UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-22184
FIRST INDEPENDENCE CORPORATION
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(Name of small business issuer as specified in its charter)
Delaware 36-3899950
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Myrtle and Sixth Streets, Independence, Kansas 67301
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (316) 331-1660
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Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such requirements for the past 90 days. YES X . NO ___.
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year:
$11,637,136.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on the NASDAQ Stock Market as of December 4, 2000, was $8.3
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of December 4, 2000, there were issued and outstanding 1,024,666 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the
fiscal year ended September 30, 2000.
Part III of Form 10-KSB - Proxy Statement for 2001
Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format: YES __ NO X .
<PAGE>
FORWARD-LOOKING STATEMENTS
First Independence Corporation ("First Independence"), and its
wholly-owned subsidiary, First Federal Savings and Loan Association of
Independence ("First Federal"), may from time to time make written or oral
"forward-looking statements," including statements contained in its filings with
the Securities and Exchange Commission (the "SEC"). These forward-looking
statements may be included in this Annual Report on Form 10-KSB and the exhibits
attached to it, in First Independence's reports to shareholders and in other
communications, which are made in good faith by us pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:
o the strength of the United States economy in general and the
strength of the local economies in which we conduct operations;
o the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and
services and the perceived overall value of these products and
services by users, including the features, pricing and quality
compared to competitors' products and services;
o the willingness of users to substitute our products and services for
products and services of our competitors;
o our success in gaining regulatory approval of our products and
services, when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and
insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in the foregoing.
The list of important factors stated above is not exclusive. We do not
undertake to update any forward-looking statement, whether written or oral, that
may be made from time to time by or on behalf of First Independence or First
Federal.
2
<PAGE>
PART I
Item 1. Description of Business
-----------------------
General
First Independence is a Delaware corporation which was formed at the
direction of First Federal in June 1993 for the purpose of becoming the savings
and loan holding company of First Federal. First Independence 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. First Independence issued 727,375 shares of common stock at a
price of $10.00 per share in the conversion. On January 6, 1999, The Neodesha
Savings and Loan Association, FSA ("Neodesha Savings") combined with First
Federal through the conversion of Neodesha Savings from a mutual savings and
loan association to a stock savings and loan association and the simultaneous
merger of Neodesha Savings into First Federal. See Note N of the Notes to
Consolidated Financial Statements in our Annual Report to Stockholders for the
year ended September 30, 2000 attached hereto as Exhibit 13 (the "Annual
Report"). All references to First Independence at or before October 5, 1993
refer to First Federal. References in this Form 10-KSB to "we," "us" and "our"
refer to First Independence and/or First Federal as the context requires. First
Independence's common stock is quoted on the Nasdaq Small Cap Market under the
symbol "FFSL."
At September 30, 2000, we had total assets of $149.1 million, and
stockholders' equity of $13.8 million.
First Federal is a federally chartered stock savings and loan
association headquartered in Independence, Kansas. First Federal was originally
organized in 1905 as a state-chartered savings and loan association and later
converted to a federally chartered institution.
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. We attract deposits
from the general public and use such deposits, together with borrowings and
other funds, to originate one- to four-family residential mortgage loans. To a
much lesser extent, we also originate 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 our market area, we
expect to continue to originate the same types of loans we currently offer,
which include the origination of a limited number of commercial and multi-family
real estate loans secured by property located in our market area. We do not
intend to originate or purchase interests in commercial or multi-family real
estate loans secured by properties located outside of our market area.
We also invest in mortgage-backed securities which are insured by or
guaranteed by federal agencies and other investment securities. See "Lending
Activities - Originations, Purchases and Sales of Loans and Mortgage-Backed
Securities."
Like all federally chartered savings associations, our operations are
regulated by the Office of Thrift Supervision (the "OTS"). First Federal is a
member of the Federal Home Loan Bank System ("FHLB System") and a stockholder in
the Federal Home Loan Bank ("FHLB") of Topeka. First Federal is also a member of
the Savings Association Insurance Fund ("SAIF") and our deposit accounts are
insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC").
Our revenue is derived principally from interest on mortgage loans and
mortgage-backed securities, interest on investment securities, dividends on
Federal Home Loan Bank stock and loan origination income.
Our executive offices are located at Myrtle and Sixth Streets in
Independence, Kansas 67301 and our telephone number is (316) 331-1660.
3
<PAGE>
Market Area
Through our offices in Independence, Coffeyville and Neodesha, Kansas, we
currently serve primarily Montgomery and Wilson Counties, Kansas and, to a
lesser extent, the eastern part of Chautauqua County in Kansas. We compete in
loan originations and in attracting deposits with approximately 25 financial
institutions serving our primary market area. We estimate our share of the
savings market in Montgomery County and Wilson to be approximately 14%.
During the year ended September 30, 1998, the Association began
originating construction loans at its new loan production office in Lawrence,
Kansas. Lawrence, located in northeastern Kansas, is approximately 25 miles from
Kansas City. Lawrence if the County Seat of Douglas County and the location of
Kansas University.
Independence, Kansas, located in southeastern Kansas, is approximately
110 miles from Wichita, Kansas. Independence is the County Seat of Montgomery
County and the location of Independence Community College.
Montgomery County has a population of approximately 37,000. Although the
economy of southeast Kansas is closely tied to the gas, oil and agricultural
industries, Montgomery County has attracted a variety of other industries. Major
employers in Montgomery County include Automotive Controls Corp., Inc., a
manufacturer of electronic and electrical parts, City Publishing Company, a
publisher of cross-reference directories, 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, we have originated fixed-rate mortgage loans.
Since 1982, however, we have emphasized, subject to market conditions, the
origination and holding of adjustable-rate mortgage loans and loans with shorter
terms to maturity than traditional 30-year, fixed-rate loans. Our strategy has
been to increase the percentage of assets in our portfolio with more frequent
repricing or shorter maturities. In response to customer demand, however, we
continue to originate for our loan portfolio fixed-rate mortgages with terms not
greater than 30 years.
Our 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 our lending has been in the form of
construction loans. To a much lesser extent, we also originate loans secured by
non-residential real estate and consumer loans and a limited amount of
multi-family real estate loans. See "- Originations, Purchases and Sales of
Loans and Mortgage-Backed Securities." At September 30, 2000, our net loan
portfolio totaled $125.1 million.
All loans must be reviewed by a committee comprised of the President and
three other officers of First Federal. 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 First Federal Board of Directors. All loan approvals
made by the loan committee are ratified by the First Federal Board of Directors.
The aggregate amount of loans that First Federal is permitted to make
under applicable federal regulations to any one borrower, including related
entities, is generally equal to the greater of 15% of unimpaired capital and
surplus or $500,000. At September 30, 2000, the maximum amount which First
Federal could have lent to any one borrower and the borrower's related entities
was approximately $1.9 million. See "Regulation - Federal Regulation of Savings
Associations."
4
<PAGE>
Loan Portfolio Composition. The following information sets forth the
composition of our 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>
September 30,
------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ------------------------------ --------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
-----------------
One- to four-family $ 90,928 66.90% $ 84,053 67.55% $ 71,855 71.06%
Multi-family 339 0.25 914 0.74 1,001 0.99
Non-residential 11,080 8.15 9,075 7.29 9,065 8.97
Construction 28,152 20.72 25,052 20.13 16,050 15.87
-------- ------ -------- ------ -------- ------
Total real estate loans $130,499 96.02 119,094 95.71 97,971 96.89
-------- ------ -------- ------ -------- ------
Consumer Loans
--------------
Deposit account 980 0.72 373 0.30 397 0.39
Automobile 2,578 1.90 2,867 2.31 961 0.95
Home equity 927 0.68 911 0.73 837 0.83
Home improvement 123 0.09 217 0.17 234 0.23
Other 806 0.59 968 0.78 714 0.71
-------- ------ -------- ------ -------- ------
Total consumer loans 5,414 3.98 5,336 4.29 3,143 3.11
-------- ------ -------- ------ -------- ------
Total Loans 135,913 100.00% 124,430 100.00% 101,114 100.00%
-------- ====== -------- ====== -------- ======
Less
----
Loans in process 9,665 10,429 6,437
Deferred fees and discounts 371 355 337
Allowance for losses 758 753 656
-------- -------- --------
Total loans receivable, net $125,119 $112,893 $ 93,684
======== ======== ========
</TABLE>
5
<PAGE>
The following table shows the composition of our loan portfolio by fixed-
and adjustable-rate categories at the dates indicated.
<TABLE>
September 30,
------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ------------------------------ --------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans
---------------
Real estate:
One- to four-family $ 67,253 49.48% $ 63,010 50.64% $ 50,637 50.08%
Multi-family --- --- 566 0.45 639 0.63
Non-residential 8,019 5.90 6,576 5.29 6,361 6.29
Construction 28,152 20.72 25,052 20.13 16,050 15.87
-------- ------ -------- ------ -------- ------
Total fixed-rate real estate loans 103,424 76.10 95,204 76.51 73,687 72.87
Consumer 4,487 3.30 4,425 3.56 2,306 2.28
-------- ------ -------- ------ -------- ------
Total fixed-rate loans 107,911 79.40 99,629 80.07 75,993 75.15
-------- ------ -------- ------ -------- ------
Adjustable-Rate Loans
---------------------
Real estate:
One- to four-family 23,675 17.42 21,043 16.91 21,218 20.98
Multi-family 339 0.25 348 0.28 362 0.36
Non-residential 3,061 2.25 2,499 2.01 2,704 2.68
-------- ------ -------- ------ -------- ------
Total adjustable-rate real estate loans 27,075 19.92 23,890 19.20 24,284 24.02
Consumer 927 0.68 911 0.73 837 0.83
-------- ------ -------- ------ -------- ------
Total adjustable-rate loans 28,002 20.60 24,801 19.93 25,121 24.85
-------- ------ -------- ------ -------- ------
Total Loans 135,913 100.00% 124,430 100.00% 101,114 100.00%
-------- ====== -------- ====== -------- ======
Less
----
Loans in process 9,665 10,429 6,437
Deferred fees and discounts 371 355 337
Allowance for losses 758 753 656
-------- -------- --------
Total loans receivable, net $125,119 $112,893 $ 93,684
======== ======== ========
</TABLE>
6
<PAGE>
The following schedule shows the scheduled contractual maturities of our
loan portfolio at September 30, 2000. 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>
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
---------- ---------- -------- ---------- ---------- --------- --------- ------------ ---------- --------
Due During Periods
Ending September 30,
-----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2001 $ 297 8.53% $ 1,452 10.02% $23,878 9.82% $2,205 8.67% $ 27,832 9.73%
2002 122 8.03 8 7.50 2,679 9.20 720 9.84 3,529 9.29
2003 436 7.98 50 8.75 --- --- 975 10.42 1,461 9.63
2004 and 2005 974 8.18 302 8.92 --- --- 1,173 9.67 2,449 8.98
2006 to 2010 9,220 7.77 1,560 8.53 12 8.00 341 10.16 11,133 7.95
2011 to 2025 38,131 7.67 7,966 8.23 1,583 8.01 --- --- 47,680 7.77
2026 and following 41,748 7.36 81 7.50 --- --- --- --- 41,829 7.36
------- ------- ------- ------ --------
Total $90,928 $11,419 $28,152 $5,414 $135,913
======= ======= ======= ====== ========
</TABLE>
The total amount of loans due after September 30, 2001, which have
predetermined interest rates is $81.0 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $27.1
million.
7
<PAGE>
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by our marketing efforts, through our present
customers and walk-in customers, and referrals from real estate brokers and
builders. We have focused our lending efforts primarily on the origination of
loans secured by first mortgages on owner-occupied, single-family residences in
our market area. At September 30, 2000, our one-to four-family residential
mortgage loans, totaled $90.9 million, or 66.9% of our loan portfolio.
We currently make 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, we require private mortgage insurance equal to 20% of the
loan value in order to reduce our exposure level. For loans with loan-to-value
ratios of greater than 80% but less than 90%, we typically require private
mortgage insurance to reduce our exposure. The determination as to whether to
obtain such insurance is made on a case-by-case basis, based on a variety of
factors including the borrower's payment history, the borrower's length of
employment, the quality of the property, the term of the loan and the debt to
income ratio of the borrower. At September 30, 2000, we had 800 loans totaling
$49.2 million with a loan-to-value ratio of greater than 80%, but less than 90%
and 469 loans totaling $24.0 million with a loan-to-value ratio of 90% or
greater.
We currently offer mortgage loans with a fixed rate for either the first
five years or three years of the loan term that automatically convert to a
one-year adjustable-rate mortgage loan during the year following the fixed term.
Rates are determined in accordance with market and competitive factors for a
term of up to 30 years. The interest rate charged on adjustable-rate mortgage
loans currently originated by us is based upon the one year Constant Maturity
Treasury Index. The adjustable-rate loans currently originated by us provide for
a 2% annual cap and floor, and a 6% 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 6% 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 us against interest rate risk. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management and Market Risk" in the Annual Report.
Approximately 40.1% of the loans secured by one- to four-family real estate
originated by us during fiscal 2000 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. We believe that these risks, which have not had a material
adverse effect on our operations to date, are more than outweighed by the
benefits received by offering adjustable-rate mortgage loans.
We also originate fixed-rate mortgage loans. Fixed-rate loans currently
originated by us 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, we evaluate 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, we will take into consideration the borrower's
ability to make future payments in the event the interest rate adjusts upward.
Since the size of our average new loan originated is approximately $50,000, we
believe increases in interest rates do not generally increase payment amounts to
levels that would significantly impair the borrower's ability to make monthly
payments.
8
<PAGE>
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, we generally require that the
borrower obtain an opinion from an attorney regarding the title to the property
or title insurance and fire and casualty insurance, as well as flood insurance,
where applicable, to protect our interest.
Approximately $2.0 million, or 2.2% of our one- to four-family
residential mortgage loan portfolio, was purchased by us. These loans are
primarily secured by property located in Texas and have been in our portfolio
for several years. We have purchased only a limited amount of one- to
four-family residential mortgage loans since 1989. However, in connection with
the opening of a loan production office in Lawrence, Kansas during fiscal 1998,
we purchased approximately $5.0 million construction real estate loans. These
loans are secured by one- to four-family real estate located in the Lawrence
market area. The level of delinquencies in our portfolio of purchased loans
secured by one- to four-family residential real estate is consistent with that
of the loans originated and retained by us.
Our residential mortgage loans customarily include due-on-sale clauses
giving us 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. We have enforced
due-on-sale clauses in our mortgage contracts for the purpose of increasing our
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 our underwriting standards and the loan terms are
modified, to the extent necessary, to conform with present yield and maturity
requirements.
Construction Lending. We also make construction loans to builders and
individuals for the construction of residences. There were $28.2 million of
construction loans outstanding at September 30, 2000.
The majority of the construction loans were originated at the Lawrence,
Kansas loan production office. This office is staffed with an originator and
three processors, each of whom has substantial experience in construction
lending. Construction loans are made to both builders and individuals and
generally have terms of nine months or less and interest rates tied to the prime
rate plus a margin. Once the loan rate is determined, however, it remains fixed
for the term of the loan. The borrower pays interest only during the
construction period. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential
loans, and are approved at our headquarters in Independence. The amount loaned
to any one builder is subject to pre-approved guidance lines with the maximum
amount not to exceed our loans-to-one-borrower limit.
Construction loans are generally considered to involve a greater degree
of risk than permanent one-to four- family residential mortgage loans. Risk of
loss on a construction loan depends largely upon the concurrence of the initial
estimate of the property's value at completion of construction and the estimated
cost (including interest) of construction, as well as the availability of
permanent take-out financing. During the construction phase, a number of factors
could result in delays and cost overruns. If the estimate of value proves to be
inaccurate, we may be confronted, at or prior to the maturity of the loan, with
a project which, when completed, has a value which is insufficient to ensure
full repayment. Because of these uncertainties inherent in estimating
development and construction costs, it is relatively difficult to evaluate
accurately the total loan funds required to complete a project. Also, the
funding of loan fees and interest during the construction phase makes the
monitoring of the progress of the project particularly important, as customary
early warning signals of project difficulties may not be present.
9
<PAGE>
Non-Residential/Multi-Family Real Estate Lending. In order to enhance the
yield on and decrease the average term to maturity of our assets, we have
originated and purchased permanent loans and participation interests in loans
originated by other lenders secured by non-residential and multi-family real
estate. We also have a limited amount of loans secured by land. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management and Market Risk" in the Annual Report.
At September 30, 2000, we had $11.4 million in non-residential/ multi-family
real estate loans, representing 8.4% of our loan portfolio.
Approximately 4.5% of the property securing our
non-residential/multi-family (including land) real estate loan portfolio is
located outside our 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 our
non-residential/multi-family real estate loan portfolio is seasoned and, during
the past five years, we have had no significant purchases or participations in
such loans.
The table below sets forth, by type of security property, our
non-residential/multi-family real estate loans at September 30, 2000.
<TABLE>
Number Outstanding Amount
of Principal Non-Performing
Loans Balance or of Concern
----------- ------------ ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Multi-family 2 $ 339 $---
Small business facilities and office buildings 47 3,580 69
Health care facility 14 2,352 ---
Churches 2 40 ---
Warehouse/mini-storage 3 258 ---
Hotel/motel 4 1,515 ---
Land 60 3,336 35
--- ------- ----
Total multi-family residential and non-residential real
estate loans 132 $11,420 $104
=== ======= ====
</TABLE>
Permanent non-residential and multi-family real estate loans originated
by us 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 our 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 First Federal are performed by an
independent appraiser designated by us at the time the loan is made. All
appraisals on multi-family and non-residential real estate loans are reviewed by
us. In addition, our 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 our
multi-family/non-residential real estate loans. While we continue to monitor
multi-family/non-residential real estate loans on a regular basis after
origination, updated appraisals are not normally obtained after closing unless
we believe that there are questions regarding the progress of the loan or the
value of the collateral.
At September 30, 2000, we 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 three unrelated borrowers
or groups of borrowers described below. The first loan is secured by a
residential care facility located in Caney, Kansas and had an outstanding
balance at September 30, 2000 of $775,000. The other loans in excess of $500,000
10
<PAGE>
at September 30, 2000, included a loan with an outstanding balance of $1,132,000
secured by a nursing home located in Independence, Kansas; and a loan with an
outstanding balance of $990,000 secured by a hotel located in Independence,
Kansas. All of these loans were current at September 30, 2000. See "Regulation -
Federal Regulation of Savings Associations."
Non-residential/multi-family real estate lending affords us the
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. We have attempted to minimize these risks through our
underwriting standards and by lending primarily on existing income-producing
properties.
We also generally maintain an escrow account for most of our 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 us in order to confirm payment. In order to monitor the adequacy of
cash flows on income-producing properties, the borrower or lead lender is
notified annually, requesting financial information including rental rates and
income, maintenance costs and an update of real estate property tax payments.
Consumer Lending. Consumer loans generally have shorter terms to maturity
(thus reducing our exposure to changes in interest rates) and carry higher rates
of interest than do one- to four-family residential mortgage loans. In addition,
we believe that the offering of consumer loan products helps to expand and
create stronger ties to our existing customer base, by increasing the number of
customer relationships and providing cross-marketing opportunities. At September
30, 2000, our consumer loan portfolio totaled $5.4 million and was 4.0% of our
loan portfolio. Under applicable federal law, First Federal is authorized to
invest up to 35% of our 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. We also offers a limited amount of
unsecured loans. We currently originate all of our consumer loans in our market
area. Our home equity and home improvement loans comprised approximately 19.4%
of our total consumer loan portfolio. These loans are generally originated in
amounts, together with the amount of the existing first mortgage, of up to 100%
of the appraised value of the property securing the loan. The term to maturity
on such loans may be up to seven years. Other consumer loan terms vary according
to the type of collateral, length of contract and credit worthiness of the
borrower. Our 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.
We do 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 us 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.
11
<PAGE>
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 our consumer loan portfolio has generally
been low (at September 30, 2000, $80,000, or approximately 1.5% of the consumer
loan portfolio, was 60 days or more delinquent), there can be no assurance that
delinquencies will not increase in the future.
Originations, Purchases and Sales of Loans and Mortgage-Backed
Securities. We originate real estate loans through marketing efforts, our
customer base, walk-in customers, and referrals from real estate brokers. We
originate both adjustable-rate and fixed-rate loans. Our ability to originate
loans is dependent upon the relative demand for fixed-rate or adjustable-rate
mortgage 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, we have 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 take advantage
of favorable lending opportunities in other markets, to diversify our portfolio
and to limit origination expenses while generally providing us with a higher
yield than was available on mortgage-backed securities.
We have underwritten our loan purchases using the same criteria we use in
originating loans. Servicing of purchased loans is generally performed by the
seller. At September 30, 2000, approximately $4.1 million of First Federal's
loan portfolio was serviced by others. During the year ended September 30, 2000,
we purchased loans totaling $1,242,000 secured by non-residential real estate.
Both of these loans are secured by property located within our market area and
were acquired with interest rates which exceeded the then available rate on
mortgage-backed securities.
During recent years, most of our loan purchase opportunities have been at
yields that 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, we have increased our
mortgage-backed securities portfolio rather than loan purchases. See "Investment
Activities - Mortgage-Backed Securities."
We had $1.3 million in loans serviced for others as of September 30,
2000.
12
<PAGE>
The following table shows our loan originations, purchases, sales and
repayment activities for the periods indicated.
<TABLE>
Year Ended September 30,
----------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Originations by type
--------------------
Adjustable-rate:
Real estate - one- to four-family $ 8,055 $ 8,099 $ 5,984
- non-residential 25 649 250
Consumer - home equity 192 84 117
------- ------- -------
Total adjustable-rate 8,272 8,832 6,351
------- ------- -------
Fixed-rate:
Real estate - one- to four-family 12,056 12,820 14,968
- non-residential 876 1,235 3,028
Construction 37,245 33,319 23,621
Consumer - non-residential 3,960 3,380 2,294
------- ------- -------
Total fixed-rate 54,137 50,754 43,911
------- ------- -------
Total loans originated 62,409 59,586 50,262
------- ------- -------
Purchases
---------
Real estate - non-residential 1,242 --- ---
Construction --- --- 4,984
------- ------- -------
Total purchased 1,242 --- 4,984
------- ------- -------
Sales and Repayments
--------------------
Mortgage-backed securities 2,118 6,248 6,164
Principal repayments(1) 52,167 45,303 30,231
-------- ------- -------
Total reductions 54,285 51,551 36,395
Loans transferred from Neodesha --- 9,032 ---
Increase (decrease), in other items, net(2) 695 (4,220) (5,979)
-------- ------- -------
Net increase $ 10,061 $12,872 $12,847
======== ======= =======
</TABLE>
(1) Includes transfers to real estate acquired through foreclosure.
(2) Consists of loans in process, net deferred origination costs, unamortized
discounts and allowance for loan losses.
Asset Quality
When a borrower fails to make a required payment on a loan, we attempt
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, we send a 30-day default letter and, once that
period elapses, usually institute 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 us. 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. Our procedures for repossession and sale of consumer collateral are
subject to various requirements under Kansas consumer protection laws.
13
<PAGE>
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. Subsequent to 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. See Note A of the
Notes to Consolidated Financial Statements in the Annual Report. Upon
acquisition, revenues and expenses from operations and changes in the valuation
allowance are included Foreclosed Assets Expense. 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 September 30, 2000, in dollar amounts and as a percentage of
our 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>
Loans Delinquent for:
-------------------------------------------------------------------- Total Loans Delinquent
60-90 Days Over 90 Days 60 Days or More
---------------------------------- --------------------------------- ---------------------------------
Percent of Percent of Percent of
Total Total Total
Loan Loan Loan
Number Amount Portfolio Number Amount Portfolio Number Amount Portfolio
------- ------- ---------- ------- --------- ------------ -------- -------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family 13 $301 0.22% 22 $ 755 0.56% 35 $1,056 0.78%
Non-residential --- --- --- 2 69 0.05 2 69 0.05
Construction --- --- --- 5 408 0.30 5 408 0.30
Consumer 6 42 0.03 9 38 0.03 15 80 0.06
--- ---- ---- ---- ------ ---- ---- ------ ----
Total 19 $343 0.25% 38 $1,270 0.94% 57 $1,613 1.19%
=== ==== ==== ==== ====== ==== ==== ====== ====
</TABLE>
14
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of our 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, we do 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>
Year Ended September 30,
--------------------------------------------------
2000 1999 1998
------------ ------------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family $ 587 $ 849 $ 217
Non-residential real estate 50 --- 21
Construction 408 330 62
Consumer 56 132 35
------ ------ ------
Total non-accruing loans 1,101 1,311 335
------ ------ ------
Accruing loans delinquent 90 days or more:
One- to four-family 169 875 690
Non-residential real estate 18 --- ---
Construction --- 239 223
Consumer --- 4 5
------ ------ ------
Total accruing loans delinquent 90 days or more 187 1,118 918
------ ------ ------
Troubled debt restructurings:
Consumer 23 --- ---
------ ------ ------
Total non-performing loans 1,311 2,429 1,253
------ ------ ------
Real estate acquired through foreclosure:
One- to four-family 423 110 72
------ ------ ------
Total non-performing assets $1,734 $2,539 $1,325
====== ====== ======
Total as a percentage of total assets 1.16% 1.84% 1.07%
==== ==== ====
</TABLE>
For the year ended September 30, 2000, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $46,000. The amount included in interest income
on such loans was $26,000 for the year ended September 30, 2000.
Included in non-accruing loans at September 30, 2000, were 14 loans
totaling $587,000 secured by one- to four-family real estate, four construction
loans totaling $373,000 secured by one- to four-family real estate, one
construction loan totaling $35,000 secured by non-residential real estate, one
loan totaling $50,000 secured by non-residential real estate, and 19 consumer
loans totaling $56,000. All non-accruing loans at September 30, 2000, were
located in our primary market area. At September 30, 2000, accruing loans
delinquent 90 days or more included eight loans totaling $169,000 secured by
one- to four-family real estate and one loan totaling $18,000 secured by
non-residential real estate. At September 30, 2000, all of our accruing loans
delinquent 90 days or more secured by real estate were located in our primary
market area.
Real Estate Acquired Through Foreclosure. At September 30, 2000, our
real estate acquired through foreclosure consisted of eleven single family
residences located in our market area. The properties have a carrying value of
$423,000 and are currently held for sale.
15
<PAGE>
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are placed on a "watch list" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances in an amount deemed
prudent by management to cover probable losses. General allowances represent
loss allowances which have been established to cover probable losses 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 our periodic reports with the OTS and in
accordance with our classification of assets policy, we regularly review the
problem loans in our portfolio to determine whether any loans require
classification in accordance with applicable regulations. We had classified
assets, all of which at September 30, 2000 are included in the table of
non-performing assets on the previous page, as follows:
<TABLE>
September 30,
------------------------------------------
2000 1999 1998
------------- ---------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Substandard $1,640 $2,274 $1,320
Doubtful 71 --- 5
Loss --- 15 ---
Pass --- 250 ---
------ ------ ------
Total classified assets $1,711 $2,539 $1,325
====== ====== ======
</TABLE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on our evaluation of the probable
losses in our loan portfolio and changes in the nature and volume of our 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 we believe it uses the best
information available to make such determinations, future adjustments to the
allowance may be necessary, and net income could be significantly affected if
circumstances differ substantially from the assumptions used in making the
initial determinations. At September 30, 2000, we had an allowance for loan
losses of $758,000.
16
<PAGE>
The following table sets forth an analysis of our allowance for loan
losses at the dates indicated.
<TABLE>
Year Ended September 30,
--------------------------------
2000 1999 1998
--------- ------------ -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of fiscal year. $753 $656 $668
Provision 99 66 ---
Transfer from Neodesha Savings merger/conversion ---- 84 ---
Charge-offs:
One- to four-family 78 7 12
Consumer Loans 16 46 ---
---- ---- ----
Net charge-offs 94 53 12
---- ---- ----
Balance at end of fiscal year. $758 $753 $656
==== ==== ====
Ratio of net charge-offs during the fiscal year to total loans at end of
fiscal year 0.08% 0.05% 0.01%
==== ===== ====
Allowance for loan losses to total loans at end of fiscal year 0.61% 0.67% 0.70%
==== ===== ====
Allowance for loan losses to non-performing loans at end of fiscal year 57.86% 30.99% 52.30%
===== ===== =====
</TABLE>
17
<PAGE>
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
September 30,
--------------------------------------------------------------------
2000 1999 1998
------------------------ --------------------- ---------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
----------- ----------- --------- ----------- --------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate
One- to four-family $353 66.90% $315 67.55% $286 71.06%
Multi-family --- 0.25 --- 0.74 --- 0.99
Non-residential 103 8.15 92 7.29 103 8.97
Construction 275 20.72 305 20.13 214 15.87
Consumer 27 3.98 41 4.29 20 3.11
Unallocated --- --- --- --- 33
---- ------ ---- ------ ---- ------
Total $758 100.00% $753 100.00% $656 100.00%
==== ====== ==== ====== ==== ======
</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, we have maintained
liquid assets at levels above the minimum requirements imposed by the OTS
regulations and at levels believed adequate to meet the requirements of normal
operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. At September 30, 2000, our liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 7.89%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report.
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, our investment policy is to invest funds among various
categories of investments and maturities based upon our asset/liability
management policies, investment quality and marketability, liquidity needs and
performance objectives.
Investment Securities. At September 30, 2000, investment securities
totaled $8.5 million, or 5.7% of total assets. As of that date, we also had a
$2.0 million investment in FHLB stock, satisfying our requirement for membership
in the FHLB of Topeka. It is our general policy to purchase investment
securities which are U.S. Government securities or federal agency obligations or
other issues that are rated investment grade or have credit enhancements. At
September 30, 2000, the average term to maturity or repricing of the investment
portfolio was 2.69 years.
18
<PAGE>
The following table sets forth the composition of our securities
portfolio at the dates indicated.
<TABLE>
September 30,
-------------------------------------------------------------------------
2000 1999 1998
--------------------- ------------------------- -------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
---------- ---------- ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
Federal agency obligations $6,100 58.41% $6,200 59.35% $5,000 50.04%
U.S. Government Securities 200 1.92 200 1.91 --- ---
Municipal Securities 196 1.88 605 5.79 --- ---
------- ------ ------- ------ ------ ------
Total Securities held to maturity 6,496 62.21 7,005 67.05 5,000 50.04
------- ------ ------- ------ ------- ------
Securities available for sale:
Federal agency obligations 1,992 19.07 2,000 19.15 3,065 30.68
Other marketable equity securities(1) --- --- --- --- 353 3.53
------- ------ ------- ------ ------ ------
Total securities available for sale 1,992 19.07 2,000 19.15 3,418 34.21
------- ------ ------- ------ ------ ------
Federal Home Loan Bank stock 1,955 18.72 1,442 13.80 1,574 15.75
------- ------ ------- ------ ------ ------
Total securities and Federal Home Loan Bank stock $10,443 100.00% $10,447 100.00% $9,992 100.00%
======= ====== ======= ====== ====== ======
Average remaining life or term to repricing of
securities (excluding Federal Home Loan Bank
stock and other marketable equity securities) 3.16 yrs. 3.96 yrs. 3.51 yrs.
Other Interest-Earning Assets:
Short-term money market investments $1,471 100.00% $ 375 100.00% $ 439 100.00%
====== ====== ======= ====== ====== ======
Average remaining life or term to repricing of
securities and other interest-earning assets (
excluding Federal Home Loan Bank stock and other
marketable equity securities) 2.69 yrs. 3.80 yrs. 3.33 yrs.
</TABLE>
------------------------------------
(1) Represents primarily investments in mutual funds investing in U.S.
Government securities and federal agency obligations.
19
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB of Topeka stock, are indicated in the following table.
<TABLE>
September 30, 2000
-----------------------------------------------------------------------
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)
<S> <C> <C> <C> <C> <C>
Held to Maturity:
Municipal securities $--- $ --- $196 $ 196 $ 194
U.S. Government securities 200 --- --- 200 200
Federal agency obligations 100 6,000 --- 6,100 6,023
---- ----- ---- ------ ------
Total investment securities $300 $6,000 $196 $6,496 $6,417
==== ====== ==== ====== ======
Weighted average yield 6.04% 6.78% 4.00% 6.66%
==== ===== ==== ====
Available for Sale:
Federal agency obligations $998 $1,002 $--- $2,000 $1,992
==== ====== ==== ====== ======
Weighted average yield 5.29% 6.42% ---% 5.85%
==== ==== === ====
</TABLE>
Our securities portfolio at September 30, 2000, did not contain
securities of any issuer with an aggregate book value in excess of 10% of our
stockholders' equity, excluding securities issued by the United States
Government, or its agencies.
Our securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors. Investments may be made by
First Federal officers within specified limits and must be approved in advance
by the Board of Directors for transactions over certain limits. At September 30,
2000, we held no investments for trading purposes, but did hold securities as
available for sale with an amortized cost and market value of $2.0 million and
$2.0 million, respectively.
Mortgage-Backed Securities. We have a portfolio of mortgage-backed
securities and have utilized such investments to complement our mortgage lending
activities. At September 30, 2000, our mortgage-backed securities totaled $8.7
million. For information regarding the carrying and fair values of our
mortgage-backed securities portfolio, see Note C of the Notes to Consolidated
Financial Statements in the Annual Report.
At September 30, 2000, $6.3 million, or 71.7%, of First Federal's
mortgage-backed securities carried adjustable-rates of interest. Under the OTS's
risk-based capital requirements, Ginnie Mae mortgage-backed securities have a
zero percent risk weighting and Fannie Mae, Freddie Mac 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.
20
<PAGE>
The following table sets forth the contractual maturities of the
mortgage-backed securities at September 30, 2000.
<TABLE>
Due in
------------------------------------------------------------------------------------------------
6 months 6 months 1 to 3 to 5 5 to 10 10 to 20 Over 20 Book
or Less to 1 Year 3 Years Years Years Years Years Value
---------- ------------- ----------- ----------- ----------- ------------ ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity
----------------
Adjustable-Rate Mortgage-Backed
Securities:
Freddie Mac $ --- $ --- $ --- $ --- $ --- $ 262 $2,316 $2,578
Fannie Mae --- --- --- --- --- 1,101 2,591 3,692
----- ----- ----- ----- ------ ------ ------ ------
Total adjustable-rate --- --- --- --- --- 1,363 4,907 6,270
----- ----- ----- ----- ------ ------ ------ ------
Fixed-Rate Mortgage-Backed
Securities:
Freddie Mac --- --- --- 206 1,141 290 --- 1,637
Fannie Mae --- --- --- --- 661 150 --- 811
Ginnie Mae --- --- --- --- --- 28 --- 28
----- ----- ----- ----- ------ ------- ------- ------
Total fixed-rate --- --- --- 206 1,802 468 --- 2,476
----- ----- ----- ----- ------ ------- ------- ------
Total mortgage-backed securities
held to maturity $ --- $ --- $ --- $ 206 $1,802 $ 1,831 $4,907 $8,746
===== ===== ===== ===== ====== ======= ====== ======
</TABLE>
Sources of Funds
General. Our 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.
We had $39.1 million in FHLB advances outstanding at September 30, 2000.
Deposits. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our deposits consist of passbook accounts, NOW
accounts, and money market and certificate accounts. We rely primarily on
advertising, competitive pricing policies and customer service to attract and
retain these deposits. We only solicit deposits from our market area and do 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 we offer have allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest rate conscious. We manage
the pricing of our deposits in keeping with our asset/liability management and
profitability objectives. Based on our experience, we believe that our passbook,
NOW and non-interest-bearing checking accounts are relatively stable sources of
deposits. However, our ability 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.
21
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered for the dates indicated and the
rates offered. See Note H of the Notes to the Consolidated Financial Statements
in the Annual Report for weighted average nominal rates.
<TABLE>
September 30,
------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------- ------------ ---------- ----------- ----------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
---------------------------------
Passbook Demand (2.85%) $ 4,527 4.80% $ 4,583 4.79% $ 2,745 3.40%
NOW Accounts (2.00-2.50%) 7,182 7.62 6,503 6.81 3,939 4.88
Money Market Accounts (2.50-5.25%) 24,729 26.24 26,541 27.78 21,952 27.22
------- ----- ------- ----- -- ------- ------
Total Transactions and Savings Deposits 36,438 38.66 37,627 39.38 28,636 35.50
------- ----- ------- ----- ------- ------
Certificates:
0.00 - 3.99% --- --- 212 0.22 3 .01
4.00 - 4.99% 2,519 2.67 15,802 16.54 1,792 2.22
5.00 - 5.99% 44,596 47.32 36,768 38.49 45,364 56.24
6.00 - 6.99% 10,575 11.22 5,030 5.27 4,751 5.89
7.00% and over --- --- 14 0.01 27 .03
------- ------ ------- ----- ------- ------
Total Certificates 57,690 61.21 57,826 60.53 51,937 64.39
------- ------ ------- ----- ------- ------
Accrued Interest 118 0.13 86 0.09 85 .11
------- ------ ------- ----- ------- ------
Total Deposits $94,246 100.00% $95,539 100.00% $80,658 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth our savings flows during the periods
indicated. Net increase refers to the amount of deposits during a period less
the amount of withdrawals during the period.
<TABLE>
Year Ended September 30,
--------------------------------------------------------
2000 1999 1998
---------------- --------------------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $ 95,453 $ 80,573 $ 76,229
Neodesha Savings acquisition --- 12,671 ---
Deposits 145,613 131,061 101,678
Withdrawals (150,535) (132,286) (100,512)
Interest credited 3,597 3,434 3,178
---------- ---------- ----------
Ending balance $ 94,128 $ 95,453 $ 80,573
========== ========== ==========
Net increase (decrease) $ (1,325) $ 14,880 $ 4,344
========== ========== ==========
Percent increase (decrease) (1.39)% 18.47% 5.70%
===== ===== ====
</TABLE>
22
<PAGE>
The following table shows rate and maturity information for our
certificates of deposit as of September 30, 2000.
<TABLE>
4.00- 5.00- 6.00- Percent
4.99% 5.99% 6.99% Total of Total
------ ------ ------ ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts maturing in
quarter ending:
December 31, 2000 $1,644 $ 5,200 $ 1,429 $ 8,273 14.34%
March 31, 2001 875 10,664 300 11,839 20.52
June 30, 2001 --- 7,168 476 7,644 13.25
September 30, 2001 --- 5,595 1,248 6,843 11.86
December 31, 2001 --- 6,028 2,120 8,148 14.12
March 31, 2002 --- 4,214 3,299 7,513 13.02
June 30, 2002 --- 388 2 390 0.68
September 30, 2002 --- 984 --- 984 1.71
December 31, 2002 --- 380 1 381 0.66
March 31, 2003 --- 510 --- 510 0.89
June 30, 2003 --- 250 --- 250 0.43
September 30, 2003 --- 275 119 394 0.68
December 31, 2003 --- 493 419 912 1.58
Thereafter --- 2,447 1,162 3,609 6.26
------ ------- ------- -------- ------
TOTAL $2,519 $44,596 $10,575 $ 57,690 100.00%
====== ======= ======= ======== ======
Percent of Total 4.37% 77.30% 18.33%
==== ===== =====
</TABLE>
The following table indicates the amount of our certificates of deposit
and other deposits by time remaining until maturity as of September 30, 2000.
<TABLE>
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 $5,757 $10,341 $14,086 $21,294 $51,478
Certificates of deposit of $100,000 or more 1,186 798 301 1,797 4,082
Public funds(1) 1,330 700 100 --- 2,130
------ ------- ------- ------- -------
Total certificates of deposit $8,273 $11,839 $14,487 $23,091 $57,690
====== ======= ======= ======= =======
</TABLE>
(1) Deposits from governmental and other public entities.
Borrowings. Although deposits are our primary source of funds, our 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, we have relied upon
borrowings for short-term liquidity needs.
We may obtain advances from the FHLB of Topeka upon the security of our
capital stock in the FHLB of Topeka and certain of our mortgage loans and
mortgage-backed securities. Such advances may be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. At September 30, 2000, we had $39.1 million in FHLB advances
outstanding.
23
<PAGE>
The following table sets forth the maximum month-end balance and average
balance of our FHLB advances and other borrowings at and for the dates
indicated.
<TABLE>
At and for the Year Ended September 30,
------------------------------------------------------
2000 1999 1998
-------------- -------------------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances $39,100 $33,400 $30,100
Average Balance:
FHLB advances $34,975 $29,217 $26,492
</TABLE>
The following table sets forth certain information as to our FHLB
advances at the dates indicated.
<TABLE>
September 30,
---------------------------------------
2000 1999 1998
----------- -------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances $39,100 $27,500 $30,100
Weighted average interest rate of FHLB advances 6.123% 5.474% 5.684%
</TABLE>
Regulation
General. First Federal is a federally chartered savings association, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, First Federal is subject to broad
federal regulation and oversight extending to all its operations. First Federal
is a member of the FHLB of Topeka and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). As the savings and loan holding company of First Federal, First
Independence is also subject to federal regulation and oversight which is
designed to protect subsidiary savings associations, like First Federal. First
Federal is a member of the SAIF, which together with the Bank Insurance Fund
(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 examination of First Federal was as of December 31, 1999. When these
examinations are conducted by the OTS and the FDIC, the examiners may require
First Federal to provide for higher general or specific loan loss reserves. All
savings associations are subject to a semi-annual assessment, based upon the
savings association's total assets, to fund the operations of the OTS. First
Federal's OTS assessment for the fiscal year ended September 30, 2000 was
$38,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Federal and First
Independence. 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.
24
<PAGE>
In addition, the investment, lending and branching authority of First
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by these laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal savings associations in loans secured
by non-residential real property may not exceed 400% of total capital, except
with approval of the OTS. Federal savings associations are also generally
authorized to branch nationwide. First Federal is in compliance with the noted
restrictions.
First Federal's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At September 30, 2000, First Federal's lending
limit under this restriction was $1.9 million. First Federal is in compliance
with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on matters like 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.
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC and the 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 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. The current assessment rates range from zero
to 0.27% per $100 of assessable deposits. 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 is made by the FDIC for each semi-annual assessment
period.
Prior to the enactment of the legislation recapitalizing the SAIF in
1996, a portion of the SAIF assessment imposed on savings associations was used
to repay obligations issued by a federally chartered corporation to provide
financing for resolving the thrift crisis in the 1980s. Although the legislation
also required assessments to be made on BIF-assessable deposits for this
purpose, effective January 1, 1997, that assessment was limited to 20% of the
rate imposed on SAIF assessable deposits until the earlier of December 31, 1999
or when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as First Federal. Thereafter, however,
assessments on BIF-member institutions are on the same basis as SAIF-member
institutions. The rate established by the FDIC to implement this requirement for
all FDIC-insured institutions is a 2.02 basis point assessment on both SAIF
deposits and BIF deposits.
25
<PAGE>
Regulatory Capital Requirements. Federally insured savings associations,
such as First Federal, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a risk-based
capital requirement applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At September 30, 2000, First Federal did not have any
intangible assets.
At September 30, 2000, First Federal had tangible capital of $12.5
million, or 8.39% of adjusted total assets, which is approximately $10.3 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
receivables. 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 allows it to maintain a 3% ratio. At September 30, 2000, First Federal
had no intangible assets which were subject to these tests.
At September 30, 2000, First Federal had core capital equal to $12.5
million, or 8.39% of adjusted total assets, which is $8.0 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At September 30, 2000, First Federal
had $758,000 of general loss reserves, which was less than 1.25% of
risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. First Federal had no
exclusions from capital and assets at September 30, 2000.
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 Fannie Mae or Freddie Mac.
26
<PAGE>
On September 30, 2000, First Federal had total capital of $13.3 million
(including $12.5 million in core capital and $758,000 in qualifying
supplementary capital) and risk-weighted assets of $73.1 million, or total
capital of 18.17% of risk-weighted assets. This amount was $7.4 million above
the 8% requirement in effect on that date.
The OTS and the FDIC are authorized, and under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any
undercapitalized association must submit a capital restoration plan and until
the 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.
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 its operations and
profitability.
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 generally permit a federal savings
association to pay dividends in any calendar year equal to net income for that
year plus retained earnings for the preceding two years. First Federal is in
compliance with this requirement.
Liquidity. All savings associations, including First Federal, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a discussion of
what First Federal includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report. This liquid asset ratio requirement may
vary from time to time depending upon economic conditions and savings flows of
all savings associations. At the present time, the minimum liquid asset ratio is
4%.
Qualified Thrift Lender Test. All savings associations, including First
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code of 1986, as amended. Under either test, such assets
primarily consist of residential housing related loans and investments. At
September 30, 2000, First Federal met the test and has always met the test since
its effectiveness.
27
<PAGE>
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 the 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 the association has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "Regulation of First Independence."
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of First Federal, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by First Federal. An unsatisfactory rating may be used as the basis for
the denial of an application by the OTS.
Due to the heightened attention being given to the CRA in recent years,
First Federal may be required to devote additional funds for investment and
lending in its local community. First Federal was examined for CRA compliance in
1998 and received a rating of "satisfactory."
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of First
Federal include First Independence 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. 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.
Regulation of First Independence. First Independence is a unitary savings
and loan holding company subject to regulatory oversight by the OTS. As a
result, First Independence 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 First Independence 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.
28
<PAGE>
As a unitary savings and loan holding company that was in existence prior
to May 4, 1999, First Independence is generally not subject to activity
restrictions at the holding company level. If First Independence acquires
control of another savings association as a separate subsidiary, it would become
a multiple savings and loan holding company, and the activities of First
Independence would be limited to those that are only financial in nature.
If First Federal fails the QTL test, First Independence must obtain the
approval of the OTS prior to continuing after the 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 the failure First Independence 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."
First Independence must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. These acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
Federal Securities Law. The common stock of First Independence is
registered with the SEC under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). First Independence is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
First Independence stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of First Independence may not be
resold without registration unless sold in accordance with certain resale
restrictions. If First Independence meets specified current public information
requirements, each affiliate of First Independence 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 noninterest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At September 30, 2000, First Federal was in compliance with
these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. First Federal is a member of the FHLB of
Topeka, which is one of 12 regional FHLBs that administer 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.
29
<PAGE>
As a member, First Federal is required to purchase and maintain stock in
the FHLB of Topeka. At September 30, 2000, First Federal had $2.0 million in
FHLB stock, which was in compliance with this requirement. In past years, First
Federal has received substantial dividends on its FHLB stock. Over the past five
fiscal years these dividends have averaged 7.13% and were 7.71% for fiscal 2000.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of First Federal's FHLB stock may result in a corresponding
reduction in First Federal's capital.
For the fiscal year ended September 30, 2000, dividends paid by the FHLB
of Topeka to First Federal totaled $134,342, which constitutes an $8,794
increase over the amount of dividends received in fiscal year 1999.
Federal and State Taxation
Federal Taxation. In addition to the regular income tax, corporations,
including savings associations like First Federal, 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.
A portion of First Federal's reserves for losses on loans 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, 2000, the portion of First Federal's reserves
subject to this treatment for tax purposes totaled approximately $2.8 million.
We file consolidated federal income tax returns on a fiscal year basis
using the accrual method of accounting. Savings institutions 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.
Our federal income tax returns for the last three years are open to
possible audit by the IRS. No returns are being audited by the IRS at the
current time. In our opinion, any examination of still open returns would not
result in a deficiency which could have a material adverse effect on our
financial condition.
30
<PAGE>
For additional information regarding federal income taxation, see Note K
of the Notes to Consolidated Financial Statements in the Annual Report.
Kansas Taxation. First Independence and First Federal file separate
Kansas income and Kansas privilege tax returns, respectively, 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 2.25% of taxable income, plus an additional 2.25% of taxable income
in excess of $25,000..
We have not been audited by the Kansas Department of Revenue for the last
ten years and have Kansas privilege tax returns which are open and subject to
audit for the years 1997 through 1999. In our opinion, any examination of such
open returns would not result in a deficiency which could have a material
adverse effect on our financial condition.
Delaware Taxation. As a Delaware holding company, First Independence 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. First Independence
is also subject to an annual franchise tax imposed by the State of Delaware.
Competition
We face strong competition, both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from commercial banks and credit unions.
We attract all of our deposits, primarily from Montgomery and Wilson
County where our offices are located; therefore, competition for those deposits
is principally from commercial banks and credit unions located in the same
communities. We compete for these deposits by offering a variety of deposit
accounts at competitive rates and convenient business hours. We estimate our
share of the savings market in our primary market area to be approximately 14%.
31
<PAGE>
Executive Officers of First Independence
The following table sets forth certain information with respect to each
of the executive officers of First Independence.
<TABLE>
NAME AGE(1) POSITION(S) HELD
----------------- ------------- ---------------------------------------
<S> <C> <C>
Larry G. Spencer 52 President, Chief Executive Officer and Director
Gary L. Overfield 48 Senior Vice President and Secretary
James B. Mitchell 45 Vice President and Chief Financial Officer
</TABLE>
---------------
(1) At September 30, 2000.
Executive Officers of First Federal
The following table sets forth certain information with respect to each
of the executive officers of First Federal.
<TABLE>
NAME AGE(1) POSITION(S) HELD
----------------- ------------- ---------------------------------------
<S> <C> <C>
Larry G. Spencer 52 President, Chief Executive Officer and Director
Gary L. Overfield 48 Senior Vice President, Secretary and Chief Loan Officer
Jim L. Clubine 47 Vice President and Asset Manager
James B. Mitchell 45 Vice President and Chief Financial Officer
</TABLE>
----------------
(1) At September 30, 2000.
32
<PAGE>
Larry G. Spencer. Mr. Spencer is President and Chief Executive Officer of
First Federal. Mr. Spencer has been employed by First Federal since 1974 and has
held a variety of positions including Executive Vice President. Mr. Spencer was
promoted to his present position in 1990. Mr. Spencer received a degree in
Business Administration from Pittsburg State University and served in the U.S.
Army for three years. He has served on the board of the Chamber of Commerce,
Main Street, the Independence Community College Endowment Association, Community
Chest and Junior Achievement. He is presently a member of the board of Heartland
Community Bankers, USD #446 Endowment Association, Kansas 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 First Federal, a position he has held since 1990. Mr.
Overfield has been employed by First Federal since 1976 and has held a variety
of positions including Vice President and Loan Officer from 1985 to 1990. Mr.
Overfield is a graduate of Pittsburg State University. He is currently licensed
by the State of Kansas as a Life and Accident and Health Insurance agent. He was
a member of the Board of Directors and previous Secretary of the Independence
Rotary Club, a youth coach for the Independence Recreation Commission, previous
Treasurer for the local chapter of Duck's Unlimited, and previous Director and
Treasurer for the Independence Chamber of Commerce.
Jim L. Clubine. Mr. Clubine is Vice President and Asset Manager of First
Federal, 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), Airport Advisory Board, Carnival Chairman for Neewolah, and a
member of the Rotary Club. He was a previous member of the Mercy Hospital
Foundation Fund Raising Committee, Eisenhower Site Council team, Chairman of the
March of Dimes and former board member for Chamber of Commerce, Community Chest
and Junior Achievement. Mr. Clubine is a graduate of Kansas State University.
James B. Mitchell. Mr. Mitchell is Vice President and Chief Financial
Officer of First Federal, a position he has held since March 1992. Prior to
joining First Federal, he was employed by Eureka Savings Bank, Eureka, Kansas,
in the capacity of Strategic Asset Manager from 1988 to 1991 and Chief Financial
Officer from 1991 to 1992. From 1976 to 1988, Mr. Mitchell was Chief Financial
Officer for Peoples Savings and Loan, Parsons, Kansas. He is presently a member
of the board of Junior Achievement. Mr. Mitchell has an accounting degree from
Pittsburg State University.
Employees
At September 30, 2000, we had a total of 37 employees. Our employees are
not represented by any collective bargaining group. We consider our employee
relations to be good.
Item 2. Description of Property
-----------------------
First Independence owns its offices located at Myrtle and Sixth in
Independence, Kansas, McArthur and Eleventh in Coffeyville, Kansas and Eight and
Main in Neodesha, Kansas. The total net book value of First Independence's
premises and equipment at September 30, 2000, was $1,449,000.
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 main office
with disbursements and collections handled at the loan production office.
We maintain 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 us at September 30,
2000, was approximately $114,000.
33
<PAGE>
Item 3. Legal Proceedings
-----------------
From time to time, we are involved as plaintiff or defendant in various
legal actions arising in the normal course of business. We were not involved in
any legal proceedings of a material nature at September 30, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
2000.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
Page 40 of the Annual Report is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
Pages 4 through 13 of the Annual Report are incorporated herein by
reference.
Item 7. Financial Statements
--------------------
The following information appearing in the Annual Report is incorporated
herein by reference.
<TABLE>
Pages in
Annual
Annual Report Section Report
------------------------------------------------------------------------------- ------------------
<S> <C>
Report of Independent Certified Public Accountants 15
Consolidated Balance Sheets (September 30, 2000 and 1999) 16-17
Consolidated Statements of Earnings (For the Years Ended September 30, 2000 18
and 1999)
Consolidated Statements of Comprehensive Income (For the Years Ended September 30, 2000 and 1999) 19
Consolidated Statements of Stockholders' Equity (For the Years Ended September 30, 2000 and 20
1999)
Consolidated Statements of Cash Flows (For the Years Ended September 30, 2000 21-22
and 1999)
Notes to Consolidated Financial Statements 23-39
</TABLE>
With the exception of the aforementioned information in Part II of the
Form 10-KSB, the Annual Report is not deemed filed as part of this Annual Report
on Form 10-KSB.
34
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
Directors
---------
Information concerning our Directors is incorporated herein by reference
from the definitive proxy statement for the annual meeting of stockholders to be
held in 2001, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Executive Officers
-------------------
Information concerning our executive officers contained in Part I of this
Form 10-KSB is incorporated herein by reference.
Item 10. Executive Compensation
----------------------
Information concerning executive compensation is incorporated herein by
reference from the definitive proxy statement for the annual meeting of
stockholders to be held in 2001, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
---------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive proxy
statement for the annual meeting of stockholders to be held in 2001, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive proxy statement for the
annual meeting of stockholders to be held in 2001, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
35
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
<TABLE>
Reference to
Regulation S-B Prior Filing or
Exhibit Exhibit Number
Number Document Attached Hereto
---------------- ---------------------------------------------------------------------------- ----------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation, or succession None
3(i) Articles of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of security holders, including debentures *
9 Voting trust agreement None
10 Executive compensation plans and arrangements
(a) 1994 Stock Option and Incentive Plan **
(b) Recognition and Retention Plan *
(c) Employment Agreements *
11 Statement re: computation of per share earnings ***
12 Statement re: computation of ratios Not Required
13 Annual report to stockholders 13
16 Letter on change in certifying accountant None
18 Letter on change in accounting principles None
21 Subsidiaries of the registrant 21
22 Published report regarding matters submitted to vote None
23 Consents of experts and counsel 23
24 Power of attorney Not Required
27 Financial data schedule 27
99 Additional exhibits None
</TABLE>
--------------------
* Filed as an exhibit to the Company's Form S-1 registration statement
filed on June 22, 1994 (File No. 33-64812) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
** Filed as an exhibit to the Company's Annual Report on Form 10-KSB filed
on December 29, 1994 (File No. 0-22184) pursuant to the Securities
Exchange Act of 1934 and incorporated herein by reference.
*** See Note A of Notes to Consolidated Financial Statements in the Annual
Report attached hereto as Exhibit 13.
(b) Reports on Form 8-K
During the quarter ended September 30, 2000, we did not file any
Current Reports on Form 8-K.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST INDEPENDENCE CORPORATION
Date: December 29, 2000 By: /s/Larry G. Spencer
------------------------- ----------------------------------------------
Larry G. Spencer, President, Chief Executive
Officer and Director (Duly Authorized
Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/ Larry G. Spencer /s/ James B. Mitchell
-------------------------------------------- -------------------------------------------
Larry G. Spencer, President, Chief Executive James B. Mitchell, Vice President and Chief
Officer and Director (Principal Financial Officer (Principal Financial and
Executive and Operating Officer) Accounting Officer)
Date: December 29, 2000 Date: December 29, 2000
/s/ E. JoVonnah Boecker /s/ William T. NewKirk II
-------------------------------------------- -------------------------------------------
E. JoVonnah Boecker, Director William T. NewKirk II, Director
Date: December 29, 2000 Date: December 29, 2000
/s/ Harold L. Swearingen /s/ Joseph M. Smith
-------------------------------------------- -------------------------------------------
Harold L. Swearingen, Director Joseph M. Smith, Director
Date: December 29, 2000 Date: December 29, 2000
/s/ Lavern W. Strecker /s/ Robert A. Johnson
-------------------------------------------- -------------------------------------------
Lavern W. Strecker, Director Robert A. Johnson, Director
Date: December 29, 2000 Date: December 29, 2000
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
--------------
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Accountants
27 Financial Data Schedule
