mortgage loans
consisted primarily of 15- and 30-year fixed-rate loans and, to a lesser extent,
one-year adjustable rate mortgages and mortgage loans with a fixed rate for the
first three years of the loan term that automatically convert to one- year
adjustable rate loans during the fourth year.
The allowance for loan losses totaled $668,000 at September 30, 1997
which represented a $22,000 decrease from the allowance for loan losses at
September 30, 1996. The ratio of the allowance for loan losses as a percent of
total loans decreased from 1.02% at September 30, 1996 to .90% at September 30,
1997, primarily due to the increase in total loans receivable at September 30,
1997. The allowance for loan losses as a percent of non-performing loans
decreased from 114.62% at September 30, 1996 to 48.05% at September 30, 1997,
due to the increase in non-performing loans at September 30, 1997. At September
30, 1997, the Company's non-performing loans were comprised primarily of one- to
four-family residential loans.
The allowance for loan losses is determined based upon an evaluation of
pertinent factors underlying the types and qualities of the Company's loans.
Management considers such factors as the repayment status of a loan, the
estimated net realizable value of the underlying collateral, the borrower's
ability to repay the loan, current and anticipated economic conditions which
might affect the borrower's ability to repay the loan and the Company's past
statistical history concerning charge-offs.
33
<PAGE>
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 March 31, 1998,
non-performing assets were approximately $637,000, which represents a decrease
of $766,000, or 54.6%, as compared to September 30, 1997. This decrease was due
primarily to fifteen loans which had been classified as non-accruing at
September 30, 1997, but were less than 90 days delinquent at March 31, 1998
(including one loan totaling $344,000 secured by single-family residence in
Texas). 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. At March 31, 1998, the borrowers were complying with the terms of the
repayment plan. To a lesser extent, the decrease was due to 10 loans which had
been classified as accruing delinquent 90 days or more at September 30, 1997,
but were less than 90 days delinquent at March 31, 1998 (including one loan
totaling $139,000 secured by a single family residence in Texas).
Included in non-accruing loans at March 31, 1998, were ten loans
totaling $528,000 secured by one- to four-family real estate, one loan totaling
$21,000 secured by non-residential real estate, and two consumer loans totaling
$24,000. All non-accruing loans at March 31, 1998, were located in the Company's
primary market area. At March 31, 1998 there were no accruing loans delinquent
90 days or more. At March 31, 1998, the Company's real estate acquired though
foreclosure included two single family residences located in the Company's
primary market area with a carrying value of $15,000.
A summary of non-performing assets by category is set forth in the
following table:
March 31, September 30,
1998 1997
---- ----
(Dollars In Thousands)
Non-Accruing Loans ............................. $ 573 $1,049
Accruing Loans Delinquent
90 Days or More ............................... -- 292
Trouble Debt Restructurings .................... 49 50
Foreclosed Assets .............................. 15 12
------ ------
Total Non-Performing Assets .................... $ 637 $1,403
====== ======
Total Non-Performing Assets
as a Percentage of Total Assets ............... 0.51% 1.25%
====== ======
34
<PAGE>
Management has taken into account its non-performing assets and the
composition of the loan portfolio in establishing its allowance for loan losses,
which totaled $656,000 at March 31, 1998. See "Business of the Company -- Asset
Quality -- Allowance for Loan Losses."
Results of Operations of the Company
Comparison of Three and Six Months Ended March 31, 1998 and March 31,
1997 for the Company
General. Net earnings for the six months ended March 31, 1998 were
$375,000 as compared to $332,000 for the six months ended March 31, 1997,
resulting in an increase of $43,000, or 12.9%. The increase in net earnings was
primarily due to increases in net interest income of $215,000 and non-interest
income of $7,000. These increases were partially offset by increases in
non-interest expense of $97,000 and income tax expense of $83,000.
Net Interest Income. Net interest income increased $215,000, or 14.52%,
for the six months ended March 31, 1998 as compared to the six months ended
March 31, 1997. This increase was due primarily to an increase in interest
income of $407,000, or 10.25%; offset partially by an increase in interest
expense of $192,000, or 7.70%. Interest income increased primarily due to a $7.6
million increase in the average balance of interest-earning assets, and a 22
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 which carry higher
rates of interest than loans originated in the Company's primary market area.
Interest expense increased primarily due to a $7.9 million increase in the
average balance of interest-bearing liabilities, offset partially by a 3 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
$5.1 million increase in the average balance of low cost demand and NOW deposits
and, to a lesser extent, a decrease in market interest rates.
Interest Income. Interest income for the six months ended March 31,
1998, increased to $4,377,000 from $3,970,000 for the six months ended March 31,
1997. This increase was caused primarily by a $7.6 million increase in the
average outstanding amount of interest-earning assets during the six months
ended March 31, 1998, as compared to the six months ended March 31, 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 six months ended March 31, 1998 was $7.4 million higher than
during the six months ended March 31, 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 22 basis points
to 7.71% for the six months ended March 31, 1998, from 7.49% for the six months
ended March 31, 1997. This increase was caused primarily by increases in yield
on the Association's Federal Home Loan Bank stock from 6.48% to 7.75%, loan
portfolio from 8.01% to 8.20%, and mortgage-backed securities portfolio from
6.48% to 6.58% for the six months ended March 31, 1998, as compared to the six
months ended March 31, 1997. These increases were partially offset by a decrease
in the investment securities portfolio yield from 6.61% to 6.34% for the six
months ended March 31, 1998, as compared to the six months ended March 31, 1997.
The increase in yield on the loan portfolio was primarily due to construction
loan originations at the Company's new loan production office in Lawrence,
Kansas. These construction loans generally have terms of six months or less and
interest rates tied to the prime rate plus a margin.
Interest Expense. Interest expense for the six months ended March 31,
1998, increased by $192,000 to $2,680,000 as compared to $2,488,000 for the six
months ended March 31, 1997. This increase in interest expense was due primarily
to a $7.9 million increase in the average outstanding amount of interest-bearing
liabilities during the six months ended March 31, 1998 as compared to the six
months ended March 31, 1997. This increase was partially offset by a 3 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 $7.4 million increase in the average
outstanding balance of deposits due primarily to new accounts opened at the
Coffeyville, Kansas branch office and seasonal deposits from public units.
Provision for Loan Losses. 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 six months ended March 31, 1998 and
March 31, 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
35
<PAGE>
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 $7,000 to $113,000
during the six months ended March 31, 1998 as compared to $106,000 for the six
months ended March 31, 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 late charges and
other fees associated with mortgage loans.
Non-interest Expense. Total non-interest expense increased to
$1,147,000 for the six months ended March 31, 1998 from $1,050,000 for the six
months ended March 31, 1997, an increase of $97,000, or 9.2%. The increase was
primarily due to increases in compensation and employee benefits of $59,000,
occupancy and equipment of $45,000, and data processing fees of $15,000. 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. 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 federal deposit insurance
premiums of $18,000, and other expenses of $3,000.
Income Tax Expense. Income tax expense was $288,000 for the six months
ended March 31, 1998 compared to $205,000 for the six months ended March 31,
1997, an increase of $83,000. 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 43.4% and 38.2% for the six months ended
March 31, 1998 and March 31, 1997, respectively. Rates exceed expected rates due
primarily to compensation expense associated with the ESOP which is not
deductible for income tax purposes.
Liquidity and Capital Resources. The Company's primary sources of funds
are deposits, principal and interest payments on loans and mortgage-backed
securities, Federal Home Loan Bank of Topeka advances and funds provided by
operations. While scheduled loan and mortgage-backed security repayments and
maturity of short-term investments are a relatively predictable source of funds,
deposit flows are greatly influenced by general interest rates, economic
conditions and competition. Current Office of Thrift Supervision ("OTS")
regulations require the Association to maintain cash and eligible investments in
an amount equal to at least 4% of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. Such
requirements may be changed from time to time by the OTS to reflect changing
economic conditions. Such investments are intended to provide a source of
relatively liquid funds upon which the Association may rely, if necessary, to
fund deposit withdrawals and other short-term funding needs. As of March 31,
1998, the Association's liquidity ratio was 15.44% 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. These ratios exceeded the minimum
regulatory liquidity requirements on both dates.
The Company uses its capital resources principally to meet its ongoing
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. At March 31, 1998, the Company had commitments
to originate loans totaling $694,000. The Company considers its liquidity and
capital resources to be adequate to meet its foreseeable short- and long-term
needs. The Company expects to be able to fund or refinance, on a timely basis,
its material commitments and long-term liabilities.
Regulatory standards impose the following capital requirements on the
Association: a risk-based capital standard expressed as a percent of
risk-adjusted assets, a leverage ratio of core capital to total adjusted assets,
and a tangible capital ratio expressed as a percent of total adjusted assets. As
of March 31, 1998, the Association exceeded all fully phased-in regulatory
capital standards.
At March 31, 1998, the Association's tangible capital was $9.8 million,
or 7.93% of adjusted total assets, which is in excess of the 1.5% requirement by
$7.9 million. In addition, at March 31, 1998, the Association had core capital
of $9.8 million, or 7.93% of adjusted total assets, which exceeds the 3.0%
requirement by $6.1 million. The Association
36
<PAGE>
had risk-based capital of $10.4 million at March 31, 1998, or 18.17% of
risk-adjusted assets, which exceeds the 8.0% risk-based capital requirements by
$5.8 million.
Under the requirements of federal law, all the federal banking
agencies, including the OTS, must revise their risk-based capital requirements
to ensure that such requirements account for interest rate risk, concentration
of credit risk and the risks of non-traditional activities, and that they
reflect the actual performance of and expected loss on multi-family loans.
The OTS has adopted a final rule that generally requires a savings
association with more than normal interest rate risk 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 provides for a two-quarter lag between
calculating interest rate risk and recognizing any deductions from capital. The
OTS has announced that it will delay the effectiveness of the rule until it
adopts the process by which savings associations may appeal an interest rate
risk deduction determination. The OTS has instructed all savings associations
not to take any capital deductions for interest rate risk exposure until
notified to do so by the OTS. In addition, any savings association with less
than $300 million in assets and a total risk-based capital ratio in excess of
12%, such as the Association, is exempt from this requirement unless the OTS
determines otherwise.
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
37
<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 $302,000 to $280,000
during the fiscal year ended September 30, 1997 as compared to $582,000 for the
fiscal year ended September 30, 1996. The decrease was primarily due to a
non-recurring $251,000 gain on the sale of FHLMC stock which was recognized in
the fiscal year ended September 30, 1996, with no gains on the sale of
securities recognized in the fiscal year ended September 30, 1997. To a lesser
extent, the decrease was due to a decrease of $60,000 in 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
$2,111,000 for the fiscal year ended September 30, 1997 from $2,384,000 for the
fiscal year ended September 30, 1996, a decrease of $273,000, or 11.4%. The
decrease was primarily due to a one-time pre-tax charge of $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 $146,000, other expenses of $58,000,
occupancy and equipment of $37,000, and data processing fees of $12,000. The
increase in compensation expense was primarily due to annual increases in
salaries and bonuses and expense associated with the Company's ESOP due to the
increase in the Company's stock price. In addition, the opening of a new branch
office in Coffeyville, Kansas resulted in additional staff, advertising,
stationery, printing and office supplies expense.
Income Tax Expense. Income tax expense was $468,000 for the fiscal year
ended September 30, 1997 compared to $487,000 for the fiscal year ended
September 30, 1996, a decrease of $19,000. The decrease was primarily the result
of a decrease in pre-tax income. The Company's effective tax rates were 39.7%
and 37.4% for the fiscal years ended September 30, 1997 and September 30, 1996,
respectively.
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.
Non-accruing loans have been included in the table as loans carrying a zero
yield.
38
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended March 31, 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)......... $ 81,262 $3,333 8.20% $69,401 $2,779 8.01% $ 71,188 $ 5,684 7.98%
Mortgage-backed securities.. 22,169 729 6.58 27,288 885 6.48 26,137 1,727 6.61
Investment securities....... 6,304 200 6.34 7,086 234 6.61 7,598 513 6.75
FHLB stock.................. 1,392 54 7.75 1,287 42 6.48 1,314 89 6.79
Federal funds sold.......... 1,850 44 4.79 855 22 5.18 567 34 6.02
Other earning assets........ 545 17 6.33 213 8 5.19 318 22 6.83
-------- ------ --------- ------ ------- -------
Total earning assets....... 113,522 4,377 7.71 106,130 3,970 7.48 107,122 8,069 7.53
Non-interest earning assets. 3,079 2,650 2,928
-------- -------- --------
Total assets................ $116,601 $108,780 $110,050
======== ======== ========
Interest-bearing liabilities:
Savings deposits and
certificates.............. $ 53,084 1,419 5.35 $ 50,794 1,361 5.36 $ 51,219 2,745 5.36
Demand and NOW.............. 25,364 525 4.14 20,272 420 4.14 22,019 914 4.15
FHLB advances............... 24,850 736 5.92 24,333 707 5.81 23,583 1,400 5.93
--------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities.............. 103,298 2,680 5.19 95,399 2,488 5.22 96,821 5,059 5.22
------ ------ ------
Non-interest-bearing
liabilities ................ 1,805 1,520 1,538
--------- -------- --------
Total liabilities......... 105,103 96,919 98,359
Equity....................... 11,498 11,861 11,691
--------- -------- --------
Total liabilities and
equity................... $116,601 $108,780 $110,050
======== ======== ========
Net interest/spread.......... $ 1,697 2.52% $ 1,482 2.26% $3,010 2.31%
======= ==== ======= ==== ====== ====
Margin....................... 2.99% 2.79% 2.81%
==== ==== ====
Assets to liabilities........ 109.90% 111.25% 110.64%
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------
1996 x1995
------------------------------- --------------------------------
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.
39
<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>
Six Months Ended
March 31, 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 .................................. $ 486 $ 68 $ 554 $ 645 $(151) $ 494 $ 372 $ 14 $ 386
Mortgage-backed securities ........................ (169) 13 (156) (223) 20 (203) 21 (30) (9)
Securities ........................................ (25) (9) (34) 24 10 34 149 9 158
FHLB stock ........................................ 4 8 12 14 5 19 4 5 9
Federal funds sold ................................ 24 (2) 22 (52) 7 (45) 44 (9) 35
Other earning assets .............................. 8 1 9 (8) 5 (3) 10 (2) 8
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets ................... $ 328 $ 79 407 $ 400 $(104) 296 $ 600 $ (13) 587
===== ===== ----- ===== ===== ----- ===== ===== -----
Interest-bearing liabilities:
Passbook savings and certificates ................. $ 61 $ (3) 58 $ (39) $ (36) (75) $ 45 $ 334 379
NOW and Demand .................................... 105 -- 105 135 17 152 188 166 354
FHLB Advances ..................................... 15 14 29 262 51 313 106 (22) 84
----- ----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing
liabilities ....................................... $ 181 $ 11 192 $ 358 $ 32 390 $ 339 $ 478 817
===== ===== ----- ===== ===== ----- ===== ===== -----
Net interest income................................. $ 215 $(94) $(230)
===== ===== ======
</TABLE>
The following table sets forth the weighted average yields on the
Company's interest-earning assets, the weighted average interest rates on
interest-bearing liabilities and the interest rate spread between the weighted
average yields and rates for the Company at the dates indicated. Non-accruing
loans have been included in the table as carrying a zero yield.
<TABLE>
<CAPTION>
At September 30,
March 31, ------------------------------
1998 1997 1996 1995
---- ---- ---- ----
Weighted average yield on:
<S> <C> <C> <C> <C>
Loans receivable.......................................... 7.87% 7.74% 7.78% 8.13%
Mortgage-backed securities................................ 6.53 6.66 6.53 6.97
Securities................................................ 6.20 6.97 6.68 7.61
Federal funds sold........................................ 5.33 5.28 5.48 5.57
Other interest-earning assets............................. 5.43 5.22 4.93 5.35
Combined weighted average yield on interest-earning 0 7. 9
assets................................................. 7.44 7.4 34 7.5
Weighted average rate paid on:
Passbook Savings and certificates......................... 5.42 5.38 5.38 5.38
NOW....................................................... 4.21 4.06 4.03 3.78
FHLB advances............................................. 5.79 6.11 5.65 5.94
Combined weighted average rate paid on interest- 1 5. 3
bearing liabilities.................................... 5.19 5.2 17 5.2
Spread..................................................... 2.25 2.19 2.17 2.36
</TABLE>
40
<PAGE>
Asset/Liability Management of the Company
The matching of assets and liabilities may be analyzed by examining the
extent to which they are "interest rate sensitive" and by monitoring an
institution's interest rate sensitivity "gap." An asset or liability is said to
be interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period and
the amount of interest-bearing liabilities anticipated, based upon certain
assumptions, to mature or reprice within that same time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect operations while a positive gap
would tend to benefit operations.
A primary objective of asset/liability management is to manage interest
rate risk. First Federal monitors its asset/liability mix on an ongoing basis
and, from time to time, may institute certain changes in its product mix and
asset and liability maturities.
Since the early 1980's, the Company has stressed the origination of
adjustable rate residential mortgage loans ("ARMs"), subject to market
conditions. In recent periods, the Company has also purchased adjustable-rate
mortgage-backed securities. At March 31, 1998, approximately $28.6 million, or
31.1% of the Company's total loans secured by real estate, were ARMs. On the
same date, the Company also had $12.3 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 March 31, 1998, the Company had $7.7
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 March 31, 1998, the Company had
approximately $7.8 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.
41
<PAGE>
Presented below, as of March 31, 1998, is an analysis of the
Association's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 200 basis points and compared to Board policy limits. The table was
prepared and furnished to the Association by the 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 March 31, 1998
Interest Rate Board Limit ------------------------------------------
(Basis Points) % Change $ Amount $ Change % Change
- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
+200 -40% $11,166 $(2,508) (18)%
+100 -25 12,627 (1,047) (8)
0 -- 13,674 -- --
-100 -25 14,007 334 2
-200 -40 13,609 (65) 0
</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
0% change in NPV in a declining rate environment and an 18% 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 OTS requires minimum levels of liquid assets. At March 31, 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 March 31, 1998 was 15.44%. 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.
42
<PAGE>
The Company's primary investing activity is the origination of mortgage
loans and the purchase of mortgage-backed and other securities. At March 31,
1998, mortgage loans and mortgage-backed securities accounted for 85.3% 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 $0 at March 31, 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 March 31, 1998, the Company had outstanding
commitments to extend credit which amounted to $694,000. The Company is not
aware of any trends, events or uncertainties which will have or that are
reasonably likely to have a material effect on the Company's liquidity, capital
resources or operations.
Certificates of deposit scheduled to mature in one year or less at
March 31, 1998 totaled approximately $30.9 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 March
31, 1998, the Company had $27.3 million in advances from the FHLB of Topeka with
$6.4 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 March 31, 1998, the Association's
tangible capital, core capital, and risk-based capital of $9.8 million, $9.8
million, and $10.4 million exceeded the applicable minimum requirements by $7.9
million, $6.1 million, and $5.8 million, respectively.
The following table sets forth the Association's compliance with such
requirements at March 31, 1998.
<TABLE>
<CAPTION>
Association capital level
OTS requirement at March 31, 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% $1,852 7.93% $ 9,787 $ 7,935
Core capital (1) 3.00 3,705 7.93 9,787 6,082
Risk-based capital 8.00 4,598 18.17 10,443 5,845
</TABLE>
- -------------
(1) Based on current core capital requirement of 3%.
43
<PAGE>
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.
Effect of New Accounting Standards
In June 1997, the Financial Accounting Standards Board "FASB" issued
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting and display of comprehensive income and its components
(revenue, expenses, gains and losses) in a full set of general-purpose financial
statements. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Income tax effects must also be shown. This
statement is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 130 relates solely to disclosure provisions and therefore
will not have a material impact on the results of operations or financial
condition of the Company.
In June 1997, The FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement is effective for financial statements for periods beginning after
December 15, 1997. The adoption of SFAS No. 131 relates solely to disclosure
provisions and therefore will not have a material impact on the results of
operations or financial condition of the Company.
44
<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 December 31, 1997, the Company had total assets of $113.7 million,
and stockholders' equity of $11.4 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%.
45
<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
March 31, 1998, the Association's net loan portfolio totaled $85.3 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 March 31, 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."
46
<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,
March 31, -------------------------------------------------------------------
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.......... $67,166 73.13% $64,152 84.30% $57,353 82.29% $50,747 82.34%
Multi-family................. 1,133 1.23 1,164 1.53 1,371 1.97 1,420 2.30
Non-residential.............. 7,538 8.21 7,479 9.83 7,224 10.36 7,454 12.10
Construction................. 13,317 14.50 764 1.00 1,834 2.63 526 0.85
-------- ------- ---------- -------- --------- -------- --------- -------
Total real estate loans... 89,154 97.07 73,559 96.66 67,782 97.25 60,147 97.59
-------- ------- -------- ------- -------- ------- -------- -------
Consumer Loans:
- ---------------
Deposit account.............. 408 0.44 350 0.46 364 0.52 314 0.50
Automobile................... 808 0.88 705 0.93 402 0.58 269 0.44
Home equity.................. 594 0.65 550 0.72 781 1.12 641 1.04
Home improvement............. 257 0.28 274 0.36 183 0.26 102 0.17
Other........................ 621 0.68 661 0.87 185 0.27 159 0.26
---------- -------- ---------- -------- ---------- -------- --------- -------
Total consumer loans...... 2,688 2.93 2,540 3.34 1,915 2.75 1,485 2.41
--------- -------- --------- -------- --------- -------- -------- -------
Total Loans.............. 91,842 100.00% 76,099 100.00% 69,697 100.00% 61,632 100.00%
====== ====== ====== ======
Less:
- -----
Loans in process............. 5,617 572 1,050 372
Deferred fees and discounts.. 305 300 274 200
Allowance for losses......... 656 668 690 690
---------- ---------- ---------- ----------
Total loans receivable, net.. $85,264 $74,559 $67,683 $60,370
======= ======= ======= =======
</TABLE>
47
<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,
March 31, --------------------------------------------------------------
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................... $41,275 44.94 $37,581 49.38% $31,231 44.81% $23,163 37.59%
Multi-family.......................... 662 0.72 683 0.90 871 1.25 821 1.33
Non-residential....................... 5,315 5.79 5,055 6.64 4,835 6.94 5,304 8.61
Construction.......................... 13,317 14.50 764 1.00 -- -- 526 0.85
--------- ------- -------- -------- ------- ------- ------- ------
Total fixed-rate real estate loans.. 60,569 65.95 44,083 57.92 36,937 53.00 29,814 48.38
Consumer............................... 2,094 2.28 1,990 2.62 1,437 2.06 1,123 1.82
--------- -------- --------- -------- ------- ------- ------- ------
Total fixed-rate loans.............. 62,663 68.23 46,073 60.54 38,374 55.06 30,937 50.20
--------- ------- -------- ------- ------- ======= ------- ------
Adjustable-Rate Loans
Real estate:
One- to four-family................... 25,891 28.19 26,571 34.92 26,122 37.47 27,584 44.75
Multi-family.......................... 471 0.51 481 0.63 500 0.72 599 0.97
Non-residential....................... 2,223 2.42 2,424 3.19 2,389 3.43 2,150 3.49
Construction.......................... -- -- -- -- 1,834 2.63 -- --
--------- -------- ---------- ------ ------- ------- ------ ------
Total adjustable-rate real
estate loans...................... 28,585 31.12 29,476 38.74 30,845 44.25 30,333 49.21
Consumer............................... 594 0.65 550 0.72 478 0.69 362 0.59
--------- -------- -------- -------- ------- -------- ------ ------
Total adjustable-rate loans........ 29,179 31.77 30,026 39.46 31,323 44.94 30,695 49.80
--------- ------- -------- ------- -------- ------- ------ ------
Total Loans........................ 91,842 100.00% 76,099 100.00% 69,697 100.00% 61,632 100.00%
====== ====== ====== ======
Less
Loans in process....................... 5,617 572 1,050 372
Deferred fees and discounts............ 305 300 274 200
Allowance for losses................... 656 668 690 690
--------- -------- ------ ------
Total loans receivable, net............ $85,264 $74,559 $67,683 $60,370
======= ======= ======= =======
</TABLE>
48
<PAGE>
The following schedule shows the scheduled contractual maturities of
the Association's loan portfolio at March 31, 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 March 31,
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999(1).................... $ 366 8.45% $ 126 9.00% $11,878 9.84% $1,036 9.08% $13,406 9.74%
2000....................... 68 9.23 69 8.10 868 9.18 291 8.88 1,296 9.06
2001....................... 260 7.61 769 8.92 -- -- 339 9.38 1,368 8.79
2002 and 2003.............. 1,247 7.88 136 8.76 -- -- 757 8.89 2,140 8.29
2004 to 2008............... 6,817 7.86 1,615 8.64 -- -- 265 8.65 8,697 8.03
2009 to 2023............... 34,882 7.66 5,809 8.42 374 8.13 -- -- 41,065 7.77
2024 and following......... 23,526 7.52 147 8.25 197 7.50 -- -- 23,870 7.52
------- ------- ------- ------ -------
Total $67,166 $8,671 $13,317 $2,688 $91,842
======= ====== ======= ====== =======
</TABLE>
- ---------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after March 31, 1999, which have a
predetermined interest rate is $49.9 million, while the total amount of loans
due after such date which have a floating or adjustable interest rate is $28.6
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 March 31, 1998, the Association's one- to
four-family residential mortgage loans, totaled $67.2 million, or 73.1% of the
Association's loan portfolio.
The Association currently makes adjustable-rate, one- to four-family
residential mortgage loans in amounts up to 95% of the appraised value, or
selling price, of the security property, whichever is less. For loans with a
loan-to-value ratio of 90% or greater, the Association requires private mortgage
insurance equal to 20% of the loan value in order to reduce the Association's
exposure level. For loans with loan-to-value ratios of greater than 80% but less
than 90%, the Association typically requires private mortgage insurance to
reduce the Association's exposure. The determination as to whether to obtain
such insurance is made on a case-by-case basis, based on a variety of factors
including the borrower's payment history, the borrower's length of employment,
the quality of the property, the term of the loan and the debt to income ratio
of the borrower. At March 31, 1998, the Association had 508 loans totaling $27.4
million with a loan-to-value ratio of greater than 80% but less than 90% and 320
loans totaling $15.4 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 25.7% of the loans secured by one- to four-family real
estate originated by the Association during the six months ended March 31, 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 $2.4 million, or 3.6% of the Association's one- to
four-family residential mortgage loan portfolio, was purchased by the
Association. These loans are primarily secured by property located in Texas and
have been in the Association's portfolio for several years. The Association has
purchased only a limited amount of one- to four-family residential mortgage
loans since 1989. The level of delinquencies in the Association's portfolio of
purchased loans secured by one- to four-family residential real estate is
consistent with that of the loans originated and retained by the Association.
The Association's residential mortgage loans customarily include
due-on-sale clauses giving the Association the right to declare the loan
immediately due and payable in the event, among other things, the borrower sells
or otherwise disposes of the property subject to the mortgage and the loan is
not repaid. The Association has enforced due-on-sale clauses in its mortgage
contracts for the purpose of increasing its loan portfolio yield. The yield
increase is obtained through the authorization of assumptions of existing loans
at higher rates of interest and the imposition of assumption fees. One- to
four-family real estate loans may be assumed provided home buyers meet the
Association's underwriting standards and the loan terms are modified, to the
extent necessary, to conform with present yield and maturity requirements.
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 March 31, 1998, the Association had $8.7 million in
non-residential/ multi-family real estate loans, representing 9.4% of the
Association's loan portfolio.
Approximately 12.4% 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.
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<PAGE>
The table below sets forth, by type of security property, the
Association's non-residential/ multi-family real estate loans at March 31, 1998.
Number Outstanding Amount
of Principal Non-Performing
Loans Balance or of Concern
----- ------- -------------
(Dollars in Thousands)
Multi-family ........................ 6 $1,133 $ --
Small business facilities
and office buildings ............... 44 4,000 21
Health care facility ................ 11 1,308 --
Churches ............................ 3 186 --
Warehouse/mini-storage .............. 3 325 --
Shopping centers .................... -- -- --
Hotel/motel ......................... 2 735 --
Land ................................ 24 984 --
------ ------ ------
Total multi-family
residential and non-
residential real
estate loans ..................... 93 $8,671 $ 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 March 31, 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 March 31,
1998 of $693,000. This loan has been current since its inception in June 1991.
The other loans in excess of $500,000 at March 31, 1998, included a loan to one
borrower totaling $604,000 secured by an apartment building located in Rogers,
Arkansas; a loan with an outstanding balance of $523,000 secured by a motel in
Independence, Kansas; a loan with an outstanding balance of $541,000 secured by
a guest home located in Caney, Kansas; and a loan with an outstanding balance of
$721,000 secured by an apartment building located in Gladstone, Missouri. All of
these loans were current at March 31, 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
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<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 $13.3 million of construction loans outstanding at March
31, 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. See "Business of the Company -- lending Activities -
Construction Lending." 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 March 31, 1998, the Association's consumer
loan portfolio totaled $2.7 million, or 2.9% 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 31.7% 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 March 31, 1998, the Association had $808,000 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
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<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 March 31, 1998, $49,000, or approximately 1.8% 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 March 31, 1998, approximately $4.2 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 none during the six months ended March 31,
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 $2.1 million in loans serviced for others as of
March 31, 1998.
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<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Association for the periods indicated.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended September 30,
March 31, ------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Thousands)
Originations by type
- --------------------
<S> <C> <C> <C> <C>
Adjustable-rate:
Real estate - one- to four-family .............................. $ 2,075 $ 6,437 $ 4,465 $ 6,144
- multi-family ................................... -- -- -- 173
- non-residential ................................ -- 633 614 921
Consumer - home equity ......................................... -- 673 314 469
-------- -------- -------- --------
Total adjustable-rate ................................... 2,075 7,743 5,393 7,707
-------- -------- -------- --------
Fixed-rate:
Real estate - one- to four-family .............................. 6,006 10,167 14,879 5,886
- non-residential and land ....................... 693 1,492 320 219
- construction ................................... 11,367 -- -- --
Consumer - non-real estate ..................................... 1,117 1,965 1,429 1,234
-------- -------- -------- --------
Total fixed-rate ........................................ 19,183 13,624 16,628 7,339
-------- -------- -------- --------
Total loans originated .................................. 21,258 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 ..................................... 2,576 4,412 5,237 3,041
Transfer of mortgage-backed securities to
mortgage-backed securities available for sale ................ -- -- -- 968
Principal repayments(1) ........................................ 10,499 15,512 13,956 11,854
-------- -------- -------- --------
Total reductions ......................................... 13,075 19,924 19,193 15,863
Increase (decrease) in other items, net(2) ....................... (5,088) 375 (730) 287
-------- -------- -------- --------
Net increase ............................................ $ 8,079 $ 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.
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<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 March 31, 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...... 7 $335 .36% 10 $ 528 .58% 17 $ 863 .94%
Non-residential.......... -- -- -- 1 21 .02 1 21 .02
Consumer. . . . . ......... 4 25 .03 2 24 .03 6 49 .06
---- ----- ----- ---- ----- ----- ---- ------ ----
Total................. 11 $360 .39% 13 $ 573 .63% 24 $ 933 1.02%
=== ==== ===== ==== ===== ===== ==== ====== ====
</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>
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<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,
March 31, ---------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
<S> <C> <C> <C> <C>
One- to four-family .............................................. $ 528 $ 919 $ 148 $ 444
Non-residential real estate ...................................... 21 98 99 100
Construction ..................................................... -- -- 94 --
Consumer ......................................................... 24 32 26 11
------ ------ ------ ------
Total non-accruing loans ...................................... 573 1,049 367 555
Accruing loans delinquent 90 days or more:
One- to four-family .............................................. -- 292 183 116
Troubled debt restructurings:
One- to four-family .............................................. 49 50 52 56
------ ------ ------ ------
Total non-performing loans ......................................... 622 1,391 602 727
------ ------ ------ ------
Real estate acquired through foreclosure:
One- to four-family .............................................. 15 12 12 --
Non-residential real estate ...................................... -- -- -- 62
------ ------ ------ ------
Total real estate acquired through foreclosure ................ 15 12 12 62
------ ------ ------ ------
Total non-performing assets ........................................ $ 637 $1,403 $ 614 $ 789
====== ====== ====== ======
Total as a percentage of total assets .............................. .51% 1.25% 0.57% 0.77%
====== ====== ====== ======
</TABLE>
For the three months ended March 31, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $22,000. The amount included in interest income
on such loans was $1,356 for the six months ended March 31, 1998.
Included in non-accruing loans at March 31, 1998, were ten loans totaling
$528,000 secured by one- to four-family real estate, one loan totaling $21,000
secured by non-residential real estate, and two consumer loans totaling $24,000.
All non-accruing loans at March 31, 1998 were located in the Company's primary
market area. At March 31, 1998, there were no accruing loans delinquent 90 days
or more.
Management has considered loans of concern in establishing the Association's
allowance for loan losses.
Real Estate Acquired Through Foreclosure. At March 31, 1998, the
Association's real estate acquired through foreclosure consisted of two single
family residences located in the Association's market area with a carrying value
of $15,000, which are currently offered for sale.
Classified Assets. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the OTS
to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the
57
<PAGE>
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 March 31, 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,
March 31, ------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Substandard .................... $ 486 $1,261 $ 676 $1,003
Doubtful ....................... 63 92 95 89
Loss ........................... -- -- -- --
------ ------ ------ ------
Total classified assets ........ $ 549 $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 March 31, 1998, the Association had an
allowance for loan losses of $656,000.
58
<PAGE>
The following table sets forth an analysis of the Association's
allowance for loan losses at the dates indicated.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended September 30,
March 31, ------------------------------------
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 ............................. 0.02% 0.03% ---% (0.04)%
===== ===== ====== =====
Allowance for loan losses to total loans at end of
period ............................................................. 0.77% 0.90% 1.02% 1.14%
===== ===== ====== =====
Allowance for loan losses to non-performing loans at
end of period ...................................................... 105.50% 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,
March 31, ---------------------------------------------------------------------------
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 ..... $397 73.13% $391 84.30% $357 82.29% $343 82.34%
Multi-family ............ -- 1.23 -- 1.53 -- 1.97 17 2.30
Non-residential ......... 89 8.21 92 9.83 87 10.36 87 12.10
Construction .............. 135 14.50 -- 1.00 11 2.63 -- .85
Consumer .................. 35 2.93 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
59
<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 March 31, 1998, the
Association's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 15.44%. 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 March 31, 1998, investment securities totaled
$8.3 million, or 6.7% 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 March 31, 1998, the average term to maturity or repricing of
the investment portfolio was 2.4 years.
60
<PAGE>
The following table sets forth the composition of the Company's
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
March 31, ------------------------------------------------------
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 51.18% $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 ........................... 3,009 30.80 2,985 34.39 2,934 34.62 3,981 46.48
FHLMC preferred stock ................................ -- -- -- -- -- -- 253 2.95
Other marketable equity securities(1) ................ 337 3.45 327 3.77 308 3.63 294 3.43
------ ------ ------ ------ ------ ------ ------ ------
Total securities available for sale ............... 3,346 34.25 4,311 49.67 5,235 61.77 6,525 76.18
------ ------ ------ ------ ------ ------ ------ ------
FHLB stock ........................................... 1,423 14.57 1,369 15.77 1,240 14.63 1,040 12.14
------ ------ ------ ------ ------ ------ ------ ------
Total securities and FHLB stock ................... $9,769 100.00% $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) ....................... 4.02 yrs. 4.61 yrs. 5.04 yrs. 4.49 yrs.
Other Interest-Earning Assets:
Short-term money market investments .................. $5,507 100.00% $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) ........................ 2.38 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.
61
<PAGE>
The composition and maturities of the securities portfolio, excluding FHLB
of Topeka stock, are indicated in the following table.
<TABLE>
<CAPTION>
March 31, 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 $4,961
------ ------ ------
Weighted average yield ............. 6.30% 6.30%
====== ======
Available for Sale:
Federal agency obligations ............ $ 986 $1,991 $2,977 $3,009
Other marketable equity securities(1) . 337 -- 337 337
------ ------ ------ ------
Total investment securities ........ $1,323 $1,991 $3,314 $3,346
====== ====== ====== ======
Weighted average yield ............. 5.54% 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 March 31, 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 March 31, 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 $3.3 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 March 31, 1998, the Association's
mortgage-backed securities totaled $20.9 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 March 31, 1998, $12.3 million, or 59.0%, of the Association's
mortgage-backed securities carried adjustable-rates of interest. Under the OTS's
risk-based capital requirements, Government National Mortgage Association
("GNMA") mortgage-backed securities have a zero percent risk weighting and
Federal National Mortgage Association ("FNMA"), FHLMC and AA-rated
mortgage-backed securities have a 20% risk weighting, in contrast to the 50%
risk weighting carried by one- to four-family performing residential mortgage
loans.
62
<PAGE>
The following table sets forth the contractual maturities of the
mortgage-backed securities at March 31, 1998. The Association had no
mortgage-based securities available for sale at that date.
<TABLE>
<CAPTION>
Due in March 31, 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 ................................ $ -- $ -- $ -- $ -- $ -- $ 167 $ 5,970 $ 6,137
Federal National Mortgage
Association ................................ -- -- -- -- -- 1,297 4,895 6,192
------- -------- -------- -------- ------- ------- ------- -------
Total adjustable-rate ...................... -- -- -- -- -- 1,464 10,865 12,329
------- -------- -------- -------- ------- ------- ------- -------
Fixed-Rate Mortgage-Backed
Securities:
Federal Home Loan Mortgage
Corporation .................................. -- -- -- -- 2,592 2,769 -- 5,361
Federal National Mortgage
Association .................................. -- -- -- -- 2,068 1,080 -- 3,148
Government National Mortgage
Association .................................. -- -- -- -- -- -- 64 64
------- -------- -------- -------- ------- ------- ------- -------
Total fixed-rate .............................. -- -- -- -- 4,660 3,849 64 8,573
------- -------- -------- -------- ------- ------- ------- -------
Total mortgage-backed securities held
to maturity ................................. $ -- $ -- $ -- $ -- $ 4,660 $ 5,313 $10,929 $20,902
======= ======== ======== ======== ======= ======= ======= =======
</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 $27.3 million in FHLB advances outstanding at March 31,
1998.
Deposits. First Federal offers a variety of deposit accounts having a wide
range of interest rates and terms. The Association's deposits consist of
passbook accounts, NOW accounts, and money market and certificate accounts. The
Association relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. First Federal solicits
deposits from its market area only and does not use brokers to obtain deposits.
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
63
<PAGE>
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 March 31, 1998 % of Total Certificates
----------------- -----------------------
(Dollars in Thousands)
<S> <C> <C>
Four-Year Certificate...... $1,503 2.88%
Five-Year Certificate...... 6,300 12.06
</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,
March 31, ------------------------------------------------------------
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%).................. $ 2,951 3.50% $2,703 3.54% $ 2,649 3.82% $ 2,752 4.05%
NOW Accounts (2.00-2.50%)................ 4,025 4.78 3,763 4.93 3,232 4.66 2,899 4.26
Money Market Accounts (2.50-5.75%)....... 24,939 29.59 20,702 27.13 15,553 22.40 11,694 17.20
------- ------ ------ ------ ------- ----- ------ ------
Total Transactions and Savings Deposits 31,915 37.87 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%........................... 1,770 2.10 2,189 2.87 4,216 6.07 10,498 15.44
5.00 - 5.99%........................... 45,786 54.33 39,911 52.30 30,296 43.64 16,882 24.83
6.00 - 6.99%........................... 4,675 5.55 6,930 9.08 13,367 19.25 22,351 32.87
7.00% and over.......................... 26 0.03 26 0.03 34 0.05 47 0.07
------- ------ ------ ------ ------- ----- -------- -------
Total Certificates........................ 52,257 62.01 49,061 64.29 47,922 69.02 50,582 74.39
------- ------ ------ ------ ------- ----- ------ ------
Accrued Interest.......................... 96 0.12 82 0.11 70 0.10 70 0.10
------- ------ ------ ------ -------
Total Deposits............................ $84,268 100.00% $76,311 100.00% $69,426 100.00% $67,997 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
64
<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>
Six Months
Ended Year Ended September 30,
March 31, -----------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Opening balance ........ $ 76,229 $ 69,356 $ 67,927 $ 64,384
Deposits ............... 51,789 86,304 65,771 61,024
Withdrawals ............ (45,361) (82,247) (67,067) (59,578)
Interest credited ...... 1,515 2,816 2,725 2,097
-------- -------- -------- --------
Ending balance ......... $ 84,172 $ 76,229 $ 69,356 $ 67,927
======== ======== ======== ========
Net increase ........... $ 7,943 $ 6,873 $ 1,429 $ 3,543
======== ======== ======== ========
Percent increase ....... 10.42% 9.91% 2.10% 5.50%
======== ======== ======== ========
</TABLE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of March 31, 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>
June 30, 1998 ............. $ 708 $ 5,575 $ 13 $ -- $ 6,296 12.05%
September 30, 1998 ........ 605 8,909 105 -- 9,619 18.41
December 31, 1998 ......... 308 5,976 177 -- 6,461 12.36
March 31, 1999 ............ 149 8,312 36 -- 8,497 16.26
June 30, 1999 ............. -- 5,773 65 -- 5,838 11.17
September 30, 1999 ........ -- 7,589 669 -- 8,258 15.80
December 31, 1999 ......... -- 438 428 -- 866 1.66
March 31, 2000 ............ -- 1,164 725 26 1,915 3.66
June 30, 2000 ............. -- 758 151 -- 909 1.74
September 30, 2000 ........ -- 641 192 -- 833 1.59
December 31, 2000 ......... -- 96 572 -- 668 1.28
March 31, 2001 ............ -- 233 -- -- 233 .45
June 30, 2001 ............. -- 113 75 -- 188 .36
Thereafter ................ -- 209 1,467 -- 1,676 3.21
------- ------- ------- ------- ------- ------
Total .................. $ 1,770 $45,786 $ 4,675 $ 26 $52,257 100.00%
======= ======= ======= ======= ======= ======
Percent of total ....... 3.39% 87.61% 8.95% .05%
======= ======= ======= ======
</TABLE>
65
<PAGE>
The following table indicates the amount of the Association's certificates
of deposit and other deposits by time remaining until maturity as of March 31,
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 ......... $ 5,440 $ 7,567 $13,518 $20,067 $46,592
Certificates of deposit
of $100,00 or more ......... 200 403 747 1,136 2,486
Public funds(1) ............. 656 1,649 694 180 3,179
------- ------- ------- ------- -------
Total certificates of deposit $ 6,296 $ 9,619 $14,959 $21,383 $52,257
======= ======= ======= ======= =======
</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 March 31, 1998, the
Association had $27.3 million in FHLB advances outstanding.
The following table sets forth the maximum month-end balance and average
balance of the Association's FHLB advances and other borrowings at the dates and
for the periods indicated.
<TABLE>
<CAPTION>
At and for the
Six Months
Ended At and for the Year Ended September 30,
March 31, ---------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Thousands)
Maximum Balance:
<S> <C> <C> <C> <C>
FHLB advances ..... $27,300 $25,000 $24,400 $19,900
Average Balance:
FHLB advances ..... $24,850 $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
Six Months
Ended At September 30,
March 31, ----------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
FHLB advances ........ $27,300 $23,700 $24,300 $18,800
Weighted average
interest rate of FHLB
advances .......... 5.751% 5.930% 5.682% 5.933%
</TABLE>
66
<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 March 31, 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 March 31, 1998, was
$1,307,769.
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 March 31, 1998, was approximately $109,000.
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 March 31, 1998.
67
<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 March 31, 1998 and September 30, 1997
Assets. The total assets at March 31, 1998 were $13,679,000 as compared
to total assets of $14,155,000 at September 30, 1997. This decrease in assets
was primarily a result of a $380,000 decrease in loans.
Liabilities. Total liabilities at March 31, 1998 were $12,556,000 as
compared to $13,063,000 at September 30, 1997. This decrease was primarily
attributable to a $789,000 decrease in deposits, partially offset by a $300,000
increase in borrowings.
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.
68
<PAGE>
Comparison of the Six Months Ended March 31, 1997 and March 31, 1998
General. The net earnings for the six months ended March 31, 1998 were
$30,000 as compared to net earnings of $38,000 for the six months ended March
31, 1997. This decrease was due primarily to a decrease in net interest income.
Net Interest Income. Net interest income for the six months ended March
31, 1998 was $236,000 as compared to $245,000 for the six months ended March 31,
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 six months ended March
31, 1998 was $508,000, as compared to $519,000 for the six months ended March
31, 1997. This decrease was due to a $316,000 decrease in the average balance of
interest-earning assets during the 1998 period, partially offset by a 3 basis
point increase in the weighted average yield on interest-earning assets.
Interest Expense. Total interest expense for the six months ended March
31, 1998 was $271,000 as compared to $274,000 for the six months ended March 31,
1997. This decrease was primarily due to a $364,000 decrease in the average
balance of interest-bearing liabilities, partially offset by an 8 basis point
increase in the weighted average rate paid on such liabilities.
Provision of Loan Losses. The loan loss provision was $3,000 for both
six month periods ended March 31, 1998 and December 31, 1997.
Non-Interest Income. The non-interest income for the six months ended
March 31, 1998 was $61,000 as compared to the non-interest income for the six
months ended March 31, 1997 of $64,000.
Non-Interest Expense. For the six months ended March 31, 1998, the
non-interest expense was $253,000 as compared to $255,000 for the six months
ended March 31, 1997. This decrease was due to a decrease in FDIC insurance
premiums.
Income Tax Expense. The income tax expense for the six months ended
March 31, 1998 was $11,000 as compared to $13,000 for the six months ended March
31, 1997.
Comparison of Years Ended September 30, 1996 and September 30, 1997
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 6 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.
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
69
<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.
70
<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. Non-accruing loans
have been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Six Months Ended March 31, 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)............ $ 9,267 $408 8.81% $ 9,430 $417 8.85 $ 9,548 $ 843 8.82
Mortgage-backed securities..... 250 7 5.95 253 8 6.07 253 15 6.07
Investment securities.......... 3,017 84 5.56 3,215 87 5.40 3,199 174 5.45
FHLB stock..................... 137 5 7.75 128 4 6.50 130 9 6.79
Interest-bearing deposits...... 339 3 1.66 300 3 1.26 317 5 1.55
------ ---- ------- ---- ------- -----
Total earning assets.......... 13,010 507 7.81 13,326 519 7.77 13,447 1,046 7.78
---- ---- -----
Non-interest earning assets.... 812 801 806
------- ------- -------
Total assets................... $13,822 $14,127 $14,253
======= ======= =======
Interest-bearing liabilities:
Savings deposits............... $ 1,762 27 3.03 $ 1,783 27 2.99 $ 1,852 56 3.02
Demand and NOW................. 2,351 29 2.49 2,393 40 3.35 2,431 84 3.46
MMDA........................... 1,801 36 3.99 1,735 21 2.40 1,743 42 2.39
Certificates of deposit........ 6,190 167 5.39 6,407 172 5.38 6,381 343 5.39
FHLB advances................. 467 12 5.31 617 14 4.54 633 35 5.48
-------- ---- ------- ---- ------- ----
Total interest-bearing
liabilities ................ 12,571 271 4.31 12,935 274 4.23 13,040 560 4.30
---- ---- ----
Non-interest-bearing liabilities 133 151 151
-------- ------- -------
Total liabilities............ 12,704 13,086 13,191
Equity.......................... 1,118 1,041 1,062
-------- ------- -------
Total liabilities and equity. $13,822 $14,127 $14,253
======== ======= =======
Net interest/spread............. $236 3.49% $245 3.54% $486 3.48%
==== ==== ==== ==== ====
Margin.......................... 3.63% 3.66% 3.61%
==== ==== ====
Assets to liabilities........... 103.49% 103.02% 103.12%
======= ======= =======
</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............... $ 1,723 52 3.05 $ 1,771 54 3.06
Demand and NOW................. 2,304 73 3.17 2,422 63 2.58
MMDA........................... 1,684 48 2.88 1,832 67 3.65
Certificates of deposit........ 6,650 358 5.38 6,063 275 4.54
FHLB advances................. 742 40 5.33 650 37 5.79
------- ----- ------- -----
Total interest-bearing
liabilities ................ 13,103 571 4.36 12,738 496 3.90
----- -----
Non-interest-bearing liabilities 180 171
------- -------
Total liabilities............ 13,283 12,909
Equity.......................... 1,040 972
------- -------
Total liabilities and equity. $14,323 $13,881
======= =======
Net interest/spread............. $474 3.40% $513 3.86%
===== ==== ===== ====
Margin.......................... 3.52% 3.94%
==== ====
Assets to liabilities........... 102.88% 102.13%
======= =======
</TABLE>
- -------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
71
<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,
March 31, ------------------------
1998 1997 1996 1995
Weighted average yield on:
<S> <C> <C> <C> <C>
Loans receivable ...................... 8.79% 8.85% 8.87% 9.06%
Mortgage-backed securities ............ 6.08 6.08 6.08 6.09
Investment securities ................. 5.55 5.49 5.44 5.38
Other interest-earning assets ......... 5.04 7.88 4.91 5.34
Combined weighted average
yield on interest-earning
assets .......................... 7.81 7.98 7.82 7.95
Weighted average rate paid on:
Passbook Savings ...................... 3.01 3.01 3.01 3.01
NOW ................................... 2.56 2.39 2.33 2.63
MMDA .................................. 4.00 3.91 3.90 3.85
Certificate accounts .................. 5.42 5.43 5.42 5.17
Borrowings ............................ 6.28 6.56 6.03 6.65
Combined weighted average
rate paid on interest-
bearing liabilities ............... 4.37 4.25 4.33 4.34
Spread ................................. 3.44% 3.73% 3.49% 3.61%
</TABLE>
72
<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>
Six Months Ended
March 31, 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................... $ (7) $ (2) $ (9) $ 27 $ (14) $ 13
Mortgage-backed securities......... 0 (1) (1) 0 0 0
Investment securities.............. (4) 1 (3) (1) 2 1
FHLB stock......................... 0 1 1 1 0 1
Interest-bearing deposits.......... 0 0 0 (7) (7) (14)
--------- -------- -------- --------- ---------- ---------
Total interest-earning assets.... $ (11) $ (1) (12) $ 20 $ (19) 1
======== ========= -------- ======= ======== ---------
Interest-bearing liabilities:
Savings deposits................... $ 0 $ 0 0 $ 4 $ 0 4
Demand and NOW..................... (1) (10) (11) 4 7 11
MMDA............................... 1 14 15 2 (8) (6)
Certificates of Deposit............ (5) 0 (5) (16) 1 (15)
FHLB advances...................... (3) 1 (2) (6) 1 (5)
---------- -------- ---------- ---------- -------- ----------
Total interest-bearing liabilities $ (8) $ 5 (3) $ (12) $ 1 (11)
========= ======= ---------- ======== ======= ---------
Net interest/spread................. $ (9) $ 12
========= =======
</TABLE>
73
<PAGE>
Asset/Liability Management of Neodesha
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 March 31, 1998, approximately $5.1
million, or 55.7% 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 March 31,
1998, Neodesha would qualify for an exemption from this rule.
74
<PAGE>
The following table sets forth, at March 31, 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 March 31, 1998
Interest Rate ------------------------------------------
Basis Points) $ Amount $ Change % Change
--------------- ---------- ---------- ---------
(Dollars in Thousands)
+200 $ 1,355 $ (73) (5)%
+100 1,405 (23) (2)
-- 1,428 -- --
-100 1,442 14 1
-200 1,495 67 5
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. Nodesha
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 March 31, 1998,
Neodesha's liquidity ratio for regulatory purposes was 19.09%.
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 $23,000 for the six
months ended March 31, 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 $790,000 decrease for the six
months ended March 31, 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 March 31, 1998, cash and
short-term investments totaled $650,000. 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.
75
<PAGE>
At March 31, 1998, Neodesha had outstanding commitments to originate
loans of $129,000, 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 March 31, 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.
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.
76
<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 March 31, 1998, Neodesha's
loans receivable, net totaled $9.1 million. See "- Originations of Loans."
77
<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,
March 31, -----------------------------------------------------------------------
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............... $6,992 76.19% $7,237 75.70% $7,455 77.18% $7,282 79.43%
Multi-family...................... -- -- -- -- 5 .05 9 .10
Commercial........................ 50 .55 72 .75 105 1.09 196 2.13
Construction or development....... -- -- -- -- 70 .72 -- --
------- ----- ------ ----- ------ ----- ------ -----
Total real estate loans......... 7,042 76.74 7,309 76.45 7,635 79.04 7,487 81.66
------- ----- ------ ----- ------ ----- ------ -----
Consumer loans:
Deposit account................... 116 1.26 123 1.29 142 1.47 153 1.67
Automobile........................ 1,797 19.58 1,872 19.58 1,606 16.63 1,261 13.76
Unsecured......................... 110 1.20 118 1.23 109 1.13 79 .86
Other............................. 112 1.22 139 1.45 167 1.73 188 2.05
-------- ----- ------ ----- ------ ----- ------ -----
Total consumer loans............ 2,135 23.26 2,252 23.55 2,024 20.96 1,681 18.34
------- ----- ------ ----- ------ ----- ------ -----
Total loans..................... 9,177 100.00% 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.............. 85 89 101 107
------- ------ ------ ------
Total loans receivable, net..... $9,088 $9,468 $9,489 $9,049
====== ====== ====== ======
</TABLE>
78
<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,
March 31, ---------------------------------------------------------
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................. $1,882 20.51% $2,162 22.61% $2,591 26.82% $2,947 32.14%
Multi-family........................ -- -- -- -- 5 0.05 9 .10
Non-residential..................... 50 .54 72 .76 105 1.09 196 2.14
------ ----- ------ ----- ------ ------ ------ ------
Total fixed -rate
real estate loans............ 1,932 21.05 2,234 23.37 2,701 27.96 3,152 34.38
Consumer............................ 2,135 23.26 2,252 23.55 2,024 20.95 1,681 18.34
------ ----- ------ ----- ------ ------ ------ ------
Total fixed-rate loans............ 4,067 44.31 4,486 46.92 4,725 48.91 4,833 52.72
------ ----- ------ ----- ------ ------ ------ ------
Adjustable-Rate Loans
Real estate:
One-to four-family.................. 5,110 55.69 5,075 53.08 4,864 50.36 4,335 47.28
Construction........................ -- -- -- -- 70 0.73 -- --
Total adjustable-rate loans....... 5,110 55.69 5,075 53.08 4,934 51.09 4,335 47.28
------ ----- ------ ----- ------ ------ ------ ------
Total loans....................... 9,177 100.00% 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................ 85 89 101 107
------ ----- ------ ------
Total loans receivable, net....... $9,088 $9,468 $9,489 $9,049
====== ====== ====== ======
</TABLE>
79
<PAGE>
The following schedule shows the scheduled contractual maturities of
Neodesha's loan portfolio at March 31, 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
March 31,
---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999(1) .............................. $ 6 7.75% $ 7 7.75% $524 10.82% $ 537 10.76%
2000 ................................. 17 8.53 -- -- 287 11.35 304 11.14
2001 ................................. 38 10.87 -- -- 620 10.50 658 10.51
2002 and 2003 ........................ 240 7.99 27 7.75 654 9.42 921 9.23
2004 to 2008 ......................... 1,739 9.00 16 7.75 34 9.22 1,789 9.03
2009 to 2023 ......................... 4,051 8.51 -- -- 16 10.21 4,067 8.37
2024 and following ................... 901 7.87 -- -- -- -- 901 7.87
------ --- ------ ------
Total ............................. $6,992 $50 $2,135 $9,177
====== === ====== ======
</TABLE>
- -----------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after March 31, 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 $5.1
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 March 31,
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 March 31, 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 $109,000
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 $102,000. At March 31, 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. Substantially all of Neodesha's
one- to four-family residential mortgage originations are secured by properties
located in its market area. All mortgage loans currently originated by Neodesha
are retained and serviced by it.
80
<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 March 31, 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 March 31, 1998, one- to four-family ARMs
totaled $5.1 million or 55.69% 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 March 31, 1998, Neodesha had
commercial real estate loans totaling $50,000, or 0.54% 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 March 31, 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 March 31, 1998 consumer loans totaled
$2.1 million or 23.26% 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
81
<PAGE>
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.
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,
March 31, -----------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Thousands)
Originations by type:
Adjustable rate:
<S> <C> <C> <C> <C>
Real estate - one- to four-family......... $ 350 $ 1,159 $ 1,518 $ 1,106
Fixed rate:
Consumer - non-real estate................ 1,189 2,755 2,361 2,013
------- -------- -------- --------
Total loans originated.............. 1,539 3,914 3,879 3,119
Repayments
Principal repayments (1).................. 1,935 4,012 3,388 3,053
Increase (decrease) in other items, net (2). 3 77 (51) 43
--------- -------- -------- --------
Net increase (decrease)............ $ (393) $ (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.
82
<PAGE>
Delinquent Loans. The following table sets forth information concerning
delinquent loans at March 31, 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... 5 $109 1.19% 4 $ 93 1.01% 9 $ 202 2.20%
Consumer................ 6 22 .24 36 80 .87 42 102 1.11
----- ----- ----- ----- ------ ---- ----- ---- ----
Total.............. 11 $131 1.43% 40 $ 173 1.88% 51 $ 304 3.31%
==== ==== ==== ===== ====== ==== ===== ===== ====
</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 March 31, 1998, Neodesha had $125,000 in loans classified as
substandard, $9,000 classified as doubtful and no loans classified as loss.
83
<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,
March 31, -----------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
<S> <C> <C> <C> <C>
One- to four-family..................... $93 $ 85 $ 60 $ 89
Non-residential real estate............ --- --- --- 58
Consumer................................ 80 72 71 39
------ ------- -------- --------
Total non-accruing loans............ 173 157 131 186
Real estate acquired through foreclosure...
One- to four-family..................... --- --- --- 22
Non-residential......................... --- --- --- 8
Repossessed assets....................... 22 25 --- 4
------ ------- -------- ---------
Total non-performing assets................ $195 $ 182 $ 131 $ 220
==== ===== ===== =====
Total as a percentage of total assets...... 1.43% 1.29% .91% 1.59%
===== ==== ====== =====
</TABLE>
For the year ended September 30, 1997 and for the six months ended
March 31, 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 six months ended March 31, 1998, respectively.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of March 31, 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.
84
<PAGE>
The following table sets forth an analysis of Neodesha's allowance for
loan losses at the dates indicated.
<TABLE>
<CAPTION>
Six months ended Year Ended September 30,
March 31, ----------------------------------------
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.................................... (9) (21) (14) (13)
Recoveries:
Consumer.................................... 2 3 2 --
------ ------ ------ -----
Net charge-offs............................. (7) (18) (12) (50)
Provision for the period...................... 3 6 6 6
------ ------ ------ -----
Balance at end of period...................... $ 85 $ 89 $ 101 $ 107
==== ===== ===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period. .08% .19% .13% .55%
===== ===== ===== =====
Allowance for loan losses to total loans at end
of period.................................. .93% .93% 1.05% 1.17%
===== ===== ==== ====
Allowance for loan losses to non-performing loans
at end of period........................... 49.13% 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,
------------------------------------------------------------------------
March 31, 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.. $ 31 76.19% $ 32 75.70% $ 33 77.18% $ 35 79.43%
Multi-family......... -- -- -- -- -- .05 -- .10
Non-residential...... -- .55 -- .75 -- 1.09 -- 2.13
Construction......... -- -- -- -- -- .72 -- --
Consumer................ 24 23.26 24 23.55 10 20.96 8 18.34
Unallocated............. 30 -- 33 -- 58 -- 64 --
------ ----- ----- ----- ------ ----- ------- -----
Total.............. $ 85 100.00% $ 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.
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
85
<PAGE>
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 March 31, 1998,
Neodesha's liquidity ratio for regulatory purposes was 19.09%. 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 March 31, 1998, Neodesha had no securities which were classified as trading
and no securities classified as available-for-sale. At March 31, 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 March 31, 1998, Neodesha's securities portfolio totaled $3.4
million. At March 31, 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.
86
<PAGE>
The following table sets forth the composition of the Association's
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
March 31, ---------------------------------------------------------
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........................... $ 898 26.44% $ 897 25.60% $1,097 30.52% $1,098 30.61%
Federal agency obligations............ 1,517 44.67 1,617 46.15 1,516 42.18 1,516 42.26
Municipals............................ 603 17.76 603 17.21 602 16.75 602 16.79
Mortgage-backed securities:........... 237 7.01 253 7.22 253 7.04 253 7.05
------ ------- ------ ----- ------ ------ ------ -----
Total securities held to maturity.. 3,256 95.88 3,370 96.18 3,468 96.49 3,469 96.71
FHLB stock............................ 140 4.12 134 3.82 126 3.51 118 3.29
------ -------- ------- ----- ------ ------ ------ -----
Total securities and FHLB stock.... $3,396 100.00% $3,504 100.00% $3,594 100.00% $3,587 100.00%
====== ====== ====== ====== ====== ====== ====== ======
Average remaining life or term to
repricing of securities (excluding
FHLB stock)........................... 2.00 years 2.12 years 2.67 years 3.54 years
Other Interest-Earning Assets:
Interest-bearing deposits:............ $ 467 100.00% $ 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>
March 31, 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.................... $ 698 $ 200 $ -- $ 898 $ 899
Federal agency obligations....... 500 1,017 -- 1,517 1,527
Municipals....................... -- 410 193 603 604
-------- -------- ------- ------- -------
Total investment securities... $ 1,198 $1,627 $ 193 $ 3,018 $3,030
======== ====== ======== ======= ======
Weighted average yield........ 5.42% 5.70% 4.55% 5.48%
======== ====== ======== =======
</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.
87
<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>
Six Months
Ended Year Ended September 30,
March 31, ----------------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Opening balance ................................ $ 12,854 $ 12,698 $ 11,673 $ 12,742
Deposits ....................................... 18,056 44,637 43,553 40,035
Withdrawals .................................... (19,001) (44,854) (42,887) (41,480)
Interest credited .............................. 156 373 359 376
-------- -------- -------- --------
Ending balance ................................. $ 12,065 $ 12,854 $ 12,698 $ 11,673
======== ======== ======== ========
Net increase (decrease) ........................ $ (789) $ 156 $ 1,025 $ (1,069)
======== ======== ======== ========
Percent increase (decrease) .................... (6.14)% 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,
March 31, -----------------------------------------------------------------------
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%)........ $ 1,806 14.96% $ 2,000 15.55% $ 1,778 13.98% $ 1,754 15.01%
NOW Accounts (2.75-3.25%)...... 2,302 19.07 2,453 19.07 2,549 20.05 2,286 19.56
Money Market Accounts
(2.75-3.50%).............. 1,733 14.35 2,074 16.12 1,623 12.77 1,741 14.90
-------- ------ ------ ------ ----- ------ ------ ------
Total Transactions and Savings
Deposits.................. 5,841 48.38 6,527 50.74 5,950 46.80 5,781 49.47
-------- ------ ------ ------ ----- ------ ------ ------
Certificates:
0.00 - 3.99%................... -- -- -- -- -- -- 74 .63
4.00 - 4.99%................... 819 6.78 1,395 10.85 2,164 17.02 1,808 15.47
5.00 - 5.99%................... 4,041 33.47 3,045 23.67 2,540 19.98 3,038 26.00
6.00 - 6.99%................... 1,364 11.30 1,887 14.67 2,044 16.08 972 8.32
-------- ------ ------- ------ ------ ----- ------ -------
Total Certificates............. 6,224 51.55 6,327 49.19 6,748 53.08 5,892 50.42
-------- ------ ------- ------ ------ ------ ------ ------
Accrued Interest............... 8 0.07 9 0.07 15 0.12 13 0.11
--------- ------- -------- ------- ------ ------ ------- -------
Total Deposits................. $12,073 100.00% $12,863 100.00% $12,713 100.00% $11,686 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
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The following table shows rate and maturity information for Neodesha's
certificates of deposit as of March 31, 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>
June 30, 1998 ........ $ 517 $ 480 $ 195 $1,192 19.15%
September 30, 1998 ... 302 939 434 1,675 26.92
December 31, 1998 .... -- 340 82 422 6.78
March 31, 1999 ....... -- 813 11 824 13.24
June 30, 1999 ........ -- 287 17 304 4.88
September 30, 1999 ... -- 283 30 313 5.03
December 31, 1999 .... -- 203 223 426 6.84
March 31, 2000 ....... -- 75 373 448 7.20
June 30, 2000 ........ -- 111 -- 111 1.78
September 30, 2000 ... -- 327 -- 327 5.25
December 31, 2000 .... -- 32 -- 32 .52
March 31, 2001 ....... -- 22 -- 22 .35
June 30, 2001 ........ -- 11 -- 11 .18
Thereafter ........... -- 117 -- 117 1.88
------ ------ ------ ------ ------
Total ................ $ 819 $4,040 $1,365 $6,224 100.00%
====== ====== ====== ====== ======
Percent of total ..... 13.16% 64.93% 21.91%
====== ====== ======
</TABLE>
The following table indicates the amount of Neodesha's certificates of
deposit and other deposits by time remaining until maturity as of March 31,
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 ................... $ 892 $ 961 $1,246 $1,710 $4,809
Certificates of deposit $100,000 or more ..................... 100 314 -- 401 815
Public funds(1) .............................................. 200 400 -- -- 600
------ ------ ------ ------ ------
Total certificates of deposit ........................... $1,192 $1,675 $1,246 $2,111 $6,224
====== ====== ====== ====== ======
</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.
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<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 Six Months At and for the Year Ended September 30,
ended March 31, ---------------------------------------
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............. $ 467 $ 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,
March 31, -------------------------------------------
1998 1997 1996 1995
------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
FHLB advances....................... $400 $100 $500 $950
Weighted average interest rate of
FHLB advances.................... 6.28% 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 March 31, 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 March 31, 1998, Neodesha had a total of 8 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.
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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 March 31, 1998 was approximately
$50,000.
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 March 31, 1998, First
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<PAGE>
Federal's and Neodesha's lending limit under this restriction was approximately
$1.5 million, and $500,000, respectively. At March 31, 1998, the Association and
Neodesha had no loans in excess of their loans-to-one borrower limits.
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 March 31, 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 March 31, 1998, neither the Association nor Neodesha
had any subsidiaries.
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<PAGE>
At March 31, 1998, First Federal had tangible capital of $9.8 million, or
7.93% of adjusted total assets, which is approximately $7.9 million above the
minimum requirement of 1.50% of adjusted total assets in effect on that date. At
March 31, 1998, Neodesha had tangible capital of $1.1 million, or 8.20% of
adjusted total assets, which is approximately $919,00 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 March 31, 1998, First
Federal and Neodesha each had no intangibles which were subject to these tests.
At March 31, 1998, First Federal had core capital equal to $9.8 million,
or 7.93% of adjusted total assets, which is $6.1 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 8.20% of adjusted total assets, which
is $714,000 above the minium 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 March 31, 1998, First Federal and
Neodesha had no capital instruments that qualify as supplementary capital and
$656,000 and $85,000 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 March 31, 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 March 31, 1998, First Federal had total risk-based capital of $10.4
million (including $9.8 million in core capital and $656,000 in qualifying
supplementary capital) and risk-weighted assets of $57.5 million; or total
capital of 18.17% of risk-weighted assets. This amount was $5.8 million above
the 8% requirement in effect on that date.
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<PAGE>
On March 31, 1998, Neodesha had total risk-based capital of $1.2 million
(including $1.1 million in core capital and $85,000 in qualifying supplementary
capital) and risk-weighted assets of $7.0 million; or total capital of 17.3% of
risk-weighted assets. This amount was $651,000 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
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<PAGE>
distribution. The OTS may object to the distribution during that 30-day period
notice based on safety and soundness concerns. See "- Regulatory Capital
Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including First Federal 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 March 31, 1998, First
Federal and Neodesha were both in compliance with this requirement, with liquid
asset ratios of 15.44% and 19.09%, 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 March 31, 1998, First
Federal and Neodesha met the test and have always met the test since its
effectiveness. At March 31, 1998, First Federal's and Neodesha's QTL percentage
was 89.8% and 91.6%, 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
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company must register as a bank holding company and become subject to all
restrictions on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of First Federal 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
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controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Exchange Act. The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At March 31, 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 March 31, 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
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<PAGE>
property loans" (generally loans secured by improved real estate) could be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage bad debt deduction thus computed was reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" 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.
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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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VOTING SECURITIES AND PRINCIPAL HOLDINGS THEREOF
As of March 31, 1998, First Independence had 955,693 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) 10.66
John Hancock Mutual Life Insurance Company
John Hancock Place
P.O. Box 111
Boston, Massachusetts 02117 71,000(3) 7.43
Athena Capital Management, Inc.
621 E. Germantown Pike
Plymouth Valley, Pennsylvania 19401 78,236(4) 8.19
Jeffrey Gendell
31 West 52nd Street
17th Floor
New York, New York 10019 97,800(7) 10.23
Larry G. Spencer
President, Chief Executive Officer and Director
901 Birdie Drive
Independence, Kansas 67301 68,975(5) 7.00
Directors and executive officers as a group (10 persons) 260,680(6) 24.60
</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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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 41 Director 1992 2001 9,818(3) (4)
Joseph M. Smith 52 Director 1993 2001 5,878(5) (4)
Larry G. Spencer 50 President, Chief Executive Officer and
Director 1993 2000 68,975(6) 6.85%
Harold L. Swearingen 60 Director 1992 2000 9,418(7) (4)
Donald E. Aitken 71 Chairman of the Board 1968 1999 28,818(8) 2.93
John T. Updegraff 70 Vice Chairman of the Board 1979 1999 14,518(9) 1.48
Lavern W. Strecker 56 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, Hartland 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.
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<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 March 31, 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 March 31, 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,
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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.
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 $414
paid by the Association.
No stock appreciation rights ("SARs") were granted during fiscal 1997. The
following table sets forth certain information concerning the number and value
of unexercised stock options held by the Company's Chief Executive Officer at
September 30, 1997. No options were exercised during fiscal 1997.
105
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
- --------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Options/SARs at FY-End (#) at FY-End ($)(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.
106
<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 69 1979 2000
Jerry Webster Director 59 1983 1999
Doug Buckles Director 46 1988 2001
Richard Stewart Director 57 1976 2000
</TABLE>
- ------------
(1) At December 31, 1997
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.
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<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
108
<PAGE>
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."
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 $46,000 at March 31, 1998, which was 4.1% of Neodesha's
retained earnings at that date. At March 31, 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 March 31, 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.
109
<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
110
<PAGE>
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.
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
111
<PAGE>
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.
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.
112
<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 May 4, 1998, the Company had 957,319 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.
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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.
114
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Independence Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of First
Independence Corporation and Subsidiary as of September 30, 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.
Wichita, Kansas
October 24, 1997
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
March 31, ---------------------------
1998 1997 1996
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Cash and due from banks .......................... $ 869,625 $ 961,350 $ 753,134
Federal funds sold ............................... 5,300,000 1,600,000 400,000
Other interest-bearing deposits .................. 207,117 589,877 610,295
------------ ------------ ------------
Cash and cash equivalents .................... 6,376,742 3,151,227 1,763,429
Investment securities held to maturity
(estimated fair value $4,960,950 at March 31,
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 ......... 3,346,443 4,311,406 5,235,073
Mortgage-backed securities held to maturity
(estimated fair value $21,093,661 at March 31,
1998; $23,748,569 at September 30, 1997;
$27,873,630 at September 30, 1996) ............. 20,902,199 23,527,689 28,039,314
Mortgage-backed securities available for sale .... -- 471,618 659,207
Loans receivable ................................. 85,263,856 74,558,783 67,682,920
Premises and equipment ........................... 1,307,769 1,297,500 910,813
Federal Home Loan Bank stock, at cost ............ 1,422,800 1,368,900 1,239,500
Accrued interest receivable ...................... 736,675 712,298 667,920
Real estate acquired through foreclosure ......... 15,320 12,131 11,845
Deferred income taxes ............................ -- -- 173,904
Other ............................................ 122,179 111,107 155,304
------------ ------------ ------------
$124,493,983 $112,522,659 $108,539,229
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30,
March 31, ---------------------------
1998 1997 1996
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Deposits ......................................... $ 84,171,855 $ 76,229,176 $ 69,356,422
Advances from borrowers for taxes and
insurance ...................................... 733,076 693,069 678,072
Checks issued in excess of cash items ............ 280,881 -- 492,627
Deferred income taxes ............................ 85,815 34,048 --
Advances from Federal Home Loan Bank ............. 27,300,000 23,700,000 24,300,000
Accrued expenses and other ....................... 368,649 337,085 709,599
------------ ------------ ------------
Total liabilities .......................... 112,940,276 100,993,378 95,536,720
Stockholders' equity
Preferred stock, $.01 par value, 500,000 shares
authorized; none issued ...................... -- -- --
Common stock, $.01 par value, 2,500,000 shares
authorized; 1,498,392 shares issued in 1998
and 1997 and 749,196 shares issued in 1996 ... 14,984 14,984 7,492
Additional paid-in capital ..................... 7,188,447 7,122,744 7,053,143
Retained earnings--substantially restricted .... 9,689,322 9,441,054 8,960,098
Unrealized gain (loss) on securities available
for sale, net of related taxes ............... 19,955 15,112 (11,293)
Required contributions for shares acquired by
Employee Stock Ownership Plan (ESOP) ......... (181,843) (218,212) (290,949)
Unearned stock compensation--recognition and
retention plan (RRP) ......................... (21,812) (43,634) (87,278)
Treasury stock, 542,699 shares at March 31,
1998, 520,059 shares at September 30, 1997
and 331,550 shares at September 30, 1996--
at cost ...................................... (5,155,346) (4,802,767) (2,628,704)
------------ ------------ ------------
Total stockholders' equity ................. 11,553,707 11,529,281 13,002,509
------------ ------------ ------------
$124,493,983 $112,522,659 $108,539,229
============ ============ ============
</TABLE>
2
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Six months ended Year ended
March 31 September 30,
----------------------- -----------------------
1998 1997 1997 1996
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans ................................. $3,332,484 $2,778,864 $5,684,053 $5,189,361
Mortgage-backed securities ............ 728,843 884,811 1,726,754 1,929,927
Investment securities ................. 199,976 234,081 513,223 478,990
Interest-bearing deposits and other ... 115,505 72,161 145,016 174,825
---------- ---------- ---------- ----------
Total interest income ............... 4,376,808 3,969,917 8,069,046 7,773,103
Interest expense
Deposits .............................. 1,944,157 1,781,023 3,659,320 3,581,799
Borrowed funds ........................ 735,448 706,940 1,399,263 1,087,249
---------- ---------- ---------- ----------
Total interest expense .............. 2,679,605 2,487,963 5,058,583 4,669,048
---------- ---------- ---------- ----------
Net interest income ..................... 1,697,203 1,481,954 3,010,463 3,104,055
Other income
Service charges ....................... 75,976 83,445 199,459 178,949
Real estate operations ................ (1,003) 1,412 34,179 94,199
Other ................................. 38,049 21,021 46,795 58,292
Gain on sale of investment securities . -- -- -- 250,945
---------- ---------- ---------- ----------
113,022 105,878 280,433 582,385
General, administrative and other expense
Employee compensation and benefits .... 659,977 600,983 1,239,516 1,093,509
Occupancy and equipment ............... 117,677 73,435 167,944 131,172
Data processing fees .................. 90,177 75,364 150,896 138,659
Federal deposit insurance premiums .... 23,831 42,216 65,626 591,677
Other operating ....................... 255,236 258,145 487,516 429,304
---------- ---------- ---------- ----------
1,146,898 1,050,143 2,111,498 2,384,321
---------- ---------- ---------- ----------
Earnings before income taxes ............ 663,327 537,689 1,179,398 1,302,119
Income tax expense ...................... 288,091 205,415 467,718 486,826
---------- ---------- ---------- ----------
NET EARNINGS ........................ $ 375,236 $ 332,274 $ 711,680 $ 815,293
========== ========== ========== ==========
Earnings per share
Basic ................................. $.41 $.33 $.73 $.72
Diluted ............................... .38 .31 .68 .68
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six months ended March 31, 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>
4
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- CONTINUED
Six months ended March 31, 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 six months
ended March 31, 1998 (unaudited) .. $ -- $ -- $ 375,236 $ -- $ -- $ -- $ -- $ 375,236
Cash dividends of $.1375 per share .. -- -- (126,968) -- -- -- -- (126,968)
Common stock options exercised ...... -- (2,558) -- -- -- -- 11,858 9,300
Appreciation of securities available
for sale .......................... -- -- -- 4,843 -- -- -- 4,843
ESOP loan repayments ................ -- -- -- -- 36,369 -- -- 36,369
Fair value adjustment on ESOP
shares committed for release ...... -- 68,261 -- -- -- -- -- 68,261
Amortization of unearned stock
compensation ...................... -- -- -- -- -- 21,822 -- 21,822
Purchase of 24,500 shares of
treasury stock .................... -- -- -- -- -- -- (364,437) (364,437)
------- ---------- ---------- --------- --------- --------- ----------- -----------
Balance at March 31, 1998
(unaudited) ....................... $14,984 $7,188,447 $9,689,322 $ 19,955 $(181,843) $ (21,812) $(5,155,346) $11,553,707
======= ========== ========== ========= ========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended Year ended
March 31, September 30,
------------------------- -------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings ...................................... $ 375,236 $ 332,274 $ 711,680 $ 815,293
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation .................................. 52,893 37,406 84,077 55,895
Amortization of premiums and discounts on
investments and mortgage-backed securities .. 37,309 65,717 88,993 106,967
Gain on sale of investment securities ......... -- -- -- (250,945)
Amortization of deferred loan origination fees (74,853) (30,784) (60,988) (64,119)
Amortization of expense related to employee
benefit plans ............................... 126,452 97,286 205,973 176,460
Gain on sale of real estate acquired
through foreclosure ......................... (2,499) (436) (41,216) (111,956)
Deferred income taxes ......................... 48,807 15,809 191,768 (38,769)
Other ......................................... -- -- 229 3,402
Increase (decrease) in cash due to changes in
Accrued interest receivable ................. (24,377) (4,796) (44,378) (49,482)
Other assets ................................ (67,281) 39,357 22,957 (4,829)
Accrued expenses and other liabilities ...... (51,343) (547,535) (369,995) 503,251
Income taxes payable ........................ 139,268 140,820 50,864 (123,286)
----------- ----------- ----------- -----------
Net cash provided by operating activities . 559,612 145,118 839,964 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 2,075,706 2,188,741 3,167,307
Held to maturity .............................. 5,576,007 3,074,425 6,412,465 5,236,916
Purchase of securities
Available for sale ............................ (63,705) (1,097,163) (1,154,129) (2,217,489)
Held to maturity .............................. (5,000,000) (2,000,000) (3,000,000) (5,790,535)
Net increase in loans ............................. (10,631,244) (2,566,948) (6,830,223) (7,215,690)
Capital expenditures .............................. (63,162) (407,445) (470,993) (308,867)
Proceeds from sale of real estate acquired
through foreclosure ............................. 174 10,194 24,136 37,669
Other ............................................. -- -- -- 2,219
----------- ----------- ----------- -----------
Net cash used in investing activities ..... (8,715,559) (911,231) (2,830,003) (6,825,325)
</TABLE>
6
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
Six months ended Year ended
March 31, September 30,
------------------------- -------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities
Net increase in deposits .......................... $ 7,942,679 $ 4,784,477 $ 6,872,754 $ 1,429,794
Net increase (decrease) in advances from
borrowers for taxes and insurance ............... 40,007 (3,998) 14,996 (564,868)
Net increase (decrease) in checks issued in
excess of cash items ............................ 280,881 (267,374) (492,627) 492,627
Advances from Federal Home Loan Bank .............. 15,500,000 9,800,000 17,500,000 20,900,000
Repayment of Federal Home Loan Bank advances ...... (11,900,000) (11,600,000) (18,100,000) (15,400,000)
Cash dividends paid ............................... (126,968) (112,683) (230,724) (213,876)
Purchase of treasury stock ........................ (364,437) (1,860,978) (2,233,832) (1,207,430)
Stock options exercised ........................... 9,300 38,180 47,270 20,000
----------- ----------- ----------- -----------
Net cash provided by financing activities ....... 11,381,462 777,624 3,377,837 5,456,247
----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents .................................. 3,225,515 11,511 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 .......... $ 6,376,742 $ 1,774,940 $ 3,151,227 $ 1,763,429
=========== =========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for
Income taxes .................................... $ 148,823 $ 64,595 $ 225,086 $ 648,881
Interest ........................................ 2,642,896 2,480,221 4,935,024 4,669,113
Noncash investing and financing activities
Transfer from loans to real estate acquired
through foreclosure ........................... 56,574 8,781 88,772 11,845
Issuance of loans receivable in connection
with the sale of real estate acquired
through foreclosure ........................... 55,550 -- 51,600 45,000
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 1998, and for the six-month periods
ended March 31, 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.
8
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
March 31, 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 for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance, adjusted for any charge-offs, the allowance for
loan losses, unearned discounts and net deferred loan origination fees.
The allowance for loan losses is increased by charges to operations and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Association's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral and current economic conditions.
9
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
March 31, 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 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
10
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
March 31, 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.
11
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
March 31, 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:
Six months ended Year ended
March 31, September 30,
------------------- ---------------------
1998 1997 1997 1996
------- --------- --------- ---------
(Unaudited)
Weighted average common
shares outstanding ............. 924,407 1,014,119 980,858 1,136,610
Common share equivalents related
to outstanding stock options ... 71,193 63,819 70,658 54,762
------- --------- --------- ---------
Adjusted weighted average common
shares deemed to be outstanding 995,600 1,077,938 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:
March 31, 1998 (unaudited)
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ---------- ---------- ---------- ----------
U.S. Government agency
obligations ................ $5,000,000 $ -- $39,050 $4,960,950
========== ======= ======= ==========
Available for sale
------------------
Intermediate term liquidity
portfolio .................. $ 336,823 $ 621 $ -- $ 337,444
U.S. Government agency
obligations ................ 2,977,435 31,564 -- 3,008,999
---------- ------- ------- ----------
$3,314,258 $32,185 $ -- $3,346,443
========== ======= ======= ==========
12
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
March 31, 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 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 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
========== ==========
13
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
March 31, 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:
March 31, 1998 (unaudited)
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ----------- ---------- ---------- -----------
GNMA certificates ............ $ 63,519 $ 5,989 $ -- $ 69,508
FHLMC certificates ........... 8,216,103 81,794 15,931 8,281,966
FNMA certificates ............ 5,542,879 120,511 22,725 5,640,665
Collateralized mortgage
obligations ................ 7,079,698 39,923 18,099 7,101,522
----------- -------- -------- -----------
$20,902,199 $248,217 $ 56,755 $21,093,661
=========== ======== ======== ===========
14
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
March 31, 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 ................ 8,599,181 64,924 112,379 8,551,726
----------- -------- -------- -----------
$23,527,689 $372,821 $151,941 $23,748,569
=========== ======== ======== ===========
Available for sale
------------------
FHLMC certificates ........... $ 469,874 $ 1,744 $ -- $ 471,618
=========== ======== ======== ===========
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 ................ 8,937,702 -- 244,746 8,692,956
----------- -------- -------- -----------
$28,039,314 $189,367 $355,051 $27,873,630
=========== ======== ======== ===========
Available for sale
------------------
FHLMC certificates ........... $ 669,454 $ -- $ 10,247 $ 659,207
=========== ======== ======== ===========
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.
15
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE C -- MORTGAGE-BACKED SECURITIES -- Continued
Mortgage-backed securities with a fair value of $16,055,495, $13,295,170 and
$11,005,909 at March 31, 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,
March 31, ----------------------------
1998 1997 1996
---- ---- ----
(Unaudited)
First mortgage loans
Secured by one-to-four
family residences ............ $ 67,166,512 $ 64,152,604 $ 57,352,844
Secured by multi-family
residences ................... 1,132,658 1,164,442 1,370,715
Nonresidential ................ 7,537,343 7,478,908 7,223,602
Construction .................. 13,317,376 763,712 1,833,750
------------ ------------ ------------
Total first mortgage loans ... 89,153,889 73,559,666 67,780,911
Consumer and other loans
Savings ....................... 407,968 349,531 364,011
Automobile .................... 808,379 704,519 402,592
Home equity and second
mortgages .................... 593,799 550,008 781,199
Unsecured home improvement .... 257,178 274,267 183,630
Other ......................... 620,719 661,209 184,723
------------ ------------ ------------
Total consumer and other loans 2,688,043 2,539,534 1,916,155
Less
Allowance for loan losses ..... (655,745) (668,185) (690,009)
Loans in process .............. (5,617,371) (571,808) (1,050,012)
Unearned discounts ............ (2,619) (2,726) (2,929)
Deferred loan origination fees (302,341) (297,698) (271,196)
------------ ------------ ------------
(6,578,076) (1,540,417) (2,014,146)
------------ ------------ ------------
Net loans receivable ....... $ 85,263,856 $ 74,558,783 $ 67,682,920
============ ============ ============
16
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 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:
Six months ended Year ended
March 31, 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) --
--------- --------- --------- ---------
Balance at end of period ..... $ 655,745 $ 690,009 $ 668,185 $ 690,009
========= ========= ========= =========
The Association's lending efforts have historically focused on one-to-four
family residential real estate loans, which comprise approximately 73%, 84% and
82% of the total loan portfolio at March 31, 1998, September 30, 1997 and 1996,
respectively. Approximately 4%, 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
March 31, 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 March 31, 1998, September 30, 1997 and
1996, respectively. During the six months ended March 31, 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.
Loans serviced under a County Mortgage Revenue Bond totaled $1,275,551,
$1,471,229 and $1,606,982 at March 31, 1998, 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:
Six months
ended Year ended
March 31, September 30,
1998 1997
---- ----
(Unaudited)
Loans outstanding at
beginning of period ................... $ 527,884 $ 563,082
New loans .......................... 48,500 37,528
Repayments ......................... (46,083) (72,726)
--------- ---------
Loans outstanding at
end of period ......................... $ 530,301 $ 527,884
========= =========
17
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 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,
March 31, ---------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Principal amount of impaired loans ...... $199,511 $206,691 $210,309
Less valuation allowance ................ 62,511 69,691 73,309
-------- -------- --------
$137,000 $137,000 $137,000
======== ======== ========
The Association has provided an allowance for loan losses on all impaired loans.
Interest income of $5,502, $5,527, $9,537 and $17,267 was recognized and
collected on impaired loans during the six months ended March 31, 1998 and 1997
and the years ended September 30, 1997 and 1996, respectively.
Nonaccrual loans totaled $572,455, $1,049,367 and $366,832 at March 31, 1998,
September 30, 1997 and 1996, respectively. Interest income that would have been
recorded under the original terms of such loans approximated $22,000, $17,000,
$40,000 and $20,000 for the six months ended March 31, 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,
March 31, -----------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Loans receivable ..................... $531,265 $450,257 $404,266
Mortgage-backed securities ........... 121,746 171,729 205,389
Investment securities ................ 83,664 90,312 58,265
-------- -------- --------
$736,675 $712,298 $667,920
======== ======== ========
18
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
September 30,
March 31, ------------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Land.................................. $ 74,958 $ 74,958 $ 74,958
Building ............................. 1,306,679 1,281,916 923,518
Furniture, fixtures and equipment .... 420,407 383,148 307,821
Automobiles .......................... 43,579 43,579 38,729
---------- ---------- ----------
1,845,623 1,783,601 1,345,026
Less accumulated depreciation ........ 537,854 486,101 434,213
---------- ---------- ----------
$1,307,769 $1,297,500 $ 910,813
========== ========== ==========
NOTE G - REAL ESTATE OPERATIONS
A summary of real estate operations is as follows:
Six months ended Year ended
March 31, September 30,
---------------------- ----------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Net gain on sale of real
estate acquired through
foreclosure ................ $ 2,499 $ 436 $ 41,216 $ 111,956
Net operating income
(expense) .................. (3,502) 976 (7,037) (17,757)
--------- --------- --------- ---------
Income (expense) from
real estate operations ..... $ (1,003) $ 1,412 $ 34,179 $ 94,199
========= ========= ========= =========
Real estate operations of the Association consist primarily of paying property
taxes and general maintenance expenses on the properties held.
19
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 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 March 31, 1998 1997 1996
March 31, ------------------------- ---------------------- -----------------------
1998 Amount Percent Amount Percent Amount Percent
---- ------ ------- ------ ------- ------ -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
NOW accounts ......................... 2.05% $ 2,166,518 2.57% $ 2,058,500 2.70% $ 1,631,512 2.35%
First Super NOW accounts ............. 2.21 1,858,017 2.21 1,704,678 2.24 1,600,400 2.31
First Money Fund accounts ............ 4.63 24,939,413 29.63 20,702,177 27.15 15,552,973 22.43
----------- ------ ----------- ------ ----------- ------
Total demand deposits .......... 4.19 28,963,948 34.41 24,465,355 32.09 18,784,885 27.09
Passbook savings accounts ............ 2.89 2,950,487 3.51 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 1,769,782 2.10 2,189,277 2.87 4,216,378 6.08
5.00% to 5.99% .................... 5.64 45,786,217 54.40 39,910,696 52.36 30,296,166 43.68
6.00% to 6.99% .................... 6.28 4,674,963 5.55 6,930,530 9.09 13,366,636 19.27
7.00% to 7.99% .................... 7.00 26,458 .03 26,039 .03 25,241 .04
8.00% to 8.99% .................... -- -- -- -- -- 8,831 .01
----------- ------ ----------- ------ ----------- ------
Total certificates of deposit ........ 5.67 52,257,420 62.08 49,061,081 64.36 47,921,817 69.09
----------- ------ ----------- ------ ----------- ------
Total deposits ...................... 5.06 $84,171,855 100.00% $76,229,176 100.00% $69,356,422 100.00%
=========== ====== =========== ====== =========== ======
</TABLE>
20
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 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 $5,664,218, $3,844,877 and $2,489,514 at March 31,
1998 and September 30, 1997 and 1996, respectively.
Scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
March 31, 1998
--------------
(Unaudited)
Less than One to Three to
one year three years five years Total
-------- ----------- ---------- -----
<S> <C> <C> <C> <C>
4.00% to 4.99% $ 1,769,782 $ -- $ -- $ 1,769,782
5.00% to 5.99% 28,772,717 16,691,141 322,359 45,786,217
6.00% to 6.99% 3,132,733 1,542,230 -- 4,674,963
7.00% to 7.99% -- 26,458 -- 26,458
----------------- ----------------- ---------------- ----------------
$ 33,675,232 $ 18,259,829 $ 322,359 $ 52,257,420
================= ================= ================ ================
September 30, 1997
------------------
Less than One to Three to
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
================= ================= ================ ================
September 30, 1996
------------------
Less than One to Three to
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
================= ================= ================ ================
</TABLE>
21
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE H - DEPOSITS - Continued
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Six months
ended Year ended
March 31, September 30,
----------------------------------- -----------------------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Certificates of deposit $ 1,418,829 $ 1,361,386 $ 2,745,188 $ 2,819,977
NOW accounts 505,456 402,297 878,302 730,627
Demand deposits 19,872 17,340 35,830 31,195
--------------- --------------- --------------- ----------------
$ 1,944,157 $ 1,781,023 $ 3,659,320 $ 3,581,799
=============== =============== =============== ================
</TABLE>
NOTE I - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
September 30,
March 31, ----------------------------------------------------------------
1998 1997 1996
------------------------------- ----------------------------- ------------------------------
Rates Amount Rates Amount Rates Amount
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Variable
rates 5.71% - 6.00% $ 4,400,000 5.67% - 6.00% $ 8,400,000 5.40% - 5.75% $ 10,600,000
Fixed rates 4.87 - 7.06 22,900,000 4.92 - 7.06 15,300,000 4.92 - 7.06 13,700,000
------------- -------------- ---------------
$ 27,300,000 $ 23,700,000 $ 24,300,000
============= ============== ===============
</TABLE>
The Company has a line of credit with the Federal Home Loan Bank totaling
$9,000,000. There were no borrowings on this line at March 31, 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.
22
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 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 $110,358 and $81,440 for the six months ended March 31,
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:
March 31, September 30,
1998 1997
---- ----
(Unaudited)
Allocated shares ............................. 65,464 58,190
Unreleased shares ............................ 36,368 43,642
-------- --------
Total ESOP shares ........................ 101,832 101,832
======== ========
Fair value of unreleased shares .............. $531,882 $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 $21,822 for each of
the six months ended March 31, 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 March 31, 1998 and September
30, 1997 and 1996 and changes during the periods ended as of those dates is
presented below:
23
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 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 14.62
Exercised ........................................ 1,860 5.00
-------
Outstanding at March 31, 1998 (unaudited) ........... 110,962 5.24
=======
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:
Six months Year ended
ended March 31, September 30,
------------------------ -------------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Current ........... $ 239,284 $ 189,606 $ 275,950 $ 525,595
Deferred .......... 48,807 15,809 191,768 (38,769)
--------- --------- --------- ---------
$ 288,091 $ 205,415 $ 467,718 $ 486,826
========= ========= ========= =========
24
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 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:
Six months ended Year ended
March 31, September 30,
--------------------- -----------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Income tax expense at
statutory rate ............ $ 225,531 $ 182,814 $ 400,995 $ 442,720
Kansas privilege tax,
net of federal tax
benefit ................... 33,708 27,741 52,542 51,434
State contribution credit .. (16,635) (14,438) (28,875) (28,875)
Nondeductible ESOP
fair value adjustment ..... 23,209 13,292 30,461 20,427
Other ...................... 22,278 (3,994) 12,595 1,120
--------- --------- --------- ---------
$ 288,091 $ 205,415 $ 467,718 $ 486,826
========= ========= ========= =========
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
September 30,
March 31, ----------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Deferred tax assets
Allowance for loan losses ............... $ 238,800 $ 241,667 $ 226,927
SAIF recapitalization assessment ........ -- -- 171,156
Accrued bonuses ......................... 9,530 8,327 7,138
State contribution credit ............... -- 18,924 28,875
Other ................................... 2,781 5,780 4,710
--------- --------- ---------
Total deferred tax assets ........... 251,111 274,698 438,806
--------- --------- ---------
Deferred tax liabilities
Securities available for sale ........... 27,522 23,393 20,232
Depreciation of property and equipment .. 34,924 34,622 29,191
Federal Home Loan Bank stock dividends .. 274,480 250,731 215,479
--------- --------- ---------
Total deferred tax liabilities ...... 336,926 308,746 264,902
--------- --------- ---------
Net deferred tax asset (liability) .. $ (85,815) $ (34,048) $ 173,904
========= ========= =========
25
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 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 March 31, 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 March 31,
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 March 31, 1998, that the Association meets all
capital adequacy requirements to which it is subject.
As of March 31, 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.
26
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE L - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL - Continued
<TABLE>
<CAPTION>
For capital To be well capitalized under
Actual adequacy purposes prompt corrective action provisions
----------------- ----------------------------------- -----------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, 1998 (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital $ 10,443 18.2% $ 4,598 greater or equal to 8.0% $ 5,748 greater or equal to 10.0%
Tier 1 risk-based capital 9,787 17.0 2,299 greater or equal to 4.0 3,449 greater or equal to 6.0
Tier 1 (core) capital 9,787 7.9 3,705 greater or equal to 3.0 6,175 greater or equal to 5.0
Tangible capital 9,787 7.9 1,852 greater or equal to 1.5 -- --
For capital To be well capitalized under
Actual adequacy purposes prompt corrective action provisions
------------------ ---------------------------------- -----------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 1997
Total risk-based capital $ 9,989 19.5% $ 4,093 greater or equal to 8.0% $ 5,116 greater or equal to 10.0%
Tier 1 risk-based capital 9,349 18.3 2,046 greater or equal to 4.0 3,069 greater or equal to 6.0
Tier 1 (core) capital 9,349 8.4 3,333 greater or equal to 3.0 5,555 greater or equal to 5.0
Tangible capital 9,349 8.4 1,666 greater or equal to 1.5 -- --
For capital To be well capitalized under
Actual adequacy purposes prompt corrective action provisions
------------------ ---------------------------------- -----------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 1996
Total risk-based capital $ 11,129 23.8% $ 3,746 greater or equal to 8.0% $ 4,682 greater or equal to 10.0%
Tier 1 risk-based capital 10,542 22.5 1,873 greater or equal to 4.0 2,809 greater or equal to 6.0
Tier 1 (core) capital 10,542 9.9 3,204 greater or equal to 3.0 5,339 greater or equal to 5.0
Tangible capital 10,542 9.9 1,602 greater or equal to 1.5 -- --
</TABLE>
Regulations of the OTS impose limitations on the payment of dividends and other
capital distributions by savings associations. Under such regulations a savings
association that immediately prior to and on a pro forma basis, after giving
effect to a proposed capital distribution, has total capital (as defined by OTS
regulation) that is equal to or greater than the amount of its fully phased-in
capital requirement is generally permitted without OTS approval (but subsequent
to 30 days prior notice to the OTS of the planned dividend) to make capital
distributions during a calendar year in the amount of up to the greater of (1)
100% of its net earnings to date during the year plus an amount equal to
one-half of the amount by which its total capital to assets ratio exceeded its
fully phased-in capital to assets ratio at the beginning of the year or (2) 75%
of its net income for the most recent four quarters. Pursuant to such OTS
dividend regulations, the Association had the ability to pay dividends of
approximately $3,200,000 to First Independence Corporation at March 31, 1998.
27
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE M - RECENT LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Association and other savings associations are
insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The
reserves of the SAIF were below the level required by law, because a significant
portion of the assessments paid into the fund were used to pay the cost of prior
thrift failures. The deposit accounts of commercial banks are insured by the
FDIC in the Bank Insurance Fund ("BIF"), except to the extent such banks have
acquired SAIF deposits. The reserves of the BIF met the level required by law in
May 1995. As a result of the respective reserve levels of the funds, deposit
insurance assessments paid by healthy savings associations exceeded those paid
by healthy commercial banks by approximately $.19 per $100 in deposits in 1995.
In 1996 and 1997, no BIF assessments were required for healthy commercial banks
except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provides for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995, in
order to increase SAIF reserves to the level required by law. The Association
had $65.7 million in deposits at March 31, 1995, resulting in an assessment of
approximately $431,000, or $260,000 after tax, which was charged to operations
in the fourth quarter of fiscal 1996.
A component of the recapitalization plan provides for the merger of the SAIF and
BIF on January 1, 1999. However, the SAIF recapitalization legislation currently
provides for an elimination of the thrift charter or of the separate federal
regulation of thrifts prior to the merger of the deposit insurance funds. As a
result, the Association would be regulated as a bank under federal laws which
would subject it to the more restrictive activity limits imposed on national
banks. Under separate legislation related to the recapitalization plan, the
Association is required to recapture as taxable income approximately $115,000 of
its bad debt reserve, which represents the post-1987 additions to the reserve
and will be unable to utilize the percentage of earnings method to compute its
reserve in the future. The Association has provided deferred taxes for this
amount and will be permitted to amortize the recapture of its bad debt reserve
over six years.
NOTE N - COMMITMENTS
The Association is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
including commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional amounts
of the commitments reflect the extent of the Association's involvement in such
financial instruments.
28
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE N - COMMITMENTS - Continued
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 March 31, 1998 include loans in
process as disclosed in Note D and first mortgage loans with fixed rates ranging
from 7.00% to 7.5% aggregating $501,025 and $193,440 of variable rate loans at
6.5%. Collateral for loans in process and commitments are the same as for other
Association loans. The commitment period is generally for forty-five days.
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.
Pursuant to the conversion merger transaction the Corporation will issue new
common shares with a fair value equal to the appraised value of Neodesha. The
appraised value of Neodesha is currently anticipated to range from $1,530,000 to
$2,070,000.
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.
29
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
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.
Investment securities and mortgage-backed securities: Fair values for investment
securities and mortgage-backed securities are based on quoted market prices, if
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans receivable: For variable rate loans that reprice frequently and which
entail no significant change in credit risk, fair values are based on the
carrying values. The estimated fair values of fixed rate loans are estimated
based on discounted cash flow analyses using prepayment assumptions and interest
rates currently offered for loans with similar terms to borrowers of similar
credit quality. Nonperforming loans have not been discounted. The carrying
amount of accrued interest receivable approximates its fair value.
Commitments to extend credit: No premium or discount was ascribed to loan
commitments because when funded virtually all funding will be at current market
rates.
Federal Home Loan Bank stock: The balance sheet carrying amount approximates the
stocks fair value.
Deposit liabilities: The fair values estimated for demand deposits, NOW
accounts, savings and certain types of money market accounts are, by definition,
equal to the amount payable on demand at the reporting date (i.e., their
carrying amounts). The carrying amounts of variable rate, fixed-term money
market accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values of fixed rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered to a schedule of aggregated expected monthly time deposit
maturities. The carrying amount of accrued interest payable approximates its
fair value.
Advances from Federal Home Loan Bank: For variable rate advances fair values are
considered equal to their carrying values. The estimated fair value of fixed
rate advances are estimated based on discounted cash flow analysis using
interest rates currently offered for advances with similar terms.
30
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 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.
March 31, 1998
---------------------------------
(Unaudited)
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
------------- -------------
Cash and cash equivalents .............. $ 6,376,742 $ 6,376,742
Investment securities
available for sale .................... 3,346,443 3,346,443
Investment securities
held to maturity ...................... 5,000,000 4,960,950
Mortgage-backed securities
held to maturity ...................... 20,902,199 21,093,661
Loans .................................. 85,919,601 86,769,718
Federal Home Loan Bank stock ........... 1,422,800 1,422,800
Deposits ............................... (84,171,855) (83,959,552)
Advances from Federal
Home Loan Bank ........................ (27,300,000) (27,351,895)
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)
31
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
1996
---------------------------------
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
------------- -------------
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)
32
<PAGE>
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.
Wichita, Kansas
April 3, 1998
<PAGE>
The Neodesha Savings and Loan Association, FSA
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
March 31, ------------------------------
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 650,484 $ 635,237 $ 772,095
Investment securities held to maturity (estimated
fair value $3,029,696 at March 31, 1998;
$3,116,637 at September 30, 1997;
$3,168,720 at September 30, 1996) 3,018,273 3,116,975 3,215,380
Mortgage-backed securities held to maturity
(estimated fair value $234,444 at March 31, 1998;
$248,950 at September 30 ,1997;
$245,325 at September 30, 1996) 237,651 252,598 252,674
Loans receivable 9,088,127 9,467,986 9,489,296
Premises and equipment 375,536 383,884 399,326
Federal Home Loan Bank stock, at cost 139,500 134,300 125,700
Accrued interest receivable 120,051 124,832 127,719
Repossessed assets 22,305 24,533 --
Other 26,812 15,075 28,904
----------------- ----------------- -----------------
$ 13,678,739 $ 14,155,420 $ 14,411,094
================= ================= =================
LIABILITIES AND RETAINED EARNINGS
Deposits $ 12,064,758 $ 12,854,278 $ 12,698,322
Advances from borrowers for taxes and
insurance 48,857 47,638 65,768
Advances from Federal Home Loan Bank 400,000 100,000 500,000
Accrued expenses and other 42,786 61,224 131,694
----------------- ----------------- -----------------
Total liabilities 12,556,401 13,063,140 13,395,784
Retained earnings (substantially restricted) 1,122,338 1,092,280 1,015,310
----------------- ----------------- ---------------
$ 13,678,739 $ 14,155,420 $ 14,411,094
================= ================= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
The Neodesha Savings and Loan Association, FSA
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Six months ended Year ended
March 31, September 30,
-------------------------------- --------------------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans $ 408,181 $ 417,126 $ 842,621 $ 830,180
Investment securities 89,125 90,963 183,129 181,257
Mortgage-backed securities 7,438 7,682 15,362 15,366
Interest-bearing deposits and other 2,826 3,048 4,904 18,802
------------- ------------- -------------- -------------
Total interest income 507,570 518,819 1,046,016 1,045,605
Interest expense
Deposits 258,796 259,857 525,789 531,698
Borrowed funds 12,387 14,001 34,678 39,528
------------- ------------- -------------- -------------
Total interest expense 271,183 273,858 560,467 571,226
------------- ------------- --------------- -------------
Net interest income 236,387 244,961 485,549 474,379
Provision for loan losses 3,000 3,000 6,000 6,000
------------- ------------- --------------- -------------
Net interest income after provision for loan
losses 233,387 241,961 479,549 468,379
Other income
Service charges 57,242 57,842 119,886 120,388
Other 3,646 5,933 15,315 19,734
------------- ------------- --------------- -------------
60,888 63,775 135,201 140,122
General, administrative and other expense
Employee compensation and benefits 131,480 127,833 254,264 248,426
Occupancy and equipment 31,561 29,114 62,102 65,479
Data processing fees 17,471 16,233 33,564 35,666
Federal deposit insurance premiums 6,514 10,393 16,787 111,577
Other operating 66,191 71,656 143,336 143,889
------------- ------------- --------------- -------------
253,217 255,229 510,053 605,037
------------- ------------- --------------- -------------
Earnings before income taxes 41,058 50,507 104,697 3,464
Income tax expense 11,000 13,000 27,727 654
------------- ------------- --------------- -------------
NET EARNINGS $ 30,058 $ 37,507 $ 76,970 $ 2,810
============= ============= =============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<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 six months ended March 31,
1998 (unaudited) 30,058
----------------
Balance at March 31, 1998 (unaudited) $ 1,122,338
================
The accompanying notes are an integral part of this statement.
4
<PAGE>
The Neodesha Savings and Loan Association, FSA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended Year ended
March 31, September 30,
------------------------------ -------------------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 30,058 $ 37,507 $ 76,970 $ 2,810
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation 14,741 14,973 30,495 30,946
Provision for loan losses 3,000 3,000 6,000 6,000
Amortization of premiums and discounts on
investments and mortgage-backed securities 482 638 965 1,220
Deferred income taxes (259) 228 1,905 (1,785)
Loss on sale of repossessed assets -- -- 5,274 6,730
Increase (decrease) in cash due to changes in
Accrued interest receivable 4,781 9,160 2,887 (3,617)
Other assets (11,737) (1,606) 12,953 18,610
Accrued expenses and other liabilities (18,179) (89,004) (71,499) 78,958
------------- ----------- ------------- -------------
Net cash provided by (used in)
operating activities 22,887 (25,104) 65,950 139,872
Cash flows from investing activities
Proceeds from maturities and repayment of
held-to-maturity securities 113,167 -- 400,000 200,000
Purchase of held-to-maturity securities -- -- (302,484) (200,313)
Purchase of Federal Home Loan Bank stock (5,200) (4,000) (8,600) (7,600)
Net (increase) decrease in loans 379,087 (231,691) (15,997) (446,441)
Capital expenditures (6,393) (2,829) (15,053) (39,720)
Proceeds from sale of repossessed assets -- -- 1,500 30,755
------------- ----------- --------------- -------------
Net cash provided by (used in)
investing activities 480,661 (238,520) 59,366 (463,319)
Cash flows from financing activities
Net increase (decrease) in deposits (789,520) (477,477) 155,956 1,025,887
Net increase (decrease) in advances from
borrowers for taxes and insurance 1,219 (23,656) (18,130) (39,028)
Net increase (decrease) in Federal Home
Loan Bank advances 300,000 600,000 (400,000) (450,000)
------------- ----------- ------------- -------------
Net cash provided by (used in)
financing activities (488,301) 98,867 (262,174) 536,859
------------- ----------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 15,247 (164,757) (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 $ 650,484 $ 607,338 $ 635,237 $ 772,095
============= =========== ============= ==========
</TABLE>
5
<PAGE>
The Neodesha Savings and Loan Association, FSA
STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Six months ended Year ended
March 31, 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 $ 19,915 $ -- $ -- $ 2,642
Interest 272,075 280,536 566,352 568,759
Noncash investing and financing activities
Transfer from loans to real estate acquired
through foreclosure 2,522 26,825 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.
6
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS
March 31, 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 March 31, 1998, and for the six-month
periods ended March 31, 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.
7
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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 for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance, adjusted for any charge-offs, the allowance
for loan losses, unearned discounts and net deferred loan origination fees.
The allowance for loan losses is increased by charges to operations and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Association's
past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and current economic
conditions.
Specific reserves are established for any impaired nonresidential loan for
which the recorded investment in the loan exceeds the measured value of the
loan. Loans subject to impairment valuation are defined as nonaccrual loans
or any other loan where it is probable that 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.
8
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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.
9
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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:
March 31, 1998 (unaudited)
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ----------
U.S. Government agency
obligations ................ $2,414,701 $13,078 $ 2,179 $2,425,600
Obligations of states and
political subdivisions ..... 603,572 1,072 548 604,096
---------- ------- ------- ----------
$3,018,273 $14,150 $ 2,727 $3,029,696
========== ======= ======= ==========
September 30, 1997
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ----------
U.S. Government agency
obligations ................ $2,513,864 $ 8,718 $ 4,679 $2,517,903
Obligations of states and
political subdivisions ..... 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 agency
obligations ................ $2,613,030 $ 3,699 $29,442 $2,587,287
Obligations of states and
political subdivisions ..... 602,350 -- 20,917 581,433
---------- ------- ------- ----------
$3,215,380 $ 3,699 $50,359 $3,168,720
========== ======= ======= ==========
10
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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 $1,325,557, $1,721,868 and
$1,477,253 at March 31, 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 obligations
March 31, 1998 (unaudited) ...... $237,651 $ -- $3,207 $234,444
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.
11
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE D - LOANS RECEIVABLE
Loans receivable are summarized as follows:
September 30,
March 31, ----------------------
1998 1997 1996
----------- ---- ----
(Unaudited)
First mortgage loans
Secured by one-to-four family
residences ....................... $6,992,641 $7,237,089 $7,455,070
Secured by multi-family residences . -- -- 5,029
Nonresidential ..................... 49,917 72,328 105,392
Construction ....................... -- -- 70,000
---------- ---------- ----------
Total first mortgage loans ....... 7,042,558 7,309,417 7,635,491
Consumer and other loans
Savings ............................ 115,990 123,254 142,200
Automobile ......................... 1,797,388 1,871,580 1,606,000
Unsecured term ..................... 109,575 118,108 108,890
Other .............................. 111,895 138,569 167,122
---------- ---------- ----------
Total consumer and other loans ... 2,134,848 2,251,511 2,024,212
Less
Allowance for loan losses .......... (84,572) (88,954) (101,324)
Loans in process ................... -- -- (57,092)
Unearned discounts ................. (4,707) (3,988) (11,991)
---------- ---------- ----------
(89,279) (92,942) (170,407)
---------- ---------- ----------
Net loans receivable ............. $9,088,127 $9,467,986 $9,489,296
========== ========== ==========
Activity in the allowance for loan losses is summarized as follows:
Six months ended Year ended
March 31, September 30,
------------------ -------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Balance at beginning of period ...... $88,954 $101,324 $101,324 $107,410
Provision charged to operations ..... 3,000 3,000 6,000 6,000
Loans charged off, net .............. (7,382) (10,851) (18,370) (12,086)
------- -------- -------- --------
Balance at end of period ............ $84,572 $ 93,473 $ 88,954 $101,324
======= ======== ======== ========
12
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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 March 31, 1998 and September 30,
1997 and 1996, respectively. Approximately 16%, 17% and 19% at March 31,
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 March 31, 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:
Six months
ended Year ended
March 31, September 30,
1998 1997
----------- -------------
(Unaudited)
Loans outstanding at beginning of period ....... $41,940 $ 31,377
New loans .................................... 6,273 29,889
Repayments ................................... (2,210) (19,326)
------- --------
Loans outstanding at end of period ............. $46,003 $ 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 $173,030, $156,989 and $131,249 at
March 31, 1998 and September 30, 1997 and 1996, respectively. Interest
income that would have been recorded under the original terms of such loans
approximated $5,200, $5,300, $9,900 and $8,600 for the six months ended
March 31, 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.
13
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE E - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
September 30,
March 31, ---------------------
1998 1997 1996
----------- ---- ----
(Unaudited)
Loans receivable ...................... $ 68,717 $ 71,656 $ 77,809
Investment securities ................. 50,124 51,889 48,624
Mortgage-backed securities ............ 1,210 1,287 1,286
--------- --------- ---------
$ 120,051 $ 124,832 $ 127,719
========= ========= =========
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
September 30,
March 31, ---------------------
1998 1997 1996
----------- ---- ----
(Unaudited)
Land .................................. $ 67,121 $ 67,121 $ 67,121
Building .............................. 402,031 398,586 389,711
Furniture, fixtures and equipment ..... 236,363 233,414 227,237
Automobile ............................ 25,436 25,436 25,436
--------- --------- ---------
730,951 724,557 709,505
Less accumulated depreciation ......... (355,415) (340,673) (310,179)
--------- --------- ---------
$ 375,536 $ 383,884 $ 399,326
========= ========= =========
14
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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 March 31, 1998 1997 1996
March 31, -------------------- -------------------- --------------------
1998 Amount Percent Amount Percent Amount Percent
----------- ------ ------- ------ ------- ------ -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing ................. --% $ 260,591 2.16% $ 448,753 3.49% $ 511,085 4.03%
NOW accounts ........................ 2.75 1,553,901 12.88 1,440,289 11.20 1,484,231 11.69
Super NOW accounts .................. 3.23 487,383 4.04 563,740 4.39 554,140 4.36
Money market accounts ............... 4.00 1,732,764 14.36 2,074,067 16.14 1,623,114 12.78
---- ----------- ------ ----------- ------ ----------- ------
Total demand deposits ........... 3.17 4,034,639 33.44 4,526,849 35.22 4,172,570 32.86
Passbook savings accounts ........... 3.00 1,806,445 14.97 2,000,521 15.56 1,777,783 14.00
Certificates of deposit
4.00% to 4.99% .................... 4.68 818,855 6.79 1,395,349 10.85 2,163,632 17.04
5.00% to 5.99% .................... 5.29 4,040,307 33.49 3,044,573 23.69 2,540,390 20.00
6.00% to 6.99% .................... 6.23 1,364,512 11.31 1,886,986 14.68 2,043,947 16.10
---- ----------- ------ ----------- ------ ----------- ------
Total certificates of deposit ... 5.42 6,223,674 51.59 6,326,908 49.22 6,747,969 53.14
---- ----------- ------ ----------- ------ ----------- ------
Total deposits .................. 4.31% $12,064,758 100.00% $12,854,278 100.00% $12,698,322 100.00%
==== =========== ====== =========== ====== =========== ======
</TABLE>
15
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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 $1,414,683, $1,312,324 and $1,326,272 at March
31, 1998 and September 30, 1997 and 1996, respectively.
Scheduled maturities of certificates of deposit are as follows:
March 31, 1998 (unaudited)
--------------------------
Less than One to Three to
one year three years five years Total
--------- ----------- ---------- -----
4.00% to 4.99% ........... $ 818,855 $ -- $ -- $ 818,855
5.00% to 5.99% ........... 2,572,475 1,340,299 127,534 4,040,308
6.00% to 6.99% ........... 721,651 642,860 -- 1,364,511
---------- ---------- -------- ----------
$4,112,981 $1,983,159 $127,534 $6,223,674
========== ========== ======== ==========
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
========== ========== ======== ==========
16
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE G - DEPOSITS - Continued
Interest expense on deposits is summarized as follows:
Six months ended Year ended
March 31, September 30,
------------------ -------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Certificates of deposit ........ $166,796 $172,222 $344,253 $357,796
NOW accounts ................... 65,310 60,955 55,836 52,510
Demand deposits ................ 26,690 26,680 125,700 121,392
-------- -------- -------- --------
$258,796 $259,857 $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
---- ------
March 31, 1998 ........................... 6.28% $400,000
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 March 31, 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:
Six months ended Year ended
March 31, September 30,
----------------- ------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Current ........................ $11,259 $12,772 $25,822 $ 2,439
Deferred ....................... (259) 228 1,905 (1,785)
------- ------- ------- -------
$11,000 $13,000 $27,727 $ 654
======= ======= ======= =======
17
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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:
Six months ended Year ended
March 31, September 30,
----------------- ------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Income tax expense at
statutory rate ................. $13,960 $17,172 $ 32,456 $1,178
Kansas privilege tax, net of
federal tax benefit ............ 1,827 2,248 4,664 154
Effective rate differential ...... (5,875) (5,850) (11,750) (658)
Other ............................ 1,088 (570) 2,357 (20)
------- ------- -------- ------
$11,000 $13,000 $ 27,727 $ 654
======= ======= ======== ======
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
September 30,
March 31, -----------------
1998 1997 1996
----------- ---- ----
(Unaudited)
Deferred tax assets
Allowance for loan losses ............... $25,372 $25,786 $26,497
Depreciation of property and equipment .. 2,738 2,738 645
Other ................................... 4,780 2,547 3,254
------- ------- -------
Total deferred tax assets ............. 32,890 31,071 30,396
Deferred tax liabilities
Federal Home Loan Bank stock dividends .. 33,660 32,100 29,520
------- ------- -------
Net deferred tax asset (liability) .... $ (770) $(1,029) $ 876
======= ======= =======
18
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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 March 31,
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 March 31, 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 March 31, 1998, that the Association
meets all capital adequacy requirements to which it is subject.
19
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 1998 and 1997 (unaudited) and
September 30, 1997 and 1996
NOTE J - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL - Continued
As of March 31, 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
Actual For capital adequacy purposes prompt corrective action provisions
------------------ ---------------------------------- -----------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1998 (unaudited)
Total risk-based capital ...... $1,209,000 17.3% $558,000 greater or equal to 8.0% $698,000 greater or equal to 10.0%
Tier 1 risk-based capital ..... 1,124,000 16.1 279,000 greater or equal to 4.0 419,000 greater or equal to 6.0
Tier 1 (core) capital ......... 1,124,000 8.2 410,000 greater or equal to 3.0 684,000 greater or equal to 5.0
Tangible capital .............. 1,124,000 8.2 205,000 greater or equal to 1.5 -- --
</TABLE>
<TABLE>
<CAPTION>
To be well capitalized under
Actual For capital adequacy purposes prompt corrective action provisions
------------------ ---------------------------------- -----------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997
Total risk-based capital ...... $1,181,000 16.4% $577,000 greater or equal to 8.0% $722,000 greater or equal to 10.0%
Tier 1 risk-based capital ..... 1,092,000 15.1 289,000 greater or equal to 4.0 433,000 greater or equal to 6.0
Tier 1 (core) capital ......... 1,092,000 7.7 425,000 greater or equal to 3.0 708,000 greater or equal to 5.0
Tangible capital .............. 1,092,000 7.7 212,000 greater or equal to 1.5 -- --
</TABLE>
<TABLE>
<CAPTION>
To be well capitalized under
Actual For capital adequacy purposes prompt corrective action provisions
------------------ ---------------------------------- -----------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996
Total risk-based capital ...... $1,106,000 15.3% $578,000 greater or equal to 8.0% $722,000 greater or equal to 10.0%
Tier 1 risk-based capital ..... 1,015,000 14.1 289,000 greater or equal to 4.0 433,000 greater or equal to 6.0
Tier 1 (core) capital ......... 1,015,000 7.0 432,000 greater or equal to 3.0 721,000 greater or equal to 5.0
Tangible capital .............. 1,015,000 7.0 216,000 greater or equal to 1.5 -- --
</TABLE>
20
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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 commitments to extend credit at March
31, 1998 include first mortgage loans with variable rates of 7.62% to 7.96%
totaling $128,400.
21
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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 appraised value of Neodesha is currently
anticipated to range from $1,530,000 to $2,070,000.
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 March 31, 1998 and September 30,
1997 and 1996.
22
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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.
23
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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.
March 31, 1998 (unaudited)
----------------------------
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
------------- -------------
Cash and cash equivalents .................... $ 650,484 $ 650,484
Investment securities held to maturity ....... 3,018,273 3,029,699
Mortgage-backed securities held to maturity .. 237,651 234,444
Loans ........................................ 9,172,699 9,262,923
Federal Home Loan Bank stock ................. 139,500 139,500
Deposits ..................................... (12,064,758) (12,073,870)
Advances from Federal Home Loan Bank ......... (400,000) (400,000)
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)
24
<PAGE>
The Neodesha Savings and Loan Association, FSA
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 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)
25
<PAGE>
No person has 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
----
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
185,590 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.
<PAGE>
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.
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.
II-2
<PAGE>
Item 27. Exhibits and Financial Statement Schedules
(a) Exhibits:
1.1 Letter Agreement Regarding Marketing Agent
1.2 Form of Agency Agreement(1)
2.1 Plan of Merger Conversion
2.2 Agreement and Plan of Merger and Reorganization
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
8.1 Form of Opinion of Silver, Freedman & Taff, L.L.P. with respect to
Federal income tax consequences of the Merger Conversion
8.2 Form of Opinion of Grant Thornton with respect to Kansas
income tax consequences of the Merger Conversion
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
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)
27 Financial Data Schedule
99.1 Appraisal(1)
99.2 Stock Order Form and Order Form Instructions(1)
99.3 Certification(1)
99.4 Question and Answer Brochure
99.5 Advertising, Training and Community Informational Meeting
Materials
99.6 Letter of Appraiser with respect to Subscription Rights
- -----------
1 To be filed supplementally or by amendment.
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.
II-3
<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.
II-4
<PAGE>
(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-5
<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 July 1, 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.
II-6
<PAGE>
/s/ Larry G. Spencer /s/ Gary L. Overfield
- ------------------------------ ---------------------------------------
Larry G. Spencer Gary L. Overfield
President, Chief Executive Senior Vice President and Secretary
Officer and Director
July 1, 1998 July 1, 1998
- ------------------------------ ---------------------------------------
/s/ James B. Mitchel /s/ Donald E. Aitker
- ------------------------------ ---------------------------------------
James B. Mitchel Donald E. Aitker
Vice President and Chief Director
Financial Officer
July 1, 1998 July 1, 1998
- ------------------------------ ---------------------------------------
/s/ John T. Updegraff /s/ William T. Newkirk, II
- ------------------------------ ---------------------------------------
John T. Updegraff William T. Newkirk, II
Vice Chairman of the Board Director
July 1, 1998 July 1, 1998
- ------------------------------ ---------------------------------------
/s/ Joseph M. Smith /s/ Harold L. Swearinsen
- ------------------------------ ---------------------------------------
Joseph M. Smith Harold L. Swearinsen
Director Director
July 1, 1998 July 1, 1998
- ------------------------------ ---------------------------------------
/s/ Lavern W. Strecker
- ------------------------------
Lavern W. Strecker
Director
July 1, 1998
- ------------------------------
II-7
Exhibit 1.1
EXHIBIT 1.1
LETTER AGREEMENT REGARDING MARKETING AGENT
<PAGE>
TRIDENT SECURITIES, INC.
4601 SIX FORKS ROAD, SUITE 400
RALEIGH, NORTH CAROLINA 27609
TELEPHONE (919) 781-8900
FACSIMILE (919) 787-1670
March 3, 1998
Board of Directors
First Independence Corporation
Myrtle & Sixth Streets
Post Office Drawer 947
Independence, Kansas 67301
RE: Merger/Conversion Stock Marketing Services
Gentlemen:
This letter sets forth the terms of the proposed engagement between
Trident Securities, Inc., Raleigh, North Carolina ("Trident") and First
Independence Corporation ("First Independence"), Independence, Kansas concerning
certain investment banking services in connection with the conversion of
Neodesha Savings and Loan Association, FSA ("Neodesha Savings") from the mutual
to the capital stock form of organization and the simultaneous acquisition of
Neodesha Savings by First Independence.
Trident is prepared to assist First Independence in connection with the
offering of its shares of common stock during the subscription and community
offering period as such terms are defined in Neodesha Savings= Plan of
Conversion. The specific terms of the services contemplated hereunder shall be
set forth in a Definitive Agreement between Trident and First Independence to be
executed on the date the Prospectus is declared effective by the appropriate
regulatory authorities. The price of the shares during the subscription and
community offering period will be the value established for Neodesha Savings by
an independent appraisal firm (the "Appraiser") at a price established by First
Independence=s Board of Directors, based upon an Appraiser=s Report as approved
by the appropriate regulatory authorities, provided such price is mutually
acceptable to Trident and First Independence.
In connection with the subscription and community offering, Trident
will act as financial advisor and exercise its best efforts to assist First
Independence in the sale of common stock during the subscription and community
offering period. Further, Trident will establish a stock information center at
Neodesha Savings and coordinate the activities in such center. Additionally,
Trident may enter into agreements with other National Association of Securities
Dealers, Inc. ("NASD") member firms to act as selected dealers, assisting in the
sale of the common stock. Trident and First Independence will determine the
selected dealers to assist First Independence during the community offering. At
the appropriate time, Trident will conduct an examination of the relevant
documents and records of First Independence and Neodesha Savings as Trident
deems necessary and appropriate. First Independence and Neodesha Savings will
make all documents, records and other information deemed necessary by Trident
and deemed to be reasonable by First Independence available upon request.
<PAGE>
Board of Directors
March 3, 1998
Page 2
For its services hereunder, Trident will receive the following
compensation and reimbursement from First Independence:
1. A management fee in the amount of $85,000.
2. 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.
3. The foregoing fees and commissions are to be payable to Trident
at Closing as defined in the Definitive Sales Agency Agreement to
be entered into between Trident and First Independence.
4. Trident shall be reimbursed for allocable expenses incurred by
them, including legal fees, whether or not the Agreement is
consummated. 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. First
Independence shall forward to Trident a check in the amount of
$10,000 as an advance payment to defray the allocable expenses of
Trident.
It is further understood that First Independence 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.
For purposes of Trident=s obligation to file certain documents and to
make certain representations to the NASD in connection with the conversion,
First Independence will warrant on the date the Application for Conversion is
filed with the OTS that: (a) First Independence has not privately placed any
securities within the last 18 months; (b) there have been no material dealings
within the last 12 months between First Independence and any NASD member or any
person related to or associated with any such member; (c) none of the officers
of directors of First Independence are affiliated or associated with the NASD;
(d) except as contemplated by this engagement letter with Trident and any
agreements with Trident=s affiliates, First Independence has no agreements
outstanding with any other person relating to the provision of investment
banking or underwriting services; (e) First Independence has not granted Trident
a right of first refusal with respect to the underwriting of any future offering
of First Independence=s stock; and , (f) there has been no intermediary between
Trident and First Independence in connection with the public offering of First
Independence=s shares, and no person is being compensated in any manner for
providing such service.
<PAGE>
Board of Directors
March 3, 1998
Page 3
This letter is merely a statement of intent and is not a binding legal
agreement except as to Paragraph (4) above with regard to the obligation to
reimburse Trident for allocable expenses to be incurred prior to the execution
of a Definitive Agreement. While Trident and First Independence agree in
principle to the contents hereof and propose to proceed promptly, and in good
faith, to work out the arrangements with respect to the proposed offering, any
legal obligation among Trident and First Independence shall be only as set forth
in a duly executed Definitive Agreement. Such Definitive Agreement shall be in
form and content satisfactory to Trident and First Independence, as well as
their counsel, and Trident=s obligations thereunder shall be subject to, among
other things, there being in Trident=s opinion no material adverse change in the
condition or obligations of First Independence and Neodesha Savings. In the
event that First Independence enters into an agreement to complete a
merger/conversion with another institution prior to the effective date of the
Prospectus, and where First Independence wishes to combine the offerings
involving Neodesha Savings with another institution, Trident will re-negotiate
this letter of intent to reflect the changed circumstances.
Please acknowledge your agreement to the foregoing by signing below and
returning to Trident one copy of this letter, along with the advance payment of
$10,000. This proposal is open for your acceptance for a period of thirty (30)
days from the date hereof.
Yours very truly
TRIDENT SECURITIES, INC.
By: /s/ R. Lee Burrows, Jr.
-----------------------------
R. Lee Burrows, Jr.
Managing Director
RLB/cs
First Independence Corporation
By: /s/ Larry G. Spencer
---------------------------
Larry G. Spencer
Chief Executive Officer
Date: March 5, 1998
---------------------------
Exhibit 2.1
EXHIBIT 2.1
PLAN OF MERGER CONVERSION
<PAGE>
PLAN OF MERGER CONVERSION
OF
NEODESHA SAVINGS & LOAN ASSOCIATION, FSA
WITH
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF INDEPENDENCE
I. GENERAL
On February 18, 1998 the Boards of Directors of Neodesha, the Holding
Company and First Federal, respectively, adopted and approved a Plan of
Conversion whereby Neodesha would convert from a federal mutual savings and loan
association to a federal stock savings and loan association pursuant to the
Rules and Regulations of the Office of Thrift Supervision (the "OTS"). The Plan
includes, as part of the conversion, the concurrent merger of Neodesha with and
into First Federal. The Board of Directors of Neodesha has concluded, in
consultation with its advisors, 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.
This Plan is subject to the approval of the OTS and the Members of
Neodesha. If appropriate or required under applicable law and regulations, the
Plan, as an exhibit to the related Agreement among Neodesha, First Federal and
the Holding Company, also will be submitted for approval by the stockholders of
the Holding Company.
II. DEFINITIONS
Acting in Concert: The term "acting in concert" shall have the same
meaning given it in ss.574.2(c) of the Rules and Regulations of the OTS.
Actual Purchase Price: The price per share, determined as provided in
Section V of the Plan, at which Holding Company Conversion Stock will be sold in
the Merger Conversion.
Affiliate: An "affiliate" of, or a Person "affiliated" with, a
specified Person, is a Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by or is under common control with,
the Person specified.
Aggregate Subscription Amount: As to each subscriber in the
Subscription Offering and each purchaser in the Direct Community Offering, the
total dollar amount submitted (or subject to a valid withdrawal authorization
submitted as provided in Section V.G. of the Plan) by such subscriber or
purchaser in payment for the total number of shares of Holding Company
Conversion Stock covered by the subscription or purchase order submitted by such
subscriber or purchaser.
Agreement: The Agreement and Plan of Merger and Reorganization to which
this Plan is an exhibit.
Associate: The term "associate," when used to indicate a relationship
with any Person, means (i) any corporation or organization (other than Neodesha,
First Federal, the Holding Company or majority-owned subsidiary of the Holding
Company) of which such Person is an officer or partner or is, directly or
indirectly, the beneficial owner of ten percent 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, and (iii) any relative or spouse of such
Person, or any relative of such spouse, who has the same home as such Person or
who is a director or officer of Neodesha,
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First Federal, the Holding Company or any subsidiary of the Holding Company;
provided, however, that to the extent provided in Section V hereof, any
Tax-Qualified Employee Plan of Neodesha, First Federal or the Holding Company
shall not be deemed to be an Associate of any director or officer of Neodesha,
First Federal or the Holding Company.
Deposit Account: Any withdrawable or repurchasable account or deposit
in Neodesha, including Savings Accounts and demand deposits.
Direct Community Offering: The offering to the general public of any
unsubscribed shares which may be effected as provided in Section V.C.2 hereof.
Eligibility Record Date: The close of business on December 31, 1996.
Eligible Account Holder: Any Person holding a Qualifying Deposit in
Neodesha on the Eligibility Record Date.
Exchange Act: The Securities Exchange Act of 1934, as amended.
First Federal: First Federal Savings & Loan Association of
Independence, a federally chartered savings institution headquartered in
Independence, Kansas.
Holding Company: First Independence Corporation, a Delaware
corporation, which, upon completion of the Merger Conversion, shall own all of
the outstanding common stock of the Resulting Association.
Holding Company Conversion Stock: Shares of common stock, par value
$.01 per share, to be issued and sold by the Holding Company as a part of the
Merger Conversion.
Market Maker: A dealer (i.e., any Person who engages directly or
indirectly as agent, broker or principal in the business of offering, buying,
selling, or otherwise dealing or trading in securities issued by another Person)
who, with respect to a particular security, (i) regularly publishes bona fide,
competitive bid and offer quotations in a recognized inter-dealer quotation
system; or (ii) furnishes bona fide competitive bid and offer quotations on
request; and (iii) is ready, willing, and able to effect transactions in
reasonable quantities at his quoted prices with other brokers or dealers.
Member: Any Person or entity that qualifies as a member of Neodesha
pursuant to its charter and bylaws.
Merger Conversion: The change of Neodesha's charter and bylaws to a
federal stock charter and bylaws, merger of Neodesha with and into First
Federal, and sale by the Holding Company of Holding Company Conversion Stock,
all as provided for in this Plan and in the Agreement.
Neodesha: Neodesha Savings & Loan Association, FSA, a federally
chartered savings institution headquartered in Neodesha, Kansas.
Non-Tax-Qualified Employee Plan: Any defined benefit plan or defined
contribution plan of Neodesha, First Federal or the Holding Company, such as an
employee stock ownership plan, stock bonus plan, profit-sharing plan or other
plan, which with its related trust does not meet the requirements to be
"qualified" under Section 401 of the Internal Revenue Code.
Officer: An executive officer of Neodesha, including the Chairman of
the Board, President, Senior Vice Presidents in charge of principal business
functions, Secretary and Treasurer.
Order Forms: Forms to be used to exercise Subscription Rights in the
Subscription Offering and to submit purchase orders in the Direct Community
Offering.
Other Members: Members of Neodesha, other than Eligible Account
Holders, Tax-Qualified Employee Plans or Supplemental Eligible Account Holders,
as of the Voting Record Date.
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OTS: Office of Thrift Supervision, Department of the Treasury.
Person: An individual, a corporation, a partnership, an association, a
joint-stock company, a trust, any unincorporated organization, or a government
or political subdivision thereof.
Plan: This Plan of Merger Conversion of Neodesha, including any
amendment approved as provided in this Plan.
Public Offering: The offering for sale by the Underwriters to the
general public of any shares of Holding Company Conversion Stock not subscribed
for in the Subscription Offering or the Direct Community Offering.
Public Offering Price: The price per share at which any unsubscribed
shares of Holding Company Conversion Stock are initially offered for sale in the
Public Offering.
Qualifying Deposit: The aggregate balance of all Deposit Accounts of an
Eligible Account Holder as of the Eligibility Record Date or of a Supplemental
Eligible Account Holder as of the Supplemental Eligibility Record Date.
Resulting Association: First Federal, which shall be the surviving or
resulting association in the Merger Conversion.
SAIF: Savings Association Insurance Fund.
Savings Account: Any withdrawable account in Neodesha, except a demand
deposit.
SEC: Securities and Exchange Commission.
Special Meeting: The Special Meeting of Members of Neodesha called for
the purpose of considering and voting upon the Plan.
Subscription Offering: The offering of shares of Holding Company
Conversion Stock for subscription and purchase pursuant to Section V.B. of the
Plan.
Subscription Rights: Non-transferable, non-negotiable, personal rights
of Eligible Account Holders, Tax- Qualified Employee Plans, Supplemental
Eligible Account Holders, Other Members, and of Neodesha's directors, Officers
and employees, to subscribe for shares of Holding Company Conversion Stock in
the Subscription Offering.
Supplemental Eligibility Record Date: The last day of the calendar
quarter preceding approval of the Plan by the OTS.
Supplemental Eligible Account Holder: Any person holding a Qualifying
Deposit in Neodesha (other than an officer or director and their associates) on
the Supplemental Eligibility Record Date.
Tax-Qualified Employee Plan: Any defined benefit plan or defined
contribution plan of Neodesha, First Federal or the Holding Company, such as an
employee stock ownership plan, stock bonus plan, profit-sharing plan or other
plan, which with its related trust meets the requirements to be "qualified"
under Section 401 of the Internal Revenue Code.
Underwriters: The investment banking firm or firms agreeing to purchase
Holding Company Conversion Stock in order to offer and sell such Holding Company
Conversion Stock in the Public Offering.
Voting Record Date: The date set by the Board of Directors of Neodesha
in accordance with federal regulations for determining Members eligible to vote
at the Special Meeting.
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III. STEPS PRIOR TO SUBMISSION OF PLAN OF MERGER CONVERSION TO THE MEMBERS FOR
APPROVAL
Prior to submission of the Plan of Merger Conversion to its Members for
approval, Neodesha must under current law receive from the OTS approval of the
Application for Approval of Conversion to convert to the stock form of
organization by merger with First Federal. The following steps must be taken
prior to such regulatory approval:
A. The Board of Directors shall adopt the Plan by not less than a
two-thirds vote.
B. Neodesha shall notify its Members of the adoption of the Plan by
publishing a statement in a newspaper having a general circulation in each
community in which Neodesha maintains an office.
C. Copies of the Plan adopted by the Board of Directors shall be made
available for inspection at each office of Neodesha.
D. Neodesha and First Federal will promptly cause an Application for
Approval of Conversion on Form AC to be prepared and filed with the OTS, an
Application on Form H-(e)3 (including related applications) to be prepared
and filed with the OTS, and a Registration Statement pursuant to the
Securities Act of 1933 to be prepared and filed with the SEC.
E. At the time and in the manner prescribed by regulations of the OTS,
Neodesha, First Federal and the Holding Company, as applicable, shall post
in their offices and publish in newspapers of general circulation notices
of the filing of the applications made by them.
IV. MERGER CONVERSION PROCEDURE
Following approval of the Merger Conversion application by the OTS, the
Agreement and the Plan will be submitted by Neodesha to a vote of its Members at
the Special Meeting. If appropriate or required, the Agreement will also be
submitted to the stockholders of the Holding Company for approval at an annual
or special meeting of the Holding Company.
The Holding Company Conversion Stock will be offered for sale in the
Subscription Offering to Tax- Qualified Employee Plans, Supplemental Eligible
Account Holders and Other Members and to Eligible Account Holders, directors,
officers and employees. The Subscription Offering will commence prior to or
within 45 days after the date of the Special Meeting. The Holding Company may,
either concurrently with, at any time during, or promptly after the Subscription
Offering, also offer the Holding Company Conversion Stock to and receive
purchase orders from other Persons in a Direct Community Offering; provided that
Eligible Account Holders, Tax- Qualified Employee Plans, Supplemental Eligible
Account Holders, Other Members and Neodesha's directors, Officers and employees
shall have the priority rights to subscribe for Holding Company Conversion Stock
set forth in Section V of this Plan. The Holding Company and Neodesha may delay
commencing the Subscription Offering beyond such 45 day period in the event
there exists unforeseen material adverse market or financial conditions. If the
Subscription Offering commences prior to the Special Meeting, subscriptions will
be accepted subject to the approval of the Plan at the Special Meeting.
The period for the Subscription Offering and the Direct Community
Offering will be not less than 20 days nor more than 45 days, unless extended by
Neodesha and the Holding Company. Upon completion of the Subscription Offering
and the Direct Community Offering, if any, any unsubscribed shares of Holding
Company Conversion Stock will, if feasible, be sold to the Underwriters for
resale to the general public in the Public Offering. If for any reason the
Public Offering of all shares not sold in the Subscription Offering and the
Direct Community Offering cannot be effected, the Holding Company and Neodesha
will use their best efforts to obtain other purchasers, subject to OTS approval.
Completion of the sale of all shares of Holding Company Conversion Stock not
sold in the Subscription Offering and the Direct Community Offering is required
within 45 days after termination of the Subscription Offering, subject to
extension of such 45 day period by the Holding Company and Neodesha with the
approval of the OTS. The Holding Company and Neodesha may jointly seek one or
more
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extensions of such 45 day period if necessary to complete the sale of all shares
of Holding Company Conversion Stock. In connection with any such extensions,
subscribers and other purchasers will be permitted to increase, decrease or
rescind their subscriptions or purchase orders to the extent required by the OTS
in approving the extensions. Completion of the sale of all shares of Holding
Company Conversion Stock is required within 24 months after the date of the
Special Meeting.
V. STOCK OFFERING
A. Total Dollar Amount of Shares and Purchase Price of Conversion Stock
All shares of Holding Company Conversion Stock sold in the Merger
Conversion shall be sold at the same price per share. The total dollar amount
for which all shares will be sold in the Merger Conversion shall be within the
valuation range, established by an independent appraisal of the estimated total
pro forma market value of Neodesha, stated in the approval or amended approval
of the Plan by the OTS. Such appraisal shall be performed in accordance with OTS
guidelines, shall be updated as appropriate under federal regulations and shall
be made by an independent investment banking or financial consulting firm which
is experienced and expert in the area of thrift institution appraisals and has
been selected for such purpose by Neodesha and the Holding Company. The total
dollar amount of shares of Holding Company Conversion Stock to be offered in the
Merger Conversion shall also be subject to increase in connection with any
option granted to Underwriters to cover over-allotments in the Public Offering
or oversubscriptions in the Subscription Offering or Direct Community Offering.
The total dollar amount of shares of Holding Company Conversion Stock
to be offered in the Subscription Offering and the Direct Community Offering
shall be determined jointly by the Boards of Directors of Neodesha and the
Holding Company, prior to the commencement of the Subscription Offering, on the
basis of the appraised valuation of Neodesha and subject to adjustment if
necessitated by market or financial conditions prior to consummation of the
Merger Conversion. Each subscriber in the Subscription Offering and each
prospective purchaser in the Direct Community Offering shall submit with his
subscription or purchase order an Aggregate Subscription Amount (or a valid
account withdrawal authorization, in accordance with Section V.G. of the Plan,
for the Aggregate Subscription Amount), which shall be the total dollar amount
of the shares of Holding Company Conversion Stock covered by such subscription
or purchase order.
The Actual Purchase Price per share of the Holding Company Conversion
Stock will be determined at the time of the final pricing, which will be after
completion of the Subscription Offering or, if later, the Direct Community
Offering. The Actual Purchase Price will be a price equal to 95% of the average
of the last sale price (or average of the closing bid and closed asked
quotations if there is no last sale price) on the Nasdaq SmallCap Market System
of a share of Common Stock for the ten trading days ending on the date of
expiration of the Subscription Offering or the Community Offering, whichever is
later, rounded to the nearest cent (with any amount equal to $.005 rounded to
the next higher $.01). If all of the Holding Company Conversion Stock is not
subscribed for in the Subscription Offering and the Direct Community Offering, a
Public Offering may be effected. The Public Offering Price will be a price
negotiated among Neodesha, the Holding Company and the Underwriters. The price
paid to the Holding Company by the Underwriters for each unsubscribed share will
be the Public Offering Price less a negotiated underwriting discount. In such
event, the Actual Purchase Price per share for each share of Holding Company
Conversion Stock will be the Public Offering Price.
The number of shares to be sold to each subscriber in the Subscription
Offering, and to each purchaser in the Direct Community Offering, shall be
determined by dividing the Aggregate Subscription Amount submitted by each
subscriber or purchaser by the Actual Purchase Price, with a refund in the
amount of any fractional remainder.
B. Subscription Rights
Non-transferable Subscription Rights to purchase shares will be issued
without payment therefor to Eligible Account Holders, Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders, Other Members and directors,
Officers and employees of Neodesha as set forth below.
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1. Preference Category No. 1: Eligible Account Holders
Each Eligible Account Holder shall receive non-transferable
Subscription Rights to subscribe for shares of Holding Company Conversion
Stock in an amount equal to the greater of $100,000, one-tenth of one
percent (.10%) of the total offering of shares, 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 Eligible Account
Holder and the denominator is the total amount of Qualifying Deposits of
all Eligible Account Holders in Neodesha in each case on the Eligibility
Record Date. If sufficient shares are not available, 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.
Non-transferable Subscription Rights to purchase Holding Company
Conversion Stock received by directors and Officers of Neodesha and their
Associates, based on their increased deposits in Neodesha in the one year
period preceding the Eligibility Record Date, shall be subordinated to all
other subscriptions involving the exercise of non-transferable Subscription
Rights of Eligible Account Holders.
2. Preference Category No. 2: Tax-Qualified Employee Plans
Each Tax-Qualified Employee Plan shall be entitled to receive
non-transferable Subscription Rights to purchase up to 10% of the shares of
Holding Company Conversion Stock, provided that singly or in the aggregate
such plans (other than that portion of such plans which is self-directed)
shall not purchase more than 10% of the shares of the Holding Company
Conversion Stock. 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 other provision of this Plan to the contrary, the
Tax-Qualified Employee Plans shall have a first priority Subscription Right
to the extent that the total number of shares of Holding Company Conversion
Stock sold in the Merger Conversion exceeds the maximum of the appraisal
range as set forth in the subscription prospectus.
3. Preference Category No. 3: Supplemental Eligible Account Holders
Each Supplemental Eligible Account Holder shall receive
non-transferable Subscription Rights to subscribe for shares of Holding
Company Conversion Stock in an amount equal to the greater of $100,000,
one-tenth of one percent (.10%) of the total offering of shares, 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 Qualifying Deposits of all Supplemental Eligible Account Holders
in Neodesha in each case on the Supplemental Eligibility Record Date.
Subscription Rights received pursuant to this category shall be
subordinated to all Subscription Rights received by Eligible Account
Holders and Tax-Qualified Employee Plans pursuant to Category Nos. 1 and 2
above.
Any non-transferable Subscription Rights to purchase shares received
by an Eligible Account Holder in accordance with Category No. 1 shall
reduce to the extent thereof the Subscription Rights to be distributed to
such person pursuant to this Category.
In the event of an oversubscription for shares under the provisions of
this subparagraph, 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
subscribing Supplemental Eligible Account Holder pro rata in the same
proportion that his Qualifying
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Deposit bears to the total Qualifying Deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied.
4. Preference Category No. 4: Other Members
Each Other Member shall receive non-transferable Subscription Rights
to subscribe for shares of Holding Company Conversion Stock remaining after
satisfying the subscriptions provided for under Category Nos. 1 through 3
above, subject to the following conditions:
a. Each Other Member shall be entitled to subscribe for an amount
of shares equal to the greater of $100,000 or one-tenth of one percent
(.10%) of the total offering of shares of common stock in the
Conversion, to the extent that Holding Company Conversion Stock is
available.
b. In the event of an oversubscription for shares under the
provisions of this subparagraph, 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 the Association's mutual charter and bylaws in effect on the
date of approval by members of this Plan of Conversion.
5. Preference Category No. 5: Directors, Officers and Employees
Each director, Officer and employee of Neodesha as of the date of the
commencement of the Subscription Offering shall be entitled to receive
non-transferable Subscription Rights to purchase shares of the Holding
Company Conversion Stock to the extent that shares are available after
satisfying subscriptions under Category Nos. 1 through 4 above. The shares
which may be purchased under this Category are subject to the following
conditions:
a. The total number of shares which may be purchased under this
Category may not exceed 25% of the number of shares of Holding Company
Conversion Stock.
b. The maximum amount of shares which may be purchased under this
Category by any Person is $100,000 of Holding Company Conversion
Stock. In the event of an oversubscription for shares under the
provisions of this subparagraph, the shares available shall be
allocated pro rata among all subscribers in this Category.
C. Public Offering or Direct Community Offering
1. The amount, if any, of Holding Company Conversion Stock not
subscribed for in the Subscription Offering may be offered for sale in a
Direct Community Offering. This will involve an offering of the
unsubscribed amount directly to the general public. The Direct Community
Offering, if any, shall be for a period of not less than 20 days nor more
than 45 days unless extended by the Holding Company and Neodesha, and shall
commence concurrently with, during or promptly after the Subscription
Offering. The purchase price per share to the general public in the Direct
Community Offering shall be the same as the Public Offering Price. The
Holding Company and Neodesha may use an investment banking firm or firms on
a best efforts basis to sell Holding Company Conversion Stock in the
Subscription Offering and the Direct Community Offering. The Holding
Company and Neodesha may pay a commission or other fee to such investment
banking firm or firms as to the shares sold by such firm or firms in the
Subscription Offering and the Direct Community Offering and may also
reimburse such firm or firms for expenses incurred in connection with the
sale. The Holding Company Conversion Stock will be offered and sold in the
Direct Community Offering, in accordance with OTS regulations, so as to
achieve the widest distribution of the Holding Company Conversion Stock.
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Neodesha and the Holding Company, in their sole discretion, may
reject, in whole or in part, purchase orders received from any Person under
this Section V.C.1. Further, Neodesha and the Holding Company may limit
total purchase orders under this Section V.C.1. so as to assure that at
least a specified amount of Holding Company Conversion Stock remains
available for the Public Offering.
In the event that the dollar amount of Holding Company Conversion
Stock for which purchase orders are received under this Section V.C.1.
exceeds the dollar amount of available shares, the available shares shall
be allocated (to the extent shares remain available) first to cover orders
of natural Persons residing in any county in which Neodesha has an office,
then to cover the orders of any other Person subscribing for shares in the
Direct Community Offering so that each such Person may receive 1,000
shares; and thereafter, by allocating the remaining shares pro rata among
such Persons based on the amount of their respective subscriptions.
2. Any shares of Holding Company Conversion Stock not sold in the
Subscription Offering or in the Direct Community Offering, if any, shall
then be sold to the Underwriters for resale to the general public at the
Public Offering Price in the Public Offering. It is expected that the
Public Offering will commence as soon as practicable after termination of
the Subscription Offering and the Direct Community Offering, if any. The
Public Offering shall be completed within 45 days after the termination of
the Subscription Offering, unless such period is extended as provided in
Section IV hereof. The Public Offering Price and the underwriting discount
shall be determined as provided in Section V.A. hereof and set forth in an
underwriting agreement between the Holding Company, Neodesha and the
Underwriters.
3. If for any reason a Public Offering of unsubscribed shares of
Holding Company Conversion Stock cannot be effected and any shares remain
unsold after the Subscription Offering and the Direct Community Offering,
if any, the Boards of Directors of the Holding Company and Neodesha will
seek to make other arrangements for the sale of the remaining shares. Such
other arrangements will be subject to the approval of the OTS and to
compliance with applicable securities laws, and may provide for purchases
by directors and Officers of Neodesha and their Associates and other
Persons in excess of the limitations provided in this Section V. If such
other purchase arrangements cannot be made, the Plan will terminate.
D. Additional Limitations Upon Purchases of Shares of Holding Company
Conversion Stock
The following additional limitations shall be imposed on all purchases
of Holding Company Conversion Stock in the Merger Conversion:
1. No Person, by himself or herself, or with an Associate or group of
Persons acting in concert, may subscribe for or purchase either (a) an
amount of Holding Company Conversion Stock so as to own upon consummation
of the Merger Conversion more than 10% of the issued and outstanding common
stock of the Holding Company, without having first complied with all legal
and regulatory requirements applicable to the acquisition or proposed
acquisition of such amount of stock, or (b) more than $100,000 of Holding
Company Conversion Stock. For purposes of this paragraph, an Associate of a
Person does not include a Tax-Qualified or Non-Tax Qualified Employee Plan
in which the person has a substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity. Moreover, for purposes of this
paragraph, shares held by one or more Tax-Qualified or Non-Tax Qualified
Employee Plans attributed to a Person shall not be aggregated with shares
purchased directly by or otherwise attributable to that Person.
2. Directors and Officers of Neodesha and their Associates may not
purchase in all categories in the Merger Conversion an aggregate of more
than 35% of the Holding Company Conversion Stock. For purposes of this
paragraph, an Associate of a Person does not include any Tax-Qualified
Employee Plan. Moreover, any shares attributable to the Officers and
directors of Neodesha and their Associates, but held by one or more
Tax-Qualified Employee Plans, shall not be included in calculating the
number of shares which may be purchased under the limitation in this
paragraph.
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3. The minimum dollar amount of Holding Company Conversion Stock that
may be purchased by any Person in the Conversion is $250, provided
sufficient shares are available.
Depending upon market and financial conditions, the Boards of Directors
of the Holding Company and Neodesha, with the approval of the OTS and without
further approval of the Members, may increase any of the above purchase
limitations.
For purposes of this Section V, the directors and officers of the
Holding Company, First Federal and Neodesha shall not be deemed to be Associates
or a group acting in concert solely as a result of their serving in such
capacities.
Each Person purchasing Holding Company Conversion Stock in the Merger
Conversion shall be deemed to confirm that such purchase does not conflict with
the above purchase limitations.
E. Restrictions and Other Characteristics of Holding Company Conversion
Stock Being Sold
1. Transferability. Holding Company Conversion Stock purchased by
Persons other than directors and Officers of Neodesha will be transferable
without restriction. Shares purchased by directors or Officers of Neodesha shall
not be sold or otherwise disposed of for value for a period of one year from the
date of Conversion, except for any disposition of such shares (i) following the
death of the original purchaser, or (ii) resulting from an exchange of
securities in a merger or acquisition approved by the applicable regulatory
authorities.
The certificates representing shares of Holding Company Conversion
Stock issued to directors and Officers of Neodesha shall bear a legend giving
appropriate notice of the one-year holding period restriction. Appropriate
instructions shall be given to the transfer agent for such stock with respect to
the applicable restrictions relating to the transfer of restricted stock. Any
shares of common stock of the Holding Company subsequently issued as a stock
dividend, stock split, or otherwise, with respect to any such restricted stock,
shall be subject to the same holding period restrictions for Neodesha directors
and Officers as may be then applicable to such restricted stock.
No director or Officer of Neodesha, or Associate of such a director or
Officer, shall purchase any outstanding shares of capital stock of the Holding
Company for a period of three years following the Merger Conversion without the
prior written approval of the OTS, except through a broker or dealer registered
with the SEC or in a "negotiated transaction" involving more than one percent of
the then-outstanding shares of common stock of the Holding Company. As used
herein, the term "negotiated transaction" means a transaction in which the
securities are offered and the terms and arrangements relating to any sale are
arrived at through direct communications between the seller or any Person acting
on its behalf and the purchaser or his investment representative. The term
"investment representative" shall mean a professional investment advisor acting
as agent for the purchaser and independent of the seller and not acting on
behalf of the seller in connection with the transaction.
2. Voting Rights. Upon completion of the Merger Conversion, holders of
deposit accounts will not have voting rights in the Resulting Association or the
Holding Company. Exclusive voting rights as to the Resulting Association will be
vested in the Holding Company, as the sole stockholder of the Resulting
Association. Voting rights as to the Holding Company will be held exclusively by
its stockholders.
F. Exercise of Subscription Rights; Order Forms
1. If the Subscription Offering occurs concurrently with the
solicitation of proxies for the Special Meeting, the subscription prospectus and
Order Form may be sent to each Eligible Account Holder, Tax-Qualified Employee
Plan, Supplemental Eligible Account Holder, Other Member, and director, Officer
and employee of Neodesha, at their last known address as shown on the records of
Neodesha. However, Neodesha may, and if the Subscription Offering commences
after the Special Meeting Neodesha shall, furnish a subscription prospectus and
Order Form only to Eligible Account Holders, Tax-Qualified Employee Plans,
Supplemental Eligible Account Holders, Other Members, and directors, Officers
and employees of Neodesha, who have returned to Neodesha by
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<PAGE>
a specified date prior to the commencement of the Subscription Offering a post
card or other written communication requesting a subscription prospectus and
Order Form. In such event, Neodesha shall provide a postage-paid post card for
this purpose and make appropriate disclosure in its proxy statement for the
solicitation of proxies to be voted at the Special Meeting and/or letter sent in
lieu of the proxy statement to those Eligible Account Holders, Tax- Qualified
Employee Plans and Supplemental Eligible Account Holders who are not Members on
the Voting Record Date.
2. Each Order Form will be preceded or accompanied by a subscription
prospectus describing the Holding Company and the Resulting Association and the
shares of Holding Company Conversion Stock being offered for subscription and
containing all other information required by the OTS or the SEC or otherwise
necessary to enable Persons to make informed investment decisions regarding the
purchase of Holding Company Conversion Stock.
3. The Order Forms (or accompanying instructions) used for the
Subscription Offering will contain, among other things, the following:
(i) A clear and intelligible explanation of the Subscription Rights
granted under the Plan to Eligible Account Holders, Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders, Other Members, and to the
directors, Officers and employees of Neodesha;
(ii) A specified expiration date by which Order Forms must be returned
to and actually received by Neodesha, the Holding Company or their
representative for purposes of exercising Subscription Rights, which date
will be not less than 20 days after the Order Forms are initially mailed to
potential subscribers;
(iii) A statement of the minimum and maximum dollar amounts of Holding
Company Conversion Stock that may be subscribed for under the Plan;
(iv) A specifically designated blank space for indicating the dollar
amount of shares being subscribed for and a statement of the arrangements
for refunding any amount in lieu of fractional shares;
(v) A set of detailed instructions as to how to complete the Order
Form, including a statement as to the available alternative methods of
payment for the shares being subscribed for;
(vi) Specifically designated blank spaces for dating and signing the
Order Form;
(vii) An acknowledgement that the subscriber has received the
subscription prospectus;
(viii) A statement of the consequences of failing to properly complete
and return the Order Form, including a statement that the Subscription
Rights will expire on the expiration date specified on the Order Form
unless such expiration date is extended by the Holding Company and
Neodesha, and that the Subscription Rights may be exercised only by
delivering the Order Form, properly completed and executed, to the Holding
Company, Neodesha or their representative by the expiration date, together
with required payment of the Aggregate Subscription Amount for all Holding
Company Conversion Stock subscribed for;
(ix) A statement that the Subscription Rights are non-transferable and
that all shares of Holding Company Conversion Stock subscribed for upon
exercise of Subscription Rights must be purchased on behalf of the Person
exercising the Subscription Rights for his own account; and
(x) A statement that, after receipt by the Holding Company, Neodesha
or their representative, a subscription may not be modified, withdrawn or
cancelled without the consent of the Holding Company or Neodesha.
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<PAGE>
G. Method of Payment
Payment for all shares of Holding Company Conversion Stock subscribed
for must be received in full by the Holding Company or Neodesha, together with
properly executed and completed Order Forms. Payment may be made in cash (if
presented in Person), by check or money order, or, if the subscriber has a
Deposit Account in Neodesha (including a certificate of deposit), the subscriber
may authorize Neodesha to charge the subscriber's account.
If a subscriber authorizes Neodesha to charge his or her account, the
funds will continue to earn interest, but may not be used by the subscriber
until all Holding Company Conversion Stock has been sold or the Plan of Merger
Conversion is terminated, whichever is earlier. Neodesha will allow subscribers
to purchase shares by withdrawing funds from certificate accounts without the
assessment of early withdrawal penalties with the exception of prepaid interest
in the form of promotional gifts. In the case of early withdrawal of only a
portion of such account, the certificate evidencing such account shall be
cancelled if the remaining balance of the account is less than the applicable
minimum balance requirement, in which event the remaining balance will earn
interest at the passbook rate. This waiver of the early withdrawal penalty is
applicable only to withdrawals made in connection with the purchase of Holding
Company Conversion Stock under the Plan of Merger Conversion. Interest will also
be paid, at not less than the then-current passbook rate, on all orders paid in
cash, by check or money order, from the date payment is received until
consummation of the Merger Conversion. Payments made in cash, by check or money
order will be placed by Neodesha in an escrow or other account established
specifically for this purpose.
In the event of an unfilled amount of any subscription order, the
Holding Company or Neodesha will make an appropriate refund or cancel an
appropriate portion of the related withdrawal authorization. If for any reason
the Merger Conversion is not consummated, purchasers will have refunded to them
all payments made and all withdrawal authorizations will be cancelled in the
case of subscription payments authorized from accounts at Neodesha.
If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans
subscribe for shares during the Subscription Offering, such plans will not be
required to pay for the shares subscribed for at the time they subscribe, but
may pay for such shares of Holding Company Conversion Stock subscribed for upon
consummation of the Merger Conversion. In the event that, after the completion
of the Subscription Offering, the amount of shares to be issued is increased
above the maximum of the appraisal range included in the subscription
prospectus, the Tax- Qualified and Non-Tax-Qualified Employee Plans shall be
entitled to increase their subscriptions by a percentage equal to the percentage
increase in the amount of shares to be issued above the maximum of the appraisal
range provided that such subscriptions shall continue to be subject to
applicable purchase limits and stock allocation procedures.
H. Undelivered, Defective or Late Order Forms; Insufficient Payment
The Boards of Directors of the Holding Company and Neodesha shall have
the absolute right, in their sole discretion, to reject any Order Form submitted
in either the Subscription Offering or the Direct Community Offering, including
but not limited to, any Order Forms which (i) are not delivered or are returned
by the United States Postal Service (or the addressee cannot be located); (ii)
are not received back by the Holding Company, Neodesha or their representative,
or are received after the termination date specified thereon; (iii) are
defectively completed or executed; (iv) are not accompanied by the total
required payment for the shares of Holding Company Conversion Stock subscribed
for (including cases in which the subscribers' Deposit Accounts or certificate
accounts are insufficient to cover the authorized withdrawal for the required
payment); or (v) are submitted by or on behalf of a Person whose representations
the Boards of Directors of the Holding Company or Neodesha believe to be false
or who they otherwise believe, either alone or acting in concert with others, is
violating, evading or circumventing, or intends to violate, evade or circumvent,
the terms and conditions of this Plan. In such event, the Subscription Rights,
if any, of the Person to whom such rights have been granted will not be honored
and will be treated as though such Person failed to return the completed Order
Form within the time period specified therein. Neodesha and the Holding Company
may, but will not be required to, waive any irregularity relating to any Order
Form or require submission of corrected Order Forms or the remittance of full
payment for subscribed shares by such date as Neodesha and the Holding Company
may specify. The interpretation by the Holding Company and Neodesha
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<PAGE>
of the terms and conditions of this Plan and of the proper completion of the
Order Form will be final, subject to the authority of the OTS.
I. Members in Non-qualified States or in Foreign Countries
The Holding Company and Neodesha will make reasonable efforts to comply
with the securities laws of all states in the United States in which Persons
entitled to subscribe for Holding Company Conversion Stock pursuant to the Plan
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 the Holding Company and Neodesha determine that compliance
with the securities laws of such state would be impracticable for reasons of
cost or otherwise, including, but not limited to, a requirement that the Holding
Company or Neodesha or any of their officers, directors or employees register,
under the securities laws of such state, as a broker, dealer, salesman or agent.
No payments will be made in lieu of the granting of Subscription Rights to any
such Person.
VI. FEDERAL STOCK CHARTER AND BYLAWS
As part of the Merger Conversion, the charter and bylaws of First
Federal will become the charter and bylaws of the Resulting Association.
VII. CONTRIBUTIONS TO TAX-QUALIFIED EMPLOYEE PLANS
The Resulting Association and the Holding Company may in their
discretion make scheduled contributions to any Tax-Qualified Employee Plans,
provided that such contributions do not cause the Resulting Association to fail
to meet its regulatory capital requirements.
VIII. STATUS OF DEPOSIT ACCOUNTS AND LOANS SUBSEQUENT TO THE MERGER CONVERSION
Each Deposit Account holder shall retain, without payment, a
withdrawable Deposit Account or Accounts in the Resulting Association, equal in
amount to the withdrawable value of such account holder's Deposit Account or
Accounts in Neodesha prior to the Merger Conversion. All Deposit Accounts will
continue to be insured by the Federal Deposit Insurance Corporation up to the
applicable limits of insurance coverage, and shall be subject to the same terms
and conditions (except as to voting and liquidation rights) as such Deposit
Account in Neodesha at the time of the Merger Conversion. All loans shall retain
the same status after the Merger Conversion as these loans had prior to the
Merger Conversion (except as to voting rights, if any).
IX. LIQUIDATION ACCOUNT
For purposes of granting to Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain Deposit Accounts at the
Resulting Association a priority in the event of a complete liquidation of the
Resulting Association, the Resulting Association will, at the time of the Merger
Conversion, establish a liquidation account in an amount equal to the net worth
of Neodesha as shown on its latest statement of financial condition contained in
the final prospectus used in connection with the Merger Conversion. The creation
and maintenance of the liquidation account will not operate to restrict the use
or application of any of the regulatory capital accounts of the Resulting
Association; provided, however, that such regulatory capital accounts will not
be voluntarily reduced below the required dollar amount of the liquidation
account. Each Eligible Account Holder and Supplemental Eligible Account Holder
shall, with respect to the Deposit Account held, have a related inchoate
interest in a portion of the liquidation account balance ("subaccount balance").
The initial subaccount balance of a Deposit Account held by an Eligible
Account Holder or Supplmental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of the Qualifying Deposit in the Deposit
Account on the Eligibility Record Date or the Supplemental Eligibility Record
Date and the denominator is the total amount of the Qualifying Deposits in
Neodesha of all Eligible Account Holders and Supplemental Eligible Account
Holders on such record
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<PAGE>
dates. Such initial subaccount balance shall not be increased, and it shall be
subject to downward adjustment as provided below.
If the deposit balance in any Deposit Account of an Eligible Account
Holder or Supplemental Eligible Account Holder at the close of business on any
annual closing date subsequent to the record date is less than the lesser of (i)
the deposit balance in such Deposit Account at the close of business on any
other annual closing date subsequent to the Eligibility Record Date or the
Supplemental Eligibility Record Date or (ii) the amount of the Qualifying
Deposit in such Deposit Account on the Eligibility Record Date or Supplemental
Eligiblity Record Date, the subaccount balance shall be reduced in an amount
proportionate to the reduction in such deposit balance. In the event of a
downward adjustment, the subaccount balance shall not be subsequently increased,
notwithstanding any increase in the deposit balance of the related Deposit
Account. If all funds in such Deposit Account are withdrawn, the related
subaccount balance shall be reduced to zero.
In the event of a complete liquidation of the Resulting Association
(and only in such event), each Eligible Account Holder and Supplemental Eligible
Account Holder shall be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then-current adjusted subaccount
balances for Deposit Accounts then held before any liquidation distribution may
be made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Deposit Accounts and other liabilities, or similar transactions
with another institution the accounts of which are insured by the Federal
Deposit Insurance Corporation, shall be considered to be a complete liquidation.
In such transactions, the liquidation account shall be assumed by the surviving
institution.
X. AMENDMENT OR TERMINATION OF PLAN
If necessary or desirable, the Plan may be amended at any time prior to
submission of the Plan and proxy materials to the Members of Neodesha by a
two-thirds vote of the Boards of Directors of Neodesha, First Federal and the
Holding Company. After submission of the Plan and proxy materials to the
Members, the Plan may be amended by a two-thirds vote of the Board of Directors
of Neodesha, First Federal and the Holding Company only with the concurrence of
the OTS. Any amendments to the Plan made after approval by the Members with the
concurrence of the OTS shall not necessitate further approval by the Members
unless otherwise required.
The Plan may be terminated by a two-thirds vote of the Boards of
Directors of Neodesha, First Federal and the Holding Company at any time prior
to the Special Meeting of Members, and at any time following such Special
Meeting with the concurrence of the OTS. In their discretion, the Boards of
Directors of Neodesha, First Federal and the Holding Company may modify or
terminate the Plan upon the order or with the approval of the OTS, and without
further approval by Members. The Plan shall terminate if the sale of all shares
of Holding Company Conversion Stock is not completed within 24 months of the
date of the Special Meeting. A specific resolution approved by a majority of the
Boards of Directors of Neodesha, First Federal and the Holding Company is
required in order for Neodesha, First Federal and the Holding Company to
terminate the Plan prior to the end of such 24 month period.
XI. EXPENSES OF THE MERGER CONVERSION
Neodesha, First Federal and the Holding Company shall use their best
efforts to assure that expenses incurred by them in connection with the Merger
Conversion shall be reasonable.
XII. TAX RULING
Consummation of the Merger Conversion is expressly conditioned upon
prior receipt of either a ruling of the United States Internal Revenue Service
or an opinion of tax counsel with respect to federal taxation, and either a
ruling of the Kansas taxation authorities or an opinion of tax counsel or
accountants with respect to Kansas taxation, to the effect that consummation of
the transactions contemplated herein will not be taxable to the Holding Company,
First Federal or Neodesha.
XIII. EXTENSION OF CREDIT FOR PURCHASE OF STOCK
Neither Neodesha nor First Federal shall knowingly loan funds or
otherwise extend credit to any Person to purchase in the Merger Conversion
shares of Holding Company Conversion Stock.
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Exhibit 2.2
EXHIBIT 2.2
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is
entered into as of February 18, 1998, by and among Neodesha Savings and Loan
Association, FSA ("Neodesha"), a federally chartered mutual savings and loan
association, First Federal Savings and Loan Association of Independence ("First
Federal"), a federally chartered stock savings and loan association, and First
Independence Corporation (the "Holding Company"), a Delaware corporation that
owns all of the issued and outstanding capital stock of First Federal.
WITNESSETH:
WHEREAS, Neodesha desires to convert to the stock form of organization
through a conversion to the stock form of organization and simultaneous merger
with First Federal; and
WHEREAS, this simultaneous conversion and merger ("Merger Conversion")
shall be accomplished in accordance with this Agreement and with the Plan of
Merger Conversion ("Plan"), attached hereto as Exhibit A and incorporated by
reference herein, and in accordance with all applicable laws, rules and
regulations.
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises herein set forth, Neodesha, First Federal and the Holding Company do
hereby mutually AGREE as follows:
1. Merger Conversion. Subject to the provisions and conditions herein
specified and the receipt of all required regulatory approvals, Neodesha shall
convert to a federally chartered capital stock savings and loan association and,
simultaneously therewith, Neodesha shall merge with First Federal, with First
Federal to be the resulting institution ("Resulting Institution"). Certain
savings account holders of Neodesha shall receive a proportionate interest in a
liquidation account to be established for their benefit in the event of a
complete liquidation of the Resulting Institution in
<PAGE>
accordance with the Plan and Office of Thrift Supervision ("OTS") regulations.
Members of Neodesha shall receive the right to subscribe for shares of common
stock to be issued by the Holding Company in connection with this Merger
Conversion in accordance with the Plan and OTS regulations. Upon consummation of
the Merger Conversion, the corporate existence of First Federal and the Holding
Company shall be continued, and the Resulting Institution shall be a
continuation of the entity of Neodesha, the separate corporate existence of
which shall cease. This Merger Conversion shall be accomplished in accordance
with Federal statutes, the regulations of the OTS and the Plan adopted by
Neodesha.
2. Approval by Boards of Directors. At least two-thirds of each of the
respective boards of directors of Neodesha, First Federal and the Holding
Company shall approve the Merger Conversion as evidenced by the Plan and this
Agreement.
3. Filing of Required Regulatory Applications. Upon the execution and
delivery of this Agreement, Neodesha, with the cooperation of First Federal and
the Holding Company, shall cause to be prepared and filed with the OTS, and any
other appropriate regulatory agency, an application for approval of the Plan and
such other applications as shall be necessary to consummate the transactions
contemplated hereby. These applications shall be in such forms as may be
prescribed by the respective regulatory authorities and shall contain such
information as they may require.
4. Approval by Members. Upon approval of the Plan and requisite
applications by the applicable regulatory authorities, this Agreement and the
Plan shall be duly submitted to the members of Neodesha. The Merger Conversion
shall be subject to approval by the requisite vote of the members of Neodesha.
Neodesha shall use its best efforts to obtain the required approval of its
members to the transactions contemplated herein. To the extent required or
appropriate pursuant to applicable regulations, the Merger Conversion shall also
be submitted for approval to the
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<PAGE>
stockholders of the Holding Company. The parties hereto, through their
respective officers and directors, shall execute and file with the appropriate
regulatory agencies all documents and papers necessary or required by such
agencies. The parties hereto shall take every reasonable and necessary step and
action to secure and to comply with such approvals as may be required by the
statutes, rules and regulations of the agencies having jurisdiction over this
Agreement and the transactions contemplated hereby.
5. Effective Date of Merger Conversion. The merger and conversion
provided for herein shall become effective on the Closing Date. The Closing Date
shall be the date upon which the last of the following occurs:
(a) all required regulatory approvals have been received in connection
with the conversion of Neodesha to a federally chartered capital stock
savings and loan association;
(b) all required regulatory approvals have been received in connection
with the merger of Neodesha with First Federal;
(c) all required regulatory approvals have been received by the
Holding Company in connection with the conversion, merger, stock offering
and associated transactions;
(d) all shares of the Holding Company required to be sold under the
Plan have been sold;
(e) all approvals of members of Neodesha (and, if applicable,
stockholders of the Holding Company) have been received; and
(f) all representations, warranties, covenants and conditions set
forth in this Agreement have been complied with or otherwise satisfied in
all material respects, unless waived in writing by the parties hereto.
3
<PAGE>
6. Resulting Institution and Holding Company. On the Closing Date, the
separate existence of Neodesha shall cease and such association shall be merged
with and into First Federal. First Federal shall be the federally chartered
stock savings and loan association resulting from the Merger Conversion.
7. Offices. The location of the home office of the Resulting
Institution shall be Myrtle & Sixth Streets, Independence, Kansas. The present
branch offices of First Federal and the office of Neodesha will be operated as
branch offices of the Resulting Institution. The location of all branch offices
of the Resulting Institution will be as provided in Schedule A hereto.
8. Savings Accounts. All savings accounts of Neodesha shall be and
become savings accounts in the Resulting Institution without change in their
respective contractual terms, maturity or withdrawal value. As of the Closing
Date, each savings account of Neodesha shall be considered for dividend or
interest purposes as if it had been a savings account of the Resulting
Institution at the time said savings account was opened and at all times
thereafter until such account ceases to be a savings account of the Resulting
Institution. Appropriate evidence of savings account ownership interest in the
Resulting Institution shall be provided by the Resulting Institution to each
savings account holder of Neodesha. Holders of savings accounts in the Resulting
Institution shall not have any voting rights in the Resulting Institution nor
will they have any other equity rights or rights to share in the remaining
assets of the Resulting Institution, except with respect to the rights of
certain savings account holders of Neodesha and First Federal in the liquidation
accounts established and to be established by the Resulting Institution pursuant
to OTS regulations in connection with the Plan and the prior conversion of First
Federal.
9. Transfer of Assets and Assumption of Liabilities. Upon the
consummation of the Merger Conversion, all of the assets and property of every
kind and character, real, personal and mixed,
4
<PAGE>
tangible and intangible, choses in action, rights, and credits then owned by
Neodesha, or which would inure to Neodesha, shall immediately by operation of
law and without any conveyance or transfer and without any further act or deed,
be vested in and become the property of the Resulting Institution which shall
have, hold and enjoy the same in its own right as fully and to the same extent
as the same were possessed, held and enjoyed by Neodesha immediately prior to
the consummation of the Merger Conversion. The Resulting Institution shall be
deemed to be and shall be a continuation of the entity of Neodesha and the
rights and obligations of Neodesha shall remain unimpaired. Upon the
consummation of the Merger Conversion, the Resulting Institution shall assume
and succeed to all of such rights, obligations, duties and liabilities of
Neodesha.
10. Board of Directors of the Resulting Institution. Upon consummation
of the Merger Conversion, the Board of Directors of the Resulting Institution
shall be the Board of Directors of First Federal until their respective
successors shall be duly elected and qualified or otherwise duly selected.
11. Employees and Employee Benefits.
(a) Upon the Closing Date, it is intended that the employees of
Neodesha shall become employees of the Resulting Institution. Their service
with Neodesha shall be deemed credited service with First Federal for
purposes of the eligibility and vesting requirements and criteria under
First Federal's employee benefit plans and policies, and they will be
integrated on an equitable basis into First Federal's salary evaluation
system.
(b) Not later than the Closing Date, First Federal will enter into an
employment contract (in substantially the form previously delivered to
Neodesha) with Franklin C. Miller, the President of Neodesha.
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<PAGE>
(c) Not later than the Closing Date, the Holding Company will grant to
Mr. Miller an option to purchase 3,000 shares, to Diane Holmquist an option
to purchase 1,500 shares and to each non-employee director of Neodesha who
elects to serve on the Resulting Institution's Neodesha area advisory board
an option to purchase 1,000 shares of common stock of the Holding Company.
Each such option shall have an exercise price equal to the fair market
value of the stock on the date of grant and a maximum term of ten years.
The stock options granted to Mr. Miller, Ms. Holmquist and the non-employee
directors shall be pursuant to the terms of the Holding Company's 1993
Stock Option and Incentive Plan (the "Option Plan").
12. Senior Officers. The senior officers of the Resulting Institution
from and after the Closing Date shall be as set forth in Schedule B hereto. Such
officers shall continue to hold office for the term specified in the Bylaws of
the Resulting Institution.
13. Charter and Bylaws of Resulting Institution and Holding Company.
Following consummation of the Merger Conversion, the Charter and Bylaws of First
Federal, and the Certificate of Incorporation and Bylaws of the Holding Company,
each as in effect on the Closing Date, shall be and remain the Charter and
Bylaws of the Resulting Institution and the Certificate of Incorporation and
Bylaws of the Holding Company, respectively.
14. Liquidation Account. On the Closing Date, the Resulting Institution
shall establish on its books a liquidation account, in accordance with the Plan
and 12 C.F.R. Section 563b.3(f), for the benefit of certain savings account
holders of Neodesha who retain their savings accounts in the Resulting
Institution. The function of this liquidation account is to establish a priority
in the unlikely event of liquidation of the Resulting Institution. The existence
of the liquidation account shall not
6
<PAGE>
otherwise operate to restrict the use or application of any of the regulatory
capital accounts of the Resulting Institution.
15. Representations and Warranties of the Holding Company and First
Federal. The Holding Company and First Federal each hereby represent and warrant
the following, the truth and accuracy of each of which shall constitute a
condition precedent to the obligations of Neodesha hereunder. All
representations and warranties of the Holding Company and First Federal are as
of the date of this Agreement and through the Closing Date, unless such
representations and warranties refer to a specified date.
(a) Organization and Standing. The Holding Company is a
corporation duly incorporated, validly existing and in good standing
under the laws of the State of Delaware. All of the issued and
outstanding shares of First Federal are owned by the Holding Company
free and clear of any liens, encumbrances, claims, security
agreements, options, charges and restrictions. The Holding Company has
no subsidiaries other than First Federal. First Federal is a capital
stock savings and loan association and First Federal is duly organized
and validly existing under the laws of the United States of America.
The Holding Company and First Federal have all requisite corporate
power and authority and are duly qualified and licensed to own, lease
and operate their properties and to carry on their business as now
being conducted. The savings accounts of First Federal, to the extent
insurable, are insured by the FDIC. Their respective Charter,
Certificate of Incorporation and Bylaws, which are attached hereto as
Exhibit 15A, are complete and correct as of the date of this
Agreement.
(b) Capitalization. On the date of this Agreement, the authorized
capital stock of the Holding Company consists solely of 2,500,000
shares of Common Stock, $0.01 par value per share ("Holding Company
Common Stock"), and 500,000 shares of preferred stock. On
7
<PAGE>
such date, not more than 953,993 shares of Holding Company Common
Stock are validly issued and outstanding, and no shares of preferred
stock are issued or outstanding. All outstanding shares of capital
stock are validly issued, fully paid and nonassessable and possess no
preemptive rights.
(c) Authority for Agreement. The Holding Company and First
Federal each have full and requisite corporate power and authority to
execute and deliver this Agreement and, subject to the approval of
regulatory authorities (including without limitation, the OTS and the
U.S. Department of Justice and the Federal Trade Commission under the
Hart-Scott- Rodino Antitrust Improvements Act of 1976), to consummate
the Merger Conversion and to carry out their respective obligations
hereunder and under the Plan. The execution and delivery of this
Agreement, and the consummation of the Merger Conversion and the other
transactions contemplated hereby and by the Plan, have been duly
authorized by the Boards of Directors of the Holding Company and First
Federal, and, subject to the requisite approvals outlined above
(including the approval of the Holding Company's stockholders, if
applicable), this Agreement constitutes the valid and legally binding
obligation of the Holding Company and First Federal enforceable in
accordance with its terms. The execution and delivery of this
Agreement and the consummation of the Merger Conversion and the other
transactions contemplated hereby and by the Plan will not conflict
with or result in any violation of, or constitute a default under, any
provision of the Certificate of Incorporation, Charter or Bylaws of
the Holding Company or First Federal, or any material mortgage,
indenture, lease, agreement (including, but not limited to, any
agreement with any governmental agency or instrumentality having
jurisdiction over the business or properties of the Holding Company or
First Federal) or other material instrument, permit, concession,
8
<PAGE>
grant, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Holding Company or
First Federal or any of their respective properties. For purposes of
this paragraph, a material mortgage, indenture, lease, agreement,
instrument, permit, concession, grant, franchise or license excludes
any mortgage, indenture, lease, agreement, instrument, permit,
concession, grant, franchise or license having a term expiring less
than six months from the date of this Agreement or which does not
require the annual expenditure of more than $50,000 (but shall include
any mortgage, indenture, lease, agreement, instrument, permit,
concession, grant, franchise or license pursuant to which credit has
been extended by First Federal).
(d) Financial Statements and Reports. The Holding Company has
delivered to Neodesha accurate and complete copies of the audited
Consolidated Balance Sheet at the close of the Holding Company's audit
year in each of the years 1995, 1996 and 1997 (collectively, the
"Balance Sheets"); and its Consolidated Statements of Earnings,
Consolidated Statements of Stockholders' Equity, Consolidated
Statements of Cash Flows and the notes pertaining to the above for
each of the fiscal years then ended, in each case accompanied by the
report thereon of the firm of independent certified public accountants
who examined such statements. The Balance Sheets and the related
Consolidated Statements of Earnings, Consolidated Statements of
Stockholders' Equity, Consolidated Statements of Cash Flows and notes
thereto for the Holding Company fairly present the consolidated
financial position of the Holding Company as of their respective
dates, and the consolidated results of its operations and consolidated
changes in its cash flows for the periods indicated, all in accordance
with generally accepted accounting principles on a basis consistent
with
9
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prior periods, except as otherwise stated therein or as required by
federal or state laws or regulations.
(e) Absence of Certain Changes. Since the date of the most recent
Balance Sheet delivered or to be delivered pursuant to subparagraph
(d) above, and except as set forth in Exhibit 15E hereto, neither the
Holding Company nor First Federal has undergone any material adverse
change in its condition (financial or otherwise), properties, assets,
liabilities, business or operations, other than changes in the
ordinary course of business which have not been materially adverse to
the Holding Company and First Federal, taken as a whole, provided that
changes in the economy of the United States of America or Kansas
generally or the thrift industry in Kansas (including, without
limitations, general changes in the availability of credit to
financial institutions, general changes in the real estate industry,
general changes in interest rates, money supply levels or the discount
rate of the Federal Reserve System) and changes in the financial
condition, results of operations or assets of the Holding Company and
First Federal, its subsidiaries and joint ventures, taken as a whole,
that are caused directly or indirectly, substantially and primarily by
such changes in the United States or Kansas economy or are applicable
generally to the thrift industry in Kansas, shall not be deemed to be
material adverse changes for purposes of this Section 15(e).
(f) FDIC Insurance. First Federal's accounts are insured up to
applicable limits by the FDIC and First Federal has paid all premiums
required to be paid and is in substantial compliance with the
applicable insurance regulations of the FDIC.
(g) Litigation. Except as otherwise disclosed in Exhibit 15G
hereto, there are no judicial or administrative actions, suits,
proceedings or investigations pending or, to the knowledge of the
Holding Company or First Federal, threatened, which might result in
any
10
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materially adverse change in the condition (financial or otherwise),
properties, assets, business or operations of the Holding Company and
First Federal, taken as a whole, or which seek to invalidate or enjoin
this Agreement or the Plan or any action taken or to be taken in
connection herewith or therewith.
(h) Compliance with Laws; Government Authorizations. Except as
otherwise described in Exhibit 15H hereto, the Holding Company and
First Federal are in compliance in all material respects with all
statutes, laws, ordinances, rules, regulations, judgments, orders and
decrees which apply to their business or properties. All permits,
concessions, grants, franchises, licenses and other governmental
authorizations and approvals necessary for the conduct of the business
of the Holding Company and First Federal have been duly obtained and
are in full force and effect, and there are no proceedings pending or,
to the knowledge of the Holding Company or First Federal, threatened,
which may result in the revocation, cancellation or suspension, or any
materially adverse modification, of any thereof. The consummation of
the Merger Conversion and the other transactions contemplated hereby
and by the Plan will not result in any such revocation, cancellation,
suspension or modification.
(i) Disclosure. Neither this Agreement, the Plan, the Exhibits
hereto, nor any letter, certificate or other document furnished by the
Holding Company or First Federal to Neodesha, insofar as it relates to
the Holding Company or First Federal and their respective operations,
properties, financial condition or prospects, contains any untrue
statement of a material fact or omits to state a material fact
necessary to make the statements contained herein and therein not
misleading. There is no fact relating specifically to the Holding
Company or First Federal or any of its or their respective operations,
properties, financial
11
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condition or prospects known to the Holding Company or First Federal
which materially adversely affects, or, to the knowledge of the
Holding Company or First Federal, in the future may materially
adversely affect, the conditions, properties, assets, liabilities,
business or operations of the Holding Company or First Federal which
have not previously been disclosed in writing to Neodesha.
(j) Proxy Statement/Prospectus. At the time the Proxy
Statement/Prospectus is mailed to eligible members of Neodesha and at
all times subsequent to such mailing, up to and including the time of
the completion of the sale of Holding Company Common Stock to be sold
in the Merger Conversion, such Proxy Statement/Prospectus (including
any supplements thereto), with respect to all information relating
specifically to the Holding Company or First Federal and provided to
Neodesha by the Holding Company or First Federal expressly for
inclusion in the Proxy Statement/Prospectus, will:
(a) comply in all material respects with applicable
provisions of the 1934 Act and the rules and regulations
thereunder and the rules and regulations of the OTS; and
(b) not contain any statement which, at the time and in
light of the circumstances under which it is made, is false or
misleading with respect to any material fact or omits to state
any material fact required to be stated therein or necessary in
order to make the statements therein not false or misleading, or
necessary to correct any statement in an earlier communication
with respect to such matters which has become false or
misleading.
16. Representations and Warranties of Neodesha. Neodesha hereby
represents and warrants the following, the truth and accuracy of each of which
shall constitute a condition precedent to the
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obligations of First Federal and the Holding Company hereunder. All
representations and warranties of Neodesha are as of the date of this Agreement
and through the Closing Date, unless such representations and warranties refer
to a specified date.
(a) Organization and Standing. Neodesha is a mutual savings and
loan association duly chartered and validly existing under the laws of
the United States of America. Neodesha has no subsidiaries. Neodesha
has all requisite corporate power and authority and is duly qualified
and licensed to own, lease and operate its properties and to carry on
its business as now being conducted. The savings accounts of Neodesha,
to the extent insurable, are insured by the FDIC. The Charter and
Bylaws of Neodesha, copies of which are attached hereto as Exhibit
16A, are complete and correct as of the date of this Agreement.
(b) Capitalization. As a mutual savings and loan association,
Neodesha has no shares of capital stock authorized, issued or
outstanding.
(c) Authority for Agreement. Neodesha has full and requisite
corporate power and authority to execute and deliver this Agreement
and the Plan, and, subject to the requisite approval of the members of
Neodesha and federal regulatory authorities (including, without
limitation, the OTS and the U.S. Department of Justice and the Federal
Trade Commission under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976), to consummate the Merger Conversion and to carry out its
obligations hereunder and thereunder. The execution and delivery of
this Agreement and the Plan, and the consummation of the Merger
Conversion and the other transactions contemplated hereby and thereby,
have been duly authorized by the Board of Directors of Neodesha, and,
subject to the requisite approvals outlined above, this Agreement and
the Plan constitute valid and legally binding obligations of Neodesha
enforceable in accordance with their terms. The execution and delivery
of this
13
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Agreement and the Plan and the consummation of the Merger Conversion
and the other transactions contemplated hereby and thereby will not
conflict with or result in any violation of, or constitute a default
under, any provision of the Charter or Bylaws of Neodesha, or any
material mortgage, indenture, lease, agreement (including, but not
limited to, any agreement with any governmental agency or
instrumentality having jurisdiction over the business or properties of
Neodesha) or other material instrument, permit, concession, grant,
franchise, license, judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Neodesha, or any of its or their
respective properties. For purposes of this paragraph, a material
mortgage, indenture, lease, agreement, instrument, permit, concession,
grant, franchise or license excludes any mortgage, indenture, lease,
agreement, instrument, permit, concession, grant, franchise or license
having a term expiring less than six months from the date of this
Agreement or which does not require the annual expenditure of more
than $50,000 (but shall include any mortgage, indenture, lease,
agreement, instrument, permit, concession, grant, franchise or license
pursuant to which credit has been extended by Neodesha).
(d) Financial Statements. Neodesha has delivered to the Holding
Company accurate and complete copies of the audited Consolidated
Statement of Financial Condition at the close of its audit year in
each of the years 1995, 1996 and 1997 (collectively, the "Balance
Sheets"); and its Consolidated Statements of Operations, Consolidated
Statements of Retained Income, Consolidated Statements of Cash Flows
and the notes pertaining to the above for each of the fiscal years
then ended, in each case accompanied by the report thereon of the firm
of independent certified public accountants who examined such
statements. The Balance Sheets and the related Consolidated Statements
of Operations, Consolidated
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Statements of Retained Income, Consolidated Statements of Cash Flows
and notes thereto for Neodesha fairly present, or upon delivery will
fairly present, the consolidated financial position of Neodesha as of
their respective dates, and the consolidated results of its operations
and consolidated changes in its cash flows for the periods indicated,
all in accordance with generally accepted accounting principles on a
basis consistent with prior periods, except as otherwise stated
therein or as required by federal or state laws or regulations. The
audits of Neodesha have been conducted in accordance with generally
accepted auditing standards. Neodesha has delivered or will deliver to
the Holding Company upon written request thereof, accurate and
complete copies of the Auditor's Reports on Internal Control for each
of the fiscal years of the Balance Sheets.
(e) Absence of Certain Changes. Since the date of the most recent
Balance Sheet delivered or to be delivered pursuant to subparagraph
(d) above, and except as set forth in Exhibit 16E hereto, neither
Neodesha nor any joint venture of Neodesha has:
(i) undergone any material adverse change in its condition
(financial or otherwise), properties, assets, liabilities,
business or operations, other than changes in the ordinary course
of business which have not been materially adverse to Neodesha
and its joint ventures, taken as a whole, provided that changes
in the economy of the United States of America or Kansas
generally or the thrift industry in Kansas (including, without
limitations, general changes in the availability of credit to
financial institutions, general changes in the real estate
industry, general changes in interest rates, money supply levels
or the discount rate of the Federal Reserve System) and changes
in the financial condition, results of operations or assets of
Neodesha that are caused directly or indirectly, substantially
and primarily by such
15
<PAGE>
changes in the United States or Kansas economy or are applicable
generally to the thrift industry in Kansas, shall not be deemed
to be material adverse changes for purposes of this Section
16(e)(i); and
(ii) except as heretofore disclosed to the Holding Company
in writing, incurred any indebtedness for borrowed money or
issued or sold any debt securities, or made any commitments with
respect to the foregoing, other than in the ordinary course of
the business of Neodesha or its joint ventures and not exceeding
an aggregate of $100,000.
(f) Tax Matters. Neodesha has duly and properly filed all
federal, state, local and other tax returns required to be filed by it
and has made timely payments of all taxes shown by such returns to be
due and payable, or which are otherwise due and payable, whether
disputed or not; the current status of audits of such returns by the
Internal Revenue Service and other applicable agencies is as set forth
in Exhibit 16F; and there is no agreement by Neodesha for the
extension of time for the assessment or payment of any taxes payable.
Neodesha has provided or will provide to the Holding Company
complete and correct copies of all such tax returns for the fiscal
years ended 1994, 1995, 1996 and 1997.
(g) FDIC Insurance. Neodesha's accounts are insured up to
applicable limits by the FDIC and Neodesha has paid all premiums
required to be paid and is in substantial compliance with the
applicable insurance regulations of the FDIC.
(h) Examination Reports. Neodesha will provide to the Holding
Company complete and correct copies of (i) all examination reports by
the OTS or FDIC forwarded to Neodesha during the calendar years 1994,
1995, 1996 and 1997 and through the Closing Date, (ii) any
correspondence between Neodesha and such agencies relating thereto
during such periods,
16
<PAGE>
and (iii) any agreements, arrangements or understandings between
Neodesha and such agencies entered into as a result of matters raised
in such examination reports or correspondence (or summaries of all
oral agreements, arrangements or understandings with such agencies).
(i) Litigation. Except as otherwise disclosed in Exhibit 16I
hereto, there are no judicial or administrative actions, suits,
proceedings or investigations pending or, to Neodesha's knowledge
threatened, which might result in any materially adverse change in the
condition (financial or otherwise), properties, assets, business or
operations of Neodesha or which seek to invalidate or enjoin this
Agreement or the Plan or any action taken or to be taken in connection
herewith or therewith.
(j) Compliance with Laws; Government Authorizations. Except as
otherwise described in Exhibit 16J hereto, Neodesha is in compliance
in all material respects with all statutes, laws, ordinances, rules,
regulations, judgments, orders and decrees which apply to its business
or properties. All permits, concessions, grants, franchises, licenses
and other governmental authorizations and approvals necessary for the
conduct of the business of Neodesha have been duly obtained and are in
full force and effect, and there are no proceedings pending or, to
Neodesha's knowledge, threatened which may result in the revocation,
cancellation or suspension, or any materially adverse modification, of
any thereof. The consummation of the Merger Conversion and the other
transactions contemplated hereby and by the Plan will not result in
any such revocation, cancellation, suspension or modification.
(k) Disclosure. Neither this Agreement, the Plan, the Exhibits
hereto, nor any letter, certificate or other document furnished by
Neodesha to the Holding Company, insofar as it
17
<PAGE>
relates to Neodesha or its joint ventures and their respective
operations, properties, financial condition or prospects, contains any
untrue statement of a material fact or omits to state a material fact
necessary to make the statements contained herein and therein not
misleading. There is no fact relating specifically to Neodesha, its
joint ventures or any of its or their respective operations,
properties, financial condition or prospects known to Neodesha which
materially adversely affects, or, to the knowledge of Neodesha, in the
future may materially adversely affect, the conditions, properties,
assets, liabilities, business or operations of Neodesha which have not
previously been disclosed in writing to the Holding Company.
(l) Proxy Statement/Prospectus. At the time the Proxy
Statement/Prospectus is mailed to the members of Neodesha for the
solicitation of proxies for the approval of the Merger Conversion and
at all times subsequent to such mailings up to and including the time
of the completion of the sale of the Common Stock of the Holding
Company to be sold in the Merger Conversion, such Proxy
Statement/Prospectus (including any supplements thereto), with respect
to all information set forth therein relating to Neodesha, this
Agreement or the contemplated transactions, will:
(a) comply in all material respects with applicable
provisions of the 1934 Act and rules and regulations thereunder
and the rules and regulations of the OTS; and
(b) not contain any statement which, at the time and in
light of the circumstances under which it is made, is false or
misleading with respect to any material fact or omit to state any
material fact required to be stated therein or necessary in order
to make the statements therein not false or misleading, or
necessary to correct any statement in an earlier communication
with respect to the
18
<PAGE>
solicitation of a proxy for the same meeting or subject matter
which has become false or misleading.
(m) Employee Benefit Plans. All employee benefit plans operating
for the benefit of employees of Neodesha are in compliance with the
applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and the rules and regulations
promulgated under ERISA. The present value of all benefits vested
under each such employee benefit plan does not exceed the value of the
assets of such plans allocable to such vested benefits. Neither any
such plan, any trust created thereunder nor any trustee or
administrator thereof has engaged in a "prohibited transaction," as
defined in ERISA, which may materially adversely affect the condition,
financial or otherwise, of Neodesha.
(n) Environmental Matters. Neodesha has not received any notice,
citation, claim, assessment, proposed assessment or demand for
abatement alleging that it (either directly or as a
successor-in-interest in connection with the enforcement of remedies
to realize the value of properties serving as collateral for
outstanding loans) is responsible for the correction or clean-up of
any condition resulting from the violation of any law, ordinance or
other governmental regulation regarding environmental health matters.
Neodesha has not emitted, generated, disposed of or stored any toxic
or hazardous substances and materials, and no such substances or
materials have been emitted, generated, disposed of or stored on any
property which is owned by Neodesha or in respect of which Neodesha
may be responsible or incur liability, in any manner that violates or,
after the lapse of time may violate, any presently existing federal,
state or local law or regulation, United States or foreign, governing
or pertaining to such substances which would have a material adverse
effect on the business, operations, properties, assets or financial
condition of Neodesha. To
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the best information and belief of Neodesha, none of the real
properties which is owned by Neodesha or in respect of which Neodesha
may be responsible or incur any liability contains any asbestos and
there are no underground storage tanks on or under any such premises,
except as set forth in Schedule 16(n).
17. Covenants of the Holding Company and First Federal.
(a) Conduct of Business. Unless otherwise agreed to in writing by
Neodesha, from the date hereof until the Merger Conversion shall
become effective, the Holding Company and First Federal will:
(i) carry on its business in, and only in, the usual,
regular and ordinary course and, to the extent consistent with
such business, use all reasonable efforts to preserve intact its
present business organization;
(ii) not take, or permit to be taken, any action which would
cause the representations and warranties contained in Paragraph
15 of this Agreement to be inaccurate in any material respect as
of the Closing Date referred to in this Agreement;
(iii) promptly advise Neodesha in writing of any materially
adverse change in the condition (financial or otherwise),
operations or business of the Holding Company or First Federal,
its subsidiaries or joint ventures;
(iv) promptly advise Neodesha in writing of any
correspondence or communication with any governmental agency
having jurisdiction over the Holding Company or First Federal
relating to any examination, report, inquiry or investigation of
the Holding Company or First Federal;
20
<PAGE>
(v) not take any action for or on behalf of any subsidiary
or cause any such action to be taken which would result in a
material breach of this Agreement or any provision hereof if such
action were taken by the Holding Company and/or First Federal
directly; and
(vi) cooperate with Neodesha in the preparation of all
information and materials reasonably requested by Neodesha or
necessary in order to effectuate the transactions contemplated by
this Agreement and the Plan, including (a) the preparation of
proxy materials for mailing to stockholders entitled to vote on
the Merger Conversion, if applicable; (b) the filing of all
required or reasonably requested materials with the appropriate
regulatory authorities; (c) cooperating with Neodesha in
obtaining all required regulatory approvals; (d) obtaining a
comfort letter from its accounting firm for use in connection
with transactions referred to herein; and (e) mailing proxy and
stock offering materials to members of Neodesha and others upon
receipt of required regulatory approvals.
(b) Advisory Board. First Federal shall cause the Resulting
Institution to establish an advisory board comprised of those persons
serving as directors of Neodesha immediately prior to the Closing Date
who desire to serve on such Advisory Board, for the purpose of
consulting with management of the Resulting Institution concerning the
operations of the Resulting Institution's offices in the Neodesha
area. The Resulting Institution will compensate members of such
advisory board in the amount of $1,000 per annum. Subject to 12 C.F.R.
Section 571.5(d)(5), it is the present intent of First Federal to
continue such advisory board on a year to year basis for up to a five
year period.
21
<PAGE>
18. Covenants of Neodesha.
(a) Conduct of Business. Unless otherwise agreed to in writing by
the Holding Company or First Federal, from the date hereof until the
Merger Conversion shall become effective, Neodesha will:
(i) carry on its business in, and only in, the usual,
regular and ordinary course and, to the extent consistent with
such business, use all reasonable efforts to preserve intact its
present business organization;
(ii) not amend its Charter or Bylaws, except as may be
requested by counsel for First Federal for the purpose of
effectuating the Merger Conversion;
(iii) not, without the prior written approval of the Holding
Company or First Federal, merge or consolidate with, or negotiate
with or agree to merge or consolidate with, or purchase
substantially all the assets of, or otherwise acquire any
business of, any corporation, partnership, association or other
business organization or division thereof, except as contemplated
hereby;
(iv) not solicit, directly or indirectly, any offer to merge
with or acquire Neodesha;
(v) not, without the prior written approval of the Holding
Company or First Federal, acquire or sell any contracts for the
purchase or sale of financial or other futures or any put or call
options relating to cash, securities or any commodities
whatsoever, except in the ordinary course of business, consistent
with past practice, to maintain or adjust existing hedge
positions against liabilities;
(vi) not take, or permit to be taken, any action which would
cause the representations and warranties contained in Paragraph
16 of this Agreement to be
22
<PAGE>
inaccurate in any material respect as of the Closing Date
referred to in this Agreement;
(vii) promptly advise the Holding Company or First Federal
in writing of any materially adverse change in the condition
(financial or otherwise), operations or business of Neodesha or
its joint ventures;
(viii) promptly advise the Holding Company or First Federal
in writing of any correspondence or communication with any
governmental agency having jurisdiction over Neodesha relating to
any examination, report, inquiry or investigation of Neodesha;
(ix) not take any action for or on behalf of any other
entity or cause any such action to be taken which would result in
a material breach of this Agreement or any provision hereof if
such action were taken by Neodesha directly; and
(x) cooperate with the Holding Company and First Federal in
the preparation of all information and materials reasonably
requested by the Holding Company or First Federal or necessary in
order to effectuate the transactions contemplated by this
Agreement and the Plan, including (a) the preparation of proxy
materials for mailing to members entitled to vote on the Merger
Conversion; (b) the filing of all required or reasonably
requested materials with the appropriate regulatory authorities;
(c) obtaining all required regulatory approvals; (d) obtaining a
comfort letter from its accounting firm for use in connection
with transactions referred to herein; and (e) mailing proxy and
stock offering materials to members and others upon receipt of
required regulatory approvals.
23
<PAGE>
(b) Access and Information. Neodesha shall give, and shall use
its best efforts to cause any joint ventures to give, to the Holding
Company or First Federal and its representatives full access, during
normal business hours and upon reasonable notice, to its properties,
books, records, contracts and commitments, and will furnish promptly
to the Holding Company or First Federal all such information and
documents relating to its properties and businesses as the Holding
Company or First Federal shall reasonably request, including all
interim financial statements and reports as they are prepared and
become available; provided, however, that any such review will not
unduly interfere with the conduct of Neodesha's business and provided
further that the right of access and examination granted hereby is
subject to the requirements of financial privacy laws or similar laws
relating to account holders and other records.
(c) Compensation. Neodesha shall not, without the prior written
approval of the Holding Company or First Federal, which approval shall
not be unreasonably withheld, increase the compensation payable to any
director, officer or employee from the amount payable as of January 1,
1998, except for increases in the ordinary course of business.
19. Conditions Precedent to the Obligations of Neodesha. The
obligations of Neodesha under this Agreement shall be subject to fulfillment, at
or prior to the Closing Date, of each of the following conditions (unless waived
in writing by Neodesha in the manner provided in Paragraph 21 hereof):
(a) Approval by Members. This Agreement and the Plan shall have
been duly approved by the affirmative vote of the members of Neodesha
in accordance with applicable law.
24
<PAGE>
(b) Governmental Consents; No Governmental Action. All requisite
consents and final approvals necessary for consummation of the Merger
Conversion by applicable regulatory authorities shall have been
obtained and all waiting or notice periods under applicable law shall
have expired. There shall not be pending or threatened any action,
proceeding or investigation by the United States Government or any
state government or any department or agency of either of the
foregoing, for any injunction, writ, preliminary restraining order, or
for any order of any court or governmental agency, domestic or
foreign, of competent jurisdiction, directing or requesting that the
Merger Conversion or any of the other transactions contemplated by
this Agreement or the Plan or any of them not be consummated, or
otherwise challenging the legality of any thereof. There shall not
have been issued and remain in effect any such injunction, writ,
preliminary restraining order, or such other order, nor shall any such
action or other proceeding be pending or threatened before any court
or governmental agency in which it is sought to obtain other relief in
connection with the Merger Conversion or such other transactions
contemplated hereby or by the Plan.
(c) Representations, Warranties and Covenants; Performance by the
Holding Company and First Federal. The representations, warranties and
covenants of the Holding Company and First Federal contained in
Paragraphs 15 and 17 of this Agreement shall be true and correct in
all material respects at and as of the Closing Date, with the same
force and effect as though made at and as of the Closing Date, except
where such representations, warranties and covenants speak as of a
specified date. The Holding Company and First Federal shall duly
perform and comply with all agreements and conditions required by this
Agreement to be complied with prior to or at the Closing Date. The
Holding Company and
25
<PAGE>
First Federal shall each have delivered to Neodesha a certificate,
dated as of the Closing Date, and signed by the President or Executive
Vice President thereof, to the foregoing effect.
(d) Compliance with the Plan. All conditions and requirements of
the Plan shall have been complied with and satisfied including,
without limitation, the sale of all required shares of common stock
offered by the Holding Company pursuant to the Plan ("Conversion
Stock").
20. Conditions Precedent to the Obligations of the Holding Company and
First Federal. The obligations of the Holding Company and First Federal under
this Agreement shall be subject to the fulfillment, at or prior to the Closing
Date, of each of the following conditions (unless waived in writing by the
Holding Company or First Federal in the manner provided in Paragraph 21 hereof):
(a) Approval by Members. This Agreement and the Plan shall have
been duly approved by the requisite vote of the members of Neodesha in
accordance with applicable law. The Merger Conversion shall have been
duly approved by the requisite vote of the stockholders of the Holding
Company, if applicable.
(b) Governmental Consents; No Governmental Action. All requisite
consents and final approvals necessary for consummation of the Merger
Conversion by applicable regulatory authorities shall have been
obtained, and all waiting or notice periods under applicable law shall
have expired. There shall not be pending or threatened any action,
proceeding or investigation by the United States Government or any
state government or any department or agency of either of the
foregoing, for any injunction, writ, preliminary restraining order, or
for any order of any court or governmental agency, domestic or
foreign, of competent jurisdiction, directing or requesting that the
Merger Conversion or any of the
26
<PAGE>
other transactions contemplated by this Agreement or the Plan or any
of them not be consummated, or otherwise challenging the legality of
any thereof. There shall not have been issued and remain in effect any
such injunction, writ, preliminary restraining order or such other
order, nor shall any such action or other proceeding be pending or
threatened before any court or governmental agency in which it is
sought to obtain other relief in connection with the Merger Conversion
or such other transactions contemplated hereby or by the Plan.
(c) Representations, Warranties and Covenants; Performance by
Neodesha. The representations, warranties and covenants of Neodesha
contained in Paragraphs 16 and 18 of this Agreement shall be true and
correct in all material respects at and as of the Closing Date, with
the same force and effect as though made at and as of the Closing
Date, except where such representations, warranties and covenants
speak as of a specified date. Neodesha shall have duly performed and
complied with all agreements and conditions required by this Agreement
to be complied with by it prior to or at the Closing Date. Neodesha
shall have delivered to the Holding Company or First Federal a
certificate, dated as of the Closing Date, and signed by the President
thereof, to the foregoing effect.
(d) Tax-Free Reorganization. The Holding Company or First Federal
shall have received a formal ruling from the Internal Revenue Service
or an opinion of counsel that the transactions contemplated herein
constitute a tax-free reorganization to the Holding Company, First
Federal and Neodesha pursuant to the applicable provisions of the
Internal Revenue Code of 1986.
27
<PAGE>
(e) Compliance with the Plan. All conditions and requirements of
the Plan shall have been complied with and satisfied including,
without limitation, the sale of all Conversion Stock offered by the
Holding Company pursuant to the Plan.
21. Termination, Amendment and Waiver.
(a) Termination. This Agreement and the Plan may be terminated,
and the Merger Conversion abandoned, at any time prior to the Closing
Date (whether before or after the approval thereof by the members of
Neodesha and, if applicable, stockholders of the Holding Company and
First Federal):
(i) by mutual consent of the Boards of Directors of the
Holding Company, First Federal and Neodesha evidenced by
appropriate resolutions;
(ii) by the Board of Directors of Neodesha if (A) the
representations, warranties, covenants or conditions precedent
set forth in Paragraphs 15, 17 and 19 hereof shall not be
accurate and satisfied in all material respects, (B) any
application for approval of or consent to the Merger Conversion
filed with any governmental agency has been denied and such
denial has not been withdrawn within 60 days, or (C) the Merger
Conversion is not consummated by December 31, 1998; and
(iii) by the Holding Company and First Federal if (A) the
representations, warranties, covenants or conditions precedent
set forth in Paragraphs 16, 18 and 20 hereof shall not be
accurate and satisfied in all material respects, (B) any
application for approval of or consent to the Merger Conversion
filed with any governmental agency has been denied and such
denial has not been withdrawn within 60 days, or (C) the Merger
Conversion is not consummated by December 31, 1998.
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<PAGE>
(b) Amendment. This Agreement may be amended by action of the
Boards of Directors of the parties at any time before or after
approval of this Agreement by the members of Neodesha and, if
applicable, the stockholders of the Holding Company and First Federal,
provided that after any such approval, no amendment shall be made
which shall affect the rights of the members or stockholders giving
such approval in a manner which, in the judgment of the Board of
Directors of the party the members or stockholders of which have given
such approval, is materially adverse to such members or stockholders
without the further approval of such members or stockholders. This
Agreement may not be amended except by an instrument in writing duly
executed and delivered on behalf of each of the parties hereto.
(c) Waiver. At any time prior to the Closing Date, the Board of
Directors of the Holding Company, First Federal or Neodesha may each
on their own behalf waive (i) any inaccuracies in the representations
and warranties of any other party contained herein or in any document
or instrument pursuant hereto and (ii) compliance with any of the
agreements, covenants or conditions contained herein. Any agreement on
the part of a party hereto to any such waiver shall be valid only if
set forth in an instrument in writing duly executed and delivered on
behalf of such party.
22. Miscellaneous.
(a) Confidentiality. Except to the extent required by law or the
rules or regulations of any governmental agency or instrumentality in
connection with the preparation of a proxy statement, prospectus or
tax ruling (tax opinion), the filing and prosecution of applications
for approval of the transactions contemplated hereby, or the
requirements of the federal securities laws, all information
concerning each of the parties hereto which is furnished to
29
<PAGE>
the other party hereto, will be held in strict confidence by it, and
all copies thereof will be returned promptly to the respective party
at its request in the event the Merger Conversion is not consummated.
(b) Amendment. First Federal shall assume and bear 662/3% of all
reasonable expenses, costs and fees incurred by each party in the
preparation and execution of this Agreement and the Plan and in
complying with the agreements, covenants, and conditions herein and
therein, including the preparation, printing and mailing of the Proxy
Statement/Offering Prospectus, whether or not the Merger Conversion
contemplated hereby and thereby shall be consummated, with the
remainder of such expenses (which remainder shall not exceed $150,000)
to be borne by Neodesha; provided, however, that in the event of a
termination of this Agreement by any party hereto otherwise than in
accordance with Section 21(a) hereof, or of a material breach of this
Agreement by any party hereto which is not waived by the other party
or cured by the breaching party within 30 days after notice thereof to
the breaching party, all such costs, expenses and fees of the parties
shall be assumed and borne by the breaching party.
(c) Finder's and Other Fees. Except with respect to commissions,
discounts and similar fees which may be paid or allowed to securities
firms in connection with the sale of stock in the Merger Conversion,
each party represents that it has neither incurred nor is liable for
any finder's, broker's or other similar fees to any third party
whatsoever as a result of the execution and delivery of this Agreement
or the Plan or the consummation of the transactions contemplated
hereby or thereby and each party hereby indemnifies and holds harmless
each other party hereto against any claim for a broker's or finder's
fee based on alleged retention of a broker or finder by it.
30
<PAGE>
(d) Further Acts. The parties hereto hereby agree to perform, at
any time and from time to time, any and all necessary acts, or to
prepare and to execute or cause to be executed any and all instruments
in writing, which shall be advisable or necessary to implement fully
the intent and terms of this Agreement, including but not limited to
applications and other documentation required to obtain approvals of
the Merger Conversion and the Plan (including proxy materials and
offering materials contemplated by the Plan) and such conveyances and
assignments as may be required. In this regard First Federal and its
counsel shall assume responsibility for the preparation of all
applications, proxy statements, offering circulars and other
documentation required to facilitate and obtain the requisite
regulatory approval of this Merger Conversion, and Neodesha and its
counsel shall assist First Federal and its counsel in preparing such
applications and documentation and shall promptly furnish to First
Federal and its counsel all information reasonably requested in
connection with the preparation of the applications, proxy statements,
offering circulars and related documents. All such information shall
be accurate and complete in all material respects.
(e) Notices. All notices and other communications pursuant to
this Agreement shall be deemed to have been duly given if in writing
and delivered personally or if mailed, first class, postage pre-paid,
as follows:
If to Neodesha, to: with a copy to:
Franklin C. Miller Dennis Depew, Esq.
President The Depew Law Firm
Neodesha Savings and Loan Association 620 Main Street
801 Main Street P.O. Box 313
P.O. Box 509 Neodesha, Kansas 66757-0313
Neodesha, Kansas 66757-1635
31
<PAGE>
If to the Holding Company
or First Federal, to: with a copy to:
Larry G. Spencer Martin L. Meyrowitz, P.C.
President and Chief Executive Officer Silver, Freedman & Taff, L.L.P.
First Independence Corporation 1100 New York Ave., N.W.,
Myrtle & Sixth Streets 7th Floor East Tower
Independence, Kansas 67301 Washington, D.C. 20005
(f) Headings; Entire Agreement. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. This Agreement constitutes
the entire agreement between the parties hereto and supersedes and replaces
any prior written or oral agreements or understandings between them
relating to the subject matter hereof.
(g) Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
shall constitute one and the same instrument.
(h) Binding Effect. This Agreement shall inure to the benefit and be
binding upon the successors of the Holding Company, First Federal and
Neodesha. This Agreement shall not otherwise be assignable by the Holding
Company, First Federal or Neodesha.
(i) Amendments. This Agreement and the Plan shall not be amended,
modified, changed or supplemented except by an instrument in writing signed
by the parties hereto.
(j) Survival of Warranties. The representations, warranties and
covenants contained herein shall not survive the Closing Date.
(k) Governing Law. This Agreement shall be governed by and construed
in accordance with the federal laws and regulations, except to the extent
certain matters may
32
<PAGE>
be governed as a matter of law by the laws of the State of Delaware (as the
state of incorporation of the Holding Company).
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
NEODESHA SAVINGS & LOAN
ATTEST: ASSOCIATION, FSA
Diane Holmquist /s/ Franklin C. Miller
- -------------------- ---------------------------------
Franklin C. Miller, President
ATTEST: FIRST FEDERAL SAVINGS & LOAN
ASSOCIATION OF INDEPENDENCE
Gary Overfield /s/ Lary G. Spencer
- --------------------- ----------------------------------
Larry G. Spencer, President and
Chief Executive Officer
ATTEST: FIRST INDEPENDENCE CORPORATION
Gary Overfield /s/ Larry G. Spencer
- ---------------------- ----------------------------------
Larry G. Spencer, President and
Chief Executive Officer
33
Exhibit 5
EXHIBIT 5
OPINION OF SILVER, FREEDMAN & TAFF, L.L.P. WITH RESPECT TO LEGALITY OF STOCK
<PAGE>
[Silver, Freedman & Taff, L.L.P. (Letterhead)]
July 1, 1998
The Board of Directors
First Independence Corporation
Myrtle & Sixth Streets
Post Office Drawer 947
Independence, Kansas 67301
Re: Registration Statement
Under the Securities Act of 1933
Gentlemen:
This opinion is rendered in connection with the Registration Statement
to be filed on Form SB-2 with the Securities and Exchange Commission under the
Securities Act of 1933 relating to the 174,752 shares of Common Stock of First
Independence Corporation (the "Company"), par value $.01 per share, to be
issued. As counsel, we have reviewed the Certificate of Incorporation of the
Company and such other documents as we have deemed appropriate for the purpose
of this opinion. We are rendering this opinion as of the time the Registration
Statement referred to above becomes effective.
Based on the foregoing, we are of the opinion that the shares of Common
Stock of the Company covered by the aforesaid Registration Statement will, when
sold, be validly issued, fully paid and non-assessable shares of Common Stock of
the Company.
Very truly yours,
/s/Silver, Freedman & Taff, L.L.P.
----------------------------------
SILVER FREEDMAN & TAFF, L.L.P.
Exhibit 8.1
EXHIBIT 8.1
FORM OF OPINION OF SILVER, FREEDMAN & TAFF, L.L.P. WITH RESPECT TO
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER CONVERSION
<PAGE>
July 1, 1998
Board of Directors
First Independence Corporation
Myrtle & Sixth
Independence, Kansas 67301
Re: Merger Conversion of Neodesha Savings and Loan
Association, FSA into First Federal Savings and Loan
Association of Independence, a subsidiary of
First Independence Corporation
Gentlemen:
You have requested this firm's opinion regarding certain federal income
tax consequences arising from the following two integrated transactions: (i) the
conversion of Neodesha Savings and Loan Association, FSA, a federally chartered
mutual savings and loan association ("Neodesha"), into a federally chartered
stock savings and loan association (the "Conversion") in accordance with the
applicable provisions of the regulations of the Office of Thrift Supervision
(the "OTS") governing all savings associations (the "Regulations"); and (ii)
simultaneously therewith, the merger in accordance with the Regulations (the
"Merger") of Neodesha into First Federal Savings and Loan Association of
Independence ("First Federal"), with First Federal to be the resulting
institution (the "Resulting Institution"). The Conversion and Merger are
hereinafter collectively referred to as the "Merger Conversion." Shares of
common stock, par value $0.01 per share ("First Independence Common Stock"), of
First Independence Corporation ("First Independence"), the holding company of
First Federal, will be offered for sale and issued in connection with the Merger
Conversion. The Merger Conversion will be consummated pursuant to the Agreement
and Plan of Merger and Reorganization (the "Agreement") entered into as of
February 18, 1998, between Neodesha and First Independence and the Plan of
Merger Conversion (the "Plan") attached as an exhibit thereto and unanimously
approved by the Boards of Directors of Neodesha and First Independence.
We have examined the Agreement and the Plan and have made such other
investigations as we have deemed relevant or necessary for the purposes of this
opinion. In our examination of these documents, we have assumed the authenticity
of those documents submitted to us as originals and the conformity to authentic
original documents of any documents submitted to us as certified, conformed or
reproduced copies.
<PAGE>
Board of Directors
July 1, 1998
Page 2
As to matters of fact which are material to this opinion, we have
relied on, and have assumed the accuracy of (i) the representations and
warranties made by Neodesha, First Independence and First Federal in the
Agreement and the Plan and (ii) the accuracy and completeness of the facts,
information and representations contained in the registration statement (the
"Prospectus") to be filed with the Securities and Exchange Commission ("SEC") to
register the shares of First Independence Common Stock (the "Conversion Stock")
that will be issued upon consummation of the Merger Conversion. As to other
matters of fact which are material to this opinion, we have relied upon
certificates of officers of First Independence, First Federal and Neodesha (the
"Facts Certificates"). We have also relied upon an opinion of Ferguson &
Company, to the effect that the subscription rights to purchase shares of the
Conversion Stock have no ascertainable value.
The Proposed Transaction
As indicated above, the Agreement and Plan provide that, subject to the
receipt of all required regulatory approvals, Neodesha shall convert from the
federal mutual to the federal stock form of organization and simultaneously
merge with and into First Federal, with First Federal to be the resulting
institution in accordance with the applicable provisions of the Regulations.
Shares of the Conversion Stock will be offered for sale and issued in connection
with the Merger Conversion. The aggregate price, per share price and number of
shares of the Conversion Stock to be issued in the Merger Conversion shall be
determined in accordance with the Plan. Members of Neodesha and other persons
shall receive the right to subscribe for shares of the Conversion Stock to be
issued by First Independence in connection with the Merger Conversion in
accordance with the Plan and the Regulations. Upon consummation of the Merger
Conversion, the corporate existence of First Federal shall be continued, and the
separate corporate existence of Neodesha shall cease. The Merger Conversion
shall be accomplished in accordance with applicable statutes and regulations and
the provisions of the Plan.
First Independence, First Federal and Neodesha shall cause to be
prepared and filed all applications with government agencies which are necessary
for consummation of the Merger Conversion, including, without limitation: (i) an
Application for Merger Conversion on Form AC to be filed by Neodesha with the
OTS, (ii) an Application on Form H-(e)3 to be filed by First Independence with
the OTS, which shall include as an exhibit thereto a Merger Application, (iii) a
registration statement (the "Registration Statement") with respect to the shares
of the Conversion Stock to be issued in the Merger Conversion to be filed by
First Independence with the SEC, and (iv) appropriate filings under the
securities/blue sky laws of the various states.
Upon approval of the Application for Merger Conversion by the OTS and
the declaration of effectiveness of First Independence's Registration Statement
by the SEC, the Agreement and the Plan shall be submitted to the members of
Neodesha for their approval. First Independence has approved the Agreement and
the Plan in its capacities as the sole stockholder of First Federal and the
issuer of the Conversion Stock.
<PAGE>
Board of Directors
July 1, 1998
Page 3
Upon consummation of the Merger Conversion, all of the assets and
property of every kind and character then owned by Neodesha, or which would
inure to Neodesha, shall immediately by operation of law be vested in and become
the property of First Federal, which shall have, hold and enjoy the same in its
own right as fully and to the same extent as the same were possessed, held and
enjoyed by Neodesha immediately prior to the consummation of the Merger
Conversion. Upon consummation of the Merger Conversion, First Federal shall be
deemed to be and shall be a continuation of the entity of Neodesha and shall
assume and succeed to all of such rights, obligations, duties and liabilities of
Neodesha.
Upon consummation of the Merger Conversion, First Federal shall
establish on its books a liquidation account in accordance with the Plan and
Section 563b.3(f) of the Regulations for the benefit of certain deposit account
holders of Neodesha who retain their deposit accounts in First Federal. The
function of this liquidation account is to establish a priority on liquidation
of First Federal, which priority shall be equal to that of all other liquidation
accounts established by First Federal pursuant to the Regulations; the existence
of any liquidation account shall not operate to restrict the use or application
of any of the capital accounts of First Federal except as provided in the Plan
and Section 563b.3(f) of the Regulations.
In addition to the foregoing description of the proposed transaction,
we have made the following factual assumptions in rendering the opinions
hereinafter set forth:
(a) The management of First Independence, First Federal and Neodesha
have no knowledge of any plan or intention on the part of
Neodesha deposit account holders to withdraw from their deposit
accounts subsequent to the proposed Merger Conversion an amount
which would reduce their interest in the liquidation account
established pursuant to the Plan to an amount which would have,
in the aggregate, a value at the time of the proposed Merger
Conversion of less than 50 percent of the aggregate interest
which the members of Neodesha had prior to the proposed
transaction.
(b) Neither First Independence nor First Federal has any plan or
intention to sell or otherwise dispose of any of the assets of
Neodesha, except in the ordinary course of business.
(c) Following the Merger Conversion, First Federal will continue the
historic business of Neodesha in a substantially similar nature.
(d) The liabilities of Neodesha to be assumed by First Federal and
the liabilities to which the transferred assets of Neodesha are
subject arose in the ordinary course of business of Neodesha.
(e) There is no intercorporate indebtedness existing between First
Independence, First Federal and Neodesha, which was issued,
acquired or will be settled at a discount.
<PAGE>
Board of Directors
July 1, 1998
Page 4
(f) The adjusted bases and the fair market value of the assets of
Neodesha to be transferred to First Federal will equal or exceed
the sum of its liabilities assumed by First Federal plus the
amount of the liabilities, if any, to which the transferred
assets are subject.
(g) First Independence has no current plan or intention to redeem or
otherwise acquire any of the shares of the Conversion Stock to be
issued in the proposed transaction.
(h) No shares of the Conversion Stock issued in the proposed
transaction will be issued to or purchased by depositor-employees
at a discount or as compensation in the proposed transaction.
(i) Both Neodesha and First Federal utilize a reserve for bad debts
in accordance with Section 593 of the Internal Revenue Code of
1986, as amended (the "Code"). Following the transaction, First
Federal will likewise continue to utilize a reserve for bad debts
in accordance with Section 593.
(j) No Eligible Account Holders or Supplemental Eligible Account
Holders, as defined in the Plan, who maintain their deposit
accounts after the Merger Conversion will be excluded from
participating in the liquidation account.
(k) The fair market value of the withdrawable deposit accounts plus
interest in the liquidation account of First Federal to be
received by Neodesha members under the Plan will be, in each
instance, equal to the fair market value of the withdrawable
deposit accounts of Neodesha surrendered in exchange therefor.
(l) The exercise price of the subscription rights received by
Eligible Account Holders and other members to purchase shares of
the Conversion Stock will be the fair market value of the
Conversion Stock at the time of the completion of the Merger
Conversion.
(m) The subscription rights received by Eligible Account Holders and
other members to purchase shares of the Conversion Stock will
have no ascertainable value.
(n) No two parties to the transaction are investment companies as
defined in sections 368(a)(2)(F)(iii) and (iv) of the Code.
(o) Neodesha is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of Section 368(a)(3)(A) of the
Code.
<PAGE>
Board of Directors
July 1, 1998
Page 5
(p) First Independence and Neodesha will pay their respective
expenses incurred in connection with the transaction, except that
First Independence will pay all filing fees and reimburse
Neodesha for certain expenses incurred in connection with the
Merger Conversion.
Analysis
Section 368(a) of the Code defines the various types of transactions
which are considered to be "reorganizations" that are generally tax-free to the
corporations involved. As discussed below, the Merger Conversion involves both
an "F" reorganization which is applicable to the conversion of Neodesha to stock
form and an "A" reorganization which is applicable to the merger of Neodesha
with and into First Federal. It is the practice of the Internal Revenue Service
(the "IRS") regarding conversion mergers to ignore the conversion step of the
proposed transaction and to consider the two steps of such a transaction to be a
valid "A" merger reorganization. These considerations are discussed below in
greater detail.
Tax Consequences of the Conversion
Section 368(a)(1)(F) of the Code provides that a mere change in the
identity, form or place of organization of one corporation, however effected, is
a reorganization. In Rev. Rul. 80-105, 1980-1 C.B. 78, the Internal Revenue
Service considered the federal income tax consequences of the conversion of a
federal mutual savings and loan association to a state stock savings and loan
association. The ruling concluded that the conversion qualified as a mere change
in identity, form or place of organization within the meaning of Section
368(a)(1)(F). The rationale for this conclusion is not clearly expressed in the
ruling, but two factors are stressed. First, the changes at the corporate level
other than the place of organization and form of organization were regarded as
insubstantial. The converted association continued its business in the same
manner; it had the same savings accounts and loans. The converted association
continued its membership in the Federal Savings and Loan Insurance Corporation
("FSLIC") and remained subject to the regulations of the Federal Home Loan Bank
Board ("FHLBB"). Second, the ruling states that the ownership rights of the
depositors in the mutual company are Amore nominal than real.@ Although the
ruling does not explain the significance of this statement, subsequent
administrative interpretations have indicated that the IRS believes these
nominal rights are preserved in the liquidation account that is typically
established for the depositors' benefit. This approach enables the IRS to
distinguish the tax treatment of conversion transactions from the tax treatment
of acquisitive transactions in which mutual companies acquire stock companies.
See Paulsen v. Commissioner, 469 U.S. 131 (1985); Rev. Rul. 69-6, 1969-1 C.B.
104.
<PAGE>
Board of Directors
July 1, 1998
Page 6
Tax Consequences of the Merger
Section 368(a)(1)(A) of the Code defines the term "reorganization" to
include a "statutory merger" of corporations such as the merger of Neodesha with
and into First Federal. Section 1.368-2(b)(1) of the Treasury Regulations
provides that, in order to qualify as a reorganization under Section 368(a) (1)
(A) , a transaction must be a merger or consolidation effected pursuant to the
corporation laws of the United States or a state. The Agreement provides that
the Merger will be accomplished in accordance with applicable laws, rules and
regulations.
Treasury Regulations and case law require that, in addition to the
existence of statutory authority for a merger, certain other conditions must be
satisfied in order to qualify a proposed transaction such as the Merger as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code. The
"business purpose test," which requires a proposed merger to have a bona fide
business purpose, must be satisfied. See 26 C.F.R. Section 1.368-1(c). We
believe that the Merger satisfies the business purpose test for the reasons set
forth in the Prospectus regarding the Merger Conversion under the caption "The
Merger Conversion - Business Purposes." The "continuity of business enterprise
test" requires an acquiring corporation either to continue an acquired
corporation's historic business or to use a significant portion of its historic
business assets in a business. The policy underlying this rule, which is to
ensure that reorganizations are limited to readjustments of continuing interests
in property under modified corporate form, requires that the determination of
compliance with the rule be based upon all of the relevant facts and
circumstances. For example, on the issue of business continuity, the fact that
First Federal is in the same line of business as Neodesha tends to establish the
requisite continuity, but is not alone sufficient. In addition, a corporation=s
historic business generally is the business it has conducted most recently.
However, a corporation's historic business is not one that it enters into as
part of the reorganization. See 26 C.F.R. Section 1.368-1(d). We believe that
the continuity of business enterprise test is satisfied because the business
conducted by Neodesha immediately prior to the Merger Conversion, including the
acceptance of deposits from the public and investment in mortgage loans, will
continue to be conducted by First Federal following the proposed transaction.
The "continuity of interest doctrine" requires that the continuing common stock
interest of the former owners of an acquired corporation, considered in the
aggregate, represent a "substantial part" of the value of their former interest,
and provide them with a "definite and substantial interest" in the affairs of
the acquiring corporation or a corporation in control of the acquiring
corporation. Paulsen v. Comm'r, 469 U.S. 131 (1985); Helvering v. Minnesota Tea
Co., 296 U.S. 378 (1935); John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935);
Southwest Natural Gas Co. v. Comm'r, 189 F.2d 332 (5th Cir. 1951) , cert.
denied, 342 U.S. 860 (1951). In the context of a merger conversion transaction,
it is the current practice of the IRS to consider the continuity of ownership
interest requirement to be satisfied if an acquired savings and loan
association's account holders do not intend to withdraw an amount of their
deposit accounts subsequent to the transaction which would reduce their interest
in the acquiring company's liquidation account to an amount having, in the
aggregate, a value of less than 50 percent of the aggregate interest which the
members of the acquired company had prior to the proposed transaction. See
Private Letter Ruling number 9049003, representation (a). We have expressly set
forth above our assumption, based upon the representations of Neodesha, First
Independence and First Federal, that this requirement regarding the preservation
of the interest of the Neodesha account holders in the liquidation account of
First Federal will be satisfied following the Merger Conversion.
<PAGE>
Board of Directors
July 1, 1998
Page 7
There is no direct authority upon which we can rely in stating that a
conversion to stock form of a mutual savings and loan association and sale of
its stock to an acquiring holding company, followed immediately by the merger of
the converted savings and loan association with another subsidiary of the
acquiring holding company, qualifies as a valid "A" reorganization. However, the
practice of the IRS is to ignore the conversion step in a conversion merger
transaction and to consider the two steps of the transaction to constitute a
valid "A" reorganization. See Private Letter Rulings numbered 9124024, 9049003,
9042058, 8952051 and 8843042.
Private letter rulings do not represent binding legal authority upon
which the parties in a proposed transaction may rely in resisting a challenge by
the IRS as to the income tax consequences of a proposed transaction. See Section
6110(j)(3) of the Code. However, such rulings are evidence of the IRS= current
position regarding the matter in question and reflect its interpretation and
analysis, with which we agree and upon which we base our response to your
questions relative to the federal income tax consequences of the Merger
Conversion.
Opinions
Based on the foregoing, our opinions are as follows:
(1) The conversion of Neodesha from a mutual savings and loan
association to a stock savings and loan association will be
ignored for federal income tax purposes. Provided that the
proposed merger of Neodesha with and into First Federal qualifies
as a statutory merger under applicable federal laws and
regulations, the Merger will constitute a reorganization within
the meaning of Section 368(a)(1)(A) of the Code. First Federal
and Neodesha will each be "a party to a reorganization" within
the meaning of Section 368(b) of the Code.
(2) No gain or loss will be recognized to Neodesha on the transfer of
its assets to First Federal in exchange for deposit accounts and
liquidation accounts in First Federal, and subscription rights to
purchase shares of the Conversion Stock, and the assumption by
First Federal of the liabilities of Neodesha. See Sections 361(a)
and 357(a) of the Code.
(3) No gain or loss will be recognized by First Federal upon the
receipt of the assets of Neodesha in exchange for First Federal
deposit accounts and liquidation accounts, subscription rights to
purchase shares of the Conversion Stock, and the assumption by
First Federal of all of the liabilities of Neodesha.
<PAGE>
Board of Directors
July 1, 1998
Page 8
(4) First Independence will recognize no gain or loss on the sale of
shares of the Conversion Stock in a community offering or through
the exercise of the subscription rights. See Section 1032(a) of
the Code.
(5) The basis of the Neodesha assets in the hands of First Federal
immediately after the Merger Conversion will be the same as the
basis of the assets in the hands of Neodesha immediately prior to
the Merger Conversion. See Section 362(b) of the Code.
(6) The holding period of the Neodesha assets in the hands of First
Federal will include, in each instance, the period during which
such assets were held by Neodesha immediately prior to the Merger
Conversion. See Section 1223(2) of the Code.
(7) First Federal will succeed to and take into account those items
of Neodesha described in Section 381(c) of the Code. See Section
381(a) of the Code and Section 1.381(c)(2)-l of the Treasury
Regulations. These items will be taken into account by First
Federal, subject to the conditions and limitations specified in
Sections 381, 382, 383 and 384 of the Code and the regulations
thereunder.
(8) Pursuant to the provisions of section 381(c)(4) of the Code and
Section 1.381(c)(4)-1(a)(1) (ii) of the Treasury Regulations,
First Federal will succeed to and take into account, immediately
after the Merger, the dollar amounts of those accounts of
Neodesha which represent bad debt reserves in respect of which
Neodesha has taken a bad debt deduction for taxable years ending
on or before the date of the Merger Conversion. Bad debt reserves
will have the same character in the hands of First Federal as
they would have had in the hands of Neodesha if the Merger
Conversion had not occurred. The bad debt reserves will not be
required to be restored to gross income of either Neodesha or
First Federal for the taxable year of the Merger Conversion,
provided that Neodesha meets the requirements of Section
593(a)(2) of the Code at the close of its taxable year ending on
the date of the Merger Conversion and First Federal meets the
requirements of Section 593(a)(2) of the Code during such taxable
year.
(9) The creation of the liquidation account on the books of First
Federal for the benefit of former account holders of Neodesha
will not require bad debt reserves to be restored to gross
income, nor will creation of such an account affect deductions
for additions to reserve for bad debts under Section 593 of the
Code or distributions to shareholders under Section 593(e) of the
Code.
<PAGE>
Board of Directors
July 1, 1998
Page 9
(10) Eligible Account Holders and Supplemental Eligible Account
Holders will realize gain, if any, upon the exchange of their
interests in Neodesha for interests in the liquidation account in
First Federal and subscription rights to purchase shares of the
Conversion Stock, but such gain shall be limited to the fair
market value, if any, of the interests in the liquidation account
and the subscription rights received by such persons.
(11) The basis of the deposit accounts in First Federal immediately
after the Merger Conversion received by the respective account
holders of Neodesha will be the same as the basis of their
deposit accounts in Neodesha immediately prior to the Merger
Conversion. See Section 1012 of the Code. The basis of the
interest of each Eligible Account Holder and Supplemental
Eligible Account Holder in the liquidation account of First
Federal will be equal to the cost of such property, i.e., the
fair market value, if any, of the proprietary interest in First
Federal received in exchange for the proprietary interest in
Neodesha. The basis of the subscription rights in the hands of
the Eligible Account Holders and Supplemental Eligible Account
Holders is zero, increased by the amount of gain, if any,
recognized upon their receipt.
(12) Neither Eligible Account Holders, Supplemental Eligible Account
Holders, other members, nor eligible officers, directors or
employees of Neodesha, will realize any taxable income as a
result of the exercise or lapse of subscription rights to
purchase shares of the Conversion Stock. See Rev. Rul. 56-572,
1956-2 C.B. 182.
(13) A purchaser of shares of the Conversion Stock will have an
initial basis in such stock equal to the purchase price of such
stock, increased (in the case of stock acquired pursuant to the
exercise of subscription rights) by the basis, if any, of the
subscription rights exercised. See Section 1012 of the Code.
(14) A purchaser of shares of the Conversion Stock will have a holding
period for stock acquired through the exercise of subscription
rights which will commence on the date on which the rights were
exercised. See Section 1223(6) of the Code. The holding period of
the Conversion Stock that will be purchased pursuant to the
community offering will commence on the date following the date
on which the stock is purchased. See Rev. Rul. 70-598, 1970-2
C.B. 168, and Rev. Rul. 66-97, 1966-1 C.B. 190.
<PAGE>
Board of Directors
July 1, 1998
Page 10
The opinions expressed above are limited to the income tax consequences
of the Merger Conversion under the laws of the United States. Furthermore, our
opinions are based on research of the Code, applicable Treasury Regulations,
current published administrative decisions of the IRS, and existing judicial
decisions as of the date hereof. No assurance can be given that legislative,
administrative or judicial decisions or interpretations may not be forthcoming
that will significantly change the opinions set forth herein.
We express no opinions other than those stated immediately above as our
opinions. We hereby consent to the filing of this opinion as an exhibit to
Neodesha=s Application for Conversion, to First Independence's Application on
Form H-(e)3 to the OTS, and to First Independence's Registration Statement.
Very truly yours,
----------------------------
Exhibit 8.2
EXHIBIT 8.2
FORM OF OPINION OF GRANT, THORNTON WITH RESPECT TO KANSAS
INCOME TAX CONSEQUENCES OF THE MERGER CONVERSION
<PAGE>
[GRANT THORNTON (Letterhead)]
Board of Directors
First Independence Corporation
P.O. Drawer 947
Independence, Kansas 67301
Re: Merger Conversion of The Neodesha Savings and Loan
Association, FSA into First Federal Savings and Loan
Association of Independence, a subsidiary of First
Independence Corporation
Gentlemen:
It is our understanding that The Neodesha Savings and Loan Association, FSA
(Neodesha) will convert from a federally chartered mutual savings and loan
association to a federally chartered stock savings institution, and
simultaneously merge with First Federal Savings & Loan Association of
Independence, with First Federal being the surviving company.
The Washington D.C. law firm of Silver, Freedman & Taff, LLP has issued their
tax opinion that the conversion, by Neodesha, from a mutual savings and loan
association to a federally chartered stock savings institution will be
considered a tax free reorganization under section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended, (subject to the caveats and representation as
indicated in their opinion letter dated ______, 1998). Further, the tax opinion
provides that the merger of Neodesha into First Federal be considered tax free
under section 368(a)(1)(A) of the Code, (subject to the caveats and
representations as indicated in their opinion letter).
You have asked our opinion as to whether the Kansas income tax consequences
would differ from the federal tax consequences, based on the federal income tax
consequences as indicated in the Silver, Freedman & Taff, LLP opinion letter.
Kansas is a conformity state that derives its income tax statute from the
federal statute (with certain modifications not pertinent to this issue).
Accordingly, the Kansas income tax consequences of the transactions described
above will coincide with the federal income tax consequences of the
transactions.
Please note that our opinion relates solely to the Kansas income tax
consequences of the transaction. Any parties to the transaction residing outside
of the state of Kansas should consult with their own advisors regarding the
state income tax consequences in their state of residency.
Our opinion is based solely on the facts and assumptions provided to us as
described above. Please note that should these facts differ from this
description in any material respect, our opinion may be inapplicable.
Very truly yours,
GRANT THORNTON LLP
Exhibit 10.4
EXHIBIT 10.4
EMPLOYMENT AGREEMENT WITH FRANK MILLER
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this ____ day of ___________________, 1998, by and between FIRST FEDERAL SAVINGS
AND LOAN ASSOCIATION OF INDEPENDENCE, Independence, Kansas (the "Association")
and Franklin C. Miller (the "Employee").
WHEREAS, the services of the Employee are of a special, unique and
unusual character which gives them distinctive value and the Association desires
that the Employee continue after the merger of Neodesha Savings and Loan
Association, FSA ("Neodesha") into the Association to render services to the
Association, in accordance with the terms and conditions set forth herein; and
WHEREAS, the Employee desires to be employed by the Association
pursuant to the terms of this Agreement;
WHEREAS, the Board of Directors recognizes that, as is the case with
publicly held corporations generally, the possibility of a change in control of
the Association or its parent, First Independence Corporation (the "Holding
Company") may exist, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of key management
personnel to the detriment of the Association, the Holding Company and its
stockholders; and
WHEREAS, the Board of Directors believes it is in the best interests of
the Association to enter into this Agreement with the Employee in order to
assure continuity of management of the Association and to reinforce and
encourage the continued attention and dedication of the Employee to his assigned
duties; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee to take effect as stated in
Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Employee will be employed as a Vice President of the
Association. As a Vice President, the Employee shall render administrative and
management services as are customarily performed by persons situated in similar
executive capacities, and shall have other powers and duties as may from time to
time be prescribed by the Board, provided that such duties are consistent with
the Employee's position as a Vice President. The Employee shall continue to
devote his best efforts and substantially all his business time and attention to
the business and affairs of the Association and its Holding Company and
affiliated companies.
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<PAGE>
2. Compensation.
(a) Salary. The Association agrees to pay the Employee during the term
of this Agreement a salary established by the Board of Directors. The
salary hereunder as of the Commencement Date (as defined in Section 4
hereof) shall be at least the Employee's current salary of $______ per
annum. The salary provided for herein shall be payable not less frequently
than monthly in accordance with the practices of the Association, provided,
however, that no such salary is required to be paid by the terms of this
Agreement in respect of any month or portion thereof subsequent to the
termination of this Agreement and provided further, that the amount of such
salary shall be reviewed by the Association not less often than annually
and may be increased (but not decreased) from time to time in such amounts
as the Association in its discretion may decide, subject to the customary
withholding tax and other employee taxes as required with respect to
compensation paid by a corporation to an employee.
(b) Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other officers of the
Association in discretionary bonuses as authorized and declared by the
Board of Directors of the Association for its employees. No other
compensation provided for in this Agreement shall be deemed a substitute
for the Employee's right to participate in such bonuses when and as
declared by the Board of Directors.
(c) Expenses. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by him in accordance with policies and
procedures at least as favorable to the Employee as those presently
applicable to the officers of the Association, provided that the Employee
properly accounts therefor in accordance with Association policy.
3. Benefits.
(a) Participation in Retirement and Employee Benefit Plans. The
Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to stock options, stock
purchases, pension, thrift, profit-sharing, group life insurance, medical
coverage, education, cash or stock bonuses, and other retirement or
employee benefits or combinations thereof, that are now or hereafter
maintained for the benefit of the Association's employees generally.
(b) Fringe Benefits. The Employee shall be eligible while employed
hereunder to participate in, and receive benefits under, any other fringe
benefits which are or may become applicable to the Association's employees
generally. The Employee will also be entitled while employed hereunder to
the exclusive use of car (of a type and class and in a manner similar to
that made available to the Employee by Neodesha immediately prior to the
Commencement Date (as defined in Section 4 hereof)). While the Employee is
employed hereunder, the Association further agrees to maintain that certain
key man life insurance policy on the life of the Employee maintained by
Neodesha immediately prior to the Commencement Date (as defined in Section
4 hereof) (or a similar such policy as mutually agreed to by the Board of
Directors of the Association and the Employee).
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<PAGE>
4. Term. The term of employment under this Agreement shall be a period
of three (3) years commencing on the date of consummation of the merger with
Neodesha (the "Commencement Date"), subject to earlier termination as provided
herein.
5. Vacations. The Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) The Employee shall be entitled to an annual vacation of not less
than three (3) weeks per year;
(b) The timing of vacations shall be scheduled in a reasonable manner
by the Employee; and
(c) Management shall, solely at the Employee's request, be entitled to
grant to the Employee a leave or leaves of absence with or without pay at
such time or times and upon such terms and conditions as management, in its
discretion, may determine.
6. Termination of Employment; Death.
(a) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Association's Board of Directors,
other than termination for cause, shall not prejudice the Employee's right
to compensation or other benefits under the Agreement. If the employment of
the Employee is involuntarily terminated, other than for "cause" as
provided in this Section 6(a) or pursuant to any of Sections 6(d) through
6(g), or by reason of death or disability as provided in Sections 6(c) or
7, the Employee shall be entitled to receive, for the period that, but for
the termination of employment, would have constituted the remaining term of
the Agreement, (i) his salary at the rate then applicable, payable in such
manner and at such times as such salary would have been payable to the
Employee under Section 2 had he remained in the employ of the Association,
and (ii) health insurance benefits as maintained by the Association for the
benefit of its employees generally.
The terms "termination" or "involuntarily terminated" in this
Agreement shall refer to the termination of the employment of Employee
without his express written consent. The Employee shall be considered to be
involuntarily terminated (1) if the employment of the Employee is
involuntarily terminated for any reason other than for "cause" as provided
in this Section 6(a), pursuant to any of Sections 6(d) through 6(g) or by
reason of death or disability as provided in Sections 6(c) and 7; or (2)
there occurs a material diminution of or interference with the Employee's
duties, responsibilities and benefits as a Vice President of the
Association. By way of example and not by way of limitation, any of the
following actions, if unreasonable or materially adverse to the Employee,
shall constitute such diminution or interference unless consented to in
writing by the Employee: (i) a change in the principal workplace of the
Employee to a location more than twenty-five (25) miles from the
Association's Neodesha branch office; (ii) a material demotion of the
Employee, a reduction in the number or seniority of other Association
personnel reporting to the Employee, or a reduction in the frequency with
which, or in the nature of the matters with respect
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<PAGE>
to which, such personnel are to report to the Employee, other than as part
of an Association-wide reduction in staff; or (iii) a reduction or adverse
change in the salary, perquisites, benefits, contingent benefits or
vacation time which had theretofore been provided to the Employee, other
than as part of an overall program applied uniformly and with equitable
effect to all members of the senior management of the Association.
In case of termination of the Employee's employment for cause, the
Association shall pay the Employee his salary through the date of
termination, and the Association shall have no further obligation to the
Employee under this Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for cause.
For purposes of this Agreement, termination for "cause" shall include
termination because of the Employee's personal dishonesty, incompetence,
willful misconduct, breach of a fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement. Notwithstanding the foregoing, the Employee shall not be deemed
to have been terminated for cause unless and until there shall have been
delivered to the Employee a copy of a resolution, duly adopted by the
affirmative vote of not less than a majority of the disinterested members
of the Board of Directors of the Association at a meeting of the Board
called and held for such purpose (after reasonable notice to the Employee
and an opportunity for the Employee, together with the Employee's counsel,
to be heard before the Board), stating that in the good faith opinion of
the Board the Employee was guilty of conduct constituting "cause" as set
forth above and specifying the particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the
Employee at any time upon 90 days written notice to the Association or upon
such shorter period as may be agreed upon between the Employee and the
Board of Directors of the Association. In the event of such voluntary
termination, the Association shall be obligated to continue to pay the
Employee his salary only through the date of termination, at the time such
payments are due, and the Association shall have no further obligation to
the Employee under this Agreement.
(c) In the event of the death of the Employee during the term of
employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously
designated in writing, shall be entitled to receive from the Association
the salary of the Employee through the last day of the calendar month in
which his death shall have occurred.
(d) If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Association's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act ("FDIA"), 12 U.S.C. ss. 1818(e)(3); (g)(1), the Association's
obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Association may in its discretion (i) pay the
Employee all or part of the compensation withheld while its obligations
under this Agreement were suspended and (ii) reinstate in whole or in part
any of the obligations which were suspended.
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<PAGE>
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Association's affairs
by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C.
ss. 1818(e)(4); (g)(1), all obligations of the Association under this
Agreement shall terminate, as of the effective date of the order, but
vested rights of the parties shall not be affected.
(f) If the Association becomes in default (as defined in Section
3(x)(1) of the FDIA, 12 U.S.C. ss. 1813(x)(1)), all obligations under this
Agreement shall terminate as of the date of default, but this provision
shall not affect any vested rights of the parties.
(g) All obligations under this Agreement shall be terminated, except
to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Association: (i) by the Director of the
Office of Thrift Supervision ("OTS") or his or her designee at the time the
Federal Deposit Insurance Corporation enters into an agreement to provide
assistance to or on behalf of the Association under the authority contained
in Section 13(c) of the FDIA, 12 U.S.C. ss. 1823(c); or (ii) by the
Director of the OTS or his or her designee at the time the Director of the
OTS or his or her designee approves a supervisory merger to resolve
problems related to operation of the Association or when the Association is
determined by the Director of the OTS to be in an unsafe or unsound
condition.
Any rights of the parties that have already vested, however, shall not
be affected by any such action.
(h) In the event the Association purports to terminate the Employee
for cause, but it is determined by a court of competent jurisdiction or by
an arbitrator pursuant to Section 16 that cause did not exist for such
termination, or if in any event it is determined by any such court or
arbitrator that the Association has failed to make timely payment of any
amounts owed to the Employee under this Agreement, the Employee shall be
entitled to reimbursement for all reasonable costs, including attorneys'
fees, incurred in challenging such termination or collecting such amounts.
Such reimbursement shall be in addition to all rights to which the Employee
is otherwise entitled under this Agreement.
7. Disability. If during the term of employment hereunder the Employee
shall become disabled or incapacitated to the extent that he is unable to
perform the duties of the Vice President, he shall be entitled to receive
disability benefits of the type provided for other employees of the Association.
While he receives such benefits, the rights of the Employee to receive the
salary stated in Section 2 hereof shall be suspended.
8. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of
Sections 6(c) through 6(g) or Section 7 of this Agreement) in connection
with or within 18 months after a change in control of the Association or
the Holding Company which occurs at any time during the term of employment
under this Agreement, the Association shall pay to the Employee in a lump
sum in cash within 25 business
5
<PAGE>
days after the Date of Termination (as hereinafter defined) of employment
an amount equal to 299 percent of the Employee's "base amount" of
compensation, as defined in Section 280G(b)(3) of the Internal Revenue Code
of 1986, as amended ("Code").
(b) Definitions. The term "Date of Termination" means the earlier of
(i) the date upon which the Association gives notice to the Employee of the
termination of his employment with the Association, or (ii) the date upon
which the Employee ceases to serve as an Employee of the Association.
The term "change in control" is defined solely as any acquisition of
control of the Association or the Holding Company (other than by a trustee
or other fiduciary holding securities under an employee benefit plan of the
Association or the Holding Company), as defined in 12 C.F.R. ss. 574.4, or
any successor regulation, which would require the filing of an application
for acquisition of control or notice of change in control as set forth in
12 C.F.R. ss. 574.3, or any successor regulation.
9. Certain Reduction of Payments by the Association. (a) Anything in
this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Association to or for the
benefit of the Employee (whether paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise) (a "Payment") would be
nondeductible (in whole or part) by the Association for Federal income tax
purposes because of Section 280G of the Code, then the aggregate present value
of amounts payable or distributable to or for the benefit of the Employee
pursuant to this Agreement ("Agreement Payments") shall be reduced to the
Reduced Amount. The "Reduced Amount" shall be an amount, not less than zero,
expressed in present value, which maximizes the aggregate present value of
Agreement Payments without causing any Payment to be nondeductible by the
Association because of Section 280G of the Code. For purposes of this Section 9,
present value shall be determined in accordance with Section 280G(d)(4) of the
Code.
(b) All determinations required to be made under this Section
9 shall be made by the Association's independent auditors, or at the election of
such auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Association, provide to both the Association
and the Employee an opinion (and detailed supporting calculations) that the
Association has substantial authority to deduct for federal income tax purposes
the full amount of the Agreement Payments and that the Employee has substantial
authority not to report on his federal income tax return any excise tax imposed
by Section 4999 of the Code with respect to the Agreement Payments. Any such
determination and opinion by the Advisory Firm shall be binding upon the
Association and the Employee. The Employee shall determine which and how much,
if any, of the Agreement Payments shall be eliminated or reduced consistent with
the requirements of this Section 9, provided that, if the Employee does not make
such determination within ten business days of the receipt of the calculations
made by the Advisory Firm, the Association shall elect which and how much, if
any, of the Agreement Payments shall be eliminated or reduced consistent with
the requirements of this Section 9 and shall notify the Employee promptly of
such election. Within five business days of the earlier of (i) the Association's
6
<PAGE>
receipt of the Employee's determination pursuant to the immediately preceding
sentence of this Agreement, or (ii) the Association's election in lieu of such
determination, the Association shall pay to or distribute to or for the benefit
of the Employee such amounts as are then due the Employee under this Agreement.
The Association and the Employee shall cooperate fully with the Advisory Firm,
including without limitation providing to the Advisory Firm all information and
materials reasonably requested by it, in connection with the making of the
determinations required under this Section 9.
(c) As a result of uncertainty in application of Section 280G
of the Code at the time of the initial determination by the Advisory Firm
hereunder, it is possible that Agreement Payments will have been made by the
Association which should not have been made ("Overpayment") or that additional
Agreement Payments will not have been made by the Association which should have
been made ("Underpayment"), in each case, consistent with the calculations
required to be made hereunder. In the event that the Advisory Firm, based upon
the assertion by the Internal Revenue Service against the Employee of a
deficiency which the Advisory Firm believes has a high probability of success,
determines that an Overpayment has been made, any such Overpayment paid or
distributed by the Association to or for the benefit of Employee shall be
treated for all purposes as a loan ab initio which the Employee shall repay to
the Association together with interest at the applicable federal rate provided
for in Section 7872(f)(2) of the Code; provided, however, that no such loan
shall be deemed to have been made and no amount shall be payable by the Employee
to the Association if and to the extent such deemed loan and payment would not
either reduce the amount on which the Employee is subject to tax under Section 1
and Section 4999 of the Code or generate a refund of such taxes. In the event
that the Advisory Firm, based upon controlling preceding or other substantial
authority, determines that an Underpayment has occurred, any such Underpayment
shall be promptly paid by the Association to or for the benefit of the Employee
together with interest at the applicable federal rate provided for in Section
7872(f)(2) of the Code.
(d) The total of payments to the Employee in the event of
involuntary termination of employment under Section 6(a) and Section 8(a) shall
not exceed three times his average annual compensation from the Association over
the most recent five taxable years (or, if employed by the Association for a
shorter period, over the period of his employment by the Association).
(e) Any payments made to the Employee pursuant to this
Agreement, or are subject to and conditioned upon their compliance with 12
U.S.C. ss. 1828(k) and any regulations promulgated thereunder. Notwithstanding
anything in this Agreement to the contrary, no payments may be made pursuant to
this Agreement without the prior approval of the OTS if the Association is not
in compliance with its regulatory capital requirements, or if such payment would
cause the Association to fail its regulatory capital requirements.
10. No Assignments. (a) This Agreement is personal to each of the
parties hereto, and neither party may assign or delegate any rights or
obligations hereunder without first obtaining the written consent of the other
party; provided, however, that the Association will require any successor or
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Association, by an assumption agreement in form and substance satisfactory to
the Employee, to expressly assume and agree to perform this
7
<PAGE>
Agreement in the same manner and to the same extent that the Association would
be required to perform it if no such succession or assignment had taken place.
Failure of the Association to obtain such an assumption agreement prior to the
effectiveness of any such succession or assignment shall be a breach of this
Agreement and shall entitle the Employee to compensation from the Association in
the same amount and on the same terms as the compensation pursuant to Section
8(a) hereof. For purposes of implementing the provisions of this Section 10(a),
the date on which any such succession becomes effective shall be deemed the Date
of Termination.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued t live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
11. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed (i) to the
Association at its home office to the attention of the Board of Directors of the
Association, with a copy to the Secretary of the Association, and (ii) to the
Employee at the home address he has most recently provided to the Association,
or to such other address as either party may have furnished to the other in
writing in accordance herewith.
12. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
13. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
14. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Kansas.
16. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
8
<PAGE>
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF INDEPENDENCE
By:_________________________________
Donald E. Aitken
Chairman of the Board
EMPLOYEE
By:_________________________________
Franklin C. Miller
9
Exhibit 23.1
EXHIBIT 23.1
CONSENT OF SILVER, FREEDMAN & TAFF, L.L.P.
<PAGE>
CONSENT OF COUNSEL
We consent to the use of our opinions, to the incorporation by
reference of such opinions as an 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 this 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.
July 1, 1998
Exhibit 23.2
EXHIBIT 23.2
CONSENT OF GRANT THORNTON
<PAGE>
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 on Forms AC and OC to be filed on or about July 1, 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
Wichita, Kansas
June 30, 1998
Exhibit 23.3
EXHIBIT 23.3
CONSENT OF FERGUSON & COMPANY
<PAGE>
FINANCIAL
Ferguson INSTITUTION
& Company CONSULTING
Suite 305
860 W. Airport Frwy
Hurst, Texas 76054
(817) 577-9558
(817) 577-3054 Fax
July 2, 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/ Charles M. Hebert
Charles M. Hebert
Principal
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the quarterly
report on Form 10-QSB for the fiscal quarter ended March 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 869,625
<INT-BEARING-DEPOSITS> 207,117
<FED-FUNDS-SOLD> 5,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,346,443
<INVESTMENTS-CARRYING> 25,902,199
<INVESTMENTS-MARKET> 26,054,611
<LOANS> 85,919,601
<ALLOWANCE> 655,745
<TOTAL-ASSETS> 124,493,983
<DEPOSITS> 84,171,855
<SHORT-TERM> 6,400,000
<LIABILITIES-OTHER> 1,468,421
<LONG-TERM> 20,900,000
0
0
<COMMON> 14,984
<OTHER-SE> 11,538,723
<TOTAL-LIABILITIES-AND-EQUITY> 124,493,983
<INTEREST-LOAN> 3,332,484
<INTEREST-INVEST> 928,819
<INTEREST-OTHER> 115,505
<INTEREST-TOTAL> 4,376,808
<INTEREST-DEPOSIT> 1,944,157
<INTEREST-EXPENSE> 2,679,605
<INTEREST-INCOME-NET> 1,697,203
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,146,898
<INCOME-PRETAX> 663,327
<INCOME-PRE-EXTRAORDINARY> 375,236
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 375,236
<EPS-PRIMARY> .41
<EPS-DILUTED> .38
<YIELD-ACTUAL> 7.71
<LOANS-NON> 573,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 49,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 668,185
<CHARGE-OFFS> 12,440
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 655,745
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 655,745
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the quarterly
report on Form 10-QSB for the fiscal quarter ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 831,502
<INT-BEARING-DEPOSITS> 196,493
<FED-FUNDS-SOLD> 100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,866,279
<INVESTMENTS-CARRYING> 28,756,691
<INVESTMENTS-MARKET> 28,755,870
<LOANS> 70,428,556
<ALLOWANCE> 690,009
<TOTAL-ASSETS> 108,913,840
<DEPOSITS> 70,138,277
<SHORT-TERM> 14,700,000
<LIABILITIES-OTHER> 1,395,418
<LONG-TERM> 10,700,000
0
0
<COMMON> 14,984
<OTHER-SE> 11,965,161
<TOTAL-LIABILITIES-AND-EQUITY> 108,913,840
<INTEREST-LOAN> 1,382,714
<INTEREST-INVEST> 569,538
<INTEREST-OTHER> 33,354
<INTEREST-TOTAL> 1,985,606
<INTEREST-DEPOSIT> 891,844
<INTEREST-EXPENSE> 1,247,375
<INTEREST-INCOME-NET> 738,231
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 510,416
<INCOME-PRETAX> 281,655
<INCOME-PRE-EXTRAORDINARY> 166,694
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166,694
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
<YIELD-ACTUAL> 7.51
<LOANS-NON> 304,000
<LOANS-PAST> 149,000
<LOANS-TROUBLED> 52,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 690,009
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 690,009
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 690,009
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the quarterly
report on Form 10-QSB for the fiscal quarter ended March 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 709,410
<INT-BEARING-DEPOSITS> 265,530
<FED-FUNDS-SOLD> 800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,795,589
<INVESTMENTS-CARRYING> 28,900,681
<INVESTMENTS-MARKET> 28,733,731
<LOANS> 70,961,880
<ALLOWANCE> 690,009
<TOTAL-ASSETS> 109,229,614
<DEPOSITS> 74,140,900
<SHORT-TERM> 9,800,000
<LIABILITIES-OTHER> 1,114,780
<LONG-TERM> 12,700,000
0
0
<COMMON> 14,984
<OTHER-SE> 11,458,950
<TOTAL-LIABILITIES-AND-EQUITY> 109,229,614
<INTEREST-LOAN> 2,778,864
<INTEREST-INVEST> 1,118,892
<INTEREST-OTHER> 72,161
<INTEREST-TOTAL> 3,969,917
<INTEREST-DEPOSIT> 1,781,023
<INTEREST-EXPENSE> 2,487,963
<INTEREST-INCOME-NET> 1,481,954
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,050,143
<INCOME-PRETAX> 537,689
<INCOME-PRE-EXTRAORDINARY> 332,274
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332,274
<EPS-PRIMARY> .33
<EPS-DILUTED> .31
<YIELD-ACTUAL> 7.49
<LOANS-NON> 440,000
<LOANS-PAST> 487,000
<LOANS-TROUBLED> 52,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 690,009
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 690,009
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 690,009
</TABLE>
Exhibit 99.4
EXHIBIT 99.4
QUESTION AND ANSWER BROCHURE
<PAGE>
II. Question and Answer Brochure
A. Explanation
The Question and Answer brochure is important to any Merger Conversion. It
serves to answer some of the most commonly asked questions in "plain,
everyday language." Most of the answers are taken verbatim from the
Prospectus and it saves the individual from searching for the answer to a
simple question.
B. Method of Distribution
There are four primary methods of distribution of the Question and Answer
brochure, however, regardless of the method they are always accompanied by
a Prospectus.
1. A Question and Answer brochure is sent out in the initial mailing
to all members of Neodesha.
2. Question and Answer brochures are available in the stock
information center of Neodesha.
3. Question and Answer brochures are distributed in information
packets at Community meetings.
4. Question and Answer brochures are sent out in a standard
information packet to all interested investors who phone the
Stock Information Center requesting information.
<PAGE>
QUESTIONS AND ANSWERS
- -----------------------------------------------------------------
- -----------------------------------------------------------------
(ART)
- -----------------------------------------------------------------
- -----------------------------------------------------------------
THIS BROCHURE ONLY HIGHLIGHTS CERTAIN INFORMATION IN THE ACCOMPANYING
PROSPECTUS. MEMBERS ARE URGED TO READ THE ACCOMPANYING PROSPECTUS FOR MORE
COMPLETE INFORMATION ON THE MERGER CONVERSION.
<PAGE>
QUESTIONS AND ANSWERS
REGARDING
THE MERGER CONVERSION
On February 18, 1998, the Board of Directors of Neodesha Savings and
Loan Association, F.S.A ("Neodesha") unanimously adopted a Plan of Conversion,
which was subsequently amended on ____________, pursuant to which Neodesha will
convert from a federally-chartered mutual savings bank to a federally-chartered
stock savings bank ("Conversion"). In conjunction with the Conversion, Neodesha
simultaneously will be acquired ("Acquisition") by First Independence
Corporation ("First Independence"), a savings institution holding company based
in Independence, Kansas. It is anticipated that after the Acquisition, Neodesha
will be merged or otherwise combined with ("Merger") First Independence's wholly
owned subsidiary, First Federal Savings and Loan Association of Independence
("First Federal"). The Conversion, Acquisition and the Merger are referred to
collectively as the "Merger Conversion."
The Merger Conversion is subject to various conditions, including
approval by Neodesha's "Voting Members." Voting Members are all persons who held
deposit accounts or borrowings at Neodesha and those who are obligated on a loan
from Neodesha on the Voting Record Date (which is _____________) and continue to
hold such deposit accounts or borrowings or be obligated on such loan on the
date of the Special Meeting scheduled to be held on _________. As part of the
Merger Conversion, certain deposit account holders, an employee stock ownership
plan ("Neodesha ESOP") established for the benefit of Neodesha's employees, loan
customers and directors, officers and employees of Neodesha are being offered
the opportunity to purchase shares of First Independence Common Stock in a
Subscription Offering at the "95% Price" (i.e., 95% of the First Independence
Market Price as defined in Question 14).
This brochure is provided to answer basic questions you might have
regarding the Merger Conversion. Following the Conversion and the Acquisition,
First Independence will operate Neodesha as a separate savings bank subsidiary
and, sometime after the Acquisition, First Independence will merge or otherwise
combine Neodesha with First Federal. Following the Merger, First Federal will
continue to provide financial services to Neodesha depositors, borrowers and
other customers. The Merger Conversion will not affect the balances or
withdrawability of existing Neodesha's deposit accounts and/or the terms of any
loans to existing borrowers. Deposits will continue to be insured up to the
maximum amount permitted by law. See Question 11 for further information.
More complete information on the Merger Conversion is contained in the
accompanying Prospectus, and all information contained or referred to herein is
qualified in its entirety by the Prospectus and the information contained or
referred to therein. You are urged to carefully read the Prospectus.
<PAGE>
ABOUT THE MERGER CONVERSION
1. Q. What is a stock "Conversion"?
A. A conversion is a change in the legal form of organization from a mutual
to a stock company. Neodesha presently operates as a federally-chartered
mutual savings bank and has no stockholders. Through its Conversion,
Neodesha will become a federally-chartered stock savings bank.
2. Q. What is the "Acquisition"?
A. Concurrent with Neodesha's Conversion, First Independence will acquire
all the stock of Neodesha issued in the Conversion, making Neodesha a
wholly-owned federally-chartered savings bank subsidiary of First
Independence.
3. Q. What is the "Merger"?
A. After the Conversion and the Acquisition, Neodesha will be merged or
otherwise combined with First Federal, First Independence's wholly-owned
subsidiary. After the Merger, First Independence will operate Neodesha
as a branch of First Federal. First Independence and Neodesha believe
that the Merger will provide Neodesha's customers greater convenience
and a broader range of services.
4. Q. What is First Independence Corporation?
A. First Independence is a savings bank holding company headquartered in
Independence, Kansas. At March 31, 1998, First Independence had assets
totaling $124.5 million. Presently, First Independence operates one
savings bank subsidiary, First Federal Savings and Loan Association of
Independence "First Federal." First Federal currently operates 2 offices
in Kansas.
First Independence is a publicly-traded company whose stock is quoted on
the Nasdaq (National Association of Security Dealers Automated
Quotation) SmallCap Market under the symbol "FFSL."
5. Q. What approvals must be received before the Merger Conversion becomes
effective?
A. First, the Merger Conversion is subject to approvals (which have been
received) from the Boards of Directors of Neodesha and First
Independence. Second, approval must be received from the Securities and
Exchange Commission (SEC) and the Office of Thrift Supervision (OTS).
Third, the Plan of Conversion must be approved by the Neodesha Voting
Members and the offering of shares of First Independence Common Stock
must be completed. A special meeting of Voting Members ("Special
Meeting") will be held on __________, 1998 to consider and vote upon the
Plan of Conversion. Additional approvals required for the Merger will
not be sought until after the Conversion and Acquisition are completed.
<PAGE>
6. Q. How did the Board of Directors of Neodesha come to the conclusion that
now is the time to convert?
A. After considering the increased competition from other financial
institutions, the need to offer new services to attract younger
customers, new legislative and regulatory requirements imposed upon
banking institutions, the growth restrictions imposed by federal and
state regulators, management succession, and the alternatives to the
Merger Conversion, the Board of Directors determined that becoming part
of First Independence would, among other things, assist Neodesha in more
effectively meeting increasingly competitive conditions in the financial
services industry, provide for expansion of services to the public,
enable Neodesha to better meet the needs of its local communities and
its customers and enhance its opportunity to attract and retain
qualified personnel. For these and other reasons, the Board of Directors
believes that the Merger Conversion is in the best interests of Neodesha
, its depositors and customers and the communities it serves.
7. Q. Why did the Board of Directors and management choose the Merger
Conversion rather than a standard mutual to stock conversion?
A. Recognizing that Neodesha would benefit most from greater resources in
management and technological resources, the Board of Directors reviewed
the opportunities available to Neodesha to (i) convert to a stock
savings bank or a stock savings and loan association on a stand-alone
basis, (ii) combine with another financial institution, or (iii) remain
as a mutual savings bank primarily engaged in making home loans and
seeking consumer savings. The Board of Directors decided that the most
desirable alternative for Neodesha was to identify and pursue a
combination with a strongly capitalized, conservatively managed savings
institution that shared Neodesha's operating philosophy and community
commitment. The Board of Directors determined that a stand-alone
conversion, given the current market and demand for thrift institution
stocks, could present substantial risk and liquidity problems in a
limited market to local investors. The Board also determined that a
stand alone conversion would not solve several of the long-term concerns
facing Neodesha. The Board of Directors also believes that the
provisions of the Plan of Conversion and the related Agreement and Plan
of Reorganization, allowing Neodesha's depositors and loan customers to
acquire First Independence Common Stock at a 5% discount, are beneficial
to its customers. Finally, all of Neodesha's officers and employees have
been offered comparable positions with First Federal, which will allow
Neodesha to provide its members, and the communities it serves, with a
continuity of personal service of the same high quality provided in the
past.
8. Q. Will Neodesha retain its name after the Merger Conversion?
A. Neodesha will retain its current name after the Conversion and
Acquisition. After the Merger is completed, Neodesha operations will be
conducted as part of First Independence under the name "First Federal
Savings and Loan Association of Independence."
<PAGE>
9. Q. Will I continue banking with the same people at Neodesha ?
A. All Neodesha officers and employees have been offered positions with
First Federal, so it is expected that the banking professionals at
Neodesha whom you know and trust will continue to serve you.
10. Q. What effect will the Conversion and the Acquisition have on my accounts?
A. The Conversion and the Acquisition will have no effect on the balance,
maturity or withdrawability of your existing deposits at Neodesha or
your obligations as a borrower from Neodesha. Your deposits will
continue to be insured by the FDIC to the maximum limits available under
federal law.
11. Q. How will the insurance of my deposit accounts be affected if I also have
an account with First Federal?
A. As noted, there will be no effect on the insurance coverage of your
deposit account as a result of the Conversion and the Acquisition. Upon
consummation of the Merger, depositors who had accounts at both Neodesha
and First Federal prior to the Merger will retain separate insurance
coverage in those accounts for a period of six months from the date of
the Merger or the date when Neodesha's certificates of deposit first
mature, if later. Thereafter, for purposes of FDIC insurance, Neodesha
accounts held by any person will be aggregated with other First Federal
accounts held by such person.
ABOUT BECOMING A STOCKHOLDER IN FIRST INDEPENDENCE
12. Q. What is the Subscription Offering?
A. Pursuant to the Plan of Conversion adopted by Neodesha's Board of
Directors, First Independence is offering shares of its Common Stock in
the Subscription Offering, first to "Eligible Account Holders" (certain
account holders of record at Neodesha on December 31, 1996, second to
the Neodesha ESOP, third to "Supplemental Eligible Account Holders"
(certain account holders of record at Neodesha on June 30, 1998), fourth
to "Other Members" of Neodesha (depositors and borrowers of record and
those obligated on a loan from Neodesha on __________ who continue to
hold such accounts and/or borrowings or continue to be obligated on such
loan as of he "Voter Record Date", ________ __, 1998) and finally to
employees, officers and directors of Neodesha who do not qualify under
any of the previous categories, each of whom will receive
non-transferable subscription rights to subscribe for shares in the
Subscription Offering. Shares not subscribed for in the Subscription
Offering will be concurrently offered in the Community Offering to
natural persons residing in the local community.
<PAGE>
13. Q. At what price will the stock be offered in the Subscription Offering?
A. The exact price per share cannot be determined until after the
expiration of the Subscription Offering. Subject to certain purchase
limitations, customers meeting the above criteria may elect to purchase
First Independence Common Stock at a price equal to 95% of the average
of the bid and ask price of First Independence Common Stock on the
closing of each of the ten days prior to the close of the Subscription
Offering. By way of example, if the average of the closing bid and ask
quotations for the Common Stock of First Independence for the 10 trading
days prior to the expiration of the offering was $13.81 per share, then
shares will be offered in this offering at $13.12 per share.
For a number of reasons set forth in the accompanying Prospectus, those
who purchase shares of First Independence Common Stock in the
Subscription Offering should recognize that they may not be able to sell
their shares at a price equal to or greater than the 95% Price or the
First Federal Market Price.
14. Q. At what price will the stock be offered in the Community Offering?
A. The price per share of stock offered in the Community Offering will be
the "95% Price," which will be equal to 95% of the average of the bid
and ask price of First Independence Common Stock on the closing of each
of the ten days prior to the close of the Subscription Offering.
For a number of reasons set forth in the accompanying Prospectus, those
who purchase shares of First Independence Common Stock in the Community
Offering should recognize that they may not be able to sell their shares
at a price equal to or greater than the 95% Price.
15. Q. Must I pay a commission to buy First Independence Common Stock in
conjunction with the Subscription or Community Offerings?
A. No. Unlike shares of First Independence Common Stock which may be
purchased in the open market, you will not pay a commission to buy the
stock if it is purchased in the Subscription Offering.
16. Q. When may I sell the stock?
A. There will not be any sale restrictions applied to shares purchased in
the Subscription Offering at the 95% Price.
17. Q. How many shares of First Independence Common Stock will be offered
through the Neodesha Merger Conversion?
A. The number of shares of First Independence Common Stock to be offered
will be determined by dividing the appraised value of Neodesha, as
independently determined by Ferguson & Company ("Ferguson") following
the closing of the Offerings, by the First Federal Market Price. The
actual number of shares to be offered may increase or decrease depending
upon changes in the appraised value and the actual market price for the
First Independence Common Stock. The Plan of Conversion does not require
that a minimum number of shares be sold in the offerings in order to
consummate the Merger Conversion. Thus, the number of shares actually
issued may be less than the number offered.
<PAGE>
18. Q. Are the subscription rights transferable?
A. No. Subscription rights granted to Neodesha's Eligible Account Holders,
Supplemental Eligible Account Holders, Voting Members in the Merger
Conversion are nontransferable. Under OTS regulations, no person may
transfer or enter into any agreement or understanding to transfer the
legal or beneficial ownership of rights to subscribe for shares
purchased in the Subscription Offering, or the actual underlying shares,
to the account of any other person prior to the completion of the
Conversion. Thus, only members of Neodesha will have the ability to
exercise such rights in the Subscription Offering.
19. Q. If I choose to subscribe for stock, what is the minimum investment that
I can make in the Subscription Offering and the Community Offering?
A. The minimum investment that can be made in either the Subscription
Offering is $250.00 Stock Order Forms must specify a minimum dollar
subscription of $250.00 to assure that the subscriber will meet the
minimum subscription. The pricing of the shares of First Independence
Common Stock on a per share basis will be determined shortly after the
expiration of the Subscription Offering, thus fixing the exact number of
shares you will receive. Subscribers may not purchase partial or
fractional shares. See Questions 13, 14 and 17 above.
20. Q. If I choose to subscribe for stock, what is the maximum investment that
I can make in the Subscription Offering?
A. The maximum number of shares that may be purchased in the Subscription
Offering is that amount having an aggregate purchase price that does not
exceed $100,000.
21. Q. Who is entitled to subscribe First Independence common stock?
A. Rights to subscribe for common stock, subject to the purchase
limitations set forth in the Plan of Conversion, will be given in order
of priority to (i) depositors of Neodesha with a $50.00 minimum deposit
as of December 31, 1996 (the "Eligible Account Holders"); (ii)
Neodesha's employee stock ownership plan (the "ESOP"), a tax qualified
employee stock benefit plan; (iii) depositors of Neodesha, who are not
Eligible Account Holders, with $50.00 or more on deposit as of June 30,
1998 (the "Supplemental Eligible Account Holders"); (iv) depositors of
Neodesha as of _______, 1998 ("Voting Record Date") and borrowers of
Neodesha who had loans outstanding as of _______, 1998, which continue
to be outstanding as of ________, 1998. ("Other Members"), and (v)
directors, officers and employees of Neodesha who do not qualify under
any of the above categories..
It is the responsibility of each subscriber qualifying as an Eligible
Account Holder, Supplemental Eligible Account Holder or Other Member to
list completely all account numbers for qualifying savings accounts as
of the qualifying date on the stock order form.
Shares that are not subscribed for during the Subscription Offering, if
any, may be offered to the general public through a Community Offering
with preference given to natural persons and trusts of natural persons
<PAGE>
who are permanent residents of Wilson and Montgomery Counties, Kansas
(the "Local Community"). It is anticipated that any shares not
subscribed for in the Subscription and Community Offerings will be
offered to certain members of the general public through a syndicate of
registered broker dealers pursuant to selected dealers agreements in a
Syndicated Community Offering.
22. Q. How do I subscribe for shares of stock?
A. Subscribers wishing to exercise their subscription rights must return
the enclosed Stock Order Form to Neodesha's Stock Information Center.
The Stock Order Form must be completed and returned along with full
payment or appropriate instructions authorizing a withdrawal from a
deposit account at Neodesha on or prior to the close of the Subscription
Offering which will be 12:00 noon, Central time, on ___________, 1998,
unless extended.
23. Q. Are the management and the Board of Directors of Neodesha subscribing
for a significant amount of Common Stock in First Independence
Corporation?
A. Directors and Executive Officers of Neodesha currently intend to
subscribe for approximately $_______ of First Independence Common Stock
in the Subscription Offering.
24. Q. May I use funds currently held in a retirement account to subscribe for
stock?
A. Yes. If you wish to use funds held in a retirement account to subscribe
for stock in the Subscription Offering, and such account is at Neodesha
or at First Federal, you first must transfer those funds to a
self-directed retirement account with an independent trustee that
permits the account to hold stock. The Stock Information Center can
assist you in this process and in directing the trustee to purchase
First Independence Common Stock. Properly done, this process should not
cause any adverse tax consequence to your retirement account. In
addition, if your retirement account at Neodesha is invested in one or
more certificates of deposit, such purchase may be done without an early
withdrawal penalty. Because it takes several days to process the
necessary IRA forms, a response must be received by _______, 1998 to
accommodate your interest.
For additional information regarding the procedures by which funds
currently held in a retirement account may be used to purchase stock,
please review the accompanying Prospectus or call the Stock Information
Center at (316) ___-____.
25. Q. Where should Stock Order Forms be delivered?
A. Subscribers in the Subscription Offering should mail or deliver a
completed and signed original Stock Order Form with full payment, or
instructions for an Authorized Withdrawal from eligible deposit accounts
with Neodesha, to the Stock Information Center, ____________ or deliver
in person to a customer service representative at the Neodesha office.
<PAGE>
26. Q. Will I receive interest on funds I submit for my stock purchase in the
Subscription Offering?
A. Yes. Neodesha will pay interest at its passbook rate (currently ___%)
from the date the funds are received until completion or termination of
the Offering, except for subscriptions funded by Authorized Withdrawals.
Funds subject to Authorized Withdrawals will remain subject to
Neodesha's applicable deposit terms and will continue to earn interest
at the contractual rates until completion or termination of the
Subscription Offering.
27. Q. May I obtain a loan from Neodesha, First Federal or their affiliates to
pay for shares of First Independence Common Stock purchased in the
Merger Conversion?
A. No. Federal regulations do not allow either institution or their
affiliates to make loans for this purpose, but another financial
institution may make a loan for this purpose.
28. Q. If I subscribe for First Independence Common Stock in the Merger
Conversion, how would I go about buying additional shares, or selling
shares in the aftermarket?
A. First Independence Common Stock is quoted on the Nasdaq SmallCap Market
under the symbol is "FFSL." Trident Securities, Inc. is a market maker
in the stock and can assist you in purchasing additional shares or
selling shares of First Independence Common Stock, as can any other
stockbroker.
29. Q. What has been First Independence's dividend history?
A. Since 1994, First Independence has paid regular cash dividends, and the
last regular quarterly dividend was $0.075 per common share (or $0.30
per share when annualized). Although First Independence currently
intends to continue to pay quarterly cash dividends on First
Independence Common Stock, the declaration and payment of dividends, as
always, will depend upon business conditions, operating results, capital
and other requirements in the judgment of First Independence's Board of
Directors.
30. Q. Will the FDIC insure the shares of First Independence Common Stock?
A. NO. THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED ARE NOT
DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY.
31. Q. If I subscribe for shares and later change my mind, will I be able to
get a refund?
A. No. A Stock Order Form cannot be canceled, withdrawn or modified without
the consent of management once it has been received by Neodesha.
<PAGE>
32. Q. If I decide to purchase stock, when will I receive the stock
certificate(s)?
A. It is expected that stock certificates will be mailed within a few weeks
after the conclusion of the Subscription Offering.
ABOUT VOTING ON THE CONVERSION
33. Q. Has the Board of Directors of Neodesha unanimously approved the
transaction?
A. Yes. Neodesha's Board of Directors has unanimously approved the Plan of
Conversion and urges that all members vote "For" approval. It is
important that all Voting Members of Neodesha sign, date and return
their proxy card(s), in the postage-paid return envelope enclosed with
the Prospectus prior to the Special Meeting, currently scheduled for
________, 1998, whether or not such members expect to attend the Special
Meeting. Failure to return your signed proxy card or to vote in person
will have the same effect as a vote against the Plan of Conversion.
34. Q. Am I eligible to vote at the Special Meeting to be held to consider the
Plan of Conversion?
A. You are eligible to vote at Neodesha's Special Meeting, currently
scheduled to be held on ______, 1998, if you are a "Voting Member," who
are all persons who held deposit accounts or borrowings at Neodesha , or
were obligated on a loan from Neodesha on, ________, 1998 and who
continue to hold such account or borrowings or continue to be obligated
on such loan through the Special Meeting. If you are a Voting Member,
you should have received a Prospectus explaining the Merger Conversion
and related matters, and a proxy card with which to vote.
35. Q. How many votes do I have as a Voting Member?
A. Each account holder is entitled to one vote for each $100 or fraction
thereof on deposit in the Voting Member's account on the Voting Record
Date. Each borrower who holds eligible borrowings and each person who is
obligated on a loan is entitled to cast one (1) vote in addition to the
number of votes, if any, he or she is entitled to vote as an account
holder. No Voting Member may cast more than 1,000 votes.
36. Q. If I vote "Against" the Plan of Conversion and it is approved, will I be
prohibited from buying First Independence Common Stock in the
Subscription Offering?
A. No. Voting against the Plan of Conversion in no way restricts you from
purchasing First Independence Common Stock in the Subscription Offering.
<PAGE>
37. Q. What happens if Neodesha does not obtain enough votes to approve the
Plan of Conversion?
A. Neodesha's Conversion would not take place, First Independence would not
acquire Neodesha and Neodesha would not merge with First Federal.
Rather, Neodesha would remain an independent mutual institution operated
by its Board of Directors. Neodesha customers would not have the
opportunity to purchase shares of First Independence Common Stock at the
95% Price.
38. Q. As a qualifying depositor or borrower of Neodesha , am I required to
vote?
A. No. However, you are encouraged to vote to assure that the Merger
Conversion is consummated on a timely basis. Failure to return your
proxy card or to vote in person will have the same effect as a vote
against the Plan of Conversion.
39. Q. What is a proxy card?
A. A proxy card gives you the ability to vote without attending the Special
Meeting in person. You may attend the meeting and vote at the meeting,
even if you have returned your proxy, if you choose to do so. However,
if you are unable to attend, but you have returned your proxy, you still
will be represented by proxy. Your proxy is revocable if you decide to
vote in person at the Special Meeting and under other circumstances
described in the Prospectus.
40. Q. How does the Merger Conversion benefit Neodesha's members?
A. The Merger Conversion will allow Neodesha to offer its members a wider
range of financial services and a greater number of locations at which
to bank. Also, members of Neodesha are being offered the opportunity to
purchase shares of First Independence Common Stock at a discount to its
market price. Additional benefits are described in the Prospectus/ Proxy
Statement.
41. Q. How can I get further information concerning the stock offerings?
A. You may call the Neodesha Stock Information Center, collect at (316)
_______ to receive further information and/or a copy of the Prospectus,
Stock Order Form and Proxy Card.
<PAGE>
This does not constitute an offer to sell or the solicitation of an offer to buy
any shares of First Independence Common Stock offered in connection with the
Merger Conversion, nor does it constitute the solicitation of a proxy in
connection with the Merger Conversion. Offers to sell and solicitations of
offers to buy are made only by means of the Prospectus and solicitations of
proxies are made only by means of the Prospectus and Annexes thereto. There
shall be no sale of First Independence Common Stock in any state in which any
offer, solicitation of an offer or sale of First Independence Common Stock would
be unlawful prior to the registration or qualification of such shares under the
securities laws of any such state. A Prospectus can be obtained by calling the
Neodesha Stock Information Center at (316)_______.
THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER CONVERSION
ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
For Your Convenience
In order to assist you during the stock offering period, we have established a
Stock Information Center to answer your questions. Please call (collect):
(316) ___-____
Exhibit 99.5
EXHIBIT 99.5
ADVERTISING, TRAINING AND COMMUNITY INFORMATION MEETING
MATERIALS
<PAGE>
First Independence Corporation/Neodesha Savings and Loan Association, F.S.A
Merger Conversion
Proposed Marketing Materials
<PAGE>
Marketing Materials for
First Independence Corporation/Neodesha
Table of Contents
-----------------
I. Press Release
A. Explanation
B. Schedule
C. Distribution List
II. Question and Answer Brochure
A. Explanation
B. Method of Distribution
C. Example
III. IRA Mailing
A. Explanation
B. Method of Distribution
C. Example
IV. Counter Cards and Lobby Posters
A. Explanation
B. Quantity
C. Examples
V. Invitations
A. Explanation
B. Quantity - Method of Distribution
C. Examples
VI. Proxygram
A. Explanation
B. Example
X. Letters to accompany initial mailing and other marketing materials
A. Dear Voting Member letter
B. Dear Friend letter
C. To Community Members (Interested Investor)
D. Eligible Members where shares must be offered through
Broker/Dealer (Trident Letter)
<PAGE>
I. Press Releases
A. Explanation
In an effort to ensure that all customers, community members and other
interested investors receive prompt accurate information in a
simultaneous manner, Trident advises Neodesha and First Federal to
forward press releases to area newspapers, radio stations, etc. at
various points during the Merger Conversion process.
Only press releases approved by Conversion Counsel and counsel for the
Sales Agent will be forwarded for publication in any manner.
B. Schedule
1. OTS Approval of Merger Conversion and SEC Effectiveness
2. Close of both the Subscription and Community Offerings
<PAGE>
C. National and Local Distribution List
---------------------------------------
First Federal should provide a supplemental distribution list which includes all
local newspapers that it considers to be within its market area.
American Banker
- ---------------
One State Street Plaza
New York, New York 10004
Michael Weinstein
Business Wire
- -------------
212 South Tryon
Suite 1460
Charlotte, federally 28281
Wall Street Journal
- -------------------
World Financial Center
200 Liberty
New York, New York 10004
SNL Securities
- --------------
Post Office Box 2124
Charlottesville, Virginia 22902
Barrons
- -------
Dow Jones & Company
Barron's Statistical Information
200 Burnett Road
Chicopee, Massachusetts 01020
Investors Business Daily
- ------------------------
12655 Beatrice Street
Post Office Box 661750
Los Angeles, California 90066
<PAGE>
Local Media List
- ----------------
<PAGE>
FOR IMMEDIATE RELEASE
Contact: Franklin C. Miller
Telephone: (316) ___-____
FIRST INDEPENDENCE CORPORATION AND
NEODESHA SAVINGS AND LOAN ASSOCIATION, F.S.A
ANNOUNCE APPROVAL OF MERGER CONVERSION
Frank Miller, President and Chief Executive Officer of Neodesha Savings
and Loan Association, F.S.A ("Neodesha") in Neodesha, Kansas, announced today
that Neodesha is mailing solicitation materials in connection with its proposed
conversion from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank at which time it would become a wholly
owned subsidiary of First Independence Corporation ("First Independence"). After
the acquisition, Neodesha will be merged or otherwise consolidated with First
Federal Savings and Loan Association of Independence, a subsidiary of First
Independence Corporation. Under the Plan of Conversion, First Independence will
offer up to approximately $1,620,000 of First Independence Common Stock to
certain members of Neodesha in a Subscription Offering. On August __, 1998,
Neodesha received approval for the Conversion and the Acquisition from Office of
Thrift Supervision (OTS).
Mr. Miller stated, "Our normal day to day operations at Neodesha will
continue without interruption. The Merger Conversion will not affect the terms
of any existing loans or the amount or withdrawability of any depositors'
savings accounts or other deposits. Depositors will continue to have their
accounts insured by the FDIC as provided by law."
Mr. Miller also stated, "Information relating to the proposed
transaction is available in the Prospectus that has been sent to certain members
of Neodesha." Neodesha's eligible account holders and borrowers will have the
opportunity to purchase First Independence Common Stock through a Subscription
Offering that currently is expected to close on September __, 1998. Subject to
certain restrictions, eligible members in the Subscription Offering will
generally be allowed to
<PAGE>
subscribe for shares of First Independence Common Stock at 95% of the average
market price of First Independence Common Stock for the last ten trading days
prior to the close of the Subscription Offering. The Subscription Offering is
being managed by Trident Securities, Inc., of Raleigh, North Carolina.
Additional questions should be directed to the Stock Information Center in
Neodesha at (316) ___-____.
First Independence, a Delaware corporation headquartered in
Independence, Kansas, is a savings institution holding company under Kansas and
federal law. First Independence Common Stock is traded on the Nasdaq SmallCap
Market under the symbol "FFSL."
<PAGE>
[Close of Offering]
FOR IMMEDIATE RELEASE
Contact: Larry G. Spencer
Telephone: (316) 331-1660
NEODESHA SAVINGS AND LOAN ASSOCIATION, F.S.A
COMPLETES STOCK CONVERSION
Neodesha Savings and Loan Association, F.S.A ("Neodesha") announced
today the successful completion of its conversion from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank. Simultaneous
with its conversion, Neodesha became a wholly owned subsidiary of First
Independence Corporation ("First Independence"), Independence, Kansas, and in
the future will be merged or otherwise consolidated with First Independence's
subsidiary, First Federal Savings and Loan Association of Independence.
Frank Miller, President and CEO of Neodesha, stated "We are very
excited about the Merger Conversion and our affiliation with First Independence.
This transaction will benefit our customers, employees and the communities we
serve and has given our members the opportunity to participate in First
Independence's future."
Larry G. Spencer, President and Chief Executive Officer of First
Independence stated, "We are really excited about further expanding our presence
in the Neodesha area and in Wilson County and we look forward to assisting the
customers of Neodesha in responding to their growing financial needs."
First Independence Common Stock is traded on the Nasdaq (National
Association of Securities Dealers Automated Quotation) SmallCap Market under the
symbol "FFSL." In connection with the Merger Conversion, First Independence sold
______ shares of its Common Stock at the discounted prices of $_______ per
share. The total number of outstanding shares of First Independence Common Stock
is approximately _________ shares (excluding the shares to be issued in the
Merger Conversion). Trident Securities, Inc. of Raleigh, North Carolina managed
the sale of First Independence Common Stock in the Subscription Offering.
III. Officer and Director Support Brochure
A. Explanation
An Officer and Director Brochure merely highlights in brochure form the
stock commitments shown in the Prospectus .
B. Method of Distribution
There are four primary methods of distribution of Officer & Director
brochures, however, regardless of the method, they are always
accompanied by a Prospectus .
1. An Officer and Director brochure is sent out in the initial mailing
to all members of Neodesha .
2. Officer and Director brochures are available in all branch offices
of Neodesha .
3. Officer and Director brochures are distributed in information
packets at community meetings.
4. Officer and Director brochures are sent out in a standard
information packet to all interested investors who phone the Stock
Information Center requesting information.
<PAGE>
ANTICIPATED
BOARD OF
DIRECTORS'
AND
EXECUTIVE OFFICERS'
COMMITMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(ART)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
Anticipated Director
and Executive Officer
Subscriptions for
First Independence Common Stock
Anticipated
Aggregate
Subscription
Title Amount
------------------------ ------------
JoVonnah Boecker Chairman of the Board
Doug Buckles Director
Frank Miller President
Loren Peck Director
Patrick Porter Director
Richard Stewart Director
Jerry Webster Director
------------
All Directors and Executive Officers as a group (_ persons) $
============
The table above sets forth certain information as to the intended
subscriptions as of the date shown for First Independence Common Stock by
Neodesha's Directors and Executive Officers, including their associates, and by
all Executive Officers and Directors as a group. The table assumes that
sufficient shares will be available to satisfy the Directors' and Officers'
anticipated subscriptions.
This does not constitute an offer to sell or the solicitation of an
offer to buy any shares of First Independence Common Stock offered in connection
with the Merger Conversion, nor does it constitute the solicitation of a proxy
in connection with the Merger Conversion. Offers to sell and solicitations of
offers to buy are made only by means of the Prospectus and solicitations of
proxies are made only by means of the Prospectus and Annexes thereto. There
shall be no sale of First Independence Common Stock in any state in which any
offer, solicitation of an offer or sale of First Independence Common Stock would
be unlawful prior to the registration or qualification of such shares under the
securities laws of any such state. A Prospectus can be obtained by calling the
Neodesha Stock Information Center at (316) _________.
THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER CONVERSION
ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
FOR YOUR CONVENIENCE
In order to assist you during the stock offering period, we have established a
Stock Information Center to answer your questions, please call (collect):
(316) ___-____
<PAGE>
IV. IRA Mailing
A. Explanation
A special IRA mailing is proposed to be sent to all IRA customers of
Neodesha following the mailing of the Prospectus to alert the customers
that funds held in an IRA can be used to purchase stock. Since this
transaction is not as simple as designating funds from a certificate of
deposit like a normal stock purchase, this letter informs the customer
that this process is slightly more detailed and involves a personal
visit to Neodesha .
B. Quantity
One IRA letter is proposed to be mailed to each IRA customer of
Neodesha . These letters would be mailed following approval by the
Administrator of the Merger Conversion and after each customer has
received the initial mailing containing a Prospectus.
<PAGE>
[Neodesha Letterhead]
Date
Dear Neodesha Retirement Account Customer:
Neodesha is in the process of converting from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank and of being
acquired by First Independence Corporation ("First Independence"). Thereafter,
Neodesha will merge or otherwise consolidate with and become part of First
Federal Savings and Loan Association of Independence, First Independence's
wholly-owned subsidiary. Neodesha is offering eligible depositors and borrowers
an opportunity to subscribe for stock of First Independence Corporation through
the Subscription Offering.
Your Neodesha Retirement Account has an opportunity to subscribe for
First Independence Common Stock in the Subscription Offering. You should,
however, consider whether common stock would be a proper asset for your
Retirement Account. If you desire to purchase shares of common stock of First
Independence through your IRA, Neodesha can assist you in self-directing those
funds. This process can be done without an early withdrawal penalty and
generally without a negative tax consequence to your IRA.
If you are interested in receiving more information on self-directing
your IRA, please contact our Stock Information Center at (316) _______. Because
it takes several days to process the necessary IRA forms, a response must be
received by _______, 1998 to accommodate your interest.
Sincerely,
/s/ Frank C. Miller
-----------------------------------
Frank C. Miller
President & Chief Executive Officer
This does not constitute an offer to sell or the solicitation of an
offer to buy any shares of First Independence Common Stock offered in connection
with the Merger Conversion, nor does it constitute the solicitation of a proxy
in connection with the Merger Conversion. Offers to sell and solicitations of
offers to buy are made only by means of the Prospectus and solicitations of
proxies are made only by means of the Prospectus. There shall be no sale of
First Independence Common Stock in any state in which any offer, solicitation of
an offer or sale of First Independence Common Stock would be unlawful prior to
the registration or qualification of such shares under the securities laws of
any such state. A Prospectus can be obtained by calling the Neodesha Stock
Information Center at (316) _________.
THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER
CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY.
<PAGE>
V. Counter Cards and Lobby Posters
A. Explanation
Counter cards and lobby posters serve two purposes: (1) As a notice to
Neodesha's customers, First Federal's customers and members of the
local community that the stock offering is underway and (2) to remind
the customers of the end of the Subscription Offering. Trident has
learned in the past that many people forget the deadline for
subscribing and therefore we suggest the use of these simple
reminders.
Counter cards are only used where Prospectuses/Proxy Statement may be
picked up by customers to take with them.
B. Quantity
Approximately 3 - 4 Counter cards will be used at each office of
Neodesha and at First Federal branch offices. They will be used on
customer service representatives' desks.
Approximately 1 - 2 Lobby posters will be used at each office of
Neodesha and at First Federal branch offices.
<PAGE>
Joining Hands For A Sound Future
Stock Offering
Materials
Available Here.
First Federal Logo Neodesha Logo
<PAGE>
VI. Statement Stuffers
A. Explanation
The statement stuffers will be mailed with Neodesha's regular monthly
statements to its customers, using the statement cycle that occurs
after the Registration Statement is declared effective and the
Conversion approved by the applicable regulatory authorities. They are
another avenue to increase the awareness of the Merger Conversion to
Neodesha's customers.
<PAGE>
Dear Customer:
Neodesha Savings and Loan is in the process of converting from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank. In conjunction with the conversion, if the Plan of Conversion is approved
by Neodesha's voting members (at a meeting scheduled for _________, 1998),
Neodesha will be acquired by First Independence Corporation ("First
Independence") and thereafter will be merged or otherwise consolidated with and
into First Federal Savings and Loan Association of Independence (First Federal),
First Independence's subsidiary.
We at Neodesha are very excited about the transaction and truly believe
we will be able to provide better services for our customers as a result of the
combined companies' resources.
As part of the transaction, current depositors, certain former
depositors and borrowers of Neodesha will have the opportunity to subscribe for
First Independence Corporation Common Stock. If you are a customer as defined by
the Plan of Conversion and Prospectus, you are entitled to purchase, without
paying a sales commission, shares of First Independence Common Stock, within
certain purchase limitations, at a 5% discount to the "First Federal Market
Price" (a price equal to 95% of the average price of First Independence Common
Stock on the ten days prior to the close of the Subscription Offering). For
various reasons set forth in the Prospectus that has been mailed to Neodesha's
members, subscribers who purchase in the Community Offering at a discount should
recognize that they may not be able to sell their shares at a price equal to or
greater than the price paid for their shares.
All officers and employees of Neodesha have been offered positions with
First Federal, so it is expected that the banking professionals at Neodesha whom
you know and trust will continue to serve you.
The conversion and the acquisition will have no effect on the balance,
maturity, or withdrawability of your existing deposits at Neodesha or your
obligations as a borrower from Neodesha .
A Prospectus relating to these securities is available at each of our
offices or by calling our Stock Information Center at (316) _______.
Sincerely,
/s/ Frank C. Miller
----------------------------------------
Frank C. Miller
President & Chief Executive Officer
This does not constitute an offer to sell or the solicitation of an
offer to buy any shares of First Independence Common Stock offered in connection
with the Merger Conversion, nor does it constitute the solicitation of a proxy
in connection with the Merger Conversion. Offers to sell and solicitations of
offers to buy are made only by means of the Prospectus and solicitations of
proxies are made only by means of the Prospectus. There shall be no sale of
First Independence Common Stock in any state in which any offer, solicitation of
an offer or sale of First Independence Common Stock would be unlawful prior to
the registration or qualification of such shares under the securities laws of
any such state. A Prospectus can be obtained by calling the Neodesha Stock
Information Center at (316) _______.
THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER
CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY.
<PAGE>
VII. Lapel Button
A. Explanation and Method of Distribution
The lapel button will be worn by the employees once the information
packets (including the effective Prospectus) have been mailed to
customers to remind customers of the Subscription Offering and the
Community Offering. "Employees" include employees of Neodesha and
First Federal employees in Iredell County.
Lapel buttons should be co-ordinated to be consistent with the central
theme of the offering.
<PAGE>
VIII. Invitations
A. Explanation
In order to educate the public about the stock offering, Trident
suggests holding several community meetings in various locations. In an
effort to target a group of interested investors Trident requests that
Directors, Officers and Employees of Neodesha and First Federal
advisory directors in Iredell County submit a list of friends,
customers and others who may have an interest and whom they would like
to invite to a Community meeting.
B. Method of Distribution
Each affiliate submits his list of prospects.
Invitations are sent to each affiliate's prospects through the mail.
All invitations are preceded by a Prospectus, and Prospectus will be
available at the community meetings.
<PAGE>
The Officers, Directors and Employees
of
Neodesha Savings and Loan Association, F.S.A
cordially invite you to a
presentation by
First Independence Corporation
regarding Neodesha's affiliation with First Federal
and the related stock offering
Please join us at the
--------------------------
___________, 1998
at 5:30 p.m.
for cocktails and hors d'oeuvres
R.S.V.P.
(316) ________
<PAGE>
IX. Proxygram
A. Explanation
A proxygram is used when the majority of votes needed to adopt the Plan
of Conversion have not been obtained. The proxygram is mailed to those
"target" voting members who have not previously returned their signed
proxy.
The targeted voting members are determined by the conversion agent.
<PAGE>
P R O X Y G R A M
YOUR VOTE ON OUR MERGER CONVERSION PLAN HAS NOT BEEN RECEIVED.
YOUR VOTE IS VERY IMPORTANT, PARTICULARLY BECAUSE FAILURE TO VOTE IS EQUIVALENT
TO VOTING "AGAINST" THE PLAN.
REMEMBER, VOTING FOR THE CONVERSION DOES NOT OBLIGATE YOU TO BUY ANY STOCK.
THE BALANCE, MATURITY AND WITHDRAWABILITY OF DEPOSITS WITH NEODESHA WILL NOT
CHANGE. DEPOSITS WILL REMAIN INSURED BY THE FDIC TO THE MAXIMUM EXTENT PROVIDED
BY LAW.
PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL OR DELIVER IT TO
EITHER NEODESHA OFFICE.
WE RECOMMEND UNANIMOUSLY THAT YOU VOTE "FOR" THE PLAN OF MERGER CONVERSION.
THANK YOU!
THE BOARD OF DIRECTORS OF NEODESHA SAVINGS AND LOAN ASSOCIATION, F.S.A
<PAGE>
X. Letters to Accompany Initial Mailing
A. Explanation
The appropriate letter is mailed in each of the initial mailing packets
(which includes a Prospectus, if applicable) to customers and
prospects.
B. Quantity
<PAGE>
[Mailed to all Voting Members]
_______ __, 1998
Dear Voting Member of Neodesha :
Neodesha Savings and Loan Association, F.S.A (Neodesha) is in the
process of converting from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank pursuant to a Plan of Conversion
unanimously adopted by the Board of Directors of Neodesha. In conjunction with
the conversion, if the Plan of Conversion is approved by Voting Members,
Neodesha will become a wholly owned subsidiary of First Independence
Corporation, and thereafter will be merged or otherwise consolidated with and
into First Independence's subsidiary, First Federal Savings and Loan Association
of Independence (First Federal). These transactions are referred to as the
"Merger Conversion." Neodesha has received regulatory approval for the
conversion and the acquisition from the Office of Thrift Supervision
The favorable vote of the Voting Members of Neodesha at a Special
Meeting to be held ___________, 1998 is required to complete the conversion. The
enclosed Prospectus contains important information to assist you in voting. Also
enclosed is a Proxy Card for you to submit your vote. The Neodesha Board of
Directors urges you to vote FOR the Plan of Conversion.
Neodesha has successfully operated as an independent mutual savings
institution since 1887. Today we believe it is best for Neodesha, its customers
and the communities it serves to join with First Independence. Indeed, we expect
the conversion and the merger to enhance our ability to meet a wider range of
your financial needs and offer you greater convenience.
Let us assure you that this transaction will not affect the balance or
withdrawability of any of your existing deposits or change the terms of any
existing loan accounts. Depositors will continue to have their accounts insured
by the FDIC to the maximum extent permitted by federal law.
As a Voting Member of Neodesha (i.e., an account holder, borrower or a
person obligated on a loan from Neodesha as of _________, 1998 and at the date
of the Special Meeting, currently scheduled for __________, 1998), you are
entitled to purchase First Independence Common Stock to be offered in the
conversion on a priority basis, without paying a sales commission, at a price
equal to 95% of the average price of First Independence Common Stock on the ten
days prior to the close of the Subscription Offering (called the "First Federal
Market Price"). For various reasons set forth in the accompanying Prospectus,
subscribers who purchase at a discount should recognize that they may be unable
to sell their shares at a price equal to or greater than the price they paid.
Voting Members are not required to purchase shares in order to be eligible to
vote.
In order to assist you in deciding whether to subscribe for shares of
First Independence Common Stock, please see the enclosed Prospectus,
For your convenience, we have established a Stock Information Center.
If you have any questions, please call us collect at (316) ________. To submit
<PAGE>
your vote on the Plan of Conversion, please complete, date, sign and return the
enclosed Proxy Card. If you decide to purchase shares, you must return the
enclosed Stock Order Form properly completed with full payment to the Stock
Information Center or to our branch office not later than 12:00 p.m, Kansas time
on __________, 1998 (unless the deadline is extended).
Very truly yours,
/s/ Frank C. Miller
-------------------------------------
Frank C. Miller
President and Chief Executive Officer
This does not constitute an offer to sell or the solicitation of an offer to buy
any shares of First Independence Common Stock offered in connection with the
Merger Conversion, nor does it constitute the solicitation of a proxy in
connection with the Merger Conversion. Offers to sell and solicitations of
offers to buy are made only by means of the Prospectus and solicitations of
proxies are made only by means of the Prospectus and Annexes thereto. There
shall be no sale of First Independence Common Stock in any state in which any
offer, solicitation of an offer or sale of First Independence Common Stock would
be unlawful prior to the registration or qualification of such shares under the
securities laws of any such state. A Prospectus and its Annexes can be obtained
by calling the Neodesha Stock Information Center at (316) _________.
THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER CONVERSION
ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY.
<PAGE>
[Mailed to Eligible Account Holders who are not Voting Members]
_____________, 1998
Dear Friend:
Neodesha Savings and Loan Association, F.S.A is in the process of
converting from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank. In conjunction with the conversion,
Neodesha will become a wholly-owned subsidiary of First Independence
Corporation, and thereafter will be merged or otherwise consolidated with and
into First Independence's subsidiary, First Federal Savings and Loan Association
of Independence. These transactions are collectively referred to herein and in
the Prospectus as the "Merger Conversion." Neodesha has received regulatory
approval for the conversion and the acquisition from the Office of Thrift
Supervision.
Neodesha has successfully operated as an independent mutual savings
institution since 1887. Today we believe it is best for Neodesha, its customers
and the communities it serves to join with First Independence. Indeed, we expect
the Merger Conversion to enhance our ability to meet a wider range of your
financial needs and offer you greater convenience.
Let us assure you that if you still have an account with Neodesha ,
this transaction will not affect the balance or withdrawability of any of your
existing deposits or change the terms of any existing loan accounts. Depositors
will continue to have their accounts insured by the FDIC to the maximum extent
permitted by federal law.
Since you have been one of our valued members, you have the opportunity
to invest in the future by subscribing to purchase First Independence Common
Stock without paying a sales commission. Subject to certain purchase
limitations, certain Neodesha account holders on) are entitled to purchase,
without paying a sales commission, shares of First Independence Common Stock at
a 5% discount equal to 95% of the average price of First Independence Common
Stock on the ten days prior to the close of the Subscription Offering. For
various reasons set forth in the accompanying Prospectus, subscribers who
purchase at a discount should recognize that they may be unable to sell their
shares at a price equal to or greater than the price they paid.
Enclosed is a Prospectus that describes First Independence and the
shares of First Independence Common Stock offered in the Merger Conversion.
Please review it carefully so you can make an informed decision.
For your convenience, we have established a Stock Information Center.
If you have any questions, please call us collect at (316) _________. If you
<PAGE>
decide to purchase shares, you must return the enclosed Stock Order Form
properly completed with full payment to the Stock Information Center or to our
branch office not later that 12:00 p.m. Kansas time on __________, 1998 (unless
the deadline is extended).
Sincerely,
/s/ Frank C. Miller
-------------------------------------
Frank C. Miller
President and Chief Executive Officer
This does not constitute an offer to sell or the solicitation of an offer to buy
any shares of First Independence Common Stock offered in connection with the
Merger Conversion, nor does it constitute the solicitation of a proxy in
connection with the Merger Conversion. Offers to sell and solicitations of
offers to buy are made only by means of the Prospectus and solicitations of
proxies are made only by means of the Prospectus and Annexes thereto. There
shall be no sale of First Independence Common Stock in any state in which any
offer, solicitation of an offer or sale of First Independence Common Stock would
be unlawful prior to the registration or qualification of such shares under the
securities laws of any such state. A Prospectus can be obtained by calling the
Neodesha Stock Information Center at (316) _________.
THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER
CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY.
<PAGE>
November __, 1993
Dear Interested Investor:
Neodesha Savings and Loan Association, F.S.A. is pleased to announce
that we have received regulatory approval to proceed with our plan to convert
from a federally-chartered mutual savings bank to a federally-chartered stock
savings bank pursuant to a Plan of Conversion adopted by the Board of Directors
of Neodesha. In conjunction with the conversion, Neodesha will become a
wholly-owned subsidiary of First Independence Corporation, and thereafter will
merge or otherwise consolidate with First Independence's subsidiary, First
Federal Savings and Loan Association of Independence.
Enclosed is a Prospectus which fully describes First Independence, its
management, board and financial condition. Please review it carefully before you
make an investment decision. For your convenience we have established a Stock
Information Center. If you have any questions, please call the Stock Information
Center at (316) ________.
Very truly yours,
/s/ Frank C. Miller
-------------------------------------
Frank C. Miller
President and Chief Executive Officer
This does not constitute an offer to sell or the solicitation of an offer to buy
any shares of First Independence Common Stock offered in connection with the
Merger Conversion, nor does it constitute the solicitation of a proxy in
connection with the Merger Conversion. Offers to sell and solicitations of
offers to buy are made only by means of the Prospectus and solicitations of
proxies are made only by means of the Prospectus and Annexes thereto. There
shall be no sale of First Independence Common Stock in any state in which any
offer, solicitation of an offer or sale of First Independence Common Stock would
be unlawful prior to registration or qualification of such shares under the
securities laws of any such state. A Prospectus can be obtained by calling the
Neodesha Stock Information Center at (316) _________.
THE SHARES OF FIRST INDEPENDENCE COMMON STOCK BEING OFFERED ARE NOT
DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
<PAGE>
(Trident Letterhead)
___________, 1998
To Members and Friends of Neodesha Savings and Loan Association:
Trident Securities, Inc., a member of the National Association of
Securities Dealers, Inc., is assisting Neodesha Savings and Loan Association
(Neodesha) in its conversion to a federally-chartered stock savings bank. In
conjunction with the conversion, Neodesha will then become a wholly owned
subsidiary of First Independence Corporation, and thereafter will be merged or
otherwise consolidated with and into First Independence's subsidiary, First
Federal Savings and Loan Association of Independence. These transactions are
collectively referred to herein and in the Prospectus as the "Merger
Conversion."
At the request of Neodesha, we are enclosing materials explaining the
conversion process and your right to subscribe for common shares of First
Independence Corporation. Please read the enclosed offering materials carefully
before subscribing for stock.
If you have any questions, please call the Stock Information Center at
(316) _________.
Sincerely,
TRIDENT SECURITIES, INC.
Enclosures
The shares of common stock offered in the conversion are not savings
accounts or deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy
stock. The offer is made only by the Prospectus. There shall be no sale of stock
in any state in which any offer, solicitation of an offer or sale of stock would
be unlawful.
Exhibit 99.6
EXHIBIT 99.6
LETTER OF APPRAISER WITH RESPECT TO SUBSCRIPTION RIGHTS
<PAGE>
July 1, 1998
Boards of Directors
Neodesha Savings and Loan Association, FSA, and
First Independence Corporation
Myrtle & Sixth Streets
Independence, Kansas 67301
Merger Conversion, Subscription Rights
--------------------------------------
Dear Directors:
Terms used in this letter not otherwise defined herein have the same
meanings for such terms in the plan by which Neodesha Savings and Loan
Association, FSA ("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"). Simultaneously, First Independence Corporation (the "Company")
will issue shares of common stock.
We understand that in accordance with the Plan of Merger Conversion, the
Non-transferable Subscription Rights to purchase shares of Common Stock in the
Company ("Subscription Rights") are to be issued, in order of priority, to: (1)
Eligible Account Holders, (2) Tax-Qualified Employee Plans, (3) Supplemental
Eligible Account Holders, (4) Other Members, and (5) Officers, directors and
employees of Neodesha. 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 (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 actual purchase price per share can not currently be
determined because it will be equal to 95% of the average market price of First
Independence Corporation common stock (based on the average of closing bid and
ask quotations on the Nasdaq SmallCap Market) for the ten trading days ending on
the expiration date of the offering.
Based solely upon our observation that the Subscription Rights will be
available to all such parties without cost, will be legally non-transferable and
of short duration, and will afford such parties the right only to purchase
shares of Common Stock at the same price to be paid by members of the general
public in the Community Offering and through selected dealers in the Syndicated
Community Offering, but without undertaking any independent investigation of
state or federal laws or the position of the Internal Revenue Service with
respect to such issue, it is our opinion:
1. the Subscription Rights will have no ascertainable market value; and
2. the price at which the Subscription Rights are exercisable will not be
more or less than the pro forma market value of the shares upon
issuance.
<PAGE>
Boards of Directors
July 1, 1998
Page 2
Changes in the local and national economy, the legislative and regulatory
environment, the stock market, interest rates and other external forces (e.g.,
natural disasters or significant global events) occur from time to time and may
materially affect the value of thrift stocks as a whole or the Holding Company's
value. Accordingly, no assurance can be given that persons who subscribe for
shares of Common Stock issued in the Merger Conversion will thereafter be able
to sell such shares at the same price paid in the Subscription Offering, the
Community Offering or the Syndicated Community Offering.
Sincerely,
/s/ Charles M. Hebert
Charles M. Hebert
Principal
