-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J81qSNZs2S1L2b+2/Tvq1PpCyTraXIquhPzJDribujgfIGYofVfzo7KDKyoIMVWe xeXqk2G5Ym5KhHc2A/KKLQ== 0000927089-99-000425.txt : 19991230 0000927089-99-000425.hdr.sgml : 19991230 ACCESSION NUMBER: 0000927089-99-000425 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST INDEPENDENCE CORP /DE/ CENTRAL INDEX KEY: 0000908486 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 363899950 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-22184 FILM NUMBER: 99783241 BUSINESS ADDRESS: STREET 1: MYRTLE & 6TH STS CITY: INDEPENDENCE STATE: KS ZIP: 67301 BUSINESS PHONE: 3163311660 MAIL ADDRESS: STREET 2: P O DRAWER 947 CITY: INDEPENDENCE STATE: KS ZIP: 67301 10KSB 1 ANNUAL REPORT 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- -------------------- Commission File Number 0-22184 FIRST INDEPENDENCE CORPORATION - -------------------------------------------------------------------------------- (Name of small business issuer as specified in its charter) Delaware 36-3899950 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Myrtle and Sixth Streets, Independence, Kansas 67301 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (316) 331-1660 Securities Registered Pursuant to Section 12(b) of the Act: None ---- Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES X . NO . --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State the issuer's revenues for its most recent fiscal year: $10,490,232. 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 6, 1999, was $9.0 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 6, 1999, there were issued and outstanding 1,063,730 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, 1999. Part III of Form 10-KSB - Proxy Statement for 2000 Annual Meeting of Stockholders. Transitional Small Business Disclosure Format: YES . NO X . --- --- FORWARD-LOOKING STATEMENTS First Independence Corporation, and its wholly-owned subsidiary, First Federal Savings and Loan Association of Independence, may from time to time make written or oral "forward-looking statements," including statements contained in its filings with the Securities and Exchange Commission. 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 PART I Item 1. Description of Business ----------------------- General First Independence Corporation is a Delaware corporation which was formed at the direction of First Federal Savings and Loan Association of Independence 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. 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, 1999, we had total assets of $138.1 million, and stockholders' equity of $13.1 million. First Federal is a federally chartered stock savings and loan association headquartered in Independence, Kansas. First Federal was originally organized in 1905 as a state-chartered savings and loan association and later converted to a federally chartered institution. First Federal has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. We attract deposits from the general public and uses such deposits, together with borrowings and other funds, to originate one- to four-family residential mortgage loans. To a much lesser extent, 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 it currently offers, 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 invests in mortgage-backed securities which are insured by or guaranteed by federal agencies and other investment securities. See "Lending Activities - Originations, Purchases and Sales of Loans and Mortgage-Backed Securities." Like all federally chartered savings associations, our operations are regulated by the Office of Thrift Supervision. First Federal is a member of the Federal Home Loan Bank System and a stockholder in the Federal Home Loan Bank of Topeka. First Federal is also a member of the Savings Association Insurance Fund and our deposit accounts are insured up to applicable limits by the 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. On January 6, 1999, The Neodesha Savings and Loan Association, FSA 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. 3 Our executive offices are located at Myrtle and Sixth Streets in Independence, Kansas 67301 and our telephone number is (316) 331-1660. 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%. 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 originates loans secured by non-residential real estate and consumer loans and a limited amount of multi-family real estate loans. See "Originations, Purchases and Sales of Loans and Mortgage-Backed Securities." At September 30, 1999, our net loan portfolio totaled $112.9 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, 1999, the maximum amount which First Federal could have lent to any one borrower and the borrower's related entities was approximately $1.8 million. See "Regulation - Federal Regulation of Savings Associations." 4 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.
September 30, -------------------------------------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent -------------------------------------------------------------------------------------- (Dollars in Thousands) Real Estate Loans One- to four-family................. $ 84,053 67.55% $ 71,855 71.06% $64,152 84.30% Multi-family........................ 914 0.74 1,001 0.99 1,164 1.53 Non-residential..................... 9,075 7.29 9,065 8.97 7,479 9.83 Construction........................ 25,052 20.13 16,050 15.87 764 1.00 -------- ------ -------- ------- ------- ------ Total real estate loans.......... 119,094 95.71 97,971 96.89 73,559 96.66 -------- ------ -------- ------- ------- ------ Consumer Loans Deposit account..................... 373 0.30 397 0.39 350 0.46 Automobile.......................... 2,867 2.31 961 0.95 705 0.93 Home equity......................... 911 0.73 837 0.83 550 0.72 Home improvement.................... 217 0.17 234 0.23 274 0.36 Other............................... 968 0.78 714 0.71 661 0.87 -------- ------ -------- ------- ------- ------ Total consumer loans............. 5,336 4.29 3,143 3.11 2,540 3.34 -------- ------ -------- ------- ------- ------ Total Loans..................... 124,430 100.00% 101,114 100.00% 76,099 100.00% ====== ======= ====== Less Loans in process.................... 10,429 6,437 572 Deferred fees and discounts......... 355 337 300 Allowance for losses................ 753 656 668 -------- -------- ------- Total loans receivable, net......... $112,893 $ 93,684 $74,559 ======== ======== =======
5 The following table shows the composition of our loan portfolio by fixed- and adjustable-rate categories at the dates indicated.
September 30, ---------------------------------------------------------------------------- 1999 1998 1997 ---------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent ---------------------------------------------------------------------------- (Dollars in Thousands) Fixed-Rate Loans Real estate: One- to four-family......................... $ 63,010 50.64% $ 50,637 50.08% $37,581 49.38% Multi-family................................ 566 0.45 639 0.63 683 0.90 Non-residential............................. 6,576 5.29 6,361 6.29 5,055 6.64 Construction................................ 25,052 20.13 16,050 15.87 764 1.00 -------- ----- --------- -------- ------- ------ Total fixed-rate real estate loans........ 95,204 76.51 73,687 72.87 44,083 57.92 Consumer..................................... 4,425 3.56 2,306 2.28 1,990 2.62 -------- ------ --------- -------- ------- ------ Total fixed-rate loans.................... 99,629 80.07 75,993 75.15 46,073 60.54 -------- ------ --------- -------- ------ ------ Adjustable-Rate Loans Real estate: One- to four-family......................... 21,043 16.91 21,218 20.98 26,571 34.92 Multi-family................................ 348 0.28 362 0.36 481 0.63 Non-residential............................. 2,499 2.01 2,704 2.68 2,424 3.19 Construction................................ --- --- --- --- --- --- -------- ------ --------- -------- -------- ------ Total adjustable-rate real estate loans.. 23,890 19.20 24,284 24.02 29,476 38.74 Consumer..................................... 911 0.73 837 0.83 550 0.72 -------- ------ --------- -------- -------- ------ Total adjustable-rate loans.............. 24,801 19.93 25,121 24.85 30,026 39.46 -------- ------ --------- -------- -------- ------ Total Loans.............................. 124,430 100.00% 101,114 100.00% 76,099 100.00% ====== ======== ====== Less Loans in process............................. 10,429 6,437 572 Deferred fees and discounts.................. 355 337 300 Allowance for losses......................... 753 656 668 -------- --------- -------- Total loans receivable, net.................. $112,893 $ 93,684 $74,559 ======== ========= =======
6 The following schedule shows the scheduled contractual maturities of our loan portfolio at September 30, 1999. 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.
Real Estate --------------------------------------------------------------------------------------------------------- One- to Multi-family, and Four-Family Non-Residential Construction Consumer Total --------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate --------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Due During Periods Ending September 30, - ----------------------- 2000....................... $ 542 8.39% $ 814 9.09% $22,318 9.37% $1,653 8.81% $ 25,327 9.30% 2001....................... 143 7.66 56 8.28 1,955 9.07 761 9.86 2,915 9.19 2002....................... 256 7.57 12 7.49 --- --- 1,228 9.60 1,496 9.24 2003 and 2004.............. 1,182 8.22 165 8.17 --- --- 1,307 9.08 2,654 8.64 2005 to 2009 .............. 9,014 7.48 1,195 8.38 --- --- 387 8.46 10,598 7.62 2010 to 2024............... 37,566 7.44 7,561 7.98 640 7.42 --- --- 45,766 7.53 2025 and following......... 35,350 7.21 186 7.47 139 7.50 --- --- 35,674 7.21 ------- ------ ------- ------ -------- Total $84,053 $9,989 $25,052 $5,336 $124,430 ======= ====== ======= ====== ======== - ---------------- (1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after September 30, 2000, which have predetermined interest rates is $75.3 million, while the total amount of loans due after such date which have floating or adjustable interest rates is $23.8 million. 7 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, 1999, our one-to four-family residential mortgage loans, totaled $84.1 million, or 67.6% 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, 1999, we had 721 loans totaling $40.3 million with a loan-to-value ratio of greater than 80% but less than 90% and 428 loans totaling $21.5 million with a loan-to-value ratio of 90% or greater. We currently offer one-year adjustable-rate mortgage loans at rates 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 1% annual cap and floor, and a 5% lifetime cap on the interest rate adjustment over the rate in effect on the date of origination. The actual interest rate on these adjustable-rate loans may not be reduced below 5% over the life of the loan. The annual and lifetime caps on interest rate increases reduce the extent to which these loans can help protect us against interest rate risk. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management" in our Annual Report to Stockholders attached hereto as Exhibit 13 (the "Annual Report"). Approximately 38.7% of the loans secured by one- to four-family real estate originated by us during fiscal 1999 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 8 $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. 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 $2.5 million, or 2.9% 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 $25.1 million of construction loans outstanding at September 30, 1999. 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 9 during the construction phase makes the monitoring of the progress of the project particularly important, as customary early warning signals of project difficulties may not be present. Non-Residential/Multi-Family Real Estate Lending. In order to enhance the yield on and decrease the average term to maturity of 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" in the Annual Report. At September 30, 1999, we had $10.0 million in non-residential/multi-family real estate loans, representing 8.0% of our loan portfolio. Approximately 9.2% 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, 1999.
Number Outstanding Amount of Principal Non-Performing Loans Balance or of Concern ----------- ----------- -------------- Multi-family................................................ 3 $ 914 $--- Small business facilities and office buildings.............. 46 3,692 --- Health care facility........................................ 13 2,210 --- Churches.................................................... 3 109 --- Warehouse/mini-storage...................................... 3 285 --- Hotel/motel................................................. 3 555 --- Land........................................................ 45 2,224 --- --- ------ ---- Total multi-family residential and non-residential real estate loans........................................ 116 $9,989 $--- === ====== ====
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 10 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, 1999, 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, 1999 of $809,000. The other loans in excess of $500,000 at September 30, 1999, included a loan with an outstanding balance of $566,000 secured by an apartment building located in Rogers, Arkansas; and a loan with an outstanding balance of $511,000 secured by a guest home located in Caney, Kansas. All of these loans were current at September 30, 1999. 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, 1999, our consumer loan portfolio totaled $5.3 million and was 4.3% 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 21.1% 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. 11 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. 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, 1999, $184,000, or approximately 3.4% 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 offset the relatively low level of loan demand in our principal market areas, 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 it uses in originating loans. Servicing of purchased loans is generally performed by the seller. At September 30, 1999, approximately $4.0 million of First Federal's loan portfolio was serviced by others. During the year ended September 30, 1999, no loans were purchased. During recent years, most of our loan purchase opportunities have been at yields that we believed were not sufficiently higher than the yields of comparable mortgage-backed securities that were guaranteed by a Federal agency as to principal and interest (or derived from certificates that were so guaranteed) to offset such credit protection. Accordingly, we have increased our mortgage-backed securities portfolio rather than loan purchases. See "Investment Activities - Mortgage-Backed Securities." We had $1.6 million in loans serviced for others as of September 30, 1999. 12 The following table shows our loan originations, purchases, sales and repayment activities for the periods indicated.
Year Ended September 30, ----------------------------------------- 1999 1998 1997 ----------------------------------------- (In Thousands) Originations by type Adjustable-rate: Real estate - one- to four-family................ $ 8,099 $ 5,984 $ 6,437 - non-residential.................... 649 250 633 Consumer - home equity........................... 84 117 673 ------- ------- ------- Total adjustable-rate..................... 8,832 6,351 7,743 ------- ------- ------- Fixed-rate: Real estate - one- to four-family................ 12,820 14,968 10,167 - non-residential................ 1,235 3,028 1,492 Construction..................................... 33,319 23,621 --- Consumer - non-residential....................... 3,380 2,294 1,965 ------- ------- ------- Total fixed-rate.......................... 50,754 43,911 13,624 ------- ------- ------- Total loans originated.................... 59,586 50,262 21,367 ------- ------- ------- Purchases Real estate - non-residential.................... --- --- 546 Construction..................................... --- 4,984 --- ------- ------- ------- Total purchased........................... --- 4,984 546 ------- ------- ------- Sales and Repayments Mortgage-backed securities....................... 6,248 6,164 4,412 Principal repayments(1).......................... 45,303 30,231 15,512 ------- ------- ------- Total reductions........................... 51,551 36,395 19,924 Loans transferred from Neodosha.................... 9,032 --- --- Increase (decrease) in other items, net(2)....... (4,220) (5,979) 375 ------- ------- ------- Net increase (decrease)................... $12,847 $12,872 $ 2,364 ======= ======= =======
- ------------------ (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 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 in Real Estate Operations. 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, 1999, 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.
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) Real Estate: One- to four-family...... 13 $923 0.74% 43 $1,724 1.39% 56 $2,647 2.13% Construction............. 1 1 --- 6 569 0.46 7 570 0.46 Consumer................... 17 67 0.06 25 117 0.09 42 184 0.15 -- ---- ---- -- ------ ---- ---- ------- ---- Total................. 31 $991 0.80% 74 $2,410 1.94% 105 $3,401 2.74% == ==== ==== == ====== ==== === ====== ====
14 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.
Year Ended September 30, ------------------------------------------------ 1999 1998 1997 ------------------------------------------------ (Dollars in Thousands) Non-accruing loans: One- to four-family.................................. $ 849 $ 217 $ 919 Non-residential real estate.......................... --- 21 98 Construction......................................... 330 62 --- Consumer............................................. 132 35 32 ------ ------- ------- Total non-accruing loans.......................... 1,311 335 1,049 ------ ------- ------- Accruing loans delinquent 90 days or more: One- to four-family................................. 875 690 292 Construction........................................ 239 223 --- Consumer............................................ 4 5 --- ------ ------- ------- Total accruing loans delinquent 90 days or more... 1,118 918 292 ------ ------- ------- Troubled debt restructurings: One- to four-family................................. --- --- 50 ------ --------- --------- Total non-performing loans........................ 2,429 1,253 1,391 ------ ------- ------- Real estate acquired through foreclosure: One- to four-family.................................. 110 72 12 ------ -------- -------- Total non-performing assets............................ $2,539 $1,325 $1,403 ====== ====== ====== Total as a percentage of total assets.................. 1.84% 1.07% 1.25% ===== ==== ====
For the year ended September 30, 1999, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $85,365. The amount included in interest income on such loans was $52,611 for the year ended September 30, 1999. Included in non-accruing loans at September 30, 1999, were 21 loans totaling $849,000 secured by one- to four-family real estate, four construction loans totaling $330,000 secured by one- to four-family real estate, and 39 consumer loans totaling $132,000. All non-accruing loans at September 30, 1999, were located in our primary market area. At September 30, 1999, accruing loans delinquent 90 days or more included 22 loans totaling $875,000 secured by one- to four-family real estate, two construction loans totaling $239,000 secured by one- to four-family real estate, and one consumer loan totaling $4,000. At September 30, 1999, all of our accruing loans delinquent 90 days or more secured by real estate were located in our primary market area, except for three loans totaling $216,000 secured by a single family residences located in Texas. Real Estate Acquired Through Foreclosure. At September 30, 1999, our real estate acquired through foreclosure consisted of five single family residences located in our market area. The properties have a carrying value of $110,000 and are currently held for sale. 15 Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of Thrift Supervision 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 Office of Thrift Supervision 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, 1999, are included in the table of non-performing assets on the previous page, as follows: September 30, ----------------------------- 1999 1998 1997 ----------------------------- (In Thousands) Substandard.................... $2,274 $1,320 $1,261 Doubtful....................... --- 5 92 Loss........................... 15 --- --- Pass........................... 250 --- --- ------- ------ ------ Total classified assets........ $2,539 $1,325 $1,353 ====== ====== ====== 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, 1999, we had an allowance for loan losses of $753,000. 16 The following table sets forth an analysis of our allowance for loan losses at the dates indicated.
Year Ended September 30, ----------------------------------------- 1999 1998 1997 ----------------------------------------- (Dollars in Thousands) Balance at beginning of period...................... $656 $668 $690 Provision........................................... 66 --- --- Transfer from Neodesha merger/conversion............ 84 --- --- Charge-offs: One- to four-family............................... 7 12 22 Consumer Loans.................................... 46 --- --- ------ -------- ------ Net charge-offs................................... 53 12 22 ------ ------- ------ Balance at end of period............................ $753 $ 656 $668 ==== ===== ==== Ratio of net charge-offs during the period to total loans at end of period............................................. 0.05% 0.01% 0.03% ===== ====== ====== Allowance for loan losses to total loans at end of period................................... 0.67% 0.70% 0.90% ===== ====== ====== Allowance for loan losses to non-performing loans at end of period............................. 30.99% 52.30% 48.05% ===== ===== =====
17 The distribution of the allowance for losses on loans at the dates indicated is summarized as follows:
September 30, ------------------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------------------ 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) Real Estate One- to four-family........................ $315 67.55% $ 286 71.06% $ 391 84.30% Multi-family............................... --- 0.74 --- 0.99 --- 1.53 Non-residential............................ 92 7.29 103 8.97 92 9.83 Construction............................... 305 20.13 214 15.87 --- 1.00 Consumer..................................... 41 4.29 20 3.11 35 3.34 Unallocated.................................. --- --- 33 --- 150 --- ------ ------ ----- ------ ----- ------ Total.................................... $753 100.00% $ 656 100.00% $ 668 100.00% ==== ====== ===== ====== ===== ======
Investment Activities General. First Federal must maintain minimum levels of investments that qualify as liquid assets under Office of Thrift Supervision 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 Office of Thrift Supervision 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, 1999, our liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 9.66%. 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, 1999, investment securities totaled $9.0 million, or 6.5% of total assets. As of such date, we also had a $1.4 million investment in Federal Home Loan Bank stock, satisfying our requirement for membership in the Federal Home Loan Bank 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, 1999, the average term to maturity or repricing of the investment portfolio was 3.8 years. 18 The following table sets forth the composition of our securities portfolio at the dates indicated.
September 30, ------------------------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------------------------- Book % of Book % of Book % of Value Total Value Total Value Total ------------------------------------------------------------------------- (Dollars in Thousands) Securities held to maturity: Federal agency obligations............................... $6,200 59.35% $5,000 50.04% $3,000 34.56% U.S. Government Securities............................... 200 1.91 --- --- --- --- Municipal Securities..................................... 605 5.79 --- --- --- --- ------ ------ ------ ------- ------ ------ Total Securities held to maturity 7,005 67.05 5,000 50.04 3,000 34.56 ------ ------ ------ ------- ------ ------ Securities available for sale: U.S. Government securities............................... --- --- --- --- 999 11.51 Federal agency obligations............................... 2,000 19.15 3,065 30.68 2,985 34.39 Other marketable equity securities(1).................... --- --- 353 3.53 327 3.77 ------ ------ ------ ------- ------ ------ Total securities available for sale................... 2,000 19.15 3,418 34.21 4,311 49.67 ------ ----- ------ ------- ------ ------ Federal Home Loan Bank stock............................. 1,442 13.80 1,574 15.75 1,369 15.77 ------- ------ ------ ------- ------ ------ Total securities and Federal Home Loan Bank stock..... $10,447 100.00% $9,992 100.00% $8,680 100.00% ======= ====== ====== ====== ====== ====== Average remaining life or term to repricing of securities (excluding Federal Home Loan Bank stock and other marketable equity securities)........... 3.96 yrs. 3.51 yrs. 4.61 yrs. Other Interest-Earning Assets: Short-term money market investments...................... $375 100.00% $ 439 100.00% $2,190 100.00% ==== ====== ----- ====== ------ ====== 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).............................. 3.80 yrs. 3.33 yrs. 3.51 yrs.
- -------------- (1) Represents primarily investments in mutual funds investing in U.S. Government securities and federal agency obligations. 19 The composition and maturities of the securities portfolio, excluding Federal Home Loan Bank of Topeka stock, are indicated in the following table.
September 30, 1999 ----------------------------------------------------------------------- Less Than 1 to 5 5 to 10 Total Investment 1 Year Years Years Securities ----------------------------------------------------------------------- Amortized Amortized Amortized Amortized Cost Cost Cost Cost Fair Value ----------------------------------------------------------------------- (Dollars in Thousands) Held to Maturity: Municipal Securities........... $410 $ --- $ 195 $ 605 $ 602 U.S. Government Securities..... --- 200 --- 200 200 Federal agency obligations..... 100 1,100 5,000 6,200 6,156 --- ------- ------- ------- ------- Total Investment Securities $510 $1,300 $5,195 $7,005 $6,958 Weighted average yield...... 4.25% 5.66% 6.91% 6.49% ==== ==== ==== ==== Available for Sale: Federal agency obligations..... $--- $1,996 $ --- $1,996 $2,000 ---- ------ ----- ------ ------ Total investment securities. $--- $1,996 $ --- $1,996 $2,000 ==== ====== ===== ====== ====== Weighted average yield...... ---% 5.86% --- % 5.86% ==== ====== ===== ======
Our securities portfolio at September 30, 1999, 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, 1999, 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, 1999, our mortgage-backed securities totaled $10.9 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, 1999, $7.1 million, or 64.8%, of First Federal's mortgage-backed securities carried adjustable-rates of interest. Under the Office of Thrift Supervision'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 The following table sets forth the contractual maturities of the mortgage-backed securities at September 30, 1999.
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 ------------------------------------------------------------------------------------------------ (In Thousands) Held to Maturity Adjustable-Rate Mortgage-Backed Securities: Freddie Mac...................... $--- $--- $--- $--- $--- $ 341 $2,673 $ 3,014 Fannie Mae....................... --- --- --- --- --- 1,344 2,710 4,054 ----- ----- ----- ----- ----- ------ ------ ------- Total adjustable-rate......... --- --- --- --- --- 1,685 5,383 7,068 ----- ----- ----- ----- ----- ------ ------ ------- Fixed-Rate Mortgage-Backed Securities: Freddie Mac........................ --- --- --- --- 1,736 479 --- 2,215 Fannie Mae......................... --- --- --- --- 1,376 224 --- 1,600 Ginnie Mae......................... --- --- --- --- --- --- 29 29 ----- ----- ----- ----- -------- --------- --------- -------- Total fixed-rate................. --- --- --- --- 3,112 703 29 3,844 ----- ----- ----- ----- ----- ------- --------- -------- Total mortgage-backed securities held to maturity.................... $--- $--- $--- $--- $3,112 $2,388 $5,412 $10,912 ==== ==== ==== ==== ====== ====== ====== =======
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 $27.5 million in Federal Home Loan Bank advances outstanding at September 30, 1999. 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 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.
September 30, ------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------------------------------ Percent Percent Percent Amount of Total Amount of Total Amount of Total ------------------------------------------------------------------------------ (Dollars in Thousands) Transactions and Savings Deposits: Passbook Demand (2.85%).................. $ 4,583 4.79% $ 2,745 3.40% $2,703 3.54% NOW Accounts (2.00-2.50%)................ 6,503 6.81 3,939 4.88 3,763 4.93 Money Market Accounts (2.50-5.25%)....... 26,541 27.78 21,952 27.22 20,702 27.13 ------ ------ ------- ------ ------ ------ Total Transactions and Savings Deposits 37,627 39.38 28,636 35.50 27,168 35.60 ------ ------ ------ ----- ------ ------ Certificates: 0.00 - 3.99%........................... 212 0.22 3 .01 5 0.01 4.00 - 4.99%........................... 15,802 16.54 1,792 2.22 2,189 2.87 5.00 - 5.99%........................... 36,768 38.49 45,364 56.24 39,911 52.30 6.00 - 6.99%........................... 5,030 5.27 4,751 5.89 6,930 9.08 7.00% and over.......................... 14 0.01 27 .03 26 0.03 ------- ------ ------- ------ -------- ------ Total Certificates........................ 57,826 60.53 51,937 64.39 49,061 64.29 ------- ------ ------ ----- ------ ------ Accrued Interest.......................... 86 0.09 85 .11 82 0.11 ------- ------ ------- -------- -------- ------ Total Deposits............................ $95,539 100.00% $80,658 100.00% $76,311 100.00% ======= ====== ======= ====== ======= ======
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.
Year Ended September 30, ------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------- (Dollars in Thousands) Opening balance............................................... $ 80,573 $ 76,229 $ 69,356 Neodesha Acquisition.......................................... 12,671 --- --- Deposits...................................................... 131,061 101,678 86,304 Withdrawals................................................... (132,286) (100,512) (82,247) Interest credited............................................. 3,434 3,178 2,816 --------- -------- -------- Ending balance................................................ $95,453 $ 80,573 $ 76,229 ======= ======== ======== Net increase.................................................. $14,880 $ 4,344 $ 6,873 ======= ========== ========= Percent increase............................................. 18.47% 5.70% 9.91% ===== ==== ====
22 The following table shows rate and maturity information for our certificates of deposit as of September 30, 1999.
0.00- 4.00- 5.00- 6.00- 7.00% or Percent 3.99% 4.99% 5.99% 6.99% greater Total of Total --------------------------------------------------------------------------------- Certificate accounts maturing in quarter ending: December 31, 1999............... $212 $2,546 $4,474 $ 592 $--- $ 7,824 13.53% March 31, 2000.................. --- 3,772 2,755 1,251 14 7,792 13.48 June 30, 2000................... --- 2,957 4,145 123 --- 7,225 12.49 September 30, 2000.............. --- 3,984 2,104 301 --- 6,389 11.05 December 31, 2000............... --- 1,528 1,159 580 --- 3,267 5.65 March 31, 2001.................. --- 1,016 5,414 --- --- 6,430 11.12 June 30, 2001................... --- --- 1,531 76 --- 1,607 2.78 September 30, 2001.............. --- --- 3,795 433 --- 4,228 7.31 December 31, 2001............... --- --- 4,470 686 --- 5,156 8.92 March 31, 2002.................. --- --- 3,553 375 --- 3,928 6.79 June 30, 2002................... --- --- 71 2 --- 73 0.13 September 30, 2002.............. --- --- 187 --- --- 187 0.32 December 31, 2002............... --- --- 62 1 --- 63 0.11 Thereafter...................... --- --- 3,047 610 --- 3,657 6.32 ------ ----------- -------- -------- ----- -------- ------- TOTAL......................... $212 $15,803 $36,767 $5,030 $14 $57,826 100.00% ==== ======= ======= ====== === ======= ====== Percent of Total................ 0.37% 27.33% 63.58% 8.70% 0.02% ==== ===== ===== ==== ====
The following table indicates the amount of our certificates of deposit and other deposits by time remaining until maturity as of September 30, 1999.
Maturity ----------------------------------------------------------------- Over Over 3 Months 3 to 6 6 to 12 Over or Less Months Months 12 Months Total ----------------------------------------------------------------- (In Thousands) Certificates of deposit less than $100,000..... $6,671 $6,625 $11,861 $27,137 $52,294 Certificates of deposit of $100,00 or more..... 412 867 1,161 1,459 3,899 Public funds(1)................................ 741 300 592 --- 1,633 -------- ------- --------- ----------- -------- Total certificates of deposit.................. $7,824 $7,792 $13,614 $28,596 $57,826 ====== ====== ======= ======= =======
- -------------- (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 Federal Home Loan Bank of Topeka upon the security of our capital stock in the Federal Home Loan Bank 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, 1999, we had $27.5 million in Federal Home Loan Bank advances outstanding. 23 The following table sets forth the maximum month-end balance and average balance of our Federal Home Loan Bank advances and other borrowings at and for the dates indicated.
At and for the Year Ended September 30, ------------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------------ (In Thousands) Maximum Balance: Federal Home Loan Bank advances................. $33,400 $30,100 $25,000 Average Balance: Federal Home Loan Bank advances................. $29,217 $26,492 $23,583
The following table sets forth certain information as to our Federal Home Loan Bank advances at the dates indicated.
September 30, ---------------------------------------------- 1999 1998 1997 ---------------------------------------------- (Dollars in Thousands) Federal Home Loan Bank advances.................................. $27,500 $30,100 $23,700 Weighted average interest rate of Federal Home Loan Bank advances........................................................ 5.474% 5.684% 5.930%
Regulation General. First Federal is a federally chartered savings and loan association, the deposits of which are federally insured and backed by the full faith and credit of the United States Government. Accordingly, First Federal is subject to broad federal regulation and oversight extending to all of our operations. First Federal is a member of the Federal Home Loan Bank of Topeka and is subject to certain limited regulation by the Board of Governors of the Federal Reserve System. As the savings and loan holding company of First Federal, First Independence also is subject to federal regulation and oversight. Federal Regulation of Savings Associations. The Office of Thrift Supervision has extensive authority over the operations of savings associations. As part of this authority, we are required to file periodic reports with the Office of Thrift Supervision and are subject to periodic examinations by the Office of Thrift Supervision and the FDIC. The last regular Office of Thrift Supervision and FDIC examinations of First Federal were commenced as of July 1998 and October 1992, respectively. When these examinations are conducted by the Office of Thrift Supervision 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 Office of Thrift Supervision. First Federal's Office of Thrift Supervision assessment for the fiscal year ended September 30, 1999, was $37,801. The Office of Thrift Supervision 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. Our 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, 24 1999, our lending limit under this restriction was approximately $1.8 million. At September 30, 1999, we had no loans in excess of our loans-to-one-borrower limit. Insurance of Accounts and Regulation by the FDIC. 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 Federal Home Loan Bank or the Bank Insurance Fund. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the Office of Thrift Supervision an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices, or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions will be made by the FDIC semi-annually. At September 30, 1999, First Federal was classified as a well-capitalized institution. Effective January 1, 1997, the premium schedule for Bank Insurance Fund and Savings Association Insurance Fund insured institutions ranged from 0 to 27 basis points. However, Savings Association Insurance Fund insured institutions and Bank Insurance Fund insured institutions are required to pay a Financing Corporation assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. This amount is currently equal to about six basis points for each $100 in domestic deposits for Savings Association Insurance Fund members while Bank Insurance Fund insured institutions pay an assessment equal to about 1.50 basis points for each $100 in domestic deposits. The savings institutions assessment is expected to be reduced to about two basis points no later than January 1, 2000, when Bank Insurance Fund insured institutions fully participate in the assessment. These assessments, which may be revised based upon the level of Bank Insurance Fund and Savings Association Insurance Fund deposits, will continue until the bonds mature in the year 2015. Regulatory Capital Requirements. Federally insured savings associations, such as First Federal, are required to maintain a minimum level of regulatory capital. The Office of Thrift Supervision 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. The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). At September 30, 1999, First Federal had tangible capital of $12.1 million, or 8.76% of adjusted total assets, which is approximately $10.0 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. At September 30, 1999, First Federal did not have any intangible assets. The capital standards also require core capital equal to at least 3% to 4% of adjusted total assets, depending on an institution's supervisory rating. Core capital generally consists of tangible capital. At September 30, 1999, we had core capital equal to $12.1 million, or 8.76% of adjusted total assets, which is $8.0 million above the minimum leverage ratio requirement of 3% as in effect on that date. The Office of Thrift Supervision 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 25 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. 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 Office of Thrift Supervision 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. On September 30, 1999, we had total risk-based capital of approximately $12.8 million, including $12.1 million in core capital and $753,000 in qualifying supplementary capital, and risk-weighted assets of $66.9 million, or total capital of 19.2% of risk-weighted assets. This amount was $7.5 million above the 8% requirement in effect on that date. The Office of Thrift Supervision is authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The Office of Thrift Supervision 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 Office of Thrift Supervision is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the Office of Thrift Supervision 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 Office of Thrift Supervision is authorized to impose the additional restrictions that are applicable to significantly undercapitalized associations. The Office of Thrift Supervision 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 Office of Thrift Supervision or the FDIC of any of these measures on First Independence or First Federal may have a substantial adverse effect on our operations and profitability. Limitations on Dividends and Other Capital Distributions. The Office of Thrift Supervision imposes 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. The Office of Thrift Supervision also prohibits a savings association from declaring or paying any dividends or from repurchasing any of its stock if, as a result of such action, the regulatory capital of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with the association's mutual to stock conversion. First Federal may make a capital distribution without the approval of the Office of Thrift Supervision provided we notify the Office of Thrift Supervision, 30 days before we declare the capital distribution and we meet the following requirements: (i) we have a regulatory rating in one of the two top examination categories, (ii) we are not of supervisory concern, and will remain adequately- or well-capitalized, as defined in the Office of Thrift Supervision prompt corrective action regulations, following the proposed distribution, and (iii) the distribution does not exceed our net income for the calendar year-to-date plus retained net income for the previous two calendar years (less any dividends previously paid). If we do not meet the above stated requirements, we must obtain the prior approval of the Office of Thrift Supervision before declaring any proposed distributions. 26 Qualified Thrift Lender Test. All savings institutions are required to meet a qualified thrift lender test to avoid certain restrictions on their operations. This test requires a savings institution 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 institutions may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, these assets primarily consist of residential housing related loans and investments. At September 30, 1999, First Federal met the test and has always met the test since its effectiveness. First Federal's qualified thrift lender percentage was 96.6% at September 30, 1999. Any savings institution that fails to meet the qualified thrift lender test must convert to a national bank charter, unless it requalifies as a qualified thrift lender and remains a qualified thrift lender. If an institution does not requalify and converts to a national bank charter, it must remain Savings Association Insurance Fund-insured until the FDIC permits it to transfer to the Banking Insurance Fund. If an institution have 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 institution is immediately ineligible to receive any new Federal Home Loan Bank borrowings and is subject to national bank limits for payment of dividends. If the institution has not requalified or converted to a national bank within three years after the failure, it must sell all investments and stop all activities not permissible for a national bank. In addition, it must repay promptly any outstanding Federal Home Loan Bank borrowings, which may result in prepayment penalties. If any institution that fails the qualified thrift lender test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "- Holding Company Regulation." Community Reinvestment Act. Under the Community Reinvestment Act, 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 Community Reinvestment Act requires the Office of Thrift Supervision, in connection with the examination of First Federal, to assess the institution's record of meeting the credit needs of our community and to take this record into account in our 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 Office of Thrift Supervision. First Federal was examined for Community Reinvestment Act compliance in March 1998 and received a rating of "satisfactory". Transactions with Affiliates. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of First Federal include 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 Office of Thrift Supervision 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 Office of Thrift Supervision. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals. Holding Company Regulation. First Independence is a unitary savings and loan holding company subject to regulatory oversight by the Office of Thrift Supervision. First Independence is required to register and file reports with the Office of Thrift Supervision and is subject to regulation and examination by the 27 Office of Thrift Supervision. In addition, the Office of Thrift Supervision has enforcement authority over First Independence and its non-savings association subsidiaries which also permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. As a unitary savings and loan holding company, First Independence generally is not subject to activity restrictions. 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 and any of our subsidiaries (other than First Federal or any other Savings Association Insurance Fund insured savings association) would generally become subject to additional restrictions. If we fail the qualified thrift lender test, within one year First Independence must register as, and will become subject to, the significant activity restrictions applicable to bank holding companies. Federal Securities Law. The stock of First Independence is registered with the SEC under the Securities Exchange Act of 1934, as amended. First Independence is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Securities Exchange Act of 1934. First Independence stock held by persons who are affiliates (generally executive officers, directors and 10% shareholders) of First Independence may not be resold without registration or 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, 1999, 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 Office of Thrift Supervision. See "--Liquidity and Capital Resources" in the Annual Report. 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 Federal Home Loan Bank borrowings, before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System. First Federal is a member of the Federal Home Loan Bank of Topeka, which is one of 12 regional Federal Home Loan Banks that administer the home financing credit function of savings associations. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It makes loans to members (i.e., advances) in accordance with policies and procedures, established by the board of directors of the Federal Home Loan Bank, which are subject to the oversight of the Federal Housing Finance Board. All advances from the Federal Home Loan Bank are required to be fully secured by sufficient collateral as determined by the Federal Home Loan Bank. In addition, all long-term advances must be used for residential home financing. As a member, First Federal is required to purchase and maintain a minimum amount of stock in the Federal Home Loan Bank of Topeka. At September 30, 1999, First Federal had $1.4 million in Federal Home Loan Bank stock, which was in compliance with this requirement. In past years, First Federal has received substantial dividends on our Federal Home Loan Bank stock. For the fiscal year ended September 30, 1999, dividends paid by the Federal Home Loan Bank of Topeka to First Federal totaled $125,548, which constitutes a $15,957 increase over the amount of dividends received in fiscal 1998. Over the past five fiscal years these dividends have averaged 6.77% and were 7.0% for fiscal 1999. 28 Federal and State Taxation Federal Taxation. Savings institutions that met certain definitional tests relating to the composition of assets and other conditions prescribed by the Internal Revenue Code of 1986, as amended, had been permitted to establish reserves for bad debts and to make annual additions which could, within specified formula limits, be taken as a deduction in computing taxable income for federal income tax purposes. The amount of the bad debt reserve deduction is now computed under the experience method. In addition to the regular income tax, corporations, including savings institutions 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. To the extent earnings appropriated to a savings institutions bad debt reserves for "qualifying real property loans" and deducted for federal income tax purposes exceed the allowable amount of such reserves computed under the experience method and to the extent of the institution's supplemental reserves for losses on loans, such excess may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). As of September 30, 1999, First Federal's excess 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. Kansas Taxation. First Independence and First Federal file separate Kansas income and Kansas privilege tax returns on a fiscal year basis using the accrual method of accounting. Kansas law permits savings and loan associations to deduct from net income, a reserve established for the sole purpose of meeting or absorbing losses, in the amount of five percent of such net income determined without the benefit of such deduction, or, in the alternative, a reasonable addition to a reserve for losses based on past experiences. The Kansas privilege tax is computed on the basis of 4.5% of taxable income, plus 2.25% of taxable income in excess of $25,000 for tax years commencing prior to January 1, 1998. For years commencing on or after January 1, 1998 the Kansas privilege tax is computed on the basis of 2.5% of taxable income, plus 2.25% of taxable income in excess of $25,000. 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 1996 through 1998. 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. We are also subject to an annual franchise tax imposed by the State of Delaware. 29 For additional information regarding taxation, see Note K of the Notes to the Consolidated Financial Statements in the Annual Report. 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%. Executive Officers of First Independence The following table sets forth certain information with respect to each of the executive officers of First Independence.
NAME AGE(1) POSITION(S) HELD - ----------------------------------------------------------------------------------------------- Larry G. Spencer 51 President and Chief Executive Officer Gary L. Overfield 47 Senior Vice President and Secretary James B. Mitchell 44 Vice President and Chief Financial Officer
- ---------------- (1) At September 30, 1999. Executive Officers of First Federal The following table sets forth certain information with respect to each of the executive officers of First Federal.
NAME AGE(1) POSITION(S) HELD - --------------------------------------------------------------------------------------------------------------- Larry G. Spencer 51 President and Chief Executive Officer and Director Gary L. Overfield 47 Senior Vice President, and Secretary and Chief Loan Officer Jim L. Clubine 46 Vice President and Asset Manager James B. Mitchell 44 Vice President and Chief Financial Officer
- ---------------- (1) At September 30, 1999. 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. 30 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), Mercy Hospital Foundation Fund Raising Committee, Eisenhower Site Council team, Airport Advisory Board, Carnival Chairman for Neewolah, and a member of the Rotary Club. He was a previous Chairman of the March of Dimes and former board member for Chamber of Commerce, Community Chest and Junior Achievement. Mr. Clubine is a graduate of Kansas State University. James B. Mitchell. Mr. Mitchell is Vice President and Chief Financial Officer of 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, 1999, we had a total of 36 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, 1999, was $1,322,128. 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, 1999, was approximately $127,000. Item 3. Legal Proceedings We are involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of these proceedings cannot be predicted with certainty, it is our opinion, after consultation with counsel representing us in the proceedings, that the resolution of these proceedings should not have a material effect on the results of operations. We were not involved in any legal proceedings at September 30, 1999. 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, 1999. 31 PART II Item 5. Market for Common Equity and Related Stockholder Matters Pages 41 and 42 of the attached 1999 Annual Report to Stockholders is herein incorporated by reference. Item 6. Management's Discussion and Analysis or Plan of Operation Pages 4 through 14 of the attached 1999 Annual Report to Stockholders is herein incorporated by reference. Item 7. Financial Statements The following information appearing in our Annual Report to Stockholders for the year ended September 30, 1999, is incorporated by reference in this Annual Report on Form 10-KSB as Exhibit 13.
Pages in Annual Annual Report Section Report - ----------------------------------------------------------------------------------------------------------------- Report of Independent Certified Public Accountants................................................. 15 Consolidated Balance Sheets (September 30, 1999 and 1998).......................................... 16-17 Consolidated Statements of Earnings (For the Years Ended September 30, 1999 and 1998)........................................................................................ 18 Consolidated Statements of Comprehensive Income (For the Years Ended September 30, 1999 and 1998)................................................................................. 19 Consolidated Statements of Stockholders' Equity (For the Years Ended September 30, 1999 and 1998)..................................................................................... 20 Consolidated Statements of Cash Flows (For the Years Ended September 30, 1999 and 1998)........................................................................................ 21-22 Notes to Consolidated Financial Statements......................................................... 23-40
With the exception of the aforementioned information in Part II of the Form 10-KSB, our Annual Report to Stockholders for the year ended September 30, 1999 is not deemed filed as part of this Annual Report on Form 10-KSB. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There has been no Current Report on Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. 32 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 2000, a copy of which will be filed not later than 120 days after the close of fiscal year. Executive Officers Information regarding the business experience of 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 2000, 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 2000, 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 2000, a copy of which will be filed not later than 120 days after the close of the fiscal year. 33 Item 13. Exhibits and Reports on Form 8-K (a) Exhibits
Reference to Regulation S-B Prior Filing or Exhibit Exhibit Number Number Document Attached Hereto - -------------------------------------------------------------------------------------------------------------------- 2 Plan of acquisition, reorganization, arrangement, liquidation, or succession None 3(a) Articles of Incorporation * 3(b) By-Laws * 4 Instruments defining the rights of security holders, including debentures * 9 Voting Trust Agreement None 10 Executive Compensation Plans and Arrangements (a) 1994 Stock Option and Incentive Plan ** (b) Recognition and Retention Plan * (c) Employment Agreements * 11 Statement re: computation of per share earnings *** 12 Statement re: computation of ratios Not Required 13 Annual Report to Security Holders 13 16 Letter on change in certifying accountants None 18 Letter on change in accounting principles None 21 Subsidiaries of the Registrant 21 23 Consents of Experts and Counsel 23 24 Power of Attorney Not Required 27 Financial Data Schedule 27 99 Additional exhibits None
- -------------------- * Filed as exhibits to the Company's Form S-1 registration statement filed on June 22, 1994 (File No. 33-64812) pursuant to Section 5 of the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. ** Filed as an exhibit to the Company's Annual Report on Form 10-KSB filed on December 29, 1994 (File No. 0-22184) pursuant to the Securities Exchange Act of 1934. ***See Note A of Notes to Consolidated Financial Statements in the Annual Report to Shareholders' attached hereto as Exhibit 13. (b) Reports on Form 8-K During the quarter ended September 30, 1999, we did not file any Current Reports on Form 8-K. 34 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, 1999 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.
/s/ Larry G. Spencer /s/ James B. Mitchell - -------------------------------------------- ------------------------------------------- Larry G. Spencer, President, Chief Executive James B. Mitchell, Vice President and Chief Officer, Officer and Director (Principal Financial Officer (Principal Financial and Executive and Operating Officer) Accounting Officer) Date: December 29, 1999 Date: December 29, 1999 /s/ JoVonnah Boecker /s/ William T. NewKirk II - -------------------------------------------- ------------------------------------------- JoVonnah Boecker, Director William T. NewKirk II, Director Date: December 29, 1999 Date: December 29, 1999 /s/ Harold L. Swearingen /s/ Joseph M. Smith - -------------------------------------------- ------------------------------------------- Harold L. Swearingen, Director Joseph M. Smith, Director Date: December 29, 1999 Date: December 29, 1999 /s/ Lavern W. Strecker /s/ Robert A. Johnson - -------------------------------------------- ------------------------------------------- Lavern W. Strecker, Director Robert A. Johnson, Director Date: December 29, 1999 Date: December 29, 1999
35 INDEX TO EXHIBITS
Exhibit Number - -------------------------------------------------------------------------------- 11 Statement Regarding Computation of Per Share Earnings (included under Note A of Notes to Consolidated Financial Statements in the Annual Report to Stockholders' attached hereto as Exhibit 13) 13 Annual Report to Security Holders 21 Subsidiaries of the Registrant 23 Consent of Accountants 27 Financial Data Schedule
36 EX-13 2 ANNUAL REPORT TO STOCKHOLDERS TABLE OF CONTENTS Page President's Message to Stockholders 1 Selected Consolidated Financial Information 2 Management's Discussion and Analysis 4 Report of Independent Certified Public Accountants 15 Consolidated Balance Sheets 16 Consolidated Statements of Earnings 18 Consolidated Statements of Comprehensive Income 19 Consolidated Statements of Stockholders' Equity 20 Consolidated Statements of Cash Flows 21 Notes to Consolidated Financial Statements 23 Stockholder Information 41 Directors and Executive officers 42 ANNUAL MEETING The Annual Meeting of Stockholders will be held at our main office located at Myrtle and Sixth Streets, Independence, Kansas at 10:30 a.m. Independence, Central Standard time, on January 26, 2000. [FIRST INDEPENDENCE CORPORATION LETTERHEAD] To Our Stockholders, Depositors and Friends: The Board of Directors, Officers, and Staff of First Independence Corporation and its wholly owned subsidiary, First Federal Savings and Loan Association, are pleased to provide you with the 1999 Annual Report. As you will see by reading the accompanying financial statements, First Independence had another excellent year with $1,143,000 in net earnings. 1999 was our second best year in earnings, a 27% increase over 1998. Diluted earnings per share for the 1999 fiscal year were $1.07, compared to diluted earnings per share of $.92 for the 1998 fiscal year, an increase of 16%. One other key number worth noting is our Operating Expense to Average Assets; it is 1.89%, well below our peer group. Our recent growth has not been at the expense of higher overhead. Since 1996 the banking industry has been diligently working on the year 2000 (Y2K) problem. All the hard work and resources that we have dedicated to this issue will soon be rewarded. We are confident that on January 3, 2000, it will be business as usual at First Federal. We believe First Federal is Y2K compliant. As you may recall, at this time last year we were working on a merger conversion with The Neodesha Savings and Loan Association, FSA. The conversion was completed on January 6, 1999, with the sale of 150,896 shares of stock at $9.42 per share. With this merger, we now have a presence in three different communities in our market area. This merger has created an opportunity to expand our customer base because of the convenience of three banking locations to choose from, a service unique in our market area. We believe our efforts to expand into new markets and to augment our service positively effect future growth. We will continue to service the needs of our customers and to explore new products and services to better meet their complete financial needs. I invite you to review our Annual Report. We are very proud of our accomplishments and look forward to the coming year. On behalf of the directors, management and employees, I would like to express our appreciation to our stockholders and valued customers for their continued support. Sincerely, /s/ Larry G. Spencer Larry G. Spencer President and Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL INFORMATION September 30, ----------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (In Thousands) Selected Financial Condition Data: Total assets $138,131 $124,337 $112,523 $108,539 $101,904 Cash, cash equivalents and interest- bearing deposits 1,440 914 3,151 1,763 2,115 Loans receivable, net 112,893 93,684 74,559 67,683 60,370 Mortgage-backed securities - at cost 10,912 17,274 23,528 28,039 28,594 Investment securities - at cost 7,005 5,000 3,000 2,000 1,000 Securities available for sale 2,000 3,418 4,783 5,894 7,358 Real estate acquired through foreclosure, net 109 72 12 12 62 Deposits 95,453 80,573 76,229 69,356 67,927 Borrowings 27,500 30,100 23,700 24,300 18,800 Stockholders' equity 13,107 12,099 11,529 13,003 13,600
Year Ended September 30, ----------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (In Thousands) Selected Operations Data: Total interest income $ 10,101 $ 9,075 $ 8,069 $ 7,773 $ 7,186 Total interest expense 5,989 5,556 5,059 4,669 3,852 -------- -------- -------- -------- -------- Net interest income 4,112 3,519 3,010 3,104 3,334 Provision for losses on loans 66 --- --- --- --- -------- -------- -------- -------- -------- Net interest income after provision for losses on loans 4,046 3,519 3,010 3,104 3,334 Non-interest income 354 192 159 214 267 Gain on sale of investments --- --- --- 251 --- Non-interest expense (2,569) (2,161) (1,989) (2,267) (1,820) -------- -------- -------- -------- -------- Earnings before income tax expense 1,831 1,550 1,180 1,302 1,781 Income tax expense 688 649 468 487 694 -------- -------- -------- -------- -------- Net earnings 1,143 901 712 815 1,087 ======== ======== ======== ======== ======== Basic earnings per share $ 1.13 $ .98 $ .73 $ .72 $ .87 ======== ======== ======== ======== ========
FINANCIAL RATIOS
September 30, ---------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- ---------- Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net earnings to average total assets) 0.84% 0.75% 0.65% 0.78% 1.12% Interest rate spread information: Average during period 2.69 2.52 2.31 2.36 2.87 End of period 2.58 2.29 2.19 2.17 2.36 Net interest margin (1) 3.11 2.99 2.81 3.02 3.52 Ratio of operating expense to average total assets 1.89 1.80 1.81 2.17 1.88 Return on equity (ratio of net earnings to average equity) 8.95 7.72 6.09 6.21 8.16 Quality Ratios: Non-performing assets to total assets, at end of period (2) 1.84 1.07 1.25 0.57 0.77 Allowance for loan losses to non-performing assets, at end of period (2) 29.65 49.48 47.64 112.36 87.45 Allowance for loan losses to non-performing loans, at end of period 30.99 52.30 48.05 114.62 94.91 Capital Ratios: Equity to total assets, at end of period 9.49 9.73 10.25 11.98 13.35 Average equity to average assets 9.38 9.70 10.62 12.57 13.78 Ratio of average interest-earning assets to average interest-bearing liabilities 109.26 109.98 110.64 114.50 115.83 Dividend payout ratio (3) 31.54 31.25 34.93 27.37 16.47 Number of full service offices 3 2 2 1 1
(1) Net interest income divided by average interest-earning assets. (2) Includes non-accruing loans, accruing loans delinquent 90 days or more and assets acquired through foreclosure. (3) Dividends paid per share divided by earnings per share. [Omitted Earnings Per Share Graph] Basic Diluted 1995 - $0.87 $0.84 1996 - $0.72 $0.69 1997 - $0.73 $0.68 1998 - $0.98 $0.92 1999 - $1.13 $1.07 [Omitted Dividends Paid Per Share] 1995 - $0.1375 1996 - $0.1875 1997 - $0.2375 1998 - $0.2875 1999 - $0.3375 Management's Discussion and Analysis of Financial Condition and Results of Operations General On October 5, 1993, First Federal Savings and Loan Association of Independence, Kansas converted from a federally chartered mutual savings association to a federally chartered stock savings association and concurrently became a wholly owned subsidiary of First Independence Corporation. First Independence earnings are primarily dependent on the operations of First Federal. Currently, First Independence has no business activity other than acting as the holding company for First Federal. As a result, the following discussion relates primarily to the activities of First Federal. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this report. Our business consists of attracting deposits from the general public and using these deposits primarily to make residential mortgage and other loans. Our revenues are derived principally from interest charges on mortgage loans and mortgage-backed securities and, to a lesser extent, from interest earned on investment securities and interest-bearing deposits. In addition, we receive fees from loan originations, late payments and for various services related to transaction and other deposit accounts, and dividends on our Federal Home Loan Bank stock. Operating expenses consist primarily of employee compensation and benefits, occupancy and equipment expenses, federal deposit insurance premiums and other general and administrative expenses. Our operations, and the operations of savings institutions and their holding companies in general, are significantly affected by general economic conditions and the related monetary and fiscal policies of regulatory agencies. Deposit flows and cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of assets, which in turn is affected by the interest rates at which such financing may be offered and other factors including the availability of funds. The primary sources of funds for lending activities include deposits, loan repayments, borrowings, sales and maturities of securities available for sale and funds provided from operations. Forward-Looking Statements Certain statements in this report that relate to our plans, objectives or future performance may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations. Actual strategies and results in future periods may differ materially from those currently expected because of various risks and uncertainties. Additional discussion of factors affecting our business and prospects is contained in our periodic filings with the Securities and Exchange Commission. Asset/Liability Management and Market Risk Qualitative Aspects of Market Risk. We derive our income primarily from the excess of interest collected over interest paid. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, our results of operations, like those of many financial institutions, are impacted by changes in interest rates and our ability to adapt to changes in interest rates is known as interest rate risk and is the most significant market risk. Quantitative Aspects of Market Risk. In an attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In monitoring interest rate risk, we continually analyze and manage our assets and liabilities based on their payment streams and interest rates, the timing of their maturities, and their sensitivity to actual or potential changes in market interest rates. The matching of assets and liabilities may be analyzed by examining the extent to which they are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect operations while a positive gap would tend to benefit operations. Since the early 1980's, 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. In recent periods, we have also purchased adjustable-rate mortgage-backed securities. At September 30, 1999, approximately $24.3 million, or 24.0% of the total loans secured by real estate, were adjustable-rate mortgage loans. On the same date, we also had $7.1 million in adjustable-rate mortgage-backed securities. Our adjustable-rate mortgage loans and adjustable-rate mortgage-backed securities adjust to various indices. We monitor the mix of indices on our adjustable rate assets and seek, consistent with market conditions, to achieve a close match in the repricing characteristics of our assets and liabilities. To increase the interest rate sensitivity of our assets, we have also maintained short and intermediate-term investment securities and other assets. At September 30, 1999, we had $3.2 million of investment securities and interest-bearing deposits maturing or repricing within three years. Finally, we have undertaken various marketing programs from time to time over the last decade in order to extend the term of our deposit liabilities. In 1993, we introduced a new certificate of deposit program in an attempt to reduce deposit outflows and attract longer term deposits which were being lost as a result of the general decline in market rates of interest. This program offers two certificate products which have 4- and 5-year terms. At September 30, 1999, we had approximately $8.6 million in these two certificates. In the future, in managing our interest rate sensitivity, we intend to continue to stress the origination of adjustable-rate mortgage loans, subject to market conditions, the purchase of adjustable-rate mortgage-backed securities and the maintenance of a relatively high level of short-term securities and other assets. As part of our effort to monitor and manage interest rate risk, we use the Onet portfolio valueO methodology adopted by the Office of Thrift Supervision. This approach calculates the difference between the present value of expected cash flows from assets and liabilities, as well as cash flows from off balance sheet contracts, arising from an assumed 200 basis point increase or decrease in interest rates. Under Office of Thrift Supervision regulations, an institution's OnormalO level of interest rate risk for this assumed change in interest rates is a decrease in the institution's net portfolio value not exceeding 2% of assets. Presented below, as of September 30, 1999, is an analysis of First Federal's interest rate risk as measured by changes in net portfolio value for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up and down 200 basis points and compared to Board policy limits. The table was prepared and furnished to us by the Office of Thrift Supervision. Assumptions used in calculating the amounts in this table were determined by the Office of Thrift Supervision (dollars in thousands): Net Portfolio Value Change in At September 30, 1999 interest rate Board Limit -------------------------------------------- (Basis Points) % Change $ Amount $ Change % Change - ------------- ---------- ---------- --------- ---------- +200 -40% $ 9,728 $ (4,893) -33% +100 -25 12,357 (2,264) -15 0 --- 14,621 --- --- -100 -25 16,202 1,581 +11 -200 -40 17,236 2,615 +18 As illustrated in the table, we have structured our assets and liabilities to minimize our exposure to interest rate risk. In the event of a 200 basis point change in interest rates, we would experience an 18% increase in net portfolio value in a declining rate environment and a 33% decrease in a rising rate environment. During periods of rising interest rates, the value of monetary assets and liabilities generally decline. Conversely, during periods of falling interest rates, the value of monetary assets and liabilities generally increase. However, the amount of change in value of specific assets and liabilities due to changes in interest rates is not the same in a rising interest rate environment as in a falling interest rate environment (i.e., as indicated above, the amount of value increase under a specific rate decline may not equal the amount of value decrease under an identical upward rate movement). Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. As a result, the actual effect of changing interest rates may differ from that presented in the foregoing table. Asset Quality The ratio of non-performing assets to total assets is one indicator of our exposure to credit risk. Our non-performing assets consist of non-accruing loans, accruing loans delinquent 90 days or more, troubled debt restructurings, and foreclosed assets, which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. At September 30, 1999, non-performing assets were approximately $2,539,000, which represents an increase of $1,214,000, or 91.6% as compared to September 30, 1998. The ratio of non-performing assets to total assets at September 30, 1999 was 1.84% compared to 1.07% at September 30, 1998. Included in non-accruing loans at September 30, 1999, were four construction loans totaling $330,000 secured by one- to four-family real estate, twenty-one loans totaling $849,000 secured by one- to four-family real estate and thirty-nine consumer loans totaling $132,000. All non-accruing loans at September 30, 1999, were located in our primary market area. At September 30, 1999, accruing loans delinquent 90 days or more included twenty-two loans totaling $875,000 secured by one- to four-family real estate, two construction loans totaling $239,000 secured by one- to four-family real estate, and one consumer loan totaling $4,000. All of our accruing loans delinquent 90 days or more were secured by real estate located in our primary market area except for three loans totaling $216,000 secured by single family residences located in Texas. All of the non-performing construction loans were originated at our loan production office in Lawrence, Kansas. At September 30, 1999, real estate acquired through foreclosure consisted of five single family residences located in our primary market area. The properties have a total carrying value of $110,000 and are currently offered for sale. The increase in non-performing assets was due to growth in the respective loan portfolios and from non-performing loans and foreclosed assets totaling $220,000, which were acquired in The Neodesha Savings and Loan merger conversion. [Omitted Non-performing Assets to Total Asset Graph 1995 - 0.77%; 1996 - 0.57%; 1997 - 1.25%; 1998 - 1.07%; 1999 - 1.84%] We have taken into account our non-performing assets and the composition of the loan portfolio in establishing our allowance for loan losses. The allowance for loan losses totaled $753,000 at September 30, 1999, which represented a $97,000 increase from the allowance for loan losses at September 30, 1998. This increase was primarily due to the transfer of $84,000 in allowance for loan losses from Neodesha. The ratio of the allowance for loan losses as a percent of total loans decreased from .70% at September 30, 1998 to .67% at September 30, 1999. The allowance for loan losses as a percent of non-performing loans decreased from 52.30% at September 30, 1998 to 30.99% at September 30, 1999, due to the increase in non-performing loans at September 30, 1999. The allowance for loan losses is determined based upon an evaluation of pertinent factors underlying the types and quality of our loans. We consider such factors as the repayment status of a loan, the estimated net realizable value of the underlying collateral, the borrower's ability to repay the loan, current and anticipated economic conditions which might affect the borrower's ability to repay the loan and our past statistical history concerning charge-offs. Results of Operations Average Balances, Interest Rates and Yields. The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and related yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made. All average balances are monthly average balances. The use of monthly averages rather than daily averages does not have a significant effect upon our results. Non-accruing loans have been included in the table as loans carrying a zero yield.
Year Ended September 30, --------------------------------------------------------------------- 1999 1998 --------------------------------------------------------------------- Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate --------------------------------------------------------------------- (Dollars in Thousands) Interest-earning assets: Loans receivable (1) $106,176 $ 8,551 8.05% $ 85,966 $ 7,032 8.18% Mortgage-backed securities 13,188 779 5.90 20,596 1,354 6.57 Investment securities 6,170 393 6.37 7,315 462 6.32 Federal Home Loan Bank stock 1,808 125 6.94 1,443 110 7.60 Federal funds sold 4,050 199 4.91 1,679 90 5.37 Other 1,025 54 5.28 435 27 6.23 -------- -------- -------- -------- Total interest-earning assets 132,417 10,101 7.63 117,434 9,075 7.72 -------- -------- -------- -------- Interest-bearing liabilities: Demand and NOW deposits 30,524 1,162 3.81 26,079 1,083 4.15 Savings deposits and certificates 61,451 3,227 5.25 54,209 2,928 5.40 Federal Home Loan Bank advances 29,217 1,600 5.48 26,492 1,545 5.83 -------- -------- -------- -------- Total interest-bearing liabilities 121,192 5,989 4.94 106,780 5,556 5.20 -------- -------- -------- -------- Net interest income $ 4,112 $ 3,519 ======== ======== Net interest rate spread 2.69% 2.52% ==== ==== Net earning assets $ 11,225 $ 10,654 ======== ======== Net yield on average interest- earning assets 3.11% 2.99% ==== ==== Average interest-earning assets to average interest-bearing liabilities 109.26% 109.98% ======== ========
Year Ended September 30, --------------------------------- 1997 --------------------------------- Average Interest Outstanding Earned/ Yield/ Balance Paid Rate --------------------------------- (Dollar in Thousands) Interest-earning assets: Loans receivable (1) $ 71,188 $ 5,684 7.98% Mortgage-backed securities 26,137 1,727 6.61 Investment securities 7,598 513 6.75 Federal Home Loan Bank stock 1,314 89 6.79 Federal funds sold 567 34 6.02 Other 318 22 6.83 -------- -------- Total interest-earning assets 107,122 8,069 7.53 -------- -------- Interest-bearing liabilities: Demand and NOW deposits 22,019 914 4.15 Savings deposits and certificates 51,219 2,745 5.36 Federal Home Loan Bank advances 23,583 1,400 5.93 -------- -------- Total interest-bearing liabilities 96,821 5,059 5.22 -------- -------- Net interest income $ 3,010 ======== Net interest rate spread 2.31% ==== Net earning assets $ 10,301 ======== Net yield on average interest- earning assets 2.81% ==== Average interest-earning assets to average interest-bearing liabilities 110.64% ======== - ------------------- (1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves. Rate/Volume Analysis of Net Interest Income The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended September 30, ----------------------------------------------------------------------------------- 1999 vs. 1998 1998 vs. 1997 ---------------------------------- -------------------------------------- Increase Increase (Decrease) (Decrease) Due to Due to ---------------------------------- -------------------------------------- Total Total Increase Increase Volume Rate (Decrease) Volume Rate (Decrease) ------- -------- ----------- ----------- --------- ---------- (Dollars in Thousands) Interest-earning assets: Loans receivable $ 1,629 $ (110) $ 1,519 $ 1,206 $ 142 $ 1,348 Mortgage-backed securities (448) (127) (575) (363) (10) (373) Investment securities (73) 4 (69) (19) (32) (51) Federal Home Loan Bank stock 25 (10) 15 9 12 21 Federal funds sold 117 (8) 109 60 (4) 56 Other 32 (5) 27 7 (2) 5 ------- ------- ------- ------- ------- ------- Total interest-earning assets 1,282 (256) 1,026 900 106 1,006 ------- ------- ------- ------- ------- ------- Interest-bearing liabilities: Demand and NOW deposits 173 (94) 79 169 --- 169 Savings deposits and certificates 382 (83) 299 162 21 183 Federal Home Loan Bank advances 152 (97) 55 169 (24) 145 ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities $ 707 $ (274) 433 $ 500 $ (3) 497 ------- ------- ------- ------- ------- ------- Net interest income $ 593 $ 509 ======= =======
The following table sets forth the weighted average yields on our interest-earning assets, the weighted average interest rates on interest-bearing liabilities and the interest rate spread between the weighted average yields and rates at the dates indicated. Non-accruing loans have been included in the table as carrying a zero yield.
At September 30, ------------------------------------------ 1999 1998 1997 ------- ------- ------- Weighted average yield on: Loans receivable 7.68% 7.80% 7.74% Mortgage-backed securities 6.14 6.34 6.66 Investment securities 6.48 6.38 6.97 Federal funds sold 5.04 5.36 5.28 Other interest-earning assets 4.82 5.51 5.22 Combined weighted average yield on interest-earning assets 7.45 7.48 7.40 Weighted average rate paid on: Savings deposits and certificates 5.12 5.44 5.38 Demand and NOW deposits 3.86 4.04 4.06 Federal Home Loan Bank advances 5.58 5.74 6.11 Combined weighted average rate paid on interest-bearing liabilities 4.87 5.19 5.21 Spread 2.58 2.29 2.19
FINANCIAL CONDITION Total assets increased $13.8 million, or 11.1%, from $124.3 million at September 30, 1998 to $138.1 million at September 30, 1999. This increase was primarily due to increases in net loans receivable of $19.2 million, investment securities of $600,000, cash and cash equivalents of $500,000 and accrued interest receivable of $100,000. These increases in assets, along with reductions in advances from the Federal Home Loan Bank of Topeka of $2.6 million, were funded by increases in savings deposits of $14.9, and the redeployment of funds received from decreases in mortgage-backed securities of $6.4 million. These increases were primarily due to assets and liabilities acquired in the merger conversion with The Neodesha Savings and Loan. Total loans receivable increased $19.2 million from $93.7 million at September 30, 1998, to $112.9 million at September 30, 1999. The increase was primarily due to loans acquired in The Neodesha Savings and Loan merger conversion totaling $8.9 million and, to a lesser extent, construction loan originations at our loan production office in Lawrence, Kansas. These construction loans generally have terms of nine months or less and interest rates tied to the prime rate plus a margin. The increase in construction loans also contributed to an increase in loans in process due to the disbursement of funds throughout the construction period. The increase was also due to originations in our market area consisting primarily of 15- and 30-year fixed-rate loans, mortgage loans with a fixed rate for the first three years of the loan term that automatically convert to one-year adjustable rate loans during the fourth year of the loan term, and to a lesser extent, one-year adjustable rate mortgages. [Total Assets Graph Omitted - 1995 - $101,904; 1996 - $108,539; 1997 - $112,523; 1998 - $124,337; 1999 - $138,131] Total deposits increased $14.9 million from $80.6 million at September 30, 1998, to $95.5 million at September 30, 1999. Deposits increased primarily due to deposits acquired in The Neodesha Savings and Loan merger conversion which totaled $10.9 million at September 30, 1999. To a lesser extent, the increase was due to public units depositing short-term funds into the OPlatinumO money fund account and new accounts totaling $3.2 million opened at the Coffeyville, Kansas branch office during the fiscal year. The "Platinum" money fund account offers tiered rates on a limited transaction account with the highest rate paid on balances of $50,000 and above. We feel the "Platinum" money fund provides a lower risk, insured alternative for deposit customers considering higher risk investments in order to get higher yields than money market accounts. [Loans graph omitted - Multi-family - 0.74%; Non-residential - 7.29%; Construction - 20.13%; Home Equity - 0.73%; Other Consumer - 3.56%; One- to four-family 67.55%] Total borrowed funds decreased $2.6 million from $30.1 million at September 30, 1998 to $27.5 million at September 30, 1999. The decrease was due to a scheduled principal repayment of advances obtained from the Federal Home Loan Bank of Topeka. Most of the advances obtained from the Federal Home Loan Bank of Topeka were used by us to invest in loans receivable at a positive spread over the term of the advances. Total stockholders' equity increased $1.0 million from $12.1 million at September 30, 1998 to $13.1 million at September 30, 1999. The increase was primarily due to net earnings from operations of $1.1 million and net proceeds of $677,000 from our issuance of 150,896 shares of common stock in connection with the merger conversion with Neodesha Savings and Loan. To a lesser extent, the increase was due to the repayment of employee stock ownership debt of $88,000, fair value adjustment of $79,000 on ESOP shares committed for release and common stock options exercised of $43,000. These increases were partially offset by the use of $629,000 to repurchase 55,885 shares of common stock, dividends of $344,000 paid to stockholders, and a decrease in the unrealized gains on securities available for sale of $50,000. [Stockholders' Equity to total assets graph ommitted: 1995 - 13.35%; 1996 - 11.98%; 1997 - 10.25%; 1998 - 9.73%; 1999 - 9.49%] Comparison of Fiscal Years Ended September 30, 1999 and September 30, 1998 General. Net earnings for the fiscal year ended September 30, 1999 were $1,143,000 as compared to $901,000 for the fiscal year ended September 30, 1998, an increase of $242,000, or 26.8%. The increase in net earnings was primarily due to increases in net interest income of $593,000 and non-interest income of $162,000. These increases were partially offset by increases in non-interest expense of $408,000, provision for loan losses of $66,000 and income tax expense of $39,000. [Net earnings graph omitted: 1995 - $1,087; 1996 - $815; 1997 - $712; 1998 - $901; 1999 - $1,143] Net Interest Income. Net interest income increased $593,000, or 16.9%, for the fiscal year ended September 30, 1999 as compared to the fiscal year ended September 30, 1998. This increase was due primarily to an increase in interest income of $1.0 million, or 11.3%; offset partially by an increase in interest expense of $433,000, or 7.8%. Interest income increased primarily due to a $15.0 million increase in the average balance of interest-earning assets, offset partially by a 9 basis point decrease in the average yield on interest-earning assets. Interest expense increased primarily due to a $14.4 million increase in the average balance of interest-bearing liabilities, offset partially by a 26 basis point decrease in the average rate paid on interest-bearing liabilities. The average balance of interest-earning assets and interest-bearing liabilities increased primarily due to The Neodesha Savings and Loan merger conversion. The average rate earned on interest-earning assets and paid on interest-bearing liabilities decreased primarily due to a decrease in market interest rates. The variance in the decrease was due primarily to interest-earning assets and interest-bearing liabilities acquired in The Neodesha Savings and Loan merger conversion having a greater spread than interest-earning assets and interest-bearing liabilities on First Federal's balance sheet. Interest Income. Interest income for the fiscal year ended September 30, 1999, increased to $10.1 million from $9.1 million for the fiscal year ended September 30, 1998. This increase was caused primarily by a $15.0 million increase in the average outstanding amount of interest-earning assets during the fiscal year ended September 30, 1999, as compared to the fiscal year ended September 30, 1998 due to assets acquired in The Neodesha Savings and Loan merger conversion. To a lesser extent, the increase in interest-earning assets was due to an increase in the average balance of loans receivable from increased construction loan originations at our Lawrence, Kansas loan production office. This increase was partially offset by a decrease in the average yield on interest-earning assets. The average yield on interest-earning assets decreased 9 basis points to 7.63% for the fiscal year ended September 30, 1999, from 7.72% for the fiscal year ended September 30, 1998. This decrease was caused primarily by the general decline in interest rates resulting in a reduction in yield on our loan portfolio from 8.18% to 8.05%. The average rate on interest-earning assets went down less than it would have if there had been no increase in the average balance of loans, since they have a higher rate earned than other assets. Therefore, the change in mix of interest-earning assets to more higher earning assets, reduced the decrease due to market rates of interest going down. To a lesser extent, the decrease in yield was due to a decrease in yield on our mortgage-backed securities portfolio from 6.57% to 5.90% for the fiscal year ended September 30, 1999, as compared to the same period in fiscal 1998. The decreased yield was caused by accelerated amortization of premiums on the mortgage-backed securities due to an increase in prepayment speeds. Interest Expense. Interest expense for the fiscal year ended September 30, 1999, increased by $433,000 to $6.0 million as compared to $5.6 million for the fiscal year ended September 30, 1998. This increase in interest expense was due primarily to a $14.4 million increase in the average outstanding amount of interest-bearing liabilities during the fiscal year ended September 30, 1999 as compared to the fiscal year ended September 30, 1998. This increase was partially offset by a 26 basis point decrease in average interest rates paid on interest-bearing liabilities, caused by decreases in market interest rates and the addition of deposits from The Neodesha Savings and Loan merger conversion at a lower average interest rate than First Federal's deposits. The increase in interest-bearing liabilities was primarily due to an $11.7 million increase in the average outstanding balance of deposits due primarily to savings deposits acquired in The Neodesha Savings and Loan merger conversion and, to a lesser extent, an increase in average advances obtained from the Federal Home Loan Bank of Topeka. Provision for Loan Losses. The provision for loan losses represents a charge to earnings to maintain the allowance for loan losses at a level we believe is adequate to absorb potential losses in the loan portfolio. The provision for loan losses amounted to $66,000 for the fiscal year ended September 30, 1999 as compared to no provision for the same period in 1998. This increase in provision for loan losses was in recognition of the increased balance of construction loans in our loan portfolio and the increase in non-performing loans. It is also reflective of the loan loss allowance obtained in the merger conversion with Neodesha Savings and Loan. Although we believe that we use the best information available in providing for possible loan losses and we believe that the allowance is adequate at September 30, 1999, future adjustments to the allowance could be necessary and net earnings could be affected if circumstances and/or economic conditions differ substantially from the assumptions used in making the initial determinations. Non-interest Income. Non-interest income increased $162,000 to $354,000 during the fiscal year ended September 30, 1999 as compared to $192,000 for the fiscal year ended September 30, 1998. The increase was primarily due to increased checking and deposit account fees as a result of accounts acquired in The Neodesha Savings and Loan merger conversion. To a lesser extent, the increase was due to amortization of $71,000 related to negative goodwill acquired in The Neodesha Savings and Loan merger conversion and increased late charges and other fees associated with mortgage loans. Non-interest Expense. Total non-interest expense increased to $2.6 million for the fiscal year ended September 30, 1999 from $2.2 million for the fiscal year ended September 30, 1998, an increase of $408,000, or 18.9%. The increase was primarily due to increases in compensation and employee benefits of $186,000, other expense of $103,000, data processing fees of $68,000, and occupancy and equipment of $52,000. These increases were primarily due to the merger conversion with Neodesha Savings and Loan, resulting in additional staff, occupancy and equipment, stationery, printing and office supplies expense. To a lesser extent, the increase in compensation expense was the result of normal, annual cost of living increases in salaries and bonuses, offset partially by a decrease in compensation expense associated with the ESOP due to the decrease in our stock price. Income Tax Expense. Income tax expense was $688,000 for the fiscal year ended September 30, 1999 compared to $649,000 for the fiscal year ended September 30, 1998, an increase of $39,000. This increase was primarily due to an increase in pre-tax earnings during the 1999 period as compared to the 1998 period. Our effective tax rates were 37.6% and 41.9% for the fiscal years ended September 30, 1999 and September 30, 1998, respectively. Rates exceeded expected rates for the September 30, 1998 period due primarily to compensation expense associated with the ESOP which is not deductible for income tax purposes. The non-deductible ESOP compensation expense was partially offset for the September 30, 1999 period by negative goodwill amortization which is not included in income for income tax calculation purposes, resulting in a lower effective tax rate. Comparison of Fiscal Years Ended September 30, 1998 and September 30, 1997 General. Net earnings for the fiscal year ended September 30, 1998 were $901,000 as compared to $712,000 for the fiscal year ended September 30, 1997, an increase of $189,000, or 26.7%. The increase in net earnings was primarily due to increases in net interest income of $509,000 and non-interest income of $33,000. These increases were partially offset by increases in income tax expense of $181,000 and non-interest expense of $171,000. Net Interest Income.EENet interest income increased $509,000, or 16.9%, for the fiscal year ended September 30, 1998 as compared to the fiscal year ended September 30, 1997. This increase was due primarily to an increase in interest income of $1.0 million, or 12.5%; offset partially by an increase in interest expense of $497,000, or 9.8%. Interest income increased primarily due to a $10.3 million increase in the average balance of interest-earning assets, and a 19 basis point increase in the average yield on interest-earning assets. The average yield on interest-earning assets increased primarily due to construction loan originations at the Lawrence loan production office. These construction loans generally have terms of nine months or less and carry higher rates of interest than loans originated for the purchase of single-family residences. Interest expense increased primarily due to a $10.0 million increase in the average balance of interest-bearing liabilities, offset partially by a 2 basis point decrease in the average rate paid on interest-bearing liabilities. The average rate paid on interest-bearing liabilities decreased primarily due to a $4.1 million increase in the average balance of low cost demand and NOW deposits (resulting in a larger percentage of interest-bearing liabilities) and, to a lesser extent, a decrease in interest rates on Federal Home Loan Bank of Topeka advances. Interest Income. Interest income for the fiscal year ended September 30, 1998, increased to $9.1 million from $8.1 million for the fiscal year ended September 30, 1997. This increase was caused primarily by a $10.3 million increase in the average outstanding balance of interest-earning assets during the fiscal year ended September 30, 1998, as compared to the fiscal year ended September 30, 1997; due to the increase in the average balance of loans. To a lesser extent, the increase in interest income was due to an increase in the average yield on interest-earning assets. The average yield on interest-earning assets increased 19 basis points to 7.72% for the fiscal year ended September 30, 1998, from 7.53% for the fiscal year ended September 30, 1997. This increase was caused primarily by increases in yield on our Federal Home Loan Bank stock from 6.79% to 7.60% and on its loan portfolio from 7.98% to 8.18% for the fiscal year ended September 30, 1998, as compared to the fiscal year ended September 30, 1997. These increases were partially offset by a decrease in the investment securities portfolio yield from 6.75% to 6.32% and mortgage-backed securities from 6.61% to 6.57% for the fiscal year ended September 30, 1998, as compared to the fiscal year ended September 30, 1997. The increase in yield on the loan portfolio was primarily due to construction loan originations at our new loan production office in Lawrence, Kansas. These construction loans generally have terms of nine months or less and interest rates tied to the prime rate plus a margin. The decrease in yield on investment securities was primarily due to the reinvestment of proceeds from called securities into lower yielding investments. Interest Expense. Interest expense for the fiscal year ended September 30, 1998, increased by $497,000 to $5.6 million as compared to $5.1 million for the fiscal year ended September 30, 1997. This increase was primarily the result of a $10.0 million increase in the average outstanding balance of interest-bearing liabilities during the fiscal year ended September 30, 1998 as compared to the fiscal year ended September 30, 1997. This increase was partially offset by a 2 basis point decrease in the average interest rate paid on interest-bearing liabilities, caused by an increase in the average balance of low cost demand and NOW deposits (resulting in a larger percentage of interest-bearing liabilities) and, to a lesser extent, a decrease in interest rates on Federal Home Loan Bank advances. The increase in interest-bearing liabilities was primarily due to a $7.1 million increase in the average outstanding balance of deposits due primarily to new accounts opened at the Coffeyville, Kansas branch office and seasonal deposits from public units. Provision for Loan Losses. There was no provision for losses on loans for the fiscal years ended September 30, 1998 and September 30, 1997. We determined that additional provisions were not necessary based upon our analysis of the established allowance and review of the composition of the loan portfolio. We will continue to monitor our allowance for loan losses and make future additions to the allowance through the provision for loan losses as economic and regulatory conditions dictate. However, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, our determinations as to the amount of the allowance for loan losses are subject to review by the regulatory agencies which can order the establishment of additional general or specific allowances. Non-interest Income. Non-interest income increased $33,000 to $192,000 during the fiscal year ended September 30, 1998 as compared to $159,000 for the fiscal year ended September 30, 1997. The increase was primarily due to increased checking and deposit account fees as a result of new accounts in the Coffeyville branch. To a lesser extent, the increase was due to increased fees associated with mortgage loans. Recurring non-interest income generally consists of servicing fees as well as deposit and other types of fees. Non-interest income levels are anticipated to remain stable in the future due to the small number of checking accounts held by us. Non-interest Expense. Total non-interest expense increased to $2.2 million for the fiscal year ended September 30, 1998 from $2.0 million for the fiscal year ended September 30, 1997, an increase of $171,000, or 8.6%. The increase was primarily due to increases in compensation and employee benefits of $117,000, occupancy and equipment of $67,000, and data processing fees of $46,000. These increases were primarily due to the opening of a new loan production office in Lawrence, Kansas, resulting in additional staff, occupancy and equipment, stationery, printing and office supplies expense. Data processing expenses also increased due to increased account volumes at the Coffeyville branch and processing price increases. To a lesser extent, the increase in compensation expense was the result of normal, annual cost of living increases in salaries and bonuses, and increased compensation expense associated with the ESOP plan due to our higher stock price during a portion of the year. These increases were partially offset by decreases in other expenses of $43,000 and federal deposit insurance premiums of $17,000. Income Tax Expense. Income tax expense was $649,000 for the fiscal year ended September 30, 1998 compared to $468,000 for the fiscal year ended September 30, 1997, an increase of $181,000. This increase was primarily due to an increase in pre-tax earnings during the 1998 period as compared to the 1997 period. Our effective tax rates were 41.9% and 39.7% for the fiscal years ended September 30, 1998 and September 30, 1997, respectively. Rates exceed effective combined federal and state statutory rates of 38% due primarily to compensation expense associated with the ESOP, of which a portion is not deductible for income tax purposes. Liquidity and Capital Resources The Office of Thrift Supervision requires minimum levels of liquid assets. At September 30, 1999, Office of Thrift Supervision regulations required First Federal to maintain an average daily balance of investments in an amount equal to at least 4.0% of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. Such requirements may be changed from time to time by the Office of Thrift Supervision to reflect changing economic conditions. Such investments are intended to provide a source of relatively liquid funds upon which First Federal may rely if necessary to fund deposit withdrawals and other short-term funding needs. First Federal's regulatory liquidity at September 30, 1999 was 9.66%, as compared to 7.01% at September 30, 1998. This increase in liquidity was primarily due to liquid investments acquired in The Neodesha Savings and Loan merger conversion. These liquid assets are being invested in mortgage loan originations which will eventually reduce our liquidity ratio to a more normal level. First Federal normally attempts to maintain liquidity between 7% and 9%. Our primary source of funds consists of deposits and loan and mortgage-backed securities repayments. Other sources of funds available include borrowings from the Federal Home Loan Bank of Topeka. We use our liquid resources principally to meet on-going commitments, to fund maturing certificates of deposit and deposit withdrawals, to invest, to fund existing and future loan commitments, to maintain liquidity, and to meet operating expenses. We believe that our existing sources of funds will be adequate to meet our foreseeable liquidity needs. Our primary investing activity is the origination of mortgage loans and the purchase of mortgage-backed and other securities. At September 30, 1999, mortgage loans and mortgage-backed securities accounted for 89.6% of total assets. We have been able to generate sufficient cash through the retail deposit market, our traditional funding source, and through short-term borrowings, to provide the cash utilized in investing activities. A $10.0 million line of credit has also been established with the Federal Home Loan Bank of Topeka since 1995, of which the entire amount is available at September 30, 1999. The line of credit is scheduled to mature on February 5, 2000, and will be renewed for another one year term at that time. The line of credit is subject to various conditions, including the pledge of acceptable collateral. The primary purpose of the line of credit is to serve as a back-up liquidity facility, however, we may from time to time utilize the line of credit to purchase investment securities and fund other commitments. Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-bearing deposits, and (iv) the objectives of its asset/liability management program. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. If we require additional funds, beyond our internal ability to generate, we have additional borrowing capacity with the Federal Home Loan Bank of Topeka. We anticipate that we will have sufficient funds available to meet current loan commitments. At September 30, 1999, we had outstanding commitments to extend credit which amounted to $2.0 million, including commitments on construction loans. We are not aware of any trends, events or uncertainties which will have or that are reasonably likely to have a material effect on our liquidity, capital resources or operations. Certificates of deposit scheduled to mature in one year or less at September 30, 1999 totaled approximately $29.2 million. We believe that a significant portion of such deposits will remain with First Federal. There can be no assurance, however, that we can retain all of these deposits. At September 30, 1999, we had $27.5 million in advances from the Federal Home Loan Bank of Topeka with $3.0 million maturing in one year or less. First Federal has minimum capital standards which generally require the maintenance of regulatory capital sufficient to meet each of three tests: the tangible capital requirement, the core capital requirement, and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as retained earnings less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus supervisory goodwill) equal to 3.0% of assets. The risk-based capital requirement provides for the maintenance of core capital plus general loss allowances (less a specified percentage of certain equity investments) equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, we multiply the book value of each asset on our balance sheet by a defined risk-weighting factor (e.g., one- to four-family residential loans carry a risk-weighted factor of 50%). We have reviewed these capital standards and determined that we are in compliance with each of the three requirements. As of September 30, 1999, our tangible capital, core capital, and risk-based capital of $12.1 million, $12.1 million, and $12.8 million exceeded the applicable minimum requirements by $10.0 million, $8.0 million, and $7.5 million, respectively. The following table sets forth our compliance with such requirements at September 30, 1999.
Office of Thrift First Federal's capital level Supervision requirement at September 30, 1999 ---------------------------- ------------------------------------------------- % of % of Amount Capital standard Assets Amount Assets Amount of Excess ------ -------- ------ -------- --------- (Dollars in Thousands) Tangible capital 1.50% $2,071 8.76% $12,092 $10,021 Core capital (1) 3.00 4,142 8.76 12,092 7,950 Risk-based capital 8.00 5,354 19.19 12,845 7,491
- ---------------- (1) Based on current core capital requirement of 3%. See Note L of Notes to Consolidated Financial Statements for additional information. We have reviewed our regulatory restrictions relating to loans to one borrower, qualification as a qualified thrift lender, and other restrictions on lending and investment, and have determined that, based on our capital position and lending and investment policies, these restrictions have not had a material impact on our operations. Impact of Inflation and Changing Prices The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and results of operations in terms of historical dollars without considering changes in the relative purchasing power of money over time because of inflation. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Year 2000 Compliance Issues The year 2000 issue confronting us and our suppliers, customers' suppliers and competitors centers on the inability of computer systems to recognize the year 2000. Many existing computer programs and systems originally were programmed with six digit dates that provided only two digits to identify the calendar year in the date field. With the impending new millennium, these programs and computers will recognize O00O as the year 1900 rather than the year 2000. The board of directors and management view the year 2000 issue as a potentially serious interruption to the conduct of our day-to-day operations. To alleviate this potential interruption, we have established a year 2000 committee to assess the risk of potential problems that might arise from the failure of computer programs to recognize the year 2000 and to develop a plan to mitigate any such risk. This committee reports to the board at least quarterly about the status and progress of our Y2K plan. Our year 2000 action plan covers five areas; awareness of the problem, inventory and assessment of hardware and software for year 2000 problems, renovation of necessary systems, validation of testing plans and implementation of system changes. We have completed all areas of the plan and are believed to be year 2000 compliant at the time of this report. We are expensing all costs associated with training and software as those costs are incurred, and such costs are being funded through operating cash flows. Hardware cost will be capitalized and expensed under our fixed asset guidelines. The total cost of the year 2000 conversion project is estimated to be $110,000. Expenses of approximately $108,000 were incurred and expensed by us through September 30, 1999. We will review our budget monthly to help ensure that sufficient resources have been allocated to this project. Any deviations to the preliminary budget will be reported to the Board of Directors. During the assessment phase, we developed back-up or contingency plans for each of our mission critical systems. Virtually all of our mission critical systems are dependent upon third-party vendors or service providers. Therefore, contingency plans include selecting a new vendor or service provider and converting to their system. For some systems, contingency plans consist of using spreadsheet software or reverting to manual systems until system problems can be corrected. Responses from third party vendors indicate that the significant providers are currently year 2000 compliant. Specifically, our core data processing is provided by an outside vendor, which has certified their software is year 2000 compliant. The potential year 2000 risk includes, but is not limited to, the risk of insufficient liquidity, communication loss, power loss and the inability to process customer data. The potential impact on our profitability related to these risks and those not yet identified cannot be measured or known at this time. Effect of New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement of Financial Accounting Standards No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. Statement of Financial Accounting Standards No. 133 does not allow hedging of a security which is classified as held to maturity. Accordingly, upon adoption of Statement of Financial Accounting Standards No. 133, companies may reclassify any security from held to maturity to available for sale if they wish to be able to hedge the security in the future. This Statement, as amended by Statement of Financial Accounting Standards No. 137, is effective for fiscal years beginning after June 15, 2000 with early adoption encouraged for any fiscal quarter beginning July 1, 1998 or later, with no retroactive application. The Company currently has no plans to adopt Statement of Financial Accounting Standards No. 133 early or to reclassify securities from held to maturity upon adoption. Management believes adoption of Statement of Financial Accounting Standards No. 133 will not have a material effect on our financial position or results of operations, nor will adoption require additional capital resources. In October 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 134, OAccounting for Mortgage-Backed Securities After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.O Statement of Financial Accounting Standards No. 134 changes the way companies involved in mortgage banking activities account for certain securities and other interests they retain after securitizing mortgage loans that were held for sale. Statement of Financial Accounting Standards No. 134 allows any retained mortgage-backed securities after a securitization of mortgage loans held for sale to be classified based on holding intent in accordance with Statement of Financial Accounting Standards No. 115, except in cases where the retained mortgage-backed security is committed to be sold before or during the securitization process, in which case it must be classified as trading. Previously, all retained mortgage-backed securities were required to be classified as trading. Statement of Financial Accounting Standards No. 134 was effective as of July 1, 1999, and did not have a material impact on our results of operations or our financial condition. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors First Independence Corporation and Subsidiary We have audited the accompanying consolidated balance sheets of First Independence Corporation and Subsidiary as of September 30, 1999 and 1998, and the related consolidated statements of earnings, comprehensive income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Independence Corporation and Subsidiary as of September 30, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with generally accepted accounting principles. Wichita, Kansas October 22, 1999 CONSOLIDATED BALANCE SHEETS First Independence Corporation and Subsidiary CONSOLIDATED BALANCE SHEETS September 30,
ASSETS 1999 1998 ---- ---- Cash and due from banks $ 1,064,794 $ 474,406 Other interest-bearing deposits 375,201 439,174 -------------- -------------- Cash and cash equivalents 1,439,995 913,580 Investment securities held to maturity (estimated fair value of $6,957,733 in 1999 and $5,004,700 in 1998) 7,005,279 5,000,000 Investment securities available for sale 1,999,800 3,418,311 Mortgage-backed securities held to maturity (estimated fair value of $10,852,983 in 1999 and $17,403,143 in 1998) 10,912,279 17,274,238 Loans receivable, net 112,893,406 93,684,258 Premises and equipment, net 1,322,128 1,309,633 Federal Home Loan Bank stock, at cost 1,441,600 1,574,000 Accrued interest receivable 887,465 753,970 Real estate acquired through foreclosure 109,579 71,596 Other 119,809 337,008 -------------- -------------- Total assets $ 138,131,340 $ 124,336,594 ============== ==============
The accompanying notes are an integral part of these statements.
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 ---- ---- Deposits $ 95,452,864 $ 80,573,077 Advances from borrowers for taxes and insurance 825,330 745,520 Deferred income taxes - 126,889 Advances from Federal Home Loan Bank 27,500,000 30,100,000 Accrued expenses and other 1,246,538 692,067 -------------- ------------ Total liabilities 125,024,732 112,237,553 Stockholders' equity Preferred stock, $.01 par value, 500,000 shares authorized; none issued - - Common stock, $.01 par value, 2,500,000 shares authorized; 1,649,288 shares and 1,498,392 shares issued in 1999 and 1998, respectively 16,493 14,984 Additional paid-in capital 8,132,391 7,239,207 Retained earnings - substantially restricted 10,876,339 10,077,091 Accumulated other comprehensive income, net of related taxes 2,316 52,497 Required contributions for shares acquired by Employee Stock Ownership Plan (ESOP) (199,680) (145,475) Treasury stock, 587,458 shares in 1999 and 539,073 shares in 1998 - at cost (5,721,251) (5,139,263) -------------- ------------ Total stockholders' equity 13,106,608 12,099,041 -------------- ------------ Total liabilities and stockholders' equity $ 138,131,340 $124,336,594 ============== ============
First Independence Corporation and Subsidiary CONSOLIDATED STATEMENTS OF EARNINGS Year ended September 30, 1999 1998 ---- ---- Interest income Loans $ 8,550,856 $ 7,032,289 Mortgage-backed securities 778,763 1,353,937 Investment securities 393,202 462,407 Interest-bearing deposits and other 378,469 226,914 ------------ ------------ Total interest income 10,101,290 9,075,547 Interest expense Deposits 4,389,547 4,010,717 Borrowed funds 1,599,633 1,545,727 ------------ ------------ Total interest expense 5,989,180 5,556,444 ------------ ------------ Net interest income 4,112,110 3,519,103 Provision for loan losses 66,000 - ------------ ------------ Net interest income after provision for loan losses 4,046,110 3,519,103 Noninterest income Service charges 202,057 105,277 Real estate operations (34,725) 3,177 Other 186,885 83,620 ------------ ------------ 354,217 192,074 Noninterest expense Employee compensation and benefits 1,421,077 1,235,386 Occupancy and equipment 286,758 235,043 Data processing fees 264,800 197,134 Other operating 596,297 493,107 ------------ ------------ 2,568,932 2,160,670 ------------ ------------ Earnings before income taxes 1,831,395 1,550,507 Income tax expense 688,307 649,087 ------------ ------------ NET EARNINGS $ 1,143,088 $ 901,420 ============ ============ Earnings per share Basic $1.13 $.98 Diluted $1.07 $.92 The accompanying notes are an integral part of these statements.
First Independence Corporation and Subsidiary CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended September 30, 1999 1998 ---- ---- Net earnings $ 1,143,088 $ 901,420 Other comprehensive income, net of tax Unrealized gains (losses) on securities avail- able for sale arising during the period, net of tax benefit of $30,757 in 1999 and expense of $22,913 in 1998 (50,181) 37,385 ----------- ----------- Comprehensive income $ 1,092,907 $ 938,805 =========== =========== The accompanying notes are an integral part of these statements.
First Independence Corporation and Subsidiary CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended September 30, 1999 and 1998 Required Accumulated contri- other butions Additional comprehensive for shares Common paid-in Retained income, acquired stock capital earnings net by ESOP --------- ----------- -------- ---------------- ------- Balance at October 1, 1997 $ 14,984 $ 7,122,744 $ 9,441,054 $ 15,112 $ (218,212) Net earnings for the year - - 901,420 - - Cash dividends of $.2875 per share - - (265,383) - - Common stock options exercised - (8,641) - - - Appreciation of securities available for sale - - - 37,385 - ESOP loan repayments - - - - 72,737 Fair value adjustment on ESOP shares committed for release - 125,104 - - - Amortization of unearned stock compensation - - - - - Purchase of 25,298 shares of treasury stock - - - - - --------- ------------ ------------- --------- ----------- Balance at September 30, 1998 14,984 7,239,207 10,077,091 52,497 (145,475) Net earnings for the year - - 1,143,088 - - Cash dividends of $.3375 per share - - (343,840) - - Issuance of 150,896 shares of common stock 1,509 817,968 - - (142,176) Common stock options exercised - (3,987) - - - Depreciation of securities available for sale - - - (50,181) - ESOP loan repayments - - - - 87,971 Fair value adjustment on ESOP shares committed for release - 79,203 - - - Purchase of 55,885 shares of treasury stock - - - - - --------- ------------ ------------- --------- ----------- Balance at September 30, 1999 $ 16,493 $ 8,132,391 $ 10,876,339 $ 2,316 $ (199,680) ========= ============ ============= ========= ===========
Unearned stock compen- Treasury sation - RRP stock Total ------------ --------- ----- Balance at October 1, 1997 $ (43,634) $ (4,802,767) $ 11,529,281 Net earnings for the year - - 901,420 Cash dividends of $.2875 per share - - (265,383) Common stock options exercised - 40,061 31,420 Appreciation of securities available for sale - - 37,385 ESOP loan repayments - - 72,737 Fair value adjustment on ESOP shares committed for release - - 125,104 Amortization of unearned stock compensation 43,634 - 43,634 Purchase of 25,298 shares of treasury stock - (376,557) (376,557) ---------- ------------ ----------- Balance at September 30, 1998 - (5,139,263) 12,099,041 Net earnings for the year - - 1,143,088 Cash dividends of $.3375 per share - - (343,840) Issuance of 150,896 shares of common stock - - 677,301 Common stock options exercised - 46,831 42,844 Depreciation of securities available for sale - - (50,181) ESOP loan repayments - - 87,971 Fair value adjustment on ESOP shares committed for release - - 79,203 Purchase of 55,885 shares of treasury stock - (628,819) (628,819) ---------- ------------ ----------- Balance at September 30, 1999 $ - $ (5,721,251) $13,106,608 ========== ============ ===========
The accompanying notes are an integral part of these statements.
First Independence Corporation and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended September 30, 1999 1998 ---- ---- Cash flows from operating activities Net earnings $ 1,143,088 $ 901,420 Adjustments to reconcile net earnings to net cash provided by operating activities Provision for loan losses 66,000 - Depreciation 112,234 102,889 Amortization of premiums and discounts on investments and mortgage-backed securities 104,186 67,751 Amortization of deferred loan origination fees (238,920) (164,663) Amortization of expense related to employee benefit plans 167,174 241,475 Amortization of negative goodwill (70,544) - Gain on sale of real estate acquired through foreclosure (23,834) (6,515) Deferred income taxes 47,614 69,928 Increase (decrease) in cash due to changes, net of effects of acquisition Accrued interest receivable (36,996) (41,672) Other assets (19,608) 13,157 Accrued expenses and other liabilities (304,948) 250,495 Income taxes payable (57,256) 148,643 ------------ ------------ Net cash provided by operating activities 888,190 1,582,908 Cash flows from investing activities Proceeds from sale of investment security 355,053 - Proceeds from maturities and repayment of securities Available for sale 1,000,000 1,466,372 Held to maturity 12,463,166 9,164,071 Purchase of securities Available for sale (8,452) (224,832) Held to maturity (6,000,000) (5,000,000) Purchase of loans - (3,691,591) Net increase in loans (10,156,916) (15,341,907) Purchase of Federal Home Loan Bank stock (271,300) - Proceeds from redemption of Federal Home Loan Bank stock 507,300 - Capital expenditures (124,729) (115,022) Proceeds from sale of real estate acquired through foreclosure 70,074 11,147 Cash acquired in acquisition 2,114,968 - ------------ ------------ Net cash used in investing activities (50,836) (13,731,762)
First Independence Corporation and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended September 30, 1999 1998 ---- ---- Cash flows from financing activities Net increase in deposits $ 2,208,774 $ 4,343,901 Net increase in advances from borrowers for taxes and insurance 58,176 52,451 Advances from Federal Home Loan Bank 27,700,000 27,700,000 Repayment of Federal Home Loan Bank advances (30,300,000) (21,300,000) Cash dividends paid (343,840) (265,383) Purchase of treasury stock (628,819) (376,557) Stock issuance costs (327,338) (274,625) Stock options exercised 42,844 31,420 Net proceeds from sale of stock 1,279,264 - ------------- ------------- - Net cash provided by (used in) financing activities (310,939) 9,911,207 ------------- ------------- Net increase (decrease) in cash and cash equivalents 526,415 (2,237,647) Cash and cash equivalents at beginning of year 913,580 3,151,227 ------------- ------------- Cash and cash equivalents at end of year $ 1,439,995 $ 913,580 ============= ============= Supplemental disclosures of cash flow information Cash paid during the year for Income taxes $ 697,949 $ 430,516 Interest 6,032,114 5,532,187 Noncash investing and financing activities Transfer from loans to real estate acquired through foreclosure 186,283 138,236 Issuance of loans receivable in connection with the sale of real estate acquired through foreclosure 111,250 65,550 Liabilities assumed in conjunction with acquisition 13,700,846 - The accompanying notes are an integral part of these statements.
First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 and 1998 NOTE A - SUMMARY OF ACCOUNTING POLICIES First Independence Corporation (the "Corporation") is a savings and loan holding company whose activities are primarily limited to holding the stock of First Federal Savings and Loan Association of Independence (the "Association"). Future references to the Corporation or the Association are utilized herein as the context requires. The Association conducts a general banking business in southeastern Kansas which consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, consumer and nonresidential purposes and the purchase of investment and mortgage-backed securities. The Association's profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) and the interest expense paid on interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Association can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management's control. The consolidated financial information presented herein has been prepared in accordance with generally accepted accounting principles (GAAP) and general accounting practices within the financial services industry. In preparing consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. The following is a summary of the Corporation's significant accounting policies which have been consistently applied in the preparation of the accompanying consolidated financial statements. 1. Principles of consolidation The consolidated financial statements include the accounts of First Independence Corporation and its wholly-owned subsidiary, First Federal Savings and Loan Association of Independence. All significant intercompany balances and transactions have been eliminated. 2. Cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, federal funds sold and other overnight deposits. 3. Investment securities and mortgage-backed securities Investment securities and mortgage-backed securities are classified in three categories and accounted for as follows: (a) debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held-to- maturity securities and reported at amortized cost, (b) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings and (c) debt and equity securities not classified as either held-to- maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as the sole component of accumulated other comprehensive income in stockholders' equity. Premiums and discounts on investment securities are amortized to operations over the term of the security using the level yield method. Premiums and discounts on mortgage-backed securities are amortized and accreted to operations using the level yield method over the estimated life of the underlying loans collateralizing the securities. Gains and losses on the sale of securities designated as available for sale are recorded using the specific identification method. First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued 4. Loans receivable Loans receivable that management has the intent and ability to hold until maturity or pay-off are reported at their outstanding principal balance, adjusted for any charge-offs, the allowance for loan losses, unearned discounts and net deferred loan origination fees. The allowance for loan losses is increased by charges to operations and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Association's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current economic conditions. Specific reserves are established for any impaired nonresidential loan for which the recorded investment in the loan exceeds the measured value of the loan. Loans subject to impairment valuation are defined as nonaccrual loans or any other loan where it is probable that all amounts due according to the contractual terms will not be collected, exclusive of smaller balance homogenous loans such as home equity, consumer and 1-4 family residential real estate loans. The values of loans subject to impairment valuation are determined based on the present value of expected future cash flows, the market price of the loans, or the fair values of the underlying collateral if the loan is collateral dependent. Uncollectible interest on loans that are contractually past due is charged off or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued. Income is subsequently recognized only to the extent cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. If the collection of principal in whole or in part is in doubt, all payments received on nonaccrual loans are credited to principal until such doubt is eliminated. 5. Loan origination fees and related costs Loan origination fees received, net of certain direct origination costs are deferred on a loan-by-loan basis and amortized to interest income over the contractual life of the loan using the interest method, giving effect to actual loan prepayments. Loan origination costs are considered to be direct costs attributable to originating a loan. 6. Real estate acquired through foreclosure Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. 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. Revenue and expenses from operations and changes in the valuation allowance are included in real estate operations. 7. Premises and equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is included in occupancy and equipment expense and is provided by the straight-line method over the following estimated useful lives: Years ----- Building 8-50 Furniture, fixtures and equipment 5-20 Automobiles 5 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued The costs of maintenance and repairs are charged to operations as incurred. The costs of significant additions, renewals and betterments to depreciable properties are capitalized and depreciated over the remaining or extended estimated useful lives of the properties. Gains and losses on disposition of property and equipment are included in operations. 8. Employee stock ownership plan The Corporation sponsors a leveraged employee stock ownership plan (ESOP). The ESOP holds company stock which serves as collateral for the ESOP debt. As shares are released from collateral, the Corporation reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings-per-share ("EPS") computations. Dividends on released and allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as compensation cost. 9. Stock-based compensation The Company uses the intrinsic value based method of accounting for stock options. Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock over the exercise price at the measurement date. 10. Income taxes First Independence Corporation and its subsidiary file a consolidated federal income tax return. Deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized. 11. Earnings per share Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the year plus the common share equivalents related to outstanding stock options. Weighted average common shares outstanding and diluted shares deemed outstanding were as follows: Year ended September 30, ----------------------- 1999 1998 ---- ---- Weighted average common shares outstanding 1,015,212 924,091 Common share equivalents related to outstanding stock options 51,003 53,403 --------- ------- Adjusted weighted average common shares deemed to be outstanding 1,066,215 977,494 Common shares outstanding exclude unallocated and committed shares held by the ESOP trust. First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued 12. Comprehensive income The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income" as of October 1, 1998. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net earnings, are components of comprehensive income. The adoption of SFAS No. 130 had no effect on the Corporation's net earnings or stockholders' equity. NOTE B - INVESTMENT SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investment securities are as follows:
September 30, 1999 ------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair Held to maturity cost gains losses value ---------------- ------------- ---------- ----------- ------------ U.S. Government and agency obligations $ 6,400,258 $ 1,352 $ (45,570) $ 6,356,040 Municipal securities 605,021 675 (4,004) 601,693 ------------ --------- ---------- ----------- $ 7,005,279 $ 2,027 $ (49,574) $ 6,957,733 ============ ========= ========== =========== Available for sale U.S. Government agency obligations $ 1,996,064 $ 6,521 $ (2,785) $ 1,999,800 ============ ========= ========== =========== September 30, 1998 ------------------------------------------------------------ Gross Gross Estimated Amortized unrealized unrealized fair Held to maturity cost gains losses value ---------------- ------------- ---------- ---------- --------- U.S. Government agency obligations $ 5,000,000 $ 4,700 $ - $ 5,004,700 ============ ========= ========== ============ Available for sale ------------------ Intermediate term liquidity portfolio $ 346,749 $ 5,862 $ - $ 352,611 U.S. Government and agency obligations 2,986,888 78,812 - 3,065,700 ------------ --------- ---------- ------------ $ 3,333,637 $ 84,674 $ - $ 3,418,311 ============ ========= ========== ============
First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE B - INVESTMENT SECURITIES - Continued The amortized cost and estimated fair value of U.S. Government and agency obligations at September 30, 1999, by term to maturity are as follows: Estimated Amortized fair Held to maturity cost value ---------------- ------------ ---------- Due in one year or less $ 510,148 $ 510,753 Due in one to two years 300,188 301,540 Due in two to five years 1,000,000 983,000 Due in five years to ten years 5,194,943 5,162,440 ------------ ---------- $ 7,005,279 $ 6,957,733 ============ =========== Available for sale ------------------ Due in one to two years $ 993,086 $ 990,300 Due in two to five years 1,002,978 1,009,500 ------------ ----------- $ 1,996,064 $ 1,999,800 ============ =========== Investment securities with a fair value of $3,384,340 and $3,065,700 at September 30, 1999 and 1998, respectively, are pledged to secure government deposits. NOTE C - MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of mortgage-backed securities are summarized as follows:
September 30, 1999 ------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair Held to maturity cost gains losses value ---------------- ------------- ---------- ------------ ------------- GNMA certificates $ 28,952 $ 2,280 $ - $ 31,232 FHLMC certificates 4,109,413 40,753 (16,725) 4,133,441 FNMA certificates 2,920,861 28,257 (33,324) 2,915,794 Collateralized mortgage obligations FHLMC 1,120,538 - (44,898) 1,075,640 FNMA 2,732,515 - (35,639) 2,696,876 ------------- --------- ----------- ------------- $ 10,912,279 $ 71,290 $ (130,586) $ 10,852,983 ============= ========= =========== ============= September 30, 1998 ------------------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair Held to maturity cost gains losses value ---------------- ------------- ---------- ------------ ------------- GNMA certificates $ 39,291 $ 3,673 $ - $ 42,964 FHLMC certificates 6,188,601 82,373 (6,104) 6,264,870 FNMA certificates 4,361,636 101,460 (25,069) 4,438,027 Collateralized mortgage obligations FHLMC 3,661,107 9,022 (9,764) 3,660,365 FNMA 3,023,603 5,750 (32,436) 2,996,917 ------------- --------- ----------- ------------- $ 17,274,238 $ 202,278 $ (73,373) $ 17,403,143 ============= ========= =========== =============
First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE C - MORTGAGE-BACKED SECURITIES - Continued Mortgage-backed securities generally mature ratably over the 30-year term of the underlying loans collateralizing the securities. Expected maturities on mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities with a fair value of $10,384,130 and $10,637,352 at September 30, 1999 and 1998, respectively, are pledged to secure government and other deposits. NOTE D - LOANS RECEIVABLE Loans receivable at September 30 are summarized as follows: 1999 1998 ---- ---- First mortgage loans One-to-four family residences $ 84,052,872 $ 71,854,962 Multi-family residences 914,016 1,001,302 Nonresidential 9,075,464 9,065,316 Construction 25,051,558 16,049,334 ------------ ------------ Total first mortgage loans 119,093,910 97,970,914 Consumer and other loans Savings 373,042 396,736 Automobile 2,866,956 961,613 Home equity and second mortgages 911,015 837,396 Unsecured home improvement 217,005 233,947 Other 967,753 713,796 ------------ ------------ Total consumer and other loans 5,335,771 3,143,488 Less Allowance for loan losses (752,650) (655,745) Loans in process (10,429,123) (6,437,204) Unearned discounts (3,041) (2,483) Deferred loan origination fees (351,461) (334,712) (11,536,275) (7,430,144) ------------- ------------- Net loans receivable $ 112,893,406 $ 93,684,258 ============= ============= First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE D - LOANS RECEIVABLE - Continued Activity in the allowance for loan losses is summarized as follows for the years ended September 30: 1999 1998 ---- ---- Balance at beginning of year $ 655,745 $ 668,185 Acquisition transfer 83,834 - Provision 66,000 - - Loans charged off (52,929) (12,440) ---------- ---------- Balance at end of year $ 752,650 $ 655,745 ========== ========== The Association's lending efforts have historically focused on one-to-four family residential real estate loans, which comprise approximately 68% (1999) and 71% (1998) of the total loan portfolio. Approximately 3% (1999) and 2% (1998) of the Association's one-to-four family residential real estate loans are collateralized by properties located outside of the primary lending area of Montgomery and surrounding Kansas counties. Generally, such loans have been underwritten on the basis of 80% to 90% loan-to-value ratio or mortgage insurance was required. The Association, as with any lending institution, is subject to the risk that real estate values could deteriorate in its primary lending area thereby impairing collateral values. Management believes, however, that real estate values in the Association's primary lending area are currently stable or increasing. During the year ended September 30, 1998 the Association began originating construction loans at its new loan production office in Lawrence, Kansas. These construction loans generally are to builders and individuals for the construction of residences and have terms of nine months or less with permanent financing provided by other lenders. Construction loans comprise approximately 20% (1999) and 16% (1998) of the Association's total loan portfolio. Approximately 8% (1999) and 10% (1998) of the loan portfolio is comprised of nonresidential and multi-family real estate loans with approximately 9% (1999) and 10% (1998) of this total collateralized by properties located outside the Association's primary lending area. Serviced loans, primarily under a County Mortgage Revenue Bond, were $1,551,660 and $1,734,818 at September 30, 1999 and 1998, respectively. In the normal course of business, the Association makes loans to directors, executive officers and related entities. An analysis of aggregate loan activity with this group is as follows: Loans outstanding at October 1, 1998 $ 505,051 New loans 182,264 Repayments (126,348) Existing loans to new director 75,611 Loans to former director (157,879) --------- Loans outstanding at September 30, 1999 $ 478,699 ========= Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. The recorded investment in these loans and the valuation allowance for losses related to loan impairment at September 30, 1999 are as follows: Principal amount of impaired loans $ 330,129 Less valuation allowance (21,302) --------- $ 308,827 ========= Average investment in impaired loans $ 232,426 ========= First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE D - LOANS RECEIVABLE - Continued The Association has provided an allowance for loan losses on all impaired loans. Interest income of $20,345 and $16,023 was recognized and collected on impaired loans during the years ended September 30, 1999 and 1998, respectively. The Association had no impaired loans which are not included in smaller balance homogeneous home equity, consumer and 1-4 family residential real estate loans at September 30, 1998. The Association is not committed to make additional loans to borrowers whose loans have been modified. NOTE E - ACCRUED INTEREST RECEIVABLE Accrued interest receivable at September 30 is summarized as follows: 1999 1998 ---- ---- Loans receivable $ 696,175 $ 576,798 Mortgage-backed securities 74,307 119,858 Investment securities 116,983 57,314 ----------- ---------- $ 887,465 $ 753,970 =========== ========== NOTE F - PREMISES AND EQUIPMENT Premises and equipment at September 30 are summarized as follows: 1999 1998 ---- ---- Land $ 74,958 $ 74,958 Building 1,362,870 1,319,309 Furniture, fixtures and equipment 539,804 458,636 Automobiles 43,579 43,579 ------------ ----------- 2,021,211 1,896,482 Less accumulated depreciation 699,083 586,849 ------------ ----------- $ 1,322,128 $ 1,309,633 ============ =========== NOTE G - REAL ESTATE OPERATIONS A summary of real estate operations is as follows for the years ended September 30: 1999 1998 ---- ---- Gain on sale of real estate acquired through foreclos$re, net 23,834 6,515 Net operating loss (58,559) (3,338) ---------- -------- Income (loss) from real estate operations $ (34,725) $ 3,177 ========== ======== Real estate operations of the Association consist primarily of paying property taxes and general maintenance expenses on the properties held. First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE H - DEPOSITS Deposits at September 30 are summarized as follows:
Weighted average rate at September 30, 1999 1998 -------------------- -------------------- ---------------------- 1999 1998 Amount Percent Amount Percent ---- ---- ------ ------- ------ ------- NOW accounts 2.05% 2.05% $ 4,341,228 4.55% $ 2,507,101 3.11% First Super NOW accounts 2.30 2.30 2,161,533 2.26 1,431,706 1.78 First Money Fund accounts 4.47 4.47 26,541,536 27.81 21,952,555 27.24 ----------- ----------- ------ Total demand deposits 4.05 4.15 33,044,297 34.62 25,891,362 32.13 Passbook savings accounts 2.89 2.89 4,582,574 4.80 2,744,506 3.41 Certificates of deposit 3.00% to 3.99% 3.90 3.80 212,257 .22 3,310 .01 4.00% to 4.99% 4.82 4.77 15,802,592 16.56 1,792,483 2.22 5.00% to 5.99% 5.49 5.64 36,767,612 38.52 45,363,830 56.30 6.00% to 6.99% 6.28 6.28 5,029,865 5.27 4,750,692 5.90 7.00% to 7.99% 7.00 7.00 13,667 .01 26,894 .03 ----------- ------ ----------- ------ Total savings certificates 5.37 5.67 57,825,993 60.58 51,937,209 64.46 ----------- ------ ----------- ------ Total savings 5.19 5.53 62,408,567 65.38 54,681,715 67.87 ----------- ------ ----------- ------ Total deposits 4.79 5.09 $95,452,864 100.00% $80,573,077 100.00% =========== ====== =========== ======
The aggregate amount of certificates of deposit and savings with a minimum denomination of $100,000 was $5,532,226 and $4,621,272 at September 30, 1999 and 1998, respectively. First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE H - DEPOSITS - Continued Scheduled maturities of certificates of deposit are as follows:
September 30, 1999 - ------------------ Less than One to Three to one year three years five years Total -------------- ------------- ----------- --------------- 3.00% to 3.99% $ 212,257 $ - $ - $ 212,257 4.00% to 4.99% 13,258,844 2,543,748 - 15,802,592 5.00% to 5.99% 13,478,106 20,179,839 3,109,667 36,767,612 6.00% to 6.99% 2,267,548 2,151,544 610,773 5,029,865 7.00% to 7.99% 13,667 - - 13,667 -------------- ------------- ------------ -------------- $ 29,230,422 $ 24,875,131 $ 3,720,440 $ 57,825,993 ============== ============= ============ ============== September 30, 1998 - ------------------ Less than One to Three to one year three years five years Total -------------- ------------- ----------- --------------- 3.00% to 3.99% $ 3,310 $ - $ - $ 3,310 4.00% to 4.99% 1,792,483 - - 1,792,483 5.00% to 5.99% 36,468,747 7,854,690 1,040,393 45,363,830 6.00% to 6.99% 970,954 2,597,477 1,182,261 4,750,692 7.00% to 7.99% - 26,894 - 26,894 -------------- ------------- ------------ -------------- $ 39,235,494 $ 10,479,061 $ 2,222,654 $ 51,937,209 ============== ============= ============ ==============
Interest expense on deposits for the years ended September 30 is summarized as follows: 1999 1998 ---- ---- Certificates of deposit $ 3,227,436 $ 2,927,897 Investment/Super NOW 1,072,719 1,040,855 Demand deposits 89,392 41,965 ------------ ------------ $ 4,389,547 $ 4,010,717 ============ ============ NOTE I - ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank at September 30 consist of the following:
1999 1998 -------------------------------- --------------------------------- Rates Amount Rates Amount ------------ ------------- ---------------- ------------- Variable rates -% $ - 5.72% - 6.00% $ 8,600,000 Fixed rates 5.65 - 7.06 9,000,000 5.65 - 7.06 9,000,000 Fixed rate convertible* 4.63 - 5.08 18,500,000 4.87 - 5.08 12,500,000 ------------- ------------- $ 27,500,000 $ 30,100,000 ============= =============
*Due in 2008 through 2009 unless converted. First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE I - ADVANCES FROM FEDERAL HOME LOAN BANK - Continued The Company has a variable rate line of credit with the Federal Home Loan Bank totaling $10,000,000 with no outstanding balance at September 30, 1999. Aggregate maturities for the years following September 30, 1999 are as follows: 2001 $ 3,000,000 2002 5,000,000 2003 1,000,000 2008 2,500,000 2009 16,000,000 ----------- $27,500,000 Assets of the Association are subject to a blanket pledge agreement to collateralize the advances. NOTE J - EMPLOYEE BENEFITS The Corporation sponsors a leveraged employee stock ownership plan ("ESOP") that covers all full-time employees. All employees of the Corporation are eligible to participate in the ESOP after they attain age 21 and complete one year of service during which they work at least 1,000 hours. The Corporation makes annual contributions to the ESOP equal to the ESOP's debt service. All dividends received by the ESOP are credited to the employee's stock ownership account. The unallocated ESOP shares are pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. Accordingly, unpaid ESOP debt is reflected as a deduction from stockholders' equity. ESOP compensation expense was $178,905 and $208,752 for the years ended September 30, 1999 and 1998, respectively. The ESOP shares as of September 30, 1999 were as follows: Allocated shares 88,902 Unreleased shares 28,023 -------- Total ESOP shares 116,925 ======== Fair value of unreleased shares at September 30, 1999 $296,007 ======== Additionally, the Corporation has a Recognition and Retention Plan (RRP) as a means of providing directors and certain key employees of the Association with an ownership interest in a manner designed to compensate such directors and key employees for services to the Corporation. During fiscal 1994 the RRP purchased 43,642 shares of common stock. Such shares are earned and allocated ratably to participants over five years. Expense under the RRP totaled $-0- and $43,634 for the years ended September 30, 1999 and 1998, respectively. First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE J - EMPLOYEE BENEFITS - Continued The Company has adopted a Stock Option and Incentive Plan (SOP) for designated participants. The SOP provides for up to 145,474 shares of common stock to be issued to participants. The option price of any options granted may not be less than the market value of the common stock on the date of the grant and unless otherwise specified, the options expire ten years from the date of the grant. A summary of the Company's stock option plan as of September 30, 1999 and 1998 and changes during the years ended as of those dates is presented below: Weighted average exercise Shares price ------- -------- Outstanding at October 1, 1997 111,822 $ 5.15 Issued 1,000 14.63 Exercised (6,284) 5.00 -------- Outstanding at September 30, 1998 106,538 5.25 Issued 13,409 10.06 Exercised (7,500) 5.71 Forfeited (3,000) 10.06 -------- Outstanding at September 30,1999 109,447 $ 5.88 ======== All options outstanding at September 30, 1999 were exercisable and are summarized as follows: Exercise Remaining Shares price life --------------- ----------------- -------------------- 88,902 $ 5.00 4 years 7,136 6.19 4 years 4 months 2,000 6.69 4 years 10 months 1,000 14.63 8 years 1 month 10,409 10.06 9 years 4 months -------- 109,447 The stock option plan is accounted for under APB Opinion 25 and related interpretations. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the fair value method of Statement of Financial Accounting Standards 123, Accounting for Stock-Based Compensation (SFAS 123), the Company's net earnings and earnings per share for the years ended September 30 would have been reduced to the pro forma amounts indicated below: 1999 1998 ---- ---- Net earnings - as reported $1,143,088 $ 901,420 Net earnings - pro forma 1,074,471 894,270 Earnings per share Basic - as reported $1.13 $.98 Basic - pro forma 1.06 .97 Diluted - as reported 1.07 .92 Diluted - pro forma 1.01 .91 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE J - EMPLOYEE BENEFITS - Continued The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for the years ended September 30: 1999 1998 ---- ---- Dividend yield .87% .51% Expected volatility 37% 28% Risk-free interest rate 5.1% 5.6% Expected life 10 years 10 years The Association participates in a defined benefit multi-employer pension plan. Substantially all employees are eligible and benefits are based on the employee's salary and years of service. No contribution was made or required to be made by the Association for the years ended September 30, 1999 and 1998 due to the plan's overfunded status. Separate actuarial disclosure information is not available due to the plan being a multi-employer pension plan. NOTE K - INCOME TAXES Income tax expense for the years ended September 30 consists of the following: 1999 1998 ---- ---- Current $ 640,693 $ 579,159 Deferred 47,614 69,928 ----------- ---------- $ 688,307 $ 649,087 =========== ========== Reconciliation of income tax expense computed at the federal statutory rate of 34% and income tax expense for the years ended September 30 is as follows: 1999 1998 ---- ---- Income tax expense at statutory rate $622,674 $527,172 Kansas privilege tax, net of federal tax benefit 36,737 69,075 State contribution credit - (26,303) Nondeductible ESOP fair value adjustment 28,675 48,109 Other 221 31,034 -------- -------- $688,307 $649,087 ======== ======== The tax effects of temporary differences that give rise to deferred tax assets and liabilities at September 30 are as follows: 1999 1998 ---- ---- Deferred tax assets Allowance for loan losses 285,601 231,272 Accrued bonuses 11,100 8,775 Depreciation of property and equipment 95,389 - ----------- ---------- Total deferred tax assets 392,090 240,047 --------- ---------- Deferred tax liabilities Securities available for sale 1,420 32,177 Depreciation of property and equipment - 37,637 Federal Home Loan Bank stock dividends 337,588 289,302 Other 53,082 7,820 ----------- ---------- Total deferred tax liabilities 392,090 366,936 ----------- ---------- Net deferred tax liability $ - $ (126,889) =========== ========== First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE K - INCOME TAXES - Continued The Association was allowed a special bad debt deduction, generally limited to 8% of otherwise taxable income subject to certain limitations based on aggregate loans and deposit account balances at the end of the year. If the amounts that qualify as deductions for federal income taxes are later used for purposes other than for bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate. Retained earnings at September 30, 1999, includes approximately $2.9 million for which federal income taxes have not been provided. The amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction at September 30, 1999, is approximately $1,000,000. NOTE L - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL The Association is subject to various regulatory capital requirements administered by the Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Association's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Association's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Association's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets and of Tier 1 (core) capital and tangible capital to adjusted total assets. Management believes, as of September 30, 1999, that the Association meets all capital adequacy requirements to which it is subject. As of September 30, 1999, the most recent notification from the OTS categorized the Association as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Association's category. To be categorized as well capitalized the Association must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 (core) ratios as set forth in the table below.
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions -------------- ------------------ ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in thousands) As of September 30, 1999 Total risk-based capital $12,845 19.2% $5,354 >8.0 $6,693 >10.0% - - Tier 1 risk-based capital 12,092 18.1 2,677 >4.0 4,016 > 6.0 - - Core capital 12,092 8.8 4,142 >3.0 6,904 > 5.0 - - Tangible capital 12,092 8.8 2,071 >1.5 N/A N/A -
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions -------------- ------------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 1998 Total risk-based capital $11,161 17.8% $5,012 >8.0 $6,265 >10.0% - - Tier 1 risk-based capital 10,505 16.8 2,506 >4.0 3,759 > 6.0 - - Core capital 10,505 8.5 3,691 >3.0 6,152 > 5.0 - - Tangible capital 10,505 8.5 1,846 >1.5 N/A N/A
First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE L - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL - Continued Regulations of the OTS impose limitations on the payment of dividends and other capital distributions by savings associations. Under such regulations a savings association that immediately prior to and on a pro forma basis, after giving effect to a proposed capital distribution, has total capital (as defined by OTS regulation) that is equal to or greater than the amount of its fully phased-in capital requirement is generally permitted without OTS approval (but subsequent to 30 days prior notice to the OTS of the planned dividend) to make capital distributions during a calendar year in the amount of up to the greater of (1) 100% of its net earnings to date during the year plus an amount equal to one-half of the amount by which its total capital to assets ratio exceeded its fully phased-in capital to assets ratio at the beginning of the year or (2) 75% of its net income for the most recent four quarters. Pursuant to such OTS dividend regulations, the Association had the ability to pay dividends of approximately $4,400,000 to First Independence Corporation at September 30, 1999. NOTE M - COMMITMENTS The Association is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of the commitments reflect the extent of the Association's involvement in such financial instruments. The Association's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Association uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance sheet instruments. The Association's commitments to extend credit at September 30, 1999 include loans in process as disclosed in Note D and first mortgage loans with fixed rates ranging from 7.25% to 10.0% aggregating $1,645,250 and $310,925 of variable rate loans at 5.75% to 6.75%. Collateral for loans in process and commitments are the same as for other Association loans. The commitment period is generally for forty-five days. NOTE N - ACQUISITION On January 6, 1999, the Corporation and The Neodesha Savings and Loan Association, FSA (Neodesha) completed the conversion of Neodesha from a federally-chartered mutual savings and loan association to a federally-chartered stock savings and loan association and its simultaneous merger with the Association. Neodesha conducts a general banking business in southeastern Kansas. In connection with this merger conversion, the Corporation sold 150,896 shares of its common stock a $9.42 per share. The transaction was accounted for under the purchase method of accounting for business combinations. Accordingly, the acquired assets and liabilities have been recorded at their fair value at acquisition date and the operating results of the acquisition are included in the Corporation's consolidated statement of earnings from the date of acquisition. The fair value of the net assets acquired in excess of the purchase price was determined to be $1,172,848. In accordance with purchase accounting rules, $232,264 of the excess value has been used to reduce to zero the carrying value of the acquired property and equipment with the remaining $940,583 of excess value recognized as negative goodwill. The negative goodwill is being amortized to income on a ten-year straight-line basis. The amortization period approximates the average life of the acquired long-term interest-bearing assets. Amortization of negative goodwill of $70,544 was recorded in the year ended September 30, 1999. The net unamortized balance of negative goodwill of $870,039 is included in other liabilities at September 30, 1999. At the date of conversion, the merged association established a liquidation account equal to the amount of retained earnings contained in the offering circular. The liquidation account is maintained for the benefit of the merged association's eligible savings account holders who maintain deposit accounts in the Association after conversion. First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE N - ACQUISITION - Continued The following summarized unaudited pro forma financial information assumes the acquisition had occurred on October 1 of each year: 1999 1998 ---- ---- Total interest income $ 10,341,414 $ 10,119,044 Net earnings 1,195,162 1,094,381 Earnings per share Basic $1.18 $1.03 Diluted 1.12 .98 In the event of a complete liquidation (and only in such event), each eligible savings account holder will be entitled to receive a pro rata liquidation distribution from the liquidation account in the amount of the then current adjusted balance of deposit accounts held, before any liquidation distribution may be made with respect to common stock. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of such retained earnings by the Association. Subsequent to consummation of the transaction, the Association may not declare or pay a cash dividend on or repurchase any of its common stock, if the effect thereof would cause stockholders' equity to be reduced below either the amount required for the combined liquidation accounts or the regulatory capital requirements for insured institutions. NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments at September 30, 1999 and 1998. Cash and cash equivalents: The balance sheet carrying amounts for cash and short-term instruments approximate the estimated fair values of such assets. Investment securities and mortgage-backed securities: Fair values for investment securities and mortgage-backed securities are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: For variable rate loans that reprice frequently and which entail no significant change in credit risk, fair values are based on the carrying values. The estimated fair values of fixed rate loans are estimated based on discounted cash flow analyses using prepayment assumptions and interest rates currently offered for loans with similar terms to borrowers of similar credit quality. Nonperforming loans have not been discounted. The carrying amount of accrued interest receivable approximates its fair value. Commitments to extend credit: No premium or discount was ascribed to loan commitments because when funded virtually all funding will be at current market rates. Federal Home Loan Bank stock: The balance sheet carrying amount approximates the stock's fair value. First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued Deposit liabilities: The fair values estimated for demand deposits, NOW accounts, savings and certain types of money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values of fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly time deposit maturities. The carrying amount of accrued interest payable approximates its fair value. Advances from Federal Home Loan Bank: For variable rate advances fair values are considered equal to their carrying values. The estimated fair value of fixed rate advances are estimated based on discounted cash flow analysis using interest rates currently offered for advances with similar terms. The following table provides summary information on the fair value of financial instruments. Such information does not purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies and subjective considerations, which vary widely among different financial institutions and which are subject to change. The carrying amounts are the amounts at which the financial instruments are reported in the consolidated financial statements.
1999 ---------------------------------- Carrying Estimated amount of fair value assets and of assets and (liabilities) (liabilities) ------------- ------------- Cash and cash equivalents $ 1,439,995 $ 1,439,995 Investment securities available for sale 1,999,800 1,999,800 Investment securities held to maturity 7,005,279 6,957,733 Mortgage-backed securities held to maturity 10,912,279 10,852,983 Loans 113,646,056 113,489,056 Federal Home Loan Bank stock 1,441,600 1,441,600 Deposits (95,452,864) (95,463,864) Advances from Federal Home Loan Bank (27,500,000) (26,986,000) 1998 ---------------------------------- Carrying Estimated amount of fair value assets and of assets and (liabilities) (liabilities) ------------- ------------- Cash and cash equivalents $ 913,580 $ 913,580 Investment securities available for sale 3,418,311 3,418,311 Investment securities held to maturity 5,000,000 5,004,700 Mortgage-backed securities held to maturity 17,274,238 17,403,143 Loans 94,340,003 94,885,003 Federal Home Loan Bank stock 1,574,000 1,574,000 Deposits (80,573,077) (81,128,077) Advances from Federal Home Loan Bank (30,100,000) (30,769,000)
First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED September 30, 1999 and 1998 NOTE P - IMPACT OF YEAR 2000 The Year 2000 issue relates to limitations in computer systems and applications that may prevent proper recognition of the Year 2000. The potential effect of the Year 2000 issue on the Corporation and its business partners will not be fully determinable until the Year 2000 and thereafter. If Year 2000 modifications are not properly completed either by the Corporation or entities with which the Corporation conducts business, the Corporation's revenues and financial condition could be adversely impacted. STOCKHOLDER INFORMATION Stock Listing Information First Federal Savings and Loan Association of Independence converted from a mutual to a stock savings and loan association effective October 5, 1993, and formed First Independence Corporation (the "Company") to act as its holding company. The Company's Common Stock (the "Common Stock") is traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") Small-Cap Market under the symbol "FFSL." Stock Price Information and Dividends As of December 6, 1999, there were approximately 224 shareholders of record of the Company's Common Stock, not including those shares held in nominee or street name through various brokerage firms or banks. The following table sets forth the high and low bid prices of the Common Stock and dividends declared for each fiscal quarter since October 1, 1997. The stock price information was provided by the NASD, Inc. Amounts have been adjusted to reflect a two-for-one stock split in fiscal 1997. Dividends Quarter Ended High Low Declared -------------- -------- -------- --------- December 31, 1997 $14.625 $13.625 $0.0625 March 31, 1998 15.000 13.500 0.0750 June 30, 1998 14.750 12.750 0.0750 September 30, 1998 13.250 10.000 0.0750 December 31, 1998 11.000 9.500 0.0750 March 31, 1999 11.000 9.000 0.0875 June 30, 1999 11.000 9.625 0.0875 September 30, 1999 10.750 10.125 0.0875 The Company has paid a cash dividend on its Common Stock for each quarter since the Association's conversion to stock form. Future dividends, if any, will be dependent upon the results of operations and financial condition of the Company, tax considerations, industry standards, economic conditions, general business practices and other factors. The Company's ability to pay dividends is dependent on the dividend payments it receives from the Association, which are subject to regulations and the Association's continued compliance with all regulatory capital requirements. See Note L of the Notes to Consolidated Financial Statements for a discussion of regulations governing the Association's ability to pay dividends. Annual Report on Form 10-KSB and Investor Information A copy of the Company's annual report on Form 10-KSB, filed with the Securities and Exchange Commission, is available without charge by writing: Gary L. Overfield Senior Vice President and Secretary First Independence Corporation Myrtle and Sixth Independence, Kansas 67301 Stock Transfer Agent Inquiries regarding stock transfer, registration, lost certificates or changes in name and address should be directed to the stock transfer agent and registrar by writing: Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 (800) 368-5948 Investor Information Stockholders, investors, and analysts interested in additional information may contact: James B. Mitchell, Vice President and Chief Financial Officer Corporate Office First Independence Corporation Myrtle and Sixth Independence, Kansas 67301 (316) 331-1660 Special Counsel Silver, Freedman & Taff, L.L.P. 7th Floor - East Tower 1100 New York Avenue, NW Washington, DC 20005 Independent Auditor Grant Thornton, LLP 8300 Thorn Drive, Suite 300 Wichita, Kansas 67226 First Federal Savings and Loan Association of Independence Myrtle and Sixth Independence, Kansas 67301 (316) 331-1660
DIRECTORS AND EXECUTIVE OFFICERS FIRST INDEPENDENCE CORPORATION OFFICERS BOARD OF DIRECTORS Lavern W. Strecker Lavern W. Strecker Chairman of the Board Chairman of the Board First Independence Corporation and Larry G. Spencer First Federal Savings and Loan Association of Independence President and Chief Executive Officer Retired - Former Manager of Accounting and Control Gary L. Overfield Arco Pipe Line Company Senior Vice President and Secretary Larry G. Spencer James B. Mitchell President and Chief Executive Officer Vice President and Chief Financial Officer First Independence Corporation President and Chief Executive Officer First Federal Savings and Loan Association of Independence William T. Newkirk II Agent Newkirk, Dennis & Buckles Insurance Co. Robert A. Johnson Human Resource Manger M-E-C Company Harold L. Swearingen Retired - Former Telecommunications Manager Arco Pipe Line Company Joseph M. Smith County Extension Agent N Agriculture and Coordinator Montgomery County Extension Council E. JoVonnah Boecker City Clerk Neodesha, Kansas
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF INDEPENDENCE OFFICERS BOARD OF DIRECTORS Lavern W. Strecker Lavern W. Strecker Chairman of the Board Larry G. Spencer Larry G. Spencer President and Chief Executive Officer William T. Newkirk II Gary L. Overfield Harold L. Swearingen Senior Vice President and Secretary Joseph M. Smith James B. Mitchell Vice President and Chief Financial Officer Robert A. Johnson Jim L. Clubine E. JoVonnah Boecker Vice President and Asset Manager Gregg S. Webster Vice President C. Alan Hoggatt Vice President Lori L. Kelley Assistant Vice President and Compliance Officer Betty J. Redman Treasurer
EX-21 3 SUBSIDIARIES OF REGISTRANT
SUBSIDIARIES OF THE REGISTRANT State of Percentage Incorporation of or Parent Subsidiary Ownership Organization - ------------------------------------------------------------------------------------------------------------------- First Independence Corporation First Federal Savings and Loan Association of 100% Federal Independence
EX-23 4 CONSENT OF GRANT THORNTON CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated October 22, 1999, accompanying the consolidated financial statements included in the Annual Report of First Independence Corporation and Subsidiary on Form 10-KSB for the year ended September 30, 1999. We hereby consent to the incorporation by reference of said report in the Registration Statement of First Independence Corporation on Form S-8 (File No. 33-58095, effective March 13, 1995 and File No. 33-75404, effective February 16, 1994). GRANT THORNTON LLP /s/ Grant Thornton LLP Wichita, Kansas December 29, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
9 The schedule contains summary financial information extracted from the annual report on Form 10-KSB for the fiscal year ended September 30, 1999 and is qualified in its entirety by reference to such financial statements. 1 12-MOS SEP-30-1999 SEP-30-1999 $1,064,794 375,201 0 0 1,999,800 17,917,558 17,810,716 113,646,056 752,650 138,131,340 95,452,864 0 2,071,868 27,500,000 16,493 0 0 13,090,115 138,131,340 8,550,856 1,171,965 378,469 10,101,290 4,389,547 5,989,180 4,112,110 66,000 0 2,568,932 1,831,395 1,143,088 0 0 1,143,088 1.13 1.07 7.63 1,311,164 1,117,929 0 0 655,745 52,929 0 752,650 0 0 752,650
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