-----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, IslEPVKYMYgL9MkjusEzGG9LuwOIjEBpp3QQgCt461aXSHKEMINar1J9Paf887OX nJ58LBb1V/geXMSLZuNw0w== 0000950164-98-000108.txt : 19980703 0000950164-98-000108.hdr.sgml : 19980703 ACCESSION NUMBER: 0000950164-98-000108 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19980702 SROS: NASD 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: SB-2 SEC ACT: SEC FILE NUMBER: 333-58423 FILM NUMBER: 98660084 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 SB-2 1 FORM SB-2 As filed with the Securities and Exchange Commission on July 2, 1998 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------- FIRST INDEPENDENCE CORPORATION (Exact name of registrant as specified in its charter) Delaware 6035 36-3899950 -------- ---- ---------- (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer) incorporation or organization) Classification Code Number) Identification No. Myrtle & Sixth Independence, Kansas 67301 (316) 331-1660 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------- Larry G. Spencer, President and Chief Executive Officer First Independence Corporation Myrtle & Sixth Independence, Kansas 67301 (316) 331-1660 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------- Please send copies of all communications to: Martin L. Meyrowitz, P.C. Beth A. Freedman SILVER, FREEDMAN & TAFF, L.L.P. (a limited liability partnership including professional corporations) 1100 New York Avenue, NW Washington, DC 20005-3934 (202) 414-6100 ---------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X]
CALCULATION OF REGISTRATION FEE =========================================================================================================================== Proposed Maximum Proposed Maximum Title of Each Class of Amount to be Offering Price Aggregate Amount of Securities to be Registered Registered(1) Per Share (1) Offering Price(1) Registration Fee - --------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share 185,590 shares(1)(2) $NA (2) $2,381,000 (2) $702 ===========================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee. (2) The number of shares to be issued by the Registrant is based upon an independent appraisal of The Neodesha Savings & Loan Association, F.S.A. (the company being acquired). Based upon such appraisal, the Registrant will issue a number of shares equal to $2,381,000, based on the average of the closing bid and ask quotation on the NASDAQ market for the ten trading days ending on the expiration date of the offering. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. PROSPECTUS FIRST INDEPENDENCE CORPORATION 185,590 Shares of Common Stock (Anticipated Maximum) First Independence Corporation (the "Company") is offering its common stock to the depositors of The Neodesha Savings and Loan Association, FSA ("Neodesha") (through subscription rights) and the public pursuant to a plan by which Neodesha is combining with First Federal Savings and Loan Association of Independence ("First Federal" or the "Association") through the conversion of Neodesha from the mutual to the stock form of organization and the simultaneous merger of Neodesha with and into the Association (the "Merger Conversion"). The Merger Conversion must be approved by the Office of Thrift Supervision and by a majority of the votes eligible to be cast by members of Neodesha. No common stock will be sold if Neodesha does not receive these approvals, or if First Independence Corporation does not receive orders for at least the minimum number of shares. Pursuant to Neodesha's plan of merger conversion ("Plan of Merger Conversion"), non-transferable rights to subscribe for the Company's common stock ("Subscription Rights") have been given, in order of priority, to: (1) Eligible Account Holders (deposit account holders of Neodesha as of December 31, 1996); (2) Tax-Qualified Employee Plans; (3) Supplemental Eligible Account Holders (deposit account holders of Neodesha as of June 30, 1998); (4) members of Neodesha, other than Eligible Account Holders and Supplemental Eligible Account Holders, as of ________ ___, 1998, the voting record date for the Special Meeting ("Other Members"); and (5) officers, directors and employees of Neodesha (the "Subscription Offering"). Concurrently, and subject to the prior rights of holders of Subscription Rights, the Company is offering its common stock for sale in a community offering to members of the general public, with a first preference to natural persons residing in Wilson County, Kansas (the "Community Offering"). It is anticipated that shares not subscribed for in the Subscription and Community Offering will be offered to certain members of the general public on a best efforts basis through a selected dealers arrangement (the "Syndicated Community Offering") (the Subscription Offering, the Community Offering and the Syndicated Community Offering are referred to collectively as the "Subscription and Community Offering"). All purchases will be subject to the maximum and minimum purchase limitations and other terms and conditions described in the Prospectus including Neodesha's and the Company's right, in their sole discretion, to reject orders received in the Community and the Syndicated Community Offering in whole or in part. --------------------- An independent appraiser has estimated the pro forma market value of Neodesha, as a stock institution, to be between $1,530,000 and $2,070,000. Subject to regulatory approval, First Independence Corporation may sell up to $2,380,500 of its common stock. The actual purchase price per share cannot currently be determined because it will be equal to 95% of the average market price of First Independence Corporation common stock (based on the average of the closing bid and ask quotations on the Nasdaq SmallCap Market) for the ten trading days ending on the expiration date of this offering. On June 9, 1998, the average of the closing bid and ask quotations for a share of Company common stock on the Nasdaq SmallCap Market was $13.81. If that price was the average market price for the ten trading days ending on the expiration date of this offering, the actual purchase price per share would be $13.12. As a result, subscribers must order, and submit payments or authorize withdrawals for a specific dollar amount of First Independence Corporation common stock. No fractional shares of common stock will be issued. Based on these estimates, First Independence is making the following offering of shares of common stock: o Price per share Minimum/Maximum: $11.15 to $15.09 o Estimated Expenses: $450,000 o Net Proceeds to First Independence Corporation Minimum/Maximum/Maximum, as adjusted: $1,080,000 to $1,620,000 to $1,930,500 o Net Proceeds per Share (based on midpoint price per share) Minimum/Maximum/Maximum, as adjusted: $9.26 to $10.27 to $10.64 ------------------- Please refer to Risk Factors beginning on page 9 of this Prospectus. These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Neither the Securities and Exchange Commission, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved or disapproved these securities or determined if this Prospectus is accurate or complete. Any representation to the contrary is a criminal offense. Trident Securities, Inc. will use its best efforts to assist First Independence Corporation in selling at least the minimum number of shares but does not guarantee that this number will be sold. All funds received from subscribers will be held in an interest bearing savings account at the Association until the completion or termination of the Merger Conversion. First Independence Corporation's common stock is listed on the Nasdaq SmallCap Market under the symbol "FFSL". For information on how to subscribe, call the Stock Information Center at (316) 325-2268. -------------------- Trident Securities, Inc. The date of this Prospectus is _________ __, 1998 [MAP TO COME] THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND. PROSPECTUS SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the detailed information and financial statements appearing elsewhere herein. First Independence Corporation The Company, a Delaware corporation, was organized by the Association for the purpose of becoming a thrift institution holding company for the Association. The Company is authorized to engage in any activity permitted by Delaware law. The principal asset of the Company is the outstanding stock of the Association, its wholly owned subsidiary. The Company presently has no separate operations, and its business consists only of the business of the Association, although it does hold some investment securities and the loan on the ESOP. All references to the Company, unless otherwise indicated, refer to the Company and the Association on a consolidated basis, as the context requires. The Company's sources of funds are primarily dividends from the Association, borrowings and the issuance of shares of capital stock. For a description of certain restrictions on the Association's ability to pay dividends to the Company, see "Common Stock Prices and Dividends." The Company and the Association are subject to examination and comprehensive regulation and oversight by the OTS and by the Federal Deposit Insurance Corporation ("FDIC"). The Association is further subject to regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") governing reserves required to be maintained against transaction accounts and non-personal time deposits. The Association is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which is one of the 12 regional banks constituting the FHLB System and its savings deposits are backed by the full faith and credit of the United States Government and are insured by the Savings Association Insurance Fund ("SAIF") to the maximum extent permitted by law. As of March 31, 1998, the Company had total assets of $124.5 million, deposits of $84.2 million and stockholders' equity of $11.6 million. For the six months ended March 31, 1998, the Company recorded net earnings of $375,000. The Company's executive offices are located at Myrtle & Sixth, Independence, Kansas 67301 and its telephone number at that location is (316) 331-1660. The Neodesha Savings and Loan Association, FSA Neodesha began operation in 1887 as a state-chartered mutual savings institution. In June, 1993, Neodesha converted to a federally chartered mutual savings and loan association. Its savings accounts have been insured since 1939 and Neodesha has been a member of the FHLB System since 1939. Neodesha's operations are conducted through its home office in Neodesha, Kansas. As of March 31, 1998, Neodesha had total assets of $13.7 million, deposits of $12.1 million and retained earnings of $1.1 million. For the six months ended March 31, 1998, Neodesha recorded net earnings of $30,000. The business of Neodesha consists primarily of attracting deposits from the general public and using those deposits to originate one- to four-family residential mortgage and consumer loans, to purchase investment securities and to make other investments. The Merger Conversion The Subscription Offering and Direct Community Offering are being made in connection with the conversion of Neodesha from a mutual to a stock savings and loan association and the simultaneous merger of Neodesha with and 1 into the Association. Net conversion proceeds are expected to increase the net worth of the Company, which may support future deposit growth and expanded operations and permit expansion of the Company's lending and investment activities and other financial services to the public. The Merger Conversion is subject to certain conditions, including the prior approval of the Plan of Merger Conversion (the "Plan") by certain of Neodesha's members at a Special Meeting to be held on ____________, 1998. After the Merger Conversion, members of Neodesha will have no voting rights in the Company unless they become Company stockholders. Depositors as of December 31, 1996 ("Eligible Account Holders") and depositors as of June 30, 1998 ("Supplemental Eligible Account Holders), however, will have certain liquidation rights in Neodesha. See "The Merger Conversion - Effects on Depositors and Borrowers of Neodesha Liquidation Rights." Subscription Offering and Direct Community Offering. The Company is offering 185,590 newly issued shares of Common Stock in the Subscription Offering. Certain depositors of Neodesha, the ESOP of the Company, and directors, officers, and employees of Neodesha will receive subscription rights to purchase the Common Stock. No person may sell, assign or transfer their subscription rights. Persons found to be selling or otherwise transferring their rights to purchase Common Stock in the Subscription Offering, or purchasing Common Stock on behalf of another person will be subject to forfeiture of such rights and possible federal penalties and sanctions. See "The Merger Conversion - - Restriction on Transfer of Subscription Rights and Shares." The Plan of Merger Conversion places limitations on the amount of Common Stock which may be purchased in the Merger Conversion by various categories of persons, including an overall limitation of $100,000 of Company Common Stock which may be purchased in the Merger Conversion by any one person or group of persons acting in concert (other than the Tax-Qualified Employee Plan). The minimum purchase limitation is $250 of Common Stock. In addition, no fractional shares of Common Stock will be issued. See "The Merger Conversion - Purchase Limitations." If the Merger Conversion is not approved by the members of Neodesha at the Special Meeting, or if all of the shares offered in the Merger Conversion are not sold, no shares will be issued, the Merger Conversion will not take place, all subscription funds received will be returned promptly with interest at the Association's passbook rate and all withdrawal authorizations will be terminated. Concurrently with the Subscription Offering, the Company is offering all unsubscribed shares, if any, to members of the general public to whom this Prospectus is delivered, with a preference to natural persons residing in Wilson County, Kansas. The Direct Community Offering may be extended by the Company up to 45 days beyond the date of the completion of the Subscription Offering or, in the event that the Company resolicits stock purchase orders, for such longer period as the OTS may approve. Stock Pricing and Number of Shares of Common Stock to be Issued in the Conversion. The actual per share purchase price for the Conversion Stock will be equal to 95% of the average of the market price of the Company's Common Stock (which is the average of the closing bid and ask quotations on the Nasdaq SmallCap Market) for the ten trading days ending on the date of expiration of the Subscription Offering or Direct Community Offering, whichever is later (the "Pricing Date"). The total number of shares of Conversion Stock to be issued will be determined by dividing the Aggregate Purchase Price by the per share purchase price. The total number of shares to be issued may be significantly increased or decreased without a resolicitation of subscriptions, unless such an increase or decrease results in an Aggregate Purchase Price which is outside the Valuation Range (without giving effect to any shares which may be issued pursuant to the Aggregate Purchase Price being within 15% above the high end of the Valuation Range), a price per share below $11.15 or above $15.09, or is otherwise determined by the Company and Neodesha to be material. The Company has established a Stock Information Center, managed by Trident Securities, to coordinate the Subscription and Community Offering, including tabulating orders and answering questions about the Subscription and Community Offering received by telephone. All subscribers will be instructed to mail payment to the Stock Information Center or deliver payment directly to the Company's main office. Payment for shares of Common Stock may be made by cash (if delivered in person), check or money order or by authorization of withdrawal from deposit accounts maintained with Neodesha. Such funds will not be available for withdrawal and will not be released until the Merger Conversion is completed or terminated. The Company will not accept wire transfers for the payment of stock for any reason. See "The Merger Conversion - Method of Payment for Subscriptions." 2 The aggregate pro forma market value of Neodesha, as converted, was estimated by Ferguson & Company ("Ferguson"), which is experienced in appraising converting thrift institutions, to be the Valuation Range. The Board of Directors of Neodesha has reviewed the Valuation Range as stated in the appraisal and compared it with recent stock trading prices as well as recent pro forma market value estimates for other financial institutions. The Board of Directors has also reviewed the appraisal report, including the assumptions and methodology utilized therein, and determined that it was not unreasonable. The appraisal is not intended to be, and must not be interpreted as, a recommendation of any kind as to the advisability of voting to approve the Merger Conversion or of purchasing shares of Common Stock. Moreover, the appraisal is necessarily based on many factors which change from time to time. See "Pro Forma Data" and "The Merger Conversion - Stock Pricing and Number of Shares to be Issued" for a description of the manner in which such valuation was made and the limitations on its use. Use of Proceeds The net proceeds from the sale of Conversion Stock in the Merger Conversion will increase the net worth of the Company, which may support future deposit growth and expanded lending and investment activities. On an interim basis the proceeds may be invested in short-term securities. Interests of Certain Persons in the Merger Conversion Certain members of Neodesha's management and Board of Directors have interests in the Merger Conversion in addition to their interests as members of Neodesha generally. These interests relate to (i) the formation and maintenance of a Neodesha, Kansas Advisory Board which will initially consist of the non-employee directors of Neodesha; (ii) the Company has agreed to grant to President Miller, Vice President Holmquist and each non-employee director of Neodesha options to purchase, upon consummation of the Merger Conversion, 3,000, 1,500, and 1,000 shares, respectively, of Common Stock (all with an exercise price equal to the fair market value on the date of grant and subject to vesting over five years); (iii) the Company has agreed to enter into a three-year employment agreement with Franklin Miller, president of Neodesha, upon consummation of the Merger Conversion, which provides for the payment of salary equal to his current compensation, the payment of 299% of his "base amount" (five-year average) compensation under certain circumstances in connection with a change of control of the Company and the use of a company car; and (iv) the eligibility of former employees of Neodesha who become employees of the Company for certain employee benefits. See "The Merger Conversion - Interests of Certain Persons in the Merger Conversion." Dividends The Company has paid a cash dividend on its Common Stock in each quarter since the Association's conversion to stock form in October 1993. The most recent quarterly dividend declared by the Company was for $.075 per share and was paid on May 22, 1998. The Company anticipates that it will continue to pay quarterly cash dividends on the Common Stock, although there can be no assurance as to the amount or timing of future dividends. The payment of dividends in the future is at the discretion of the Company's Board of Directors and will depend on the Company's operating results and financial condition, availability of funds, regulatory limitations, tax considerations and other factors. See "Common Stock Prices and Dividends." Market for Common Stock The Company's Common Stock is quoted on the Nasdaq SmallCap Market under the symbol "FFSL." See "Common Stock Prices and Dividends." Forward-Looking Statements In connection with this offering, when used in this Prospectus, in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements." Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in the Company's and Neodesha's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's and Neodesha's 3 market area and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made and are subject to the above-stated qualifications in any event. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake -- and specifically declines any obligation -- to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 4 SELECTED CONSOLIDATED FINANCIAL INFORMATION OF FIRST INDEPENDENCE CORPORATION
September 30, March 31, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 1993(1) ---- ---- ---- ---- ---- ------- (In Thousands) Selected Financial Condition Data: - ---------------------------------- Total assets ................................... $124,494 $112,523 $108,539 $101,904 $ 94,593 $ 96,166 Cash, cash equivalents and interest- bearing deposits .............................. 6,377 3,151 1,763 2,115 1,415 20,146 Loans receivable, net .......................... 85,264 74,559 67,683 60,370 56,895 58,089 Mortgage-backed securities - at cost ........... 20,902 23,528 28,039 28,594 29,617 13,963 Investment securities - at cost ................ 5,000 3,000 2,000 1,000 4,245 271 Securities available for sale .................. 3,346 4,783 5,894 7,358 12 -- Real estate acquired through foreclosure, net .............................. 15 12 12 62 234 1,409 Deposits ....................................... 84,172 76,229 69,356 67,927 64,384 84,941 Borrowings ..................................... 27,300 23,700 24,300 18,800 15,400 3,000 Stockholders' equity ........................... 11,554 11,529 13,003 13,600 13,351 6,103
Six Months Ended March 31, Year Ended September 30, -------------------- ------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993(1) (In Thousands) Selected Operations Data: - ------------------------- Total interest income ................... $ 4,377 $ 3,970 $ 8,069 $ 7,773 $ 7,186 $ 6,296 $ 6,570 Total interest expense .................. 2,680 2,488 5,059 4,669 3,852 2,857 3,490 ------- ------- ------- ------- ------- ------- ------- Net interest income ................... 1,697 1,482 3,010 3,104 3,334 3,439 3,080 Provision for losses on loans ........... -- -- -- -- -- 45 332 ------- ------- ------- ------- ------- ------- ------- Net interest income after provision for loan losses .............. 1,697 1,482 3,010 3,104 3,334 3,394 2,748 Other income ............................ 113 106 281 331 267 216 217 Gain on sale of investments ............. -- -- -- 251 -- -- 326 General, administrative and other expense .......................... (1,147) (1,050) (2,111) (2,384) (1,820) (1,653) (1,506) ------- ------- ------- ------- ------- ------- ------- Earnings before income tax expense and cumulative effect of change in accounting principle ................ 663 538 1,180 1,302 1,781 1,957 1,785 Income tax expense ...................... 288 206 468 487 694 750 465 ------- ------- ------- ------- ------- ------- ------- Earnings before cumulative effect of change in accounting principle ................ 375 332 712 815 1,087 1,207 1,320 Cumulative effect of change in accounting principle ............... -- -- -- -- -- 241 -- ------- ------- ------- ------- ------- ------- ------- Net earnings ............................ $ 375 $ 332 $ 712 $ 815 $ 1,087 $ 1,448 $ 1,320 ------- ======= ======= ======= ======= ======= ======= Basic earnings per share ................ $ .41 $ .33 $ .73 $ .72 $ .87 $ .99 N/A ======= ======= ======= ======= ======= ======= =======
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Six Months Ended March 31, Year Ended September 30, ---------------- ---------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993(1) ---- ---- ---- ---- ---- ---- ------- Selected Financial Ratios and Other Data: - ----------------------------------------- Performance Ratios: Return on assets (ratio of net earnings to average total assets) .......................... 0.64% 0.61% 0.65% 0.78% 1.12% 1.61% 1.50% Interest rate spread information: Average during period ............................ 2.52 2.26 2.31 2.36 2.87 3.38 3.45 End of period .................................... 2.25 2.17 2.19 2.17 2.36 3.34 2.94 Net interest margin(2) ........................... 2.99 2.79 2.81 3.02 3.52 3.91 3.64 Ratio of operating expense to average total assets ...................................... 1.97 1.93 1.92 2.28 1.88 1.82 1.61 Return on equity (ratio of net earnings to average equity) ................................ 6.53 5.60 6.09 6.21 8.16 11.21 24.63 Quality Ratios: Non-performing assets to total assets at end of period(3) .................................. .51 .91 1.25 0.57 0.77 1.27 2.81 Allowance for loan losses to non-performing assets at end of period(3) ........................ 102.97 69.83 47.64 112.36 87.45 55.31 24.72 Allowance for loan losses to non-performing loans at end of period ............................ 105.50 70.46 48.05 114.62 94.91 68.62 51.66 Capital Ratios: Equity to total assets, at end of period ........... 9.28 10.50 10.25 11.98 13.35 14.11 6.35 Average equity to average assets ................... 9.86 10.90 10.62 12.57 13.78 14.38 6.08 Ratio of average interest-earning assets to average interest-bearing liabilities ........... 109.90 111.25 110.64 114.50 115.83 116.42 104.66 Dividend payout ratio(4) ........................... 36.18 36.29 34.93 27.37 16.47 7.73 N/A Number of full service offices ..................... 2 2 2 1 1 1 1
- ------------- (1) Does not reflect proceeds from the Association's conversion to stock form and stock issuance by First Independence Corporation which was completed on October 5, 1993. (2) Net interest income divided by average interest-earning assets. (3) Includes non-accruing loans, accruing loans delinquent 90 days or more and assets acquired though foreclosure. (4) Dividends paid per share divided by earnings per share. The ratio for 1994 does not give pro forma effect for annualizing dividends paid. 6 SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THE NEODESHA SAVINGS AND LOAN ASSOCIATION, F.S.A.
September 30, March 31, ---------------------------------------------------------- 1998 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- (In Thousands) Selected Financial Condition Data: - ---------------------------------- Total assets ......................................... $13,679 $14,155 $14,411 $13,799 $14,477 $13,943 Cash, cash equivalents and interest-bearing deposits ......................................... 650 635 772 559 796 1,319 Loans receivable, net ................................ 9,088 9,468 9,489 9,049 8,940 9,116 Mortgage-backed securities -- at cost: ............... 238 253 253 253 253 627 Investment securities -- at cost: U.S. Treasury .................................... 898 897 1,097 1,098 1,099 806 Agency ........................................... 1,517 1,617 1,516 1,516 1,817 1,105 Municipal ......................................... 603 603 602 602 602 -- Deposits ............................................. 12,065 12,854 12,698 11,673 12,742 12,904 Borrowings ........................................... 400 100 500 950 650 -- Retained earnings - substantially restricted ......... 1,122 1,092 1,015 1,012 941 854
Six Months Ended March 31, Year Ended September 30, ------------------ -------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- (In Thousands) Selected Operations Data: - ------------------------- Total interest income .......................... $ 507 $ 519 $ 1,046 $ 1,045 $ 1,009 $ 1,013 $ 1,122 Total interest expense ......................... 271 274 560 571 496 461 548 ------- ------- ------- ------- ------- ------- ------- Net interest income ......................... 236 245 486 474 513 552 573 Provision for losses on loans .................. 3 3 6 6 6 36 24 ------- ------- ------- ------- ------- ------- ------- Net interest income after provision for loan losses ................................. 233 242 480 468 507 516 549 Other income ................................... 61 64 135 140 124 104 112 General, administrative and other expense ............................... (253) (255) (510) (604) (538) (538) (520) ------- ------- ------- ------- ------- ------- ------- Earnings before income tax expense and cumulative effect of change in accounting principle ..................... 41 51 105 4 91 82 141 Income tax expense ............................. 11 13 28 1 20 18 46 ------- ------- ------- ------- ------- ------- ------- Earnings before cumulative effect of change in accounting principle .............. 30 38 77 3 71 64 95 Cumulative effect of change in accounting principle ........................ -- -- -- -- -- 23 -- ------- ------- ------- ------- ------- ------- ------- Net earnings ................................... $ 30 $ 38 $ 77 $ 3 $ 71 $ 87 $ 95 ======= ======= ======= ======= ======= ======= =======
7
Six Months Ended March 31, Year Ended September 30, ---------------- -------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- Selected Financial Ratios and Other Data: - ----------------------------------------- Performance Ratios: Return on assets (ratio of net earnings to average total assets) .................................................. 0.43% 0.53% 0.54% 0.02% 0.51% 0.60% 0.66% Interest rate spread information: Average during period ..................................... 3.49 3.54 3.48 3.40 3.86 4.16 4.27 End of period ............................................. 3.44 3.45 3.73 3.49 3.61 4.32 4.46 Net interest margin(1) .................................... 3.63 3.66 3.61 3.52 3.94 4.15 4.26 Ratio of operating expense to average total assets .......... 3.68 3.62 3.58 4.22 3.88 3.73 3.59 Return on equity (ratio of net earnings to average equity) .. 5.37 7.21 7.25 .29 7.30 9.67 11.54 Quality Ratios: Non-performing assets to total assets at end of period(2) ... 1.43 1.41 1.29 0.91 1.59 4.41 5.06 Allowance for loan losses to non-performing assets at end of period(2) .................................... 43.59 45.75 48.90 77.10 48.64 23.66 21.82 Allowance for loan losses to non-performing loans at end of period ....................................... 49.13 52.67 56.69 77.10 57.53 30.92 31.14 Capital Ratios: Equity to total assets, at end of period .................... 8.20 7.28 7.71 7.04 7.34 6.50 6.12 Average equity to average assets ............................ 8.09 7.37 7.45 7.26 7.00 6.25 5.69 Ratio of average interest-earning assets to average interest-bearing liabilities ........................... 103.49 103.02 103.12 102.88 102.13 99.90 99.84 Other data: Number of full service offices .............................. 1 1 1 1 1 1 1
- ------------- (1) Net interest income divided by average interest-earning assets. (2) Includes non-accruing loans, accruing loans delinquent 90 days or more and assets acquired through foreclosure. 8 RISK FACTORS The following factors, in addition to those discussed elsewhere in this Prospectus, should be considered by investors before deciding whether to purchase the Common Stock offered in the Offering. Interest Rate Risk Exposure The Company's profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investments, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. When interest rates rise, the Company's net interest income tends to be adversely impacted since its liabilities tend to reprice more quickly than its assets. Conversely, in a declining rate environment the Company's net interest income is generally positively impacted since its assets tend to reprice more slowly than its liabilities. Changes in the level of interest rates also affect the amount of loans originated by the Company and, thus, the amount of loan and commitment fees, as well as the market value of the Company's interest-earning assets. Moreover, increases in interest rates also can result in disintermediation, which is the flow of funds away from savings institutions into direct investments, such as corporate securities and other investment vehicles, which generally pay higher rates of return than savings institutions. Finally, a flattening of the "yield curve" (i.e., a decline in the difference between long and short-term interest rates), could adversely impact net interest income to the extent that the Company's assets have a longer average term than its liabilities. In managing its asset/liability mix, the Company has, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, placed more emphasis on managing net interest margin than on better matching the interest rate sensitivity of its assets and liabilities in an effort to enhance net interest income. In particular, because of customer demand, a large majority of the Company's residential loans carry fixed interest rates. As a result, the Company will continue to be significantly vulnerable to changes in interest rates and to decreases in the difference between long- and short-term interest rates. The Company is also subject to reinvestment risk relating to interest rate movements. Changes in interest rates can affect the average life of loans and mortgage related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage related securities, as borrowers refinance to reduce borrowing costs. Under these circumstances, the Company is subject to reinvestment risk to the extent that it is not able to reinvest such prepayments at rates that are comparable to the rates on the maturing loans or securities. Despite the Company's efforts to limit its sensitivity to interest rate changes, at March 31, 1998, the Association's net portfolio value would have declined by 18% in the event of an instantaneous 200 basis point increase in general interest rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company - Asset/Liability Management." Diversified Lending Risks The Company's current operating strategy includes an increased emphasis on originating real estate construction loans. This lending category is generally considered to involve a higher degree of risk than that for traditional single-family residential lending, because, among other factors, such loans involve larger loan balances to a single borrower or groups of related borrowers. In addition some loans may default despite the Company's policies and procedures for loan underwriting. At March 31, 1998, the Company had a balance of $13.3 million in residential construction loans. Risk of loss on a construction loan depends largely upon the concurrence of the initial estimate of the property's value at completion of construction and the estimated cost (including interest) of construction, as well as the availability of permanent take-out financing. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of value proves to be inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a project which, when completed, has a value which is insufficient to ensure full repayment. See "Business of the Company -- Lending Activities - Construction Lending." 9 Competition Both the Association and Neodesha experience significant competition in their local market areas in both originating real estate and other loans and attracting deposits. This competition arises from other savings institutions as well as credit unions, mortgage banks, commercial banks, mutual funds and national and local securities firms. Due to their size, many competitors can achieve certain economies of scale and as a result offer a broader range of products and services than the Association and Neodesha. The Association and Neodesha attempt to mitigate the effect of such factors by emphasizing customer service and community outreach. Such competition may limit the Company's growth in the future. Geographic Concentration of Business Activities The Association's and Neodesha's lending and deposit gathering activities are focused primarily on the local communities of Independence and Neodesha, Kansas, respectively (although the Association has recently expanded its lending activities through its new loan production office in Lawrence, Kansas). In the event that such communities experienced an economic slow down or a decline in real estate values, the results of operations of the Company could be materially adversely affected. See "Business of the Company -- Market Area." Market For Common Stock Although the Company's Common Stock has been quoted on the Nasdaq "Small Cap" Market under the symbol "FFSL" for several years, there can be no assurance that an active or liquid trading market will continue. A public market having the desirable characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of both willing buyers and sellers of the Common Stock at any given time, which is not within the control of the Company or any market maker. Accordingly, there can be no assurance that purchasers will be able to sell their shares at or above the Purchase Price. See "Market for Common Stock." Takeover Defensive Provisions Certain provisions included in the Company's certificate of incorporation and bylaws are designed to encourage potential acquirors to negotiate directly with the Board of Directors of the Company. By discouraging non-negotiated takeover attempts, these provisions may have the effect of delaying or preventing attempts to change the control of the Company, including attempts which might result in the payment to stockholders of a premium over the market price for the Company's shares. These provisions include a classified board of directors, lack of cumulative voting and authority for stockholders to call a special meeting, authority for the Company to issue preferred stock and additional common stock, certain restrictions on acquisitions of or offers to acquire 10% or more of the outstanding voting stock of the Company, supermajority vote requirements for amendments to certain provisions of the certificate of incorporation and to the bylaws, and the requirement that certain business combinations be approved by either at least 80% of the Company's outstanding voting stock or by a two-thirds vote of the Board of Directors or satisfy certain minimum price requirements. In addition, a federal regulation prohibits transfers of, or agreements to transfer, the legal or beneficial ownership of subscription rights or the stock issued upon their exercise prior to completion of a conversion. This regulation also prohibits direct or indirect acquisitions of (or offers to acquire) the beneficial ownership of more than 10% of the stock of a converted savings institution without prior OTS approval. The Change in Savings and Loan Control Act and the Savings and Loan Holding Company Act, as amended (as well as regulations promulgated pursuant to both of these Acts) also require OTS approval prior to the acquisition of "control" (as defined in the regulations) of an insured institution, including a holding company thereof. See "Restrictions on Acquisitions of Stock and Related Takeover Defensive Provisions." Regulatory Oversight The Association and Neodesha are subject to extensive regulation, supervision and examination by the OTS as their chartering authority and primary federal regulator, and by the FDIC, which insures their deposits up to applicable limits. The Association and Neodesha are members of the FHLB of Topeka and are subject to certain limited regulation by the Federal Reserve Board. As the savings and loan holding company of the Association, the Company is subject to regulation and oversight by the OTS. See "Regulation." Such regulation and supervision governs the 10 activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities which are intended to strengthen the financial condition of the banking industry, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution, the adequacy of an institution's capital and allowance for loan losses and the assessment of fees to protect the insurance funds. See "Regulation - Federal Regulation of Savings Associations" and "- Regulatory Capital Requirements." Any change in such regulation and oversight, whether by the OTS, the Federal Reserve Board, the FDIC or Congress, could have a material impact on the Company, the Association and their respective operations. Risk of Delay in Completion of the Offering The Subscription and Community Offering will expire at ____, Independence, Kansas time, on _____ __, 1998 unless extended by Neodesha and the Company. If the offering is extended beyond _______ _, 1998, all subscribers will have the right to modify or rescind their subscriptions and to have their subscription funds returned with interest. There can be no assurance that the Subscription and Community Offering will not be extended as set forth above. A material delay in the completion of the sale of all unsubscribed shares in the Subscription and Community Offering or otherwise may result in a significant increase in the costs in completing the Merger Conversion. Significant changes in the Company's or Neodesha's operations and financial condition, the aggregate market value of the shares to be issued in the Merger Conversion and general market conditions may occur during such material delay. See "The Merger Conversion - Risk of Delay in Completion of the Offering." Capability of the Company's Data Information System to Accommodate the Year 2000 Like many financial institutions, the Association and Neodesha rely upon computers for the daily conduct of their business and for information systems processing. There is concern among industry experts that on January 1, 2000 computers will be unable to "read" the new year and there may be widespread computer malfunctions. The Company and Neodesha generally rely on software and hardware developed by independent third parties to provide the information systems they use and management has been advised by the Company's and Neodesha's information systems providers that the issue is being addressed. The Company and Neodesha are also in the process of reviewing internally developed programs to assure year 2000 compliance. Based on information currently available, management of the Company and Neodesha do not believe that significant additional costs will be incurred in connection with the year 2000 issue. FIRST INDEPENDENCE CORPORATION The Company, a Delaware corporation, was organized by the Association for the purpose of becoming a thrift institution holding company for the Association. The Company is authorized to engage in any activity permitted by Delaware law. The principal asset of the Company is the outstanding stock of the Association, its wholly-owned subsidiary. The Company presently has no separate operations, and its business consists only of the business of the Association. All references to the Company, unless otherwise indicated, refer to the Company and the Association on a consolidated basis, as the context requires. The Company's sources of funds are primarily dividends from the Association, borrowings and the issuance of shares of capital stock. For a description of certain restrictions on the Association's ability to pay dividends to the Company, see "Common Stock Prices and Dividends." The Company and the Association are subject to examination and comprehensive regulation and oversight by the OTS and by the FDIC. The Association is further subject to regulations of Federal Reserve Board governing reserves required to be maintained against transaction accounts and non-personal time deposits. The Association is a member of the FHLB of Topeka, which is one of the 12 regional banks constituting the FHLB System and its savings deposits are backed by the full faith and credit of the United States Government and are insured by the SAIF to the maximum extent permitted by law. 11 The Company's executive offices are located at Myrtle & Sixth, Independence, Kansas 67301 and its telephone number at that location is (316) 331-1660. THE NEODESHA SAVINGS AND LOAN ASSOCIATION, FSA Neodesha began operations in 1887 as a state-chartered mutual savings institution. In June, 1993, Neodesha converted to a federally chartered mutual savings and loan association. Its savings accounts have been insured since 1939 and Neodesha has been a member of the FHLB System since 1939. Neodesha's operations are conducted through its home office in Neodesha, Kansas. As of March 31, 1998, Neodesha had total assets of $13.7 million, deposits of $12.1 million and retained earnings of $1.1 million. The business of Neodesha consists primarily of attracting deposits from the general public and using those deposits to originate one- to four-family residential mortgage and consumer loans, to purchase investment securities and to make other investments. Neodesha's deposits are backed by the full faith and credit of the United States Government and are insured to the maximum extent permitted by law by the SAIF. Neodesha is subject to examination and comprehensive regulation by the OTS and the FDIC. Neodesha is also a member of the FHLB of Topeka. The home office of Neodesha is located at 801 Main Street, Neodesha, Kansas 66757. Its telephone number at that address is (316) 325-3033. PRO FORMA DATA Selected Pro Forma Combined Financial Information The following selected pro forma combined financial information has been prepared based on the purchase method of accounting. This method of accounting for business combinations requires that all assets and liabilities of Neodesha be adjusted to their fair market value as of the date of acquisition. The actual net proceeds from the sale of the Conversion Stock cannot be determined until the Merger Conversion is completed. However, net proceeds are currently estimated to be between $1,080,000 and $1,620,000. Such estimate and the pro forma information which follows are computed based on an Aggregate Purchase Price at the minimum, midpoint, maximum and 15% above the maximum of the Valuation Range on the assumptions that (i) the number of shares of Conversion Stock at the indicated points within the Valuation Range were sold at the indicated prices per share (which ranges between 15% above and 15% below the average of the closing bid and ask quotations of the Company's Common Stock on the Nasdaq SmallCap Market on June 9, 1998) at the beginning of the appropriate periods and resulted in net proceeds as indicated; (ii) the net proceeds were invested at the beginning of the appropriate periods to yield an annualized return of 5.44%, the one-year treasury bill rate on June 9, 1998 less applicable federal and state taxes at 38.0% of such return resulting in a pro forma after tax return of 3.37%; and (iii) other expenses of the Merger Conversion (including a fee of $85,000 to Trident for its services in connection with the Merger Conversion) will aggregate $450,000. The net earnings for the periods have been adjusted for the pro forma effect of the resulting assumed increase in Neodesha's and the Company's interest income. No effect has been given to (i) the withdrawals from savings and deposit accounts for the purpose of subscribing for shares of the Conversion Stock to be offered in the Subscription and Community Offering or (ii) the liquidation account to be established for the benefit of depositors of Neodesha. See "The Merger Conversion - Effects on Depositors and Borrowers of Neodesha." The pro forma information may be materially affected by the actual Aggregate Purchase Price and the number of shares of Conversion Stock issued in the Merger Conversion. 12 This information should be read in conjunction with the other pro forma financial information, the accompanying pro forma notes and the consolidated financial statements for the respective institutions and the related notes thereto included elsewhere in this Prospectus. The per share prices shown are for illustrative purposes only, and reflect the minimum, midpoint and maximum of the per share price range within which shares may be issued in the Merger Conversion without a resolicitation of subscriptions. The pro forma net earnings derived from the assumptions set forth above should not be considered indicative of the actual results of operations of Neodesha or of the Company for any period, and the assumptions regarding investment yield should not be considered indicative of the actual yields expected during this and any future period. The book value data should not be regarded as indicative of the fair market value of the Conversion Stock, nor does it represent amounts that would be available in the event of liquidation.
Pro Forma Information - Aggregate Purchase Price -------------------------------------------------------------------------- 15% Above Minimum of Midpoint of Maximum of Maximum of Valuation Valuation Valuation Valuation Range Range Range Range ----- ----- ----- ----- (Dollars in Thousands) Number of shares of the Company Common Stock to be issued at the following prices: $11.15 per share ............. 137,176 161,383 185,590 213,429 $13.12 per share ............. 116,599 137,176 157,752 181,415 $15.09 per share ............. 101,391 119,283 137,176 157,752 Gross proceeds ......................... $1,530 $1,800 $2,070 $2,381 Less offering expenses.................. 450 450 450 450 -------- -------- -------- -------- Estimated net proceeds............. $1,080 $1,350 $1,620 $1,931 ====== ====== ====== ======
13
At or For the Six Months Ended At or For the Year Ended March 31, 1998 September 30, 1997 --------------------------------------------- --------------------------------------------- 15% 15% Above Above Minimum Midpoint Maximum Maximum Minimum Midpoint Maximum Maximum of of of of of of of of Valuation Valuation Valuation Valuation Valuation Valuation Valuation Valuation Range Range Range Range Range Range Range Range ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in Thousands, except per share data) Net earnings: Historical-- Company ...... $ 375 $ 375 $ 375 $ 375 $ 712 $ 712 $ 712 $ 712 Historical-- Neodesha ..... 30 30 30 30 77 77 77 77 -------- -------- -------- -------- -------- -------- -------- -------- Historical -- Combined .... 405 405 405 405 789 789 789 789 Pro forma earnings from proceeds ................. 18 22 27 32 36 45 54 65 ESOP ...................... (10) (12) (14) (16) (21) (24) (28) (33) Purchase accounting effect on earnings ....... 54 54 54 54 108 108 108 108 -------- -------- -------- -------- -------- -------- -------- -------- Pro forma combined net earnings ................ $ 467 $ 469 $ 472 $ 475 $ 912 $ 918 $ 923 $ 929 ======== ======== ======== ======== ======== ======== ======== ======== Per Share: Historical-- Company ...... $ 0.41 $ 0.41 $ 0.41 $ 0.41 $ 0.73 $ 0.73 $ 0.73 $ 0.73 Pro forma combined basic net earnings per share at the following assumed prices: $11.15 per share...... $ 0.44 $ 0.44 $ 0.43 $ 0.42 $ 0.82 $ 0.81 $ 0.80 $ 0.79 $13.12 per share...... $ 0.45 $ 0.45 $ 0.44 $ 0.44 $ 0.84 $ 0.83 $ 0.82 $ 0.81 $15.09 per share...... $ 0.46 $ 0.46 $ 0.45 $ 0.45 $ 0.85 $ 0.84 $ 0.84 $ 0.83 Total stockholders' equity (net worth): Historical-- Company ..... $ 11,554 $ 11,554 $ 11,554 $ 11,554 $ 11,529 $ 11,529 $ 11,529 $ 11,529 Historical-- Neodesha .... 1,122 1,122 1,122 1,122 1,092 1,092 1,092 1,092 -------- -------- -------- -------- -------- -------- -------- -------- Historical-- Combined .... 12,676 12,676 12,676 12,676 12,621 12,621 12,621 12,621 Estimated net offering proceeds ................ 1,080 1,350 1,620 1,930 1,080 1,350 1,620 1,931 Common stock acquired by ESOP ................. (153) (180) (207) (238) (153) (180) (207) (238) Purchase accounting effect on equity ........ (1,122) (1,122) (1,122) (1,122) (1,092) (1,092) (1,092) (1,092) -------- -------- -------- -------- -------- -------- -------- -------- Pro forma combined stockholders' equity ... $ 12,481 $ 12,724 $ 12,967 $ 13,246 $ 12,456 $ 12,699 $ 12,942 $ 13,222 ======== ======== ======== ======== ======== ======== ======== ======== Per share: Historical-- Company ...... $ 12.09 $ 12.09 $ 12.09 $ 12.09 $ 11.78 $ 11.78 $ 11.78 $ 11.78 Pro forma combined net stockholders' equity per share at the following assumed prices: $11.15 per share...... $ 11.42 $ 11.39 $ 11.36 $ 11.33 $ 11.17 $ 11.14 $ 11.12 $ 11.09 $13.12 per share...... 11.64 11.64 11.65 11.65 11.38 11.38 11.39 11.40 $15.09 per share...... 11.81 11.84 11.86 11.90 11.54 11.57 11.60 11.64
14 PRO FORMA CONDENSED FINANCIAL STATEMENTS (Unaudited) The following unaudited pro forma combined condensed balance sheets as of March 31, 1998 and the unaudited combined condensed statements of earnings for the six months ended March 31, 1998 and for the year ended September 30, 1997 combine the historical financial statements of the Company and Neodesha. The pro forma combined condensed statements are presented under the purchase method of accounting for business combinations. The purchase method of accounting requires that all assets and liabilities be adjusted to their estimated fair market value as of the date of acquisition. The pro forma statements are provided for informational purposes only. The pro forma combined condensed statements of earnings are not necessarily indicative of actual results that would have been achieved had the acquisition been consummated at the beginning of the periods presented, and is not indicative of future results. The pro forma financial statements should be read in conjunction with the audited financial statements and the notes thereto of Neodesha and the Company, and their unaudited interim financial statements included elsewhere herein. 15 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS BALANCE SHEET March 31, 1998
Pro Forma Purchase Conversion Accounting Pro Forma Company Neodesha Adjustments Adjustments Combined ------- -------- ----------- ----------- -------- (Dollars in Thousands) ASSETS Cash, cash equivalents and interest- bearing deposits ................................. $ 6,337 $ 650 $ 1,170(a) $ -- $ 8,197 Investment securities held to maturity ............ 5,000 3,018 -- -- 8,018 Investment securities available for sale .......... 3,346 -- -- -- 3,346 Mortgage-backed securities held to maturity ..................................... 20,902 238 -- -- 21,140 Loans receivable .................................. 85,264 9,088 -- -- 94,352 Premises and equipment ............................ 1,308 376 -- (376)(b) 1,308 Federal Home Loan Bank stock ...................... 1,423 140 -- -- 1,563 Real estate acquired through foreclosure .......... 15 22 -- -- 37 Other assets ...................................... 859 147 -- -- 1,006 --------- --------- --------- --------- --------- Total assets ............................ $ 124,494 $ 13,679 $ 1,170 $ (376) $ 138,967 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits .......................................... $ 84,172 $ 12,065 $ -- $ -- $ 96,237 Advances from Federal Home Loan Bank .............. 27,300 400 -- -- 27,700 Negative goodwill ................................. -- -- -- 889 (d) 778 Other liabilities ................................. 1,468 92 -- (143)(c) 1,417 --------- --------- --------- --------- --------- Total liabilities ....................... 112,940 12,557 -- 746 (b) 126,243 Stockholders' equity .............................. 11,554 1,122 1,170(a) (1,122)(c)(d) 12,724 --------- --------- --------- --------- --------- $ 124,494 $ 13,679 $ 1,170 $ (376) $ 138,967 ========= ========= ========= ========= =========
See notes to Pro Forma Unaudited Combined Condensed Financial Statements. 16 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS STATEMENT OF EARNINGS Six months ended March 31, 1998
Pro Forma Purchase Conversion Accounting Pro Forma Company Neodesha Adjustments Adjustments Combined ------- -------- ----------- ----------- -------- (Dollars in thousands, except per share data) Total interest income............... $ 4,377 $ 507 $ 37 (e) $ -- $ 4,921 Total interest expense.............. 2,680 271 -- -- 2,951 ------------ ------------- ------------- ------------- ----------- Net interest income............ 1,697 236 37 (e) -- 1,970 Provision for losses on loans....... --- 3 -- -- 3 ------------ ------------ ------------ ------------- ----------- Net interest income after provision for losses on loans................ 1,697 233 37 (e) -- 1,967 Other income........................ 113 61 -- 44 (f) 218 Other expenses...................... (1,147) (253) (20)(g) 15 (h) (1,405) ------------ ------------ ------------ ------------- ----------- Earnings before income taxes........ 663 41 17 59 780 Income tax expense.................. (288) (11) (7)(i) (5)(j) (311) ------------ ------------ ----------- ------------- ----------- Net earnings........................ $ 375 $ 30 $ 10 $ 54 $ 469 ============ ============ =========== ============= =========== Earnings per share Basic.......................... $ .41 $ .45 Diluted........................ .38 .42 Average common shares Basic........................... 924,407 1,048,355 Diluted........................ 995,600 1,119,548
See notes to Pro Forma Unaudited Combined Condensed Financial Statements. 17 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS STATEMENT OF EARNINGS Year ended September 30, 1997
Pro Forma Purchase Conversion Accounting Pro Forma Company Neodesha Adjustments Adjustments Combined ------- -------- ----------- ----------- -------- (Dollars in thousands, except per share data) Total interest income............... $ 8,069 $ 1,046 $ 73 (e) $ -- $ 9,188 Total interest expense.............. 5,059 560 -- -- 5,619 ------------ ------------ --------- ----------- ----------- Net interest income............ 3,010 486 73 (e) -- 3,569 Provision for losses on loans....... -- 6 -- -- 6 ------------ ------------ --------- ----------- ----------- Net interest income after provision for losses on loans............ 3,010 480 73 (e) -- 3,563 Other income........................ 281 135 -- 89 (f) 505 Other expense....................... (2,111) (510) (39)(g) 30 (h) (2,630) ------------ ------------ --------- ----------- ----------- Earnings before income taxes........ 1,180 105 34 119 1,438 Income tax expense.................. (468) (28) (13)(i) (11)(j) (520) ------------ ------------ --------- ----------- ----------- Net earnings........................ $ 712 $ 77 $ 21 $ 108 $ 918 ============ ============ ========= =========== =========== Earnings per share Basic............................ $ .73 $ .83 Diluted.......................... .68 .77 Average common shares Basic............................ 980,858 1,118,034 Diluted.......................... 1,051,516 1,188,692
See notes to Pro Forma Unaudited Combined Condensed Financial Statements. NOTES TO PRO FORMA UNAUDITED COMBINED CONDENSED FINANCIAL STATEMENTS General The pro forma unaudited combined condensed balance sheet as of March 31, 1998 gives effect to the Merger Conversion between the Holding Company and Neodesha as if the business combination had occurred as of that date. The pro forma combined condensed balance sheet reflects the business combination using the purchase method of accounting. The pro forma unaudited combined condensed statements of earnings for the year ended September 30, 1997 and the six-month period ended March 31, 1998 reflect the historical results of operations of the respective institutions for the periods presented. Pro forma adjustments have been made to reflect the Merger Conversion and purchase accounting adjustments as if the Merger Conversion had occurred at the beginning of the earliest period presented. Pro Forma Adjustments (a) Net proceeds of offering ($1,350,000 at midpoint of the Valuation Range), after deducting amount of stock purchased by ESOP ($180,000). (b) Write-off of property and equipment. (c) Adjustment to deferred tax due to write-off of property and equipment. (d) Negative goodwill. (e) Earnings on net proceeds. (f) Amortization of negative goodwill on a ten-year straight-line basis. (g) ESOP expense. (h) Remove depreciation expense (due to write-off of property and equipment). (i) Tax effect of (e) and (g). (j) Tax effect of (h). 18 CAPITALIZATION The following table sets forth the capitalization, including deposit accounts, of the Company and Neodesha as of March 31, 1998, and the pro forma capitalization on a combined basis giving effect to the merger and the proposed sale of the Conversion Stock in the Merger Conversion, which is to be accounted for under the purchase method of accounting for business combinations. Any changes in the number of shares of Common Stock to be issued and the actual per share purchase price from those assumed for purposes of this table may materially affect such pro forma capitalization.
March 31, 1998 Pro Forma Combined Capitalization Based Upon ----------------------- -------------------------------------------------------- 15% Above Minimum of Midpoint of Maximum of Maximum of Valuation Valuation Valuation Valuation Company Neodesha Range Range Range Range ------- -------- ----- ----- ----- ----- (In thousands) Savings deposits .......................... $ 84,172 $ 12,065 $ 96,237 $ 96,237 $ 96,237 $ 96,237 ======== ======== ======== ======== ======== ======== Borrowings: FHLB advances .......................... $ 27,300 $ 400 $ 27,700 $ 27,700 $ 27,700 $ 27,700 ======== ======== ======== ======== ======== ======== Stockholders' equity Preferred stock ........................ $ -- $ -- $ -- $ -- $ -- $ -- Common stock ........................... 15 -- 16 16 17 17 Additional paid-in capital ............. 7,188 -- 8,267 8,537 8,807 9,117 Retained earnings ...................... 9,689 1,122 9,689 9,689 9,689 9,689 Unrealized gain on securities available for sale, net ............ 20 -- 20 20 20 20 Treasury stock at cost (542,699 shares) ................... (5,155) -- (5,155) (5,155) (5,155) (5,155) Required ESOP contribution ............. (181) -- (334) (361) (389) (420) Unearned stock compensation ............ (22) -- (22) (22) (22) (22) -------- -------- -------- -------- -------- -------- Total stockholders' equity ............. $ 11,554 $ 1,122 $ 12,481 $ 12,724 $ 12,967 $ 13,246 ======== ======== ======== ======== ======== ========
- -------- (1) See "The Merger Conversion -- Effects on Depositors and Borrowers of Neodesha" for information concerning the liquidation account to be established as a result of the Merger Conversion as well as the liquidation account established pursuant to the Association's 1993 conversion from mutual to stock form. See also "Common Stock Prices and Dividends," "Regulation" and Note L of the Notes to the Company's Consolidated Financial Statements regarding restrictions on future dividend payments. USE OF PROCEEDS The net Merger Conversion proceeds from the sale of the Common Stock will increase the net worth of the Company and may support future deposit growth and expanded lending and investment activities. The Company may retain up to 50% of such proceeds, and the balance will become part of the Association's general funds. On an interim basis, the proceeds may be invested in short term securities. The Company has considered and may continue to consider certain acquisition possibilities, but has no agreement or understanding at the present time with respect to any acquisition other than Neodesha. There can be no assurance that the Company will effect any acquisition. The Company reserves the right to use the proceeds in any manner authorized by law. The final appraisal of Neodesha may reflect a significantly different Valuation Range and the Aggregate Purchase Price may be different than any of the numbers set forth herein. The Aggregate Purchase Price for the Conversion Stock will not be determined until after the termination of the Subscription and Direct Community Offerings. Accordingly, the net proceeds to the Company may vary from the estimate set forth herein. See "Pro Forma Data." The net proceeds to the Company will also vary if the Aggregate Purchase Price is adjusted to reflect a change in the estimated pro forma market value of Neodesha, and will reflect the actual expenses incurred in the Merger Conversion. 19 COMMON STOCK PRICES AND DIVIDENDS The Company's Common Stock has been traded on the Nasdaq SmallCap Market under the symbol "FFSL" since the consummation of the Association's conversion to stock form in October 1993. Presented below are the high and low bid prices for the Common Stock as reported on the Nasdaq SmallCap Market, as well as the amount of dividends paid on the Common Stock, for each quarter since the Association's October 7, 1993 conversion to stock form. Amounts have been adjusted to reflect a two-for-one stock split (in the form of a 100% stock dividend paid January 24, 1997) in fiscal 1997. Price Range Dividends Quarter Ended High Low Declared - ------------- ---- --- -------- December 31, 1993 $ 6.375 $ 5.750 $ -- March 31, 1994 6.250 5.813 .0250 June 30, 1994 6.125 5.500 .0250 September 30, 1994 6.875 6.125 .0250 December 31, 1994 6.750 6.125 .0250 March 31, 1995 7.625 6.375 .0375 June 30, 1995 7.875 7.500 .0375 September 30, 1995 9.250 7.750 .0375 December 31, 1995 9.375 9.250 .0375 March 31, 1996 9.375 9.250 .0500 June 30, 1996 9.250 8.875 .0500 September 30, 1996 9.375 8.875 .0500 December 31, 1996 10.250 9.375 .0500 March 31, 1997 11.750 10.250 .0625 June 30, 1997 11.750 10.750 .0625 September 30, 1997 14.000 11.375 .0625 December 31, 1997 14.625 13.625 .0625 March 31, 1998 15.000 13.500 .0750 June 30, 1998 (through ________, 1998) _____ _____ _____ On June 9, 1998, the average of the closing bid and ask quotations of the Common Stock as reported on the Nasdaq SmallCap Market was $13.81. On February 25, 1998, the last trading day before announcement of the Merger Conversion, the average of the closing bid and ask quotations of the Common Stock was $14.8125. As of March 31, 1998, the Company had 955,693 outstanding shares of Common Stock, held by approximately 207 stockholders of record. This number of stockholders does not reflect the number of persons or entities who may hold their stock in nominee or "street" name through brokerage firms or others. The Company anticipates that it will continue to pay quarterly cash dividends on the Common Stock, although there can be no assurance as to the amount or timing of future dividends. The payment of dividends in the future is at the discretion of the Company's Board of Directors and will depend on the Company's operating results and financial condition, availability of funds, regulatory limitations, tax considerations and other factors. The Company is a legal entity separate and distinct from the Association. The principal source of the Company's funds on an unconsolidated basis is expected to be dividends from the Association. There are various statutory and regulatory limitations on the extent to which the Association can pay dividends to the Company. See Note L of the Notes to the Company's Consolidated Financial Statements. In addition to dividends from the Association, the Company may obtain funds through borrowings and through the sale of additional equity securities. See "Regulation." 20 THE MERGER CONVERSION The OTS has approved the Plan of Merger Conversion, subject to the approval of the Plan by the members of Neodesha and to the satisfaction of certain other conditions imposed by the OTS. Such approval, however, does not constitute a recommendation or endorsement of the Plan by the OTS. General On February 18, 1998 the Boards of Directors of the Company, the Association and Neodesha, respectively, unanimously adopted the Plan subject to approval by the OTS and the members of Neodesha. Pursuant to the Plan, Neodesha will combine with the Association through the conversion of Neodesha from a mutual savings and loan association to a stock savings and loan association and the simultaneous merger of Neodesha with and into the Association. The OTS has approved the Plan, subject to its approval by the affirmative vote of the members of Neodesha holding not less than a majority of the total number of votes eligible to be cast at a special meeting (the "Special Meeting") called for that purpose to be held on __________, 1998. Subscription Rights are being offered in a Subscription Offering to deposit account holders as of December 31, 1996, Tax-Qualified Employee Plans, deposit account holders as of June 30, 1998, voting members of Neodesha as of __________, 1998, and officers, directors and employees of Neodesha. Additionally, certain members of the general public are being afforded the opportunity to subscribe for Company Common Stock in the Direct Community Offering. See " - Subscription Offering" and " - Direct Community Offering." Subscriptions for shares will be subject to the maximum and minimum purchase limitations set forth in the Plan of Conversion. Business Purposes Under federal regulations the merger of a mutual institution, such as Neodesha, with and into a stock institution, such as the Association, requires the issuance of equity securities of the surviving institution, in this case the Company. The Board of Directors of Neodesha has approved the Merger Conversion in the belief that the Merger Conversion is in the best interests of Neodesha, the depositors and borrowers of Neodesha, and the communities served by Neodesha. The Merger Conversion will enhance Neodesha's competitive position and further the interests of the depositors and borrowers of Neodesha and the communities served by Neodesha by promoting a program of sound growth, increasing funds and capital available for lending, and providing additional resources for expansion of services, as well as by providing an enhanced opportunity for attracting and retaining qualified personnel. Certain members of Neodesha's management and Board of Directors have interests in the Merger Conversion in addition to their interests as members of Neodesha generally. These interests include (i) the formation and maintenance of a Neodesha, Kansas Advisory Board (which will initially include all non-employee directors of Neodesha); (ii) the agreement by the Company to grant to President Miller, Vice President Holmquist and each non-employee director of Neodesha options to purchase, upon consummation of the Merger Conversion, 3,000, 1,500, and 1,000 shares, respectively, of Common Stock (all with an exercise price equal to the fair market value on the date of grant and subject to vesting over five years); (iii) the agreement by the Company to enter into a three year employment agreement with Franklin Miller, president of Neodesha, upon consummation of the Merger Conversion, which provides for the payment of salary equal to his current compensation, the payment of 299% of his "base amount" (five-year average) compensation under certain circumstances in connection with a change of control of the Company and the use of a company car; and (iv) the eligibility of former employees of Neodesha who become employees of the Company for certain employee benefits. Effects on Depositors and Borrowers of Neodesha Voting Rights. Deposit account holders of Neodesha will have no voting rights in the resulting institution ("Resulting Institution") or the Company and will therefore not be able to elect directors of either entity or to control their affairs. Voting rights as to the Company will be held exclusively by its stockholders. Each purchaser of Company Common Stock shall be entitled to vote on any matters to be considered by the Company stockholders. A stockholder will be entitled to one vote for each share of Common Stock owned. See "Description of Capital Stock." The Company intends to supply each stockholder with quarterly and annual reports and proxy statements. 21 Deposit Accounts and Loans. Upon consummation of the Merger Conversion, each deposit account holder in Neodesha will have a deposit account in the Resulting Institution equivalent in withdrawable amount to the withdrawal value and upon substantially the same terms and conditions (other than voting and liquidation rights) as existed prior to such consummation. The existence of Neodesha as a financial institution will be terminated by the Merger Conversion and the Resulting Institution will assume all of the rights, franchises, interests, obligations and liabilities of Neodesha. The Resulting Institution will continue to be a member of the FHLB System. Furthermore, the Merger Conversion will not affect the loan accounts, the balances of these accounts, or the obligations of the borrowers under their individual contractual arrangements with Neodesha. Liquidation Rights. The Association and Neodesha have no plans whatsoever to liquidate in the foreseeable future, whether or not the Merger Conversion is completed. However, if there should ever be a complete liquidation, either before or after Merger Conversion, deposit account holders of both institutions would receive the protection of insurance by the SAIF up to applicable limits. Subject thereto, liquidation rights before and after the Merger Conversion would be as follows: Liquidation Rights in Present Mutual Association. In addition to the protection of SAIF insurance up to applicable limits, in the event of a complete liquidation each holder of a deposit account in Neodesha in its present mutual form would receive his or her pro rata share of any assets of Neodesha remaining after payment of claims of all creditors (including the claims of all depositors in the amount of the withdrawal value of their accounts). Such holder's pro rata share of such remaining assets, if any, would be in the same proportion of such assets as the balance in his or her deposit account was to the aggregate balance in all deposit accounts in Neodesha at the time of liquidation. Liquidation Rights in Proposed Resulting Institution. After the Merger Conversion, each deposit account holder, in the event of a complete liquidation, would have a claim of the same general priority as the claims of all other general creditors of the Resulting Institution in addition to the protection of SAIF insurance up to applicable limits. Therefore, except as described below, the deposit account holder's claim would be solely in the amount of the balance in his or her deposit account plus accrued interest. The holder would have no interest in the value of the Resulting Institution above that amount. The Plan of Merger Conversion provides that there shall be established, upon the completion of the Merger Conversion, a special "liquidation account" for the benefit of Eligible Account Holders of Neodesha (i.e., depositors at December 31, 1996) and Supplemental Eligible Account Holders (i.e., depositors at June 30, 1998), who continue to maintain their deposit accounts, in an amount equal to the regulatory capital of Neodesha as of the date of its latest statement of financial condition contained in the final prospectus relating to the sales of shares of Company Common Stock in the Merger Conversion. Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial interest in such liquidation account for each deposit account held in Neodesha on their respective qualifying dates. A deposit account holder's interest as to each deposit account would be in the same proportion of the total liquidation account as the balance in his or her account on December 31, 1996 and June 30, 1998 was to the aggregate balance in all deposit accounts of Eligible Account Holders and Supplemental Eligible Account Holders, respectively, on such date. However, if the amount in the deposit account of an Eligible Account Holder or Supplemental Eligible Account Holder on any annual closing date of the Resulting Institution is less than the lowest amount in such account on December 31, 1996 or June 30, 1998, as applicable, and on any subsequent closing date, then the deposit account holder's interest in this special liquidation account would be reduced by an amount proportionate to any such reduction, and the deposit account holder's interest would cease to exist if such deposit account were closed. In addition, the interest in the special liquidation account would never be increased despite any increase in the balance of the deposit account holder's related account after Merger Conversion, and would only decrease. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders and other creditors were satisfied would be distributed to the Company as the sole stockholder of the Resulting Institution. No merger, consolidation, bulk purchase of assets with assumptions of deposit accounts and other liabilities, or similar transactions, with a SAIF-insured institution in which Neodesha is not the surviving institution, shall be considered to be a complete liquidation for purposes of distribution of the liquidation account and, in any such transaction, the liquidation account would be assumed to the full extent authorized by regulations of the OTS as then 22 in effect. The OTS has stated that the consummation of a transaction of the type described in the preceding sentence in which the surviving entity is not a SAIF-insured institution would be reviewed on a case-by-case basis to determine whether the transaction should constitute a "complete liquidation" requiring distribution of any then remaining balance in the liquidation account. While the Company believes that such a transaction should not constitute a complete liquidation, there can be no assurance that the OTS will not adopt a contrary position. Common Stock. For information as to the characteristics of the Common Stock to be issued under the Plan of Merger Conversion, see "Dividends" and "Description of Capital Stock." Common Stock issued under the Plan of Merger Conversion cannot, and will not, be insured by the SAIF. Tax Consequences of Merger Conversion The Company has received an opinion from its legal counsel Silver, Freedman & Taff, L.L.P. to the effect that, based in part on certain representations made by the Company and Neodesha, for federal income tax purposes: (i) the Merger Conversion will be a non-taxable reorganization under Section 368(a)(1)(A) of the Internal Revenue Code of 1986 ("Code"); (ii) no gain or loss will be recognized by Neodesha or the Association as a result of the Merger Conversion; (iii) the basis of Neodesha's assets in the hands of the Association will be the same as the basis of those assets in the hands of Neodesha immediately prior to the transaction; (iv) the holding period of the Neodesha assets in the hands of the Association will include the period during which such assets were held by Neodesha; (v) the Association will succeed to and take into account the earnings and profits, or deficit in earnings and profits, of Neodesha as of the date of the Merger Conversion; (vi) the Association will succeed to and take into account immediately after the Merger Conversion the dollar amounts of Neodesha's bad debt reserve accounts of which Neodesha has taken a bad debt deduction for taxable years ending on or before the date of the Merger Conversion and the bad debt reserves will not be required to be restored to gross earnings of either Neodesha or the Association for the taxable year of Merger Conversion; (vii) no gain or loss will be recognized by the Association upon receipt of money for Conversion Stock of the Company; (viii) gain, if any, will be recognized by savings depositors of Neodesha upon the issuance to them of withdrawable savings deposits in the Association in the same dollar amount as their savings deposits in Neodesha, interests in the liquidation account of the Association, and non-transferable Subscription Rights to purchase Conversion Stock, in exchange for their Neodesha savings deposits, to the extent of the fair market value of the Subscription Rights; (ix) no earnings, gain, or loss will be recognized by savings depositors, employees or officers of Neodesha as a result of the exercise of non-transferable Subscription Rights; (x) the basis of the savings deposits in the Association received by the savings depositors of Neodesha will, in each instance, be the same as the basis of their savings deposits in Neodesha which are surrendered in exchange therefor, decreased by the fair market value of the subscription rights received and increased by the amount of gain recognized on the exchange; (xi) the basis of the non-transferable subscription rights will be their fair market value; (xii) the basis of the Company Common Stock to its shareholders will be the purchase price thereof plus, in the case of Conversion Stock acquired by depositors of Neodesha, the basis, if any, in the subscription rights; and (xiii) a shareholder's holding period for Conversion Stock acquired through the exercise of the non-transferable subscription rights shall begin on the date on which the subscription rights are exercised. A number of the opinions described above are premised upon a letter of Ferguson which, based on certain assumptions, states that the subscription rights to be received by Eligible Account Holders, Supplemental Eligible Account Holders and other eligible subscribers do not have any economic value at the time of distribution or at the time the subscription rights are exercised, whether or not a public offering takes place. The Company has also received an opinion of Grant Thornton, LLP that the Merger Conversion will not be a taxable transaction for Kansas income tax purposes. The opinions of Silver, Freedman & Taff, L.L.P., Grant Thornton and Ferguson have no binding effect on the IRS or the Kansas tax authorities, and there is no assurance that the conclusions in any of those opinions would be sustained by a court if contested by such authorities. Subscription Offering In accordance with federal regulations, nontransferable Subscription Rights have been granted under the Plan of Merger Conversion to the following persons in the following order of priority: (1) Eligible Account Holders (deposit 23 account holders of Neodesha as of December 31, 1996); (2) Tax-Qualified Employee Plans (defined benefit and contribution plans of the Company, the Association or Neodesha, qualified under Section 401 of the Internal Revenue Code); (3) Supplemental Eligible Account Holders (deposit account holders of Neodesha as of June 30, 1998); (4) members of Neodesha, other than Eligible Account Holders and Supplemental Eligible Account Holders, at the close of business on _________, 1998, the voting record date for the Special Meeting ("Other Members"); and (5) officers, directors and employees of Neodesha. All subscriptions received will be subject to the availability of Company Common Stock after satisfaction of all subscriptions of all persons having prior rights in the Subscription Offering, and to the maximum and minimum purchase limitations set forth in the Plan of Merger Conversion (and described below). The beneficiaries of IRA and Keogh accounts are deemed to have the same subscription rights as other depositors. However, the IRA and Keogh accounts maintained in Neodesha do not permit investment in the Common Stock. Preference categories are more fully described below. Category No. 1 is reserved for Neodesha's Eligible Account Holders. Subscription Rights to purchase shares under this category will be allocated among Eligible Account Holders to permit each such depositor to purchase shares in this Category in an amount equal to the greater of $100,000 of Common Stock, one-tenth of one percent (.10%) of the total shares offered in the Merger Conversion, or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Common Stock to be issued by a fraction of which the numerator is the amount of the qualifying deposits of the Eligible Account Holder and the denominator is the total amount of the qualifying deposits of the Eligible Account Holders in Neodesha, in each case on the Eligibility Record Date. To the extent shares are oversubscribed in this category, shares shall be allocated first to permit each subscribing Eligible Account Holder to purchase, to the extent possible, 100 shares and thereafter among each subscribing Eligible Account Holder pro rata in the same proportion that his Qualifying Deposit bears to the total Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unsatisfied. Category No. 2 provides for the issuance of Subscription Rights to Tax-Qualified Employee Plans to purchase up to 10% of the total amount of shares of Common Stock issued in the Subscription Offering on a second priority basis. However, such plans shall not, in the aggregate, purchase more than 10% of the Conversion Stock issued. The Company's ESOP intends to purchase a total of 10% of the Company's Common Stock sold in the Merger Conversion under this category. Subscription Rights received pursuant to this category shall be subordinated to all rights received by Eligible Account Holders to purchase shares pursuant to Category No. 1; provided, however, that notwithstanding any provision of the Plan of Merger Conversion to the contrary, the Tax-Qualified Employee Plans shall have first priority Subscription Rights to the extent that the total number of shares of Common Stock sold in the Merger Conversion exceeds the maximum of the Valuation Range. Category No. 3 is reserved for Neodesha's Supplemental Eligible Account Holders. Subscription Rights to purchase shares under this category will be allocated among Supplemental Eligible Account Holders to permit each such depositor to purchase shares in this Category in an amount equal to the greater of $100,000 of Common Stock, one-tenth of one percent (.10%) of the total shares of Common Stock offered in the Merger Conversion, or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Common Stock to be issued by a fraction of which the numerator is the amount of the qualifying deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of the qualifying deposits of the Supplemental Eligible Account Holders in Neodesha in each case on ______ __, 1998 (the "Supplemental Eligibility Record Date"), subject to the overall purchase limitation after satisfying the subscriptions of Eligible Account Holders and Tax Qualified Employee Plans. Any non-transferable Subscription Rights received by an Eligible Account Holder shall reduce, to the extent thereof, the subscription rights to be distributed to such person as a Supplemental Eligible Account Holder. In the event of an oversubscription for shares, the shares available shall be allocated first to permit each subscribing Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation (including the number of shares, if any, allocated in accordance with Category No. 1) equal to 100 shares, and thereafter among each 24 subscribing Supplemental Eligible Account Holder pro rata in the same proportion that his Qualifying Deposit bears to the total Qualifying Deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unsatisfied. Category No. 4 provides, to the extent that shares are then available after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified Employee Plans and Supplemental Eligible Account Holders, for the issuance of Subscription Rights to Other Members to purchase in this Category up to the greater of $100,000 of Common Stock, or one-tenth of one percent (.10%) of the Common Stock offered in the Merger Conversion. In the event of an oversubscription, the shares available shall be allocated among the subscribing Other Members pro rata in the same proportion that his number of votes on the Voting Record Date bears to the total number of votes on the Voting Record Date of all subscribing Other Members on such date. Such number of votes shall be determined based on Neodesha's mutual charter and bylaws in effect on the date of approval by members of this Plan of Merger Conversion. Category No. 5 provides for the issuance of Subscription Rights to officers, directors and employees of Neodesha, to purchase in this Category up to $100,000 of the Common Stock to the extent that shares are available after satisfying the subscriptions of eligible subscribers in preference Categories 1, 2, 3 and 4. The total number of shares which may be purchased under this Category may not exceed 25% of the number of shares of Conversion Stock. In the event of an oversubscription, the available shares will be allocated pro rata among all subscribers in this category based on the number of shares ordered by each subscriber. Direct Community Offering Any shares not subscribed for in the Subscription Offering will be available for purchase in a Direct Community Offering to the general public, with a preference to natural persons residing in Wilson County, Kansas. The Direct Community Offering is being made concurrently with the Subscription Offering, and may continue after the end of the Subscription Offering for a period of up to 45 days or for such longer period as the OTS may approve. Purchase orders received during the Direct Community Offering shall be filled on a when received basis up to a maximum of $100,000 per purchaser. The Conversion Stock will be offered and sold in a manner to achieve the widest practicable distribution of the Conversion Stock. In the event of an extension for longer than such 45-day period, purchasers will be notified and may increase, decrease or cancel their purchase orders under conditions prescribed by the Director in approving the extension. Purchase orders may not otherwise be decreased or changed by the purchaser without the approval of the Company. The Company has the right, in its sole discretion, to reject orders, in whole or in part, in the Direct Community Offering. Purchase Limitations The following purchase limitations apply to all purchases of the Conversion Stock. (1) No less than $250 worth of the Conversion Stock may be purchased by any person purchasing Conversion Stock offered in the Merger Conversion. (2) No person, by himself or herself or with an Associate or with a group of persons acting in concert (other than a Tax-Qualified Employee Plan), including individuals on joint accounts or having the same address on Neodesha's records, may subscribe for or purchase more than $100,000 of the Conversion Stock offered in the Merger Conversion. (3) Directors and Officers of Neodesha and their associates may not purchase an aggregate of more than 35% of the Conversion Stock. Depending upon market and financial conditions, the Boards of Directors of the Company and Neodesha, with the approval of the OTS, may increase the purchase limitations set forth in categories (1) and (2) above. Under such circumstances, either written or oral notification of the increase will be provided, to the extent possible, to those persons 25 who subscribed for the maximum purchase limitation. Subscribers would then have the opportunity to subscribe for additional shares of Conversion Stock up to the new maximum purchase limitation. Each person purchasing Conversion Stock will be deemed to confirm that such purchase does not conflict with the above purchase limitations. Directors of the Company or Neodesha will not be deemed to be Associates or a group acting in concert in purchasing Conversion Stock solely as a result of their being directors of the Company or Neodesha. Independent Valuation Federal regulations require that the aggregate purchase price of shares of stock of a thrift institution sold in connection with the conversion of the thrift institution, must be based on an appraised aggregate pro forma market value of the converting institution as determined on the basis of an independent valuation. The Company has retained the appraisal firm of Ferguson to make such a valuation of the aggregate pro forma market value of Neodesha to the Company and, accordingly, the Conversion Stock to be offered and sold. For its appraisal services, Ferguson will receive a fee of approximately $25,000 plus reimbursement of ordinary and customary out-of-pocket expenses required in connection with the appraisal and any updates. The appraisal was prepared in reliance upon the information contained in this prospectus including Neodesha's and the Company's consolidated financial statements. The appraiser also considered the following factors among others: the present and projected operating results and financial condition of Neodesha and the Company, the economic and demographic conditions in Kansas, the quality and depth of Neodesha's and the Company's management and personnel, certain historical, financial and other information relating to Neodesha and the Company, a comparative evaluation of the operating and financial statistics of Neodesha and the Company with those of other comparable financial institutions, the aggregate size of the offering of the Conversion Stock, the impact of the Merger Conversion on Neodesha's and the Company's net worth and earnings potential, the trading market for comparable financial institutions' stocks, and general conditions in the markets for such common stocks. However, Ferguson does not guarantee the accuracy or completeness of such information. No detailed individual analysis of the separate components of Neodesha's assets and liabilities was performed, nor was the accuracy of the information provided by Neodesha and the Company verified in connection with this evaluation. The Boards of Directors reviewed the appraisal, including the methodology and the appropriateness of the assumptions utilized by Ferguson and determined that in their opinions the appraisal was not unreasonable. The Valuation Range may be amended with the approval of the OTS in connection with changes in the financial condition or operating results of Neodesha or market conditions generally. As described below, an amendment to the Valuation Range above $2,380,500 would not be made without a resolicitation of subscriptions and/or proxies except in limited circumstances. On the basis of the foregoing, the appraiser has advised the Company and Neodesha that in its opinion at June 15, 1998, the date as of which such valuation was made, the aggregate estimated pro forma market value of Neodesha upon Merger Conversion would have been within the range of $1,530,000 to $2,070,000 or 15% above and below the $1,800,000 midpoint of the range in accordance with federal regulations. Depending upon market and financial conditions subsequent to the date of this prospectus and the length of time needed for the sale of the Conversion Stock, the independent valuation may be updated as required by federal regulations. Subscribers and other purchasers will be notified of any material change in the valuation that would cause the Aggregate Purchase Price to be outside of the valuation range. Immediately prior to completion of the Merger Conversion, the appraiser will provide Neodesha and the Company with an updated valuation reflecting current financial and market conditions. The Aggregate Purchase Price at which the Conversion Stock is to be sold must be consistent with this updated final valuation. If the Aggregate Purchase Price is not within the final valuation range approved by the OTS, completion of the Merger Conversion will be delayed until the updated final valuation has received approval from the Director. THE INDEPENDENT VALUATION IS NOT INTENDED AND MUST NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THE CONVERSION STOCK. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO THE AMOUNT 26 OF NET PROCEEDS AND THE EARNINGS THEREON), ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SHARES IN THE MERGER CONVERSION WILL THEREAFTER BE ABLE TO SELL THE SHARES AT PRICES RELATED TO THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE. Purchase Price and Number of Shares The Aggregate Purchase Price for all shares of Conversion Stock to be issued will be consistent with an independent valuation of the pro forma market value of Neodesha, as converted. Based on the Valuation Range as of June 15, 1998, the aggregate pro forma market value of Neodesha upon Merger Conversion would be within the Valuation Range of $1,530,000 to $2,070,000 with a midpoint of $1,800,000. The Aggregate Purchase Price at which the Conversion Stock is sold will be consistent with the Valuation Range, unless market and financial conditions at the time of the final updated valuation cause a change in this Valuation Range. In such event, a revised Valuation Range would be subject to further OTS approval. If the estimated pro forma market value of Neodesha as so determined is not within the Valuation Range, a resolicitation of subscriptions may be made, the Plan of Merger Conversion may be terminated or such other action as the OTS may permit may be taken; provided that if the pro forma market value of Neodesha upon Merger Conversion has increased to an amount which does not exceed $2,380,500 (15% above the high end of the Valuation Range), the Company and Neodesha do not intend to resolicit subscriptions unless it is determined after consultation with the OTS that a resolicitation is required. All shares to be issued in the Merger Conversion will be sold at the same actual purchase price per share, which shall be equal to 95% of the average of the market price of the Company's Common Stock (which is the average of the closing bid and ask quotations on the Nasdaq SmallCap Market) for the ten trading days ending on the Pricing Date. Assuming a price per share of $13.81, which was the average of the closing bid and ask quotations for the Company's Common Stock as of June 9, 1998, a minimum of 101,391 shares and a maximum of 185,590 shares (or 213,429 shares if the Valuation Range is increased by 15%) of Conversion Stock will be issued. Depending upon market and financial conditions, the number of shares of Conversion Stock issued may be more or less than the range in number of shares shown above. The total number of shares to be issued in the Merger Conversion will be determined by dividing the actual purchase price into the appropriate aggregate price for the shares within the current Valuation Range as determined by Ferguson. However, no fractional shares of Common Stock will be issued. The total number of shares of the Conversion Stock to be issued and sold to each purchaser will be determined promptly after the Pricing Date by dividing the Aggregate Purchase Price by the actual purchase price per share, with a refund for the differences between (i) such amount paid and (ii) the portion of such amount representing the actual purchase price multiplied by the highest possible number of whole shares. Marketing Arrangements The Company has retained Trident, a broker-dealer registered with the Securities and Exchange Commission (the "SEC") and a member of the National Association of Securities Dealers, Inc. (the "NASD"), to consult with and advise the Company and Neodesha and to assist in the distribution of shares in the offering on a best-efforts basis. Among the services Trident will perform are (i) training and educating Company and Neodesha employees, who will be performing certain ministerial functions in the offering, regarding the mechanics and regulatory requirements of the stock sale process, (ii) keeping records of orders for shares of Common Stock, (iii) targeting sales efforts including preparation of marketing materials, (iv) assisting in the collection of proxies from members of Neodesha for use at the Special Meeting, and (v) providing its registered stock representatives to staff the Stock Center and meeting with and assisting potential subscribers. For its services, Trident will receive a success fee of $85,000. If the offering is terminated before completion, Trident will be entitled to retain any fee or expense payments already accrued or received. To the extent registered broker-dealers are utilized ("Selected Dealers"), the Company will pay a fee (to be negotiated, but not to exceed 4.5% of the aggregate Purchase Price of shares of Common Stock sold in the Direct Community Offering) to such dealers, including any sponsoring dealer fees. Fees paid to Trident and to any other broker-dealer may be deemed to be underwriting fees, and Trident and such other broker-dealers may be deemed to be underwriters. The Company has agreed to reimburse Trident for its reasonable out-of-pocket expenses (not to exceed 27 $12,500), and its legal fees and expenses (not to exceed $35,000) and to indemnify Trident against certain claims or liabilities, including certain liabilities under the Securities Act. Directors and executive officers of the Company and Neodesha may, to a limited extent, participate in the solicitation of offers to purchase Common Stock. Sales will be made from a Stock Center located away from the publicly accessible areas (including teller windows) of Neodesha's offices. Other employees of Neodesha may participate in the offering in administrative capacities, providing clerical work in effecting a sales transaction or answering questions of a potential purchaser provided that the content of the employee's responses is limited to information contained in this Prospectus or other offering document. Other questions of prospective purchasers will be directed to executive officers or registered representatives of Trident. Such other employees have been instructed not to solicit offers to purchase Common Stock or provide advice regarding the purchase of Common Stock. To the extent permitted under applicable law, directors and executive officers of the Company and Neodesha may participate in the solicitation of offers to purchase Common Stock. The Company will rely on Rule 3a4-1 under the Exchange Act and sales of Common Stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors and employees to participate in the sale of Common Stock. No officer, director or employee of the Company or Neodesha will be compensated in connection with his or her participation by the payment of commissions or other remuneration based either directly or indirectly on the transactions in the Common Stock. A Stock Center will be established at Neodesha's office, in an area separated from Neodesha's banking operations. No sales activities will be conducted in the public areas of Neodesha's offices, but persons will be able to obtain a Prospectus and sales information at such places, and employees will inform prospective purchasers to direct their questions to the Stock Center and will provide such persons with the telephone number of the Stock Center. Completed stock orders will be accepted at such places, and will be promptly forwarded to the Stock Center for processing. Neodesha and the Company will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for shares, pursuant to the Plan of Merger Conversion, reside. However, no shares will be offered or sold under the Plan of Merger Conversion to any such person who (1) resides in a foreign country or (2) resides in a state of the United States in which a small number of persons otherwise eligible to subscribe for shares under the Plan of Merger Conversion reside or as to which Neodesha and the Company determine that compliance with the securities law of such state would be impracticable for reasons of cost or otherwise, including, but not limited to, a requirement that Neodesha or the Company or any of their officers, directors or employees register, under the securities laws of such state, as a broker, dealer, salesmen or agent. No payments will be made in lieu of the granting of Subscription Rights to any such person. Method of Payment for Subscriptions For Subscription Rights to be exercised, a completed Order Form and certification with the required payment must be received by the Company or Neodesha by ____ p.m., Independence, Kansas time, on ___________, 1998, unless the period of the Subscription Offering and Direct Community Offering is extended. Any Order Forms not received during the Subscription Offering and Direct Community Offering period, or any executed defectively, or any received without full payment, will not be accepted and the Subscription Rights will expire. The Company may seek correction of defectively executed forms, or may waive an immaterial irregularity but does not represent that it will do so. After receipt by the Company or Neodesha, subscriptions may not be modified, withdrawn or canceled without the consent of the Company, except in the event of an extension of the 45-day period after the termination of the Subscription Offering for completion of the sale of all unsubscribed shares. In such event, subscribers will be entitled to increase, decrease or cancel their subscriptions under conditions set by the Director. Full payment for subscriptions may be made (i) in cash if delivered in person at the Stock Information Center, (ii) by check, bank draft, or money order, or (iii) by authorization of withdrawal from deposit accounts maintained with Neodesha. Appropriate means by which such withdrawals may be authorized are provided on the Order Form. However, neither the Company nor Neodesha may knowingly lend money to any person for the purpose of purchasing shares in the Merger Conversion. Payments from private third parties or payments through electronic transfer of funds will not be accepted. No wire transfers will be accepted. Interest will be paid on payments made by cash, check, bank draft or money order at the Association's passbook rate from the date payment is received until the completion or 28 termination of the Merger Conversion. If payment is made by authorization of withdrawal from deposit accounts, the funds authorized to be withdrawn from a deposit account will continue to accrue interest at the contractual rates until completion or termination of the Merger Conversion (unless the certificate matures after the date of receipt of the Order Form but prior to closing, in which case funds will earn interest at the passbook rate from the date of maturity until consummation of the Merger Conversion ), but a hold will be placed on such funds, thereby making them unavailable to the depositor until completion or termination of the Merger Conversion. At the completion of the Merger Conversion, the funds received in the Subscription and Community Offering will be used to subscribe for the shares of Common Stock ordered. The shares of Common Stock issued in the Merger Conversion cannot and will not be insured by the FDIC or any other government agency. In the event that the Merger Conversion is not consummated for any reason, all funds submitted will be promptly refunded with interest as described above. Interest penalties for early withdrawal applicable to certificate accounts will not apply to withdrawals authorized for the purchase of Conversion Stock. However, if the remaining balances in certificate accounts are less than the minimum qualifying balance, the certificates evidencing such accounts will be canceled upon consummation of the offering, and the remaining balances will thereafter earn interest at the passbook rate. Interest will be paid on all amounts authorized for withdrawal from savings accounts until the date of the completion or termination of the Subscription Offering and Direct Community Offering. A depositor interested in using his or her Neodesha IRA funds to purchase Common Stock must do so through a self-directed IRA. Since neither Neodesha nor the Company offers such accounts, a depositor will be allowed to make a trustee-to-trustee transfer of the IRA funds to a trustee offering a self-directed IRA program with the agreement that such funds will be used to purchase the Company's Common Stock in the offering. There will be no early withdrawal or IRS interest penalties for such transfers. The new trustee would hold the Common Stock in a self-directed account in the same manner as Neodesha now holds the depositor's IRA funds. An annual administrative fee may be payable to the new trustee. Depositors interested in using funds in a Neodesha IRA to purchase Common Stock should contact the Stock Center at Neodesha as soon as possible so that the necessary forms may be forwarded for execution and returned prior to the Expiration Date. The ESOP will not be required to pay for the shares subscribed for at the time it subscribes, but rather, may pay for such shares of Common Stock subscribed for upon consummation of the Merger Conversion, provided that there is in force from the time of its subscription until such time, a loan commitment to lend to the ESOP, at such time, the aggregate purchase price of the shares for which it subscribed. Cash, checks, bank drafts and money orders received in anticipation of stock purchases by subscribers will be placed in a savings account established specifically for this purpose. Interest will be paid on subscriptions made by check or in cash at the Association's passbook rate from the date payment is received until consummation or termination of the Merger Conversion. All refunds and any interest due will be paid after completion of the Merger Conversion. Certificates representing shares of Common Stock purchased will be mailed to purchasers at the last address of such persons appearing on the records of Neodesha, or to such other address as may be specified in properly completed Order Forms, as soon as practicable following consummation of the sale of all shares of Conversion Stock. Any certificates returned as undeliverable will be disposed of in accordance with applicable law. To ensure that each purchaser receives a prospectus at least 48 hours prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange Act, no prospectus will be mailed any later than five days prior to such date or hand delivered any later than two days prior to such date. Execution of the Order Form will confirm receipt or delivery in accordance with Rule 15c2-8. Order Forms will only be distributed with a prospectus. The Company will accept for processing only orders submitted on original Order Forms. Photocopies or facsimile copies of Order Forms will not be accepted. Payment by cash, check, money order, bank draft or debit authorization to an existing account at Neodesha must accompany the Order Form. No wire transfers will be accepted. In order to ensure that Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are properly identified as to their stock purchase priorities, depositors as of the Eligibility Record Date (December 31, 1996), Supplemental Eligibility Record Date (June 30, 1998) and/or the Voting Record Date (_____ 29 __, 1998) must list all accounts on the Order Form giving all names on each account and the account number as of the applicable record date. In the event that the Merger Conversion is not consummated for any reason, all funds submitted in the Subscription Offering and Direct Community Offering will be promptly refunded after termination of the offering. Subscription Rights are non-transferable and non-negotiable, and may only be exercised by the holder on his or her own behalf. Risk of Delayed Offering In the event that all shares of the Conversion Stock are not sold in the Subscription Offering and concurrent Direct Community Offering, the Company may extend the Direct Community Offering for a period of 45 days from the Subscription Expiration Date. Further extensions are subject to OTS approval. Some converting financial institutions and their holding companies have had to obtain extensions from the OTS for the consummation of their offerings. An extension may be necessitated by volatility of the market for the stock of thrift institutions or by periods of widespread operating losses in the industry. If the offering is extended beyond _____, 1998, all subscribers will have the right to modify or rescind their subscriptions and to have their subscription funds returned with interest. There can be no assurance that the offering will not be extended as set forth above. A material delay in the completion of the sale of all unsubscribed shares of Conversion Stock may result in a significant increase in the costs in completing the Merger Conversion. Significant changes in Neodesha's operations and financial condition, the aggregate market value of the shares to be issued in the Merger Conversion and general market conditions may occur during such material delay. In the event the Merger Conversion is not consummated within 24 months after the date of the Special Meeting of Members, Neodesha would charge accrued Merger Conversion costs to then current period operations. Approval, Interpretation, Amendment and Termination All interpretations of the Plan of Merger Conversion, as well as the completeness and validity of order forms and stock order and account withdrawal authorizations, will be made by Neodesha and the Company and will be final, subject to the authority of the OTS and the requirements of applicable law. The Plan of Merger Conversion provides that, if deemed necessary or desirable by the Boards of Directors of Neodesha and the Company, the Plan of Merger Conversion may be substantively amended by the Boards of Directors of Neodesha and the Company, as a result of comments from regulatory authorities or otherwise, at any time with the concurrence of the OTS and the SEC. In the event the Plan of Merger Conversion is substantially amended, other than a change in the maximum purchase limits set forth herein, the Company intends to notify subscribers of the change and to refund subscription funds with interest unless subscribers affirmatively elect to increase, decrease or maintain their subscriptions. The Plan of Merger Conversion will terminate if the sale of all shares is not completed within 24 months after the date of the Special Meeting of Members. The Plan of Merger Conversion may be terminated by the Boards of Directors of the Company and Neodesha with the concurrence of the OTS, at any time. A specific resolution approved by a two-thirds vote of the Boards of Directors of the Company and Neodesha would be required to terminate the Plan of Merger Conversion prior to the end of such 24-month period. Restrictions on Transferability Prior to the completion of the Merger Conversion, the OTS conversion regulations prohibit any person with subscription rights, including Eligible Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account Holders, Other Members and employees, officers and directors, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Such rights may be executed only by the person to whom they are granted and only for his account. Each person exercising such subscription rights will be required to certify that he is purchasing shares solely for his own account and that he has no agreement or understanding regarding the sale or transfer of such shares. The OTS regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase such subscription rights or shares of Common Stock prior to the completion of the Merger Conversion. 30 Neodesha and the Company may pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of such rights. Except as to directors, executive officers of Neodesha and the Company and their associates, the shares of Common Stock sold pursuant to the Merger Conversion will be freely transferable. Shares purchased by directors, executive officers or their associates in the Merger Conversion shall be subject to the restrictions that said shares shall not be sold during the period of one year following the date of purchase, except in the event of the death of the stockholder, in which event such restriction shall be released. Accordingly, stock certificates issued by the Company to directors, executive officers and associates shall bear a legend giving appropriate notice of such restriction and, in addition, Neodesha and the Company will give appropriate instructions to the transfer agent for the Company's Common Stock with respect to the applicable restriction upon transfer of any restricted shares. Any shares issued at a later date as a stock dividend, stock split or otherwise, to holders of restricted stock, shall be subject to the same restrictions that may apply to such restricted stock. Company Common Stock (like the stock of most companies) is subject to the requirements of the Securities Act. Accordingly, Company Common Stock may be offered and sold only in compliance with registration requirements or pursuant to an applicable exemption from registration. Company Common Stock received in the Merger Conversion by persons who are not "affiliates" of the Company may be resold without registration. Shares received by affiliates of the Company (primarily the directors, officers and principal stockholders of the Company) will be subject to the resale restrictions of Rule 144 under the Securities Act, which are discussed below. Rule 144 generally requires that there be publicly available certain information concerning the Company, and that sales thereunder be made in routine brokerage transactions or through a market maker. If the conditions of Rule 144 are satisfied, each affiliate (or group of persons acting in concert with one or more affiliates) is entitled to sell in the public market, without registration, in any three-month period, a number of shares which does not exceed the greater of (i) 1% of the number of outstanding shares of Company Common Stock, or (ii) if the stock is admitted to trading on a national securities exchange or reported through the automated quotation system of a registered securities association, the average weekly reported volume of trading during the four weeks preceding the sale. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY General Effective October 5, 1993, First Federal converted from a federally chartered mutual savings association to a federally chartered stock savings association and concurrently became a subsidiary of the Company. The Company owns all of the outstanding stock of First Federal and the Company's earnings are primarily dependent on the operations of First Federal. Currently, the Company has no other business activity other than acting as the holding company for First Federal. As a result, the following discussion relates primarily to the activities of First Federal. The Company's business consists of attracting deposits from the general public and using such deposits primarily to make residential mortgage and other loans. The Company's revenues are derived principally from interest charges on mortgage loans and mortgage-backed securities and, to a lesser extent, from interest earned on investment securities and interest-bearing deposits. In addition, the Company receives fees from loan originations, late payments and for various services related to transaction and other deposit accounts, and dividends on its Federal Home Loan Bank ("FHLB") stock. The operations of the Company, and savings institutions and their holding companies in general, are significantly affected by general economic conditions and the related monetary and fiscal policies of regulatory agencies. Deposit flows and cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of assets, which in turn is affected by the interest rates at which such financing may be offered and other factors including the availability of funds. Historically, the Company's principal business was the origination for its portfolio of long-term, fixed rate mortgage loans, using funds provided by passbook and short-term certificate of deposit accounts. During the early 1980's, the Board commenced the development and implementation of a strategy designed to reduce vulnerability to interest rate fluctuations by increasing the Company's adjustable rate assets. As a result of the implementation of this strategy, management believes that the Company has reduced its vulnerability to changes in interest rates. Comparison of Financial Condition at March 31, 1998 and September 30, 1997 for the Company The Company's total assets increased $12.0 million, or 10.64%, from $112.5 million at September 30, 1997 to $124.5 million at March 31, 1998. This increase was primarily a result of an increase of $10.7 million in net loans receivable, $3.2 million in cash and cash equivalents, and $1.0 million in investment securities. These increases in assets were funded by increases in savings deposits of $8.0 million, advances from the Federal Home Loan Bank of Topeka of $3.6 million, checks issued in excess of cash items of $300,000, and a decrease in mortgage-backed securities of $3.1 million. Loans receivable increased $10.7 million from $74.6 million at September 30, 1997, to $85.3 million at March 31, 1998. The increase was primarily due to construction loan originations at the Company's new loan production office in Lawrence, Kansas. These construction loans generally have terms of six months or less and interest rates tied to the prime rate plus a margin. To a lesser extent, the increase was due to originations in the Company's market area consisting primarily of 15- and 30-year fixed-rate loans, mortgage loans with a fixed rate for the first three years of the loan term that automatically convert to one-year adjustable rate loans during the fourth year of the loan term, and, to a lesser extent, one-year adjustable rate mortgages. The allowance for loan losses totaled $656,000, or .77% of total loans at March 31, 1998, which represented a $12,000 decrease from the $668,000, or .90% of total loans, at September 30, 1997. The ratio of the allowance for loan losses as a percent of non-performing loans increased from 48.05% at September 30, 1997 to 105.50% at March 31, 1998. At March 31, 1998, the Company's non-performing loans were comprised primarily of one- to four-family residential loans. See "Non-performing Assets." 32 The allowance for loan losses is determined based upon an evaluation of pertinent factors underlying the types and qualities of the Company's loans. Management considers such factors as the repayment status of a loan, the estimated net realizable value of the underlying collateral, the borrower's ability to repay the loan, current and anticipated economic conditions which might affect the borrower's ability to repay the loan and the Company's past statistical history concerning charge-offs. Total deposits increased $8.0 million from $76.2 million at September 30, 1997, to $84.2 million at March 31, 1998. Deposits increased primarily as a result of public units depositing short-term funds into the "Platinum" money fund account. The "Platinum" money fund account offers tiered rates on a limited transaction account with the highest rate paid on balances of $50,000 and above. Management feels the "Platinum" money fund provides a lower risk, insured alternative for deposit customers considering higher risk investments in order to get higher yields than money market accounts. Total borrowed funds increased $3.6 million from $23.7 million at September 30, 1997 to $27.3 million at March 31, 1998. The increase was from advances obtained from the Federal Home Loan Bank of Topeka. The FHLB advances allowed the Association to invest the funds borrowed in loans receivable at a positive spread. Total stockholders' equity increased $25,000 from $11,529,000 at September 30, 1997 to $11,554,000 at March 31, 1998. The increase was primarily due to the Company's net earnings from operations of $375,000, fair value adjustment of $68,000 on ESOP shares committed for release, the repayment of employee stock ownership debt of $36,000, the amortization of unearned stock compensation of $22,000, common stock options exercised of $9,300, and unrealized gains on securities available for sale of $5,000. These increases were partially offset by the Company's use of $364,000 to repurchase 24,500 shares of common stock and dividends of $127,000 paid to stockholders. Comparison of Financial Condition at September 30, 1997 and September 30, 1996 for the Company The Company's total assets increased $4.0 million, or 3.7%, from $108.5 million at September 30, 1996 to $112.5 million at September 30, 1997. This increase was primarily due to increases in net loans receivable of $6.9 million, cash and cash equivalents of $1.4 million, premises and equipment of $400,000, investment securities of $100,000 and Federal Home Loan Bank stock of $100,000. These increases in assets, along with reductions in advances from the Federal Home Loan Bank of Topeka of $600,000, checks issued in excess of cash items of $500,000 and other accrued expenses and liabilities of $400,000 were funded by increases in deposits of $6.8 million and decreases in mortgage-backed securities of $4.7 million. Total loans receivable increased $6.9 million from $67.7 million at September 30, 1996, to $74.6 million at September 30, 1997. Increased economic activity in the Company's lending area resulted in loan originations exceeding loan repayments. The loan portfolio is comprised primarily of first mortgage loans secured by one- to four-family residential real estate located in the Company's market area. The increase in one- to four-family mortgage loans consisted primarily of 15- and 30-year fixed-rate loans and, to a lesser extent, one-year adjustable rate mortgages and mortgage loans with a fixed rate for the first three years of the loan term that automatically convert to one- year adjustable rate loans during the fourth year. The allowance for loan losses totaled $668,000 at September 30, 1997 which represented a $22,000 decrease from the allowance for loan losses at September 30, 1996. The ratio of the allowance for loan losses as a percent of total loans decreased from 1.02% at September 30, 1996 to .90% at September 30, 1997, primarily due to the increase in total loans receivable at September 30, 1997. The allowance for loan losses as a percent of non-performing loans decreased from 114.62% at September 30, 1996 to 48.05% at September 30, 1997, due to the increase in non-performing loans at September 30, 1997. At September 30, 1997, the Company's non-performing loans were comprised primarily of one- to four-family residential loans. The allowance for loan losses is determined based upon an evaluation of pertinent factors underlying the types and qualities of the Company's loans. Management considers such factors as the repayment status of a loan, the estimated net realizable value of the underlying collateral, the borrower's ability to repay the loan, current and anticipated economic conditions which might affect the borrower's ability to repay the loan and the Company's past statistical history concerning charge-offs. 33 Total deposits increased $6.8 million from $69.4 million at September 30, 1996, to $76.2 million at September 30, 1997. Deposits increased in fiscal 1997 primarily as a result of the "Bulldog" certificate account developed in January 1995 and the "Platinum" money fund account introduced in May 1995. The "Bulldog" account offers interest rates from 25 to 50 basis points above the local market for a term of eighteen months. The "Platinum" money fund account offers tiered rates on a limited transaction account with the highest rate paid on balances of $50,000 and above. Management feels the "Bulldog" certificate and "Platinum" money fund provide an alternative to deposit customers looking to higher risk investments with higher yields than certificates of deposit and money market accounts. Total borrowed funds decreased $600,000 from $24.3 million at September 30, 1996 to $23.7 million at September 30, 1997 although the average balance of FHLB advances during fiscal 1997 was $4.5 million higher than in fiscal 1996. The decrease was due to the principal repayment of advances obtained from the Federal Home Loan Bank of Topeka. The increase in deposits provided the Company with the opportunity to reduce the amount of its outstanding advances. Most of the advances obtained from the Federal Home Loan Bank of Topeka were originally used by the Company to invest in loans receivable at a positive spread over the term of the advances. Total stockholders' equity decreased approximately $1.5 million from $13.0 million at September 30, 1996 to $11.5 million at September 30, 1997. The decrease was primarily the result of the Company's use of $2.2 million to repurchase 197,963 shares of common stock and dividends of $231,000 paid to stockholders. These decreases were partially offset by the Company's net earnings from operations of $712,000, a fair value adjustment of $90,000 on ESOP shares committed for release, the repayment of employee stock ownership plan ("ESOP") debt of $73,000, common stock options exercised of $47,000, the amortization of unearned stock compensation of $44,000 and unrealized gains on securities available for sale of $26,000, net of deferred taxes. Non-performing Assets of the Company The ratio of non-performing assets to total assets is one indicator of the Company's exposure to credit risk. Non-performing assets of the Company consist of non-accruing loans, accruing loans delinquent 90 days or more, troubled debt restructurings, and foreclosed assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. At March 31, 1998, non-performing assets were approximately $637,000, which represents a decrease of $766,000, or 54.6%, as compared to September 30, 1997. This decrease was due primarily to fifteen loans which had been classified as non-accruing at September 30, 1997, but were less than 90 days delinquent at March 31, 1998 (including one loan totaling $344,000 secured by single-family residence in Texas). In February 1991, the borrowers experienced financial difficulties and filed for protection under the bankruptcy statutes. Pursuant to the plan of reorganization approved by the Bankruptcy Court, the borrowers are required to make additional payments each month to make up the delinquent payments and interest. At March 31, 1998, the borrowers were complying with the terms of the repayment plan. To a lesser extent, the decrease was due to 10 loans which had been classified as accruing delinquent 90 days or more at September 30, 1997, but were less than 90 days delinquent at March 31, 1998 (including one loan totaling $139,000 secured by a single family residence in Texas). Included in non-accruing loans at March 31, 1998, were ten loans totaling $528,000 secured by one- to four-family real estate, one loan totaling $21,000 secured by non-residential real estate, and two consumer loans totaling $24,000. All non-accruing loans at March 31, 1998, were located in the Company's primary market area. At March 31, 1998 there were no accruing loans delinquent 90 days or more. At March 31, 1998, the Company's real estate acquired though foreclosure included two single family residences located in the Company's primary market area with a carrying value of $15,000. A summary of non-performing assets by category is set forth in the following table: March 31, September 30, 1998 1997 ---- ---- (Dollars In Thousands) Non-Accruing Loans ............................. $ 573 $1,049 Accruing Loans Delinquent 90 Days or More ............................... -- 292 Trouble Debt Restructurings .................... 49 50 Foreclosed Assets .............................. 15 12 ------ ------ Total Non-Performing Assets .................... $ 637 $1,403 ====== ====== Total Non-Performing Assets as a Percentage of Total Assets ............... 0.51% 1.25% ====== ====== 34 Management has taken into account its non-performing assets and the composition of the loan portfolio in establishing its allowance for loan losses, which totaled $656,000 at March 31, 1998. See "Business of the Company -- Asset Quality -- Allowance for Loan Losses." Results of Operations of the Company Comparison of Three and Six Months Ended March 31, 1998 and March 31, 1997 for the Company General. Net earnings for the six months ended March 31, 1998 were $375,000 as compared to $332,000 for the six months ended March 31, 1997, resulting in an increase of $43,000, or 12.9%. The increase in net earnings was primarily due to increases in net interest income of $215,000 and non-interest income of $7,000. These increases were partially offset by increases in non-interest expense of $97,000 and income tax expense of $83,000. Net Interest Income. Net interest income increased $215,000, or 14.52%, for the six months ended March 31, 1998 as compared to the six months ended March 31, 1997. This increase was due primarily to an increase in interest income of $407,000, or 10.25%; offset partially by an increase in interest expense of $192,000, or 7.70%. Interest income increased primarily due to a $7.6 million increase in the average balance of interest-earning assets, and a 22 basis point increase in the average yield on interest-earning assets. The average yield on interest-earning assets increased primarily due to construction loan originations at the Lawrence loan production office which carry higher rates of interest than loans originated in the Company's primary market area. Interest expense increased primarily due to a $7.9 million increase in the average balance of interest-bearing liabilities, offset partially by a 3 basis point decrease in the average rate paid on interest-bearing liabilities. The average rate paid on interest-bearing liabilities decreased primarily due to a $5.1 million increase in the average balance of low cost demand and NOW deposits and, to a lesser extent, a decrease in market interest rates. Interest Income. Interest income for the six months ended March 31, 1998, increased to $4,377,000 from $3,970,000 for the six months ended March 31, 1997. This increase was caused primarily by a $7.6 million increase in the average outstanding amount of interest-earning assets during the six months ended March 31, 1998, as compared to the six months ended March 31, 1997; due to the increase in the average balance of loans receivable financed by the increased average balance of savings deposits. The average balance of savings deposits during the six months ended March 31, 1998 was $7.4 million higher than during the six months ended March 31, 1997. To a lesser extent, the increase in interest income was due to an increase in the average yield on interest-earning assets. The average yield on interest-earning assets increased 22 basis points to 7.71% for the six months ended March 31, 1998, from 7.49% for the six months ended March 31, 1997. This increase was caused primarily by increases in yield on the Association's Federal Home Loan Bank stock from 6.48% to 7.75%, loan portfolio from 8.01% to 8.20%, and mortgage-backed securities portfolio from 6.48% to 6.58% for the six months ended March 31, 1998, as compared to the six months ended March 31, 1997. These increases were partially offset by a decrease in the investment securities portfolio yield from 6.61% to 6.34% for the six months ended March 31, 1998, as compared to the six months ended March 31, 1997. The increase in yield on the loan portfolio was primarily due to construction loan originations at the Company's new loan production office in Lawrence, Kansas. These construction loans generally have terms of six months or less and interest rates tied to the prime rate plus a margin. Interest Expense. Interest expense for the six months ended March 31, 1998, increased by $192,000 to $2,680,000 as compared to $2,488,000 for the six months ended March 31, 1997. This increase in interest expense was due primarily to a $7.9 million increase in the average outstanding amount of interest-bearing liabilities during the six months ended March 31, 1998 as compared to the six months ended March 31, 1997. This increase was partially offset by a 3 basis point decrease in average interest rates paid on interest-bearing liabilities, caused by decreases in market interest rates. The increase in interest-bearing liabilities was primarily due to a $7.4 million increase in the average outstanding balance of deposits due primarily to new accounts opened at the Coffeyville, Kansas branch office and seasonal deposits from public units. Provision for Loan Losses. Based upon management's analysis of established reserves and its ongoing review of the composition of the loan portfolio, including non-performing assets and other loans of concern, there was no provision for losses on loans for the six months ended March 31, 1998 and March 31, 1997. The Company will continue to monitor its allowance for loan losses and make future additions to the allowance through the provision for loan losses 35 as economic and regulatory conditions dictate. However, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Company's determinations as to the amount of the allowance for loan losses is subject to review by the regulatory agencies which can order the establishment of additional general or specific allowances. Non-interest Income. Non-interest income increased $7,000 to $113,000 during the six months ended March 31, 1998 as compared to $106,000 for the six months ended March 31, 1997. The increase was primarily due to increased checking and deposit account fees as a result of new accounts in the Coffeyville branch. To a lesser extent, the increase was due to increased late charges and other fees associated with mortgage loans. Non-interest Expense. Total non-interest expense increased to $1,147,000 for the six months ended March 31, 1998 from $1,050,000 for the six months ended March 31, 1997, an increase of $97,000, or 9.2%. The increase was primarily due to increases in compensation and employee benefits of $59,000, occupancy and equipment of $45,000, and data processing fees of $15,000. These increases were primarily due to the opening of a new loan production office in Lawrence, Kansas, resulting in additional staff, occupancy and equipment, stationery, printing and office supplies expense. To a lesser extent, the increase in compensation expense was the result of normal, annual cost of living increases in salaries and bonuses, and increased compensation expense associated with the Company's ESOP plan due to the increase in the Company's stock price. These increases were partially offset by decreases in federal deposit insurance premiums of $18,000, and other expenses of $3,000. Income Tax Expense. Income tax expense was $288,000 for the six months ended March 31, 1998 compared to $205,000 for the six months ended March 31, 1997, an increase of $83,000. This increase was primarily due to an increase in pre-tax earnings during the 1998 period as compared to the 1997 period. The Company's effective tax rates were 43.4% and 38.2% for the six months ended March 31, 1998 and March 31, 1997, respectively. Rates exceed expected rates due primarily to compensation expense associated with the ESOP which is not deductible for income tax purposes. Liquidity and Capital Resources. The Company's primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, Federal Home Loan Bank of Topeka advances and funds provided by operations. While scheduled loan and mortgage-backed security repayments and maturity of short-term investments are a relatively predictable source of funds, deposit flows are greatly influenced by general interest rates, economic conditions and competition. Current Office of Thrift Supervision ("OTS") regulations require the Association to maintain cash and eligible investments in an amount equal to at least 4% of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. Such requirements may be changed from time to time by the OTS to reflect changing economic conditions. Such investments are intended to provide a source of relatively liquid funds upon which the Association may rely, if necessary, to fund deposit withdrawals and other short-term funding needs. As of March 31, 1998, the Association's liquidity ratio was 15.44% as compared to 7.20% at September 30, 1997. This increase was primarily due to an increase in short-term investments funded with public unit deposits. These ratios exceeded the minimum regulatory liquidity requirements on both dates. The Company uses its capital resources principally to meet its ongoing commitments, to fund maturing certificates of deposit and deposit withdrawals, to invest, to fund existing and future loan commitments, to maintain liquidity, and to meet operating expenses. At March 31, 1998, the Company had commitments to originate loans totaling $694,000. The Company considers its liquidity and capital resources to be adequate to meet its foreseeable short- and long-term needs. The Company expects to be able to fund or refinance, on a timely basis, its material commitments and long-term liabilities. Regulatory standards impose the following capital requirements on the Association: a risk-based capital standard expressed as a percent of risk-adjusted assets, a leverage ratio of core capital to total adjusted assets, and a tangible capital ratio expressed as a percent of total adjusted assets. As of March 31, 1998, the Association exceeded all fully phased-in regulatory capital standards. At March 31, 1998, the Association's tangible capital was $9.8 million, or 7.93% of adjusted total assets, which is in excess of the 1.5% requirement by $7.9 million. In addition, at March 31, 1998, the Association had core capital of $9.8 million, or 7.93% of adjusted total assets, which exceeds the 3.0% requirement by $6.1 million. The Association 36 had risk-based capital of $10.4 million at March 31, 1998, or 18.17% of risk-adjusted assets, which exceeds the 8.0% risk-based capital requirements by $5.8 million. Under the requirements of federal law, all the federal banking agencies, including the OTS, must revise their risk-based capital requirements to ensure that such requirements account for interest rate risk, concentration of credit risk and the risks of non-traditional activities, and that they reflect the actual performance of and expected loss on multi-family loans. The OTS has adopted a final rule that generally requires a savings association with more than normal interest rate risk to deduct from its total capital, for purposes of determining compliance with such requirement, an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The rule provides for a two-quarter lag between calculating interest rate risk and recognizing any deductions from capital. The OTS has announced that it will delay the effectiveness of the rule until it adopts the process by which savings associations may appeal an interest rate risk deduction determination. The OTS has instructed all savings associations not to take any capital deductions for interest rate risk exposure until notified to do so by the OTS. In addition, any savings association with less than $300 million in assets and a total risk-based capital ratio in excess of 12%, such as the Association, is exempt from this requirement unless the OTS determines otherwise. Comparison of Fiscal Years Ended September 30, 1997 and September 30, 1996 for the Company General. Net earnings for the fiscal year ended September 30, 1997 were $712,000 as compared to $815,000 for the fiscal year ended September 30, 1996, a decrease of $103,000, or 12.6%. The decrease in net earnings was due to decreases in net interest income of $94,000 and income from real estate operations of $60,000. The decrease was also due to a non-recurring $251,000 gain on the sale of FHLMC stock which was recognized in the fiscal year ended September 30, 1996, with no similar activity in the fiscal year ended September 30, 1997. These decreases to net earnings were partially offset by decreases in non-interest expenses of $273,000 and income tax expense of $19,000. Net Interest Income. Net interest income decreased $94,000, or 3.02%, for the fiscal year ended September 30, 1997 as compared to the fiscal year ended September 30, 1996. This decrease was due primarily to an increase in interest expense of $390,000, or 8.34%, offset partially by an increase in interest income of $296,000, or 3.81%. Interest expense increased primarily due to a $7.0 million increase in the average balance of interest-bearing liabilities and, to a lesser extent, a 2 basis point increase in the average rate paid on interest-bearing liabilities. Interest income increased primarily due to a $4.2 million increase in the average balance of interest-earning assets, partially offset by a 3 basis point decrease in yield on interest-earning assets. Interest Income. Interest income for the fiscal year ended September 30, 1997, increased to $8.1 million from $7.8 million for the fiscal year ended September 30, 1996. This increase resulted primarily from a $4.2 million increase in the average outstanding balance of interest-earning assets (due to the increase in the average balance of loans receivable and investment securities financed with borrowings from the Federal Home Loan Bank of Topeka and increased savings deposits) during the fiscal year ended September 30, 1997, as compared to the fiscal year ended September 30, 1996. These increases were partially offset by a decrease in the average yield on interest-earning assets. The average yield on interest-earning assets decreased 3 basis points to 7.53% during fiscal 1997, from 7.56% during fiscal 1996. This decrease was caused primarily by a decrease in yield on the Company's loans receivable from 8.22% to 7.98% due to new loans being originated at interest rates lower than those currently in the loan portfolio. This decrease was partially offset by an increase in yield on mortgage-backed securities from 6.54% to 6.61% and investment securities from 6.62% to 6.75%. Interest Expense. Interest expense for the fiscal year ended September 30, 1997, increased by $400,000 to $5.1 million as compared to $4.7 million for the fiscal year ended September 30, 1996. This increase was primarily the result of a $7.0 million increase in the average outstanding balance of interest-bearing liabilities during the fiscal year ended September 30, 1997 as compared to the fiscal year ended September 30, 1996. To a lesser extent, the increase in interest expense was due to a 2 basis point increase in average interest rates paid on interest-bearing liabilities. The increase in 37 interest-bearing liabilities was primarily due to a $4.5 million increase in the average outstanding amount of advances obtained from the Federal Home Loan Bank of Topeka and a $3.3 million increase in demand and NOW deposits. The advances were used by the Company to invest in loans receivable at a positive spread over the term of the advances. Provision for Loan Losses. There was no provision for losses on loans for the fiscal years ended September 30, 1997 and September 30, 1996. Management determined that additional provisions were not necessary based upon their analysis of the established allowance and review of the composition of the loan portfolio. The Company will continue to monitor its allowance for loan losses and make future additions to the allowance through the provision for loan losses as economic and regulatory conditions dictate. However, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Company's determinations as to the amount of the allowance for loan losses are subject to review by the regulatory agencies which can order the establishment of additional general or specific allowances. Non-interest Income. Non-interest income decreased $302,000 to $280,000 during the fiscal year ended September 30, 1997 as compared to $582,000 for the fiscal year ended September 30, 1996. The decrease was primarily due to a non-recurring $251,000 gain on the sale of FHLMC stock which was recognized in the fiscal year ended September 30, 1996, with no gains on the sale of securities recognized in the fiscal year ended September 30, 1997. To a lesser extent, the decrease was due to a decrease of $60,000 in earnings from real estate operations for the fiscal year ended September 30, 1997 as compared to the fiscal year ended September 30, 1996. Recurring non-interest income generally consists of servicing fees as well as deposit and other types of fees. Non-interest income levels are anticipated to remain stable in the future due to the small number of checking accounts held by the Company. Non-interest Expense. Total non-interest expense decreased to $2,111,000 for the fiscal year ended September 30, 1997 from $2,384,000 for the fiscal year ended September 30, 1996, a decrease of $273,000, or 11.4%. The decrease was primarily due to a one-time pre-tax charge of $431,000 during the fiscal year ended September 30, 1996, with no similar charge during the fiscal year ended September 30, 1997. The charge was related to a special assessment of 65.7 basis points on deposits of SAIF-insured institutions as of March 31, 1995, in order to recapitalize the Savings Association Insurance Fund. To a lesser extent, the decrease was due to a reduction in the Company's ongoing deposit insurance premium of $94,000, as a result of the recapitalization of the Savings Association Insurance Fund. These decreases were partially offset by increases in compensation and employee benefits of $146,000, other expenses of $58,000, occupancy and equipment of $37,000, and data processing fees of $12,000. The increase in compensation expense was primarily due to annual increases in salaries and bonuses and expense associated with the Company's ESOP due to the increase in the Company's stock price. In addition, the opening of a new branch office in Coffeyville, Kansas resulted in additional staff, advertising, stationery, printing and office supplies expense. Income Tax Expense. Income tax expense was $468,000 for the fiscal year ended September 30, 1997 compared to $487,000 for the fiscal year ended September 30, 1996, a decrease of $19,000. The decrease was primarily the result of a decrease in pre-tax income. The Company's effective tax rates were 39.7% and 37.4% for the fiscal years ended September 30, 1997 and September 30, 1996, respectively. Average Balances, Interest Rates and Yields of the Company The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and related yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made. All average balances are monthly average balances. Non-accruing loans have been included in the table as loans carrying a zero yield. 38
Six Months Ended March 31, Year Ended September 30, --------------------------------------------------------- ------------------------------ 1998 1997 1997 ---------------------------- -------------------------- ------------------------------ Average Interest Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate ------- ---- ---- ------- ---- ---- ------- ---- ---- (Dollars in Thousands) Interest-earning assets: Loans receivable(1)......... $ 81,262 $3,333 8.20% $69,401 $2,779 8.01% $ 71,188 $ 5,684 7.98% Mortgage-backed securities.. 22,169 729 6.58 27,288 885 6.48 26,137 1,727 6.61 Investment securities....... 6,304 200 6.34 7,086 234 6.61 7,598 513 6.75 FHLB stock.................. 1,392 54 7.75 1,287 42 6.48 1,314 89 6.79 Federal funds sold.......... 1,850 44 4.79 855 22 5.18 567 34 6.02 Other earning assets........ 545 17 6.33 213 8 5.19 318 22 6.83 -------- ------ --------- ------ ------- ------- Total earning assets....... 113,522 4,377 7.71 106,130 3,970 7.48 107,122 8,069 7.53 Non-interest earning assets. 3,079 2,650 2,928 -------- -------- -------- Total assets................ $116,601 $108,780 $110,050 ======== ======== ======== Interest-bearing liabilities: Savings deposits and certificates.............. $ 53,084 1,419 5.35 $ 50,794 1,361 5.36 $ 51,219 2,745 5.36 Demand and NOW.............. 25,364 525 4.14 20,272 420 4.14 22,019 914 4.15 FHLB advances............... 24,850 736 5.92 24,333 707 5.81 23,583 1,400 5.93 --------- ------ -------- ------ -------- ------ Total interest-bearing liabilities.............. 103,298 2,680 5.19 95,399 2,488 5.22 96,821 5,059 5.22 ------ ------ ------ Non-interest-bearing liabilities ................ 1,805 1,520 1,538 --------- -------- -------- Total liabilities......... 105,103 96,919 98,359 Equity....................... 11,498 11,861 11,691 --------- -------- -------- Total liabilities and equity................... $116,601 $108,780 $110,050 ======== ======== ======== Net interest/spread.......... $ 1,697 2.52% $ 1,482 2.26% $3,010 2.31% ======= ==== ======= ==== ====== ==== Margin....................... 2.99% 2.79% 2.81% ==== ==== ==== Assets to liabilities........ 109.90% 111.25% 110.64% ======== ======= =======
Year Ended September 30, ----------------------------------------------------------------- 1996 x1995 ------------------------------- -------------------------------- Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate ------- ---- ---- ------- ---- ---- (Dollars in Thousands) Interest-earning assets: Loans receivable(1)......... $ 63,152 $ 5,190 8.22% $ 58,628 $ 4,804 8.19% Mortgage-backed securities.. 29,510 1,930 6.54 29,191 1,939 6.64 Investment securities....... 7,233 479 6.62 4,977 321 6.45 FHLB stock.................. 1,103 70 6.38 1,028 61 5.93 Federal funds sold.......... 1,434 79 5.53 650 44 6.77 Other earning assets........ 445 25 5.64 275 17 6.18 -------- -------- ------- Total earning assets....... 102,877 7,773 7.56 94,749 7,186 7.58 Non-interest earning assets. 1,606 1,883 -------- -------- Total assets................ $104,483 $ 96,632 ======== ======== Interest-bearing liabilities: Savings deposits and certificates.............. $ 51,950 2,820 5.43 $ 51,019 2,441 4.78 Demand and NOW.............. 18,765 762 4.06 13,508 408 3.02 FHLB advances............... 19,133 1,087 5.68 17,275 1,003 5.81 -------- ----- -------- ------- Total interest-bearing liabilities.............. 89,848 4,669 5.20 81,802 3,852 4.71 ----- ------- Non-interest-bearing liabilities ................ 1,497 1,512 -------- -------- Total liabilities......... 91,345 83,314 Equity....................... 13,138 13,318 -------- -------- Total liabilities and equity................... $104,483 $ 96,632 ======== ======== Net interest/spread.......... $3,104 2.36% $3,334 2.87% ====== ==== ====== ==== Margin....................... 3.02% 3.52% ==== ==== Assets to liabilities........ 114.50% 115.83% ======= ========
- ------------ (1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves. 39 Rate/Volume Analysis of Net Interest Income of the Company The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Six Months Ended March 31, Year Ended September 30 Year Ended September 30, 1998 vs. 1997 1997 vs. 1996 1996 vs. 1995 -------------------------- ----------------------- ------------------------ Increase Increase Increase (Decrease) (Decrease) (Decrease) Due to Total Due to Total Due to Total -------------- Increase ------------ Increase ------------ Increase Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease) ------ ---- ---------- ------ ---- ---------- ------ ---- --------- (Dollars in Thousands) Interest-earning assets: Loans receivable .................................. $ 486 $ 68 $ 554 $ 645 $(151) $ 494 $ 372 $ 14 $ 386 Mortgage-backed securities ........................ (169) 13 (156) (223) 20 (203) 21 (30) (9) Securities ........................................ (25) (9) (34) 24 10 34 149 9 158 FHLB stock ........................................ 4 8 12 14 5 19 4 5 9 Federal funds sold ................................ 24 (2) 22 (52) 7 (45) 44 (9) 35 Other earning assets .............................. 8 1 9 (8) 5 (3) 10 (2) 8 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total interest-earning assets ................... $ 328 $ 79 407 $ 400 $(104) 296 $ 600 $ (13) 587 ===== ===== ----- ===== ===== ----- ===== ===== ----- Interest-bearing liabilities: Passbook savings and certificates ................. $ 61 $ (3) 58 $ (39) $ (36) (75) $ 45 $ 334 379 NOW and Demand .................................... 105 -- 105 135 17 152 188 166 354 FHLB Advances ..................................... 15 14 29 262 51 313 106 (22) 84 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total interest-bearing liabilities ....................................... $ 181 $ 11 192 $ 358 $ 32 390 $ 339 $ 478 817 ===== ===== ----- ===== ===== ----- ===== ===== ----- Net interest income................................. $ 215 $(94) $(230) ===== ===== ======
The following table sets forth the weighted average yields on the Company's interest-earning assets, the weighted average interest rates on interest-bearing liabilities and the interest rate spread between the weighted average yields and rates for the Company at the dates indicated. Non-accruing loans have been included in the table as carrying a zero yield.
At September 30, March 31, ------------------------------ 1998 1997 1996 1995 ---- ---- ---- ---- Weighted average yield on: Loans receivable.......................................... 7.87% 7.74% 7.78% 8.13% Mortgage-backed securities................................ 6.53 6.66 6.53 6.97 Securities................................................ 6.20 6.97 6.68 7.61 Federal funds sold........................................ 5.33 5.28 5.48 5.57 Other interest-earning assets............................. 5.43 5.22 4.93 5.35 Combined weighted average yield on interest-earning 0 7. 9 assets................................................. 7.44 7.4 34 7.5 Weighted average rate paid on: Passbook Savings and certificates......................... 5.42 5.38 5.38 5.38 NOW....................................................... 4.21 4.06 4.03 3.78 FHLB advances............................................. 5.79 6.11 5.65 5.94 Combined weighted average rate paid on interest- 1 5. 3 bearing liabilities.................................... 5.19 5.2 17 5.2 Spread..................................................... 2.25 2.19 2.17 2.36
40 Asset/Liability Management of the Company The matching of assets and liabilities may be analyzed by examining the extent to which they are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect operations while a positive gap would tend to benefit operations. A primary objective of asset/liability management is to manage interest rate risk. First Federal monitors its asset/liability mix on an ongoing basis and, from time to time, may institute certain changes in its product mix and asset and liability maturities. Since the early 1980's, the Company has stressed the origination of adjustable rate residential mortgage loans ("ARMs"), subject to market conditions. In recent periods, the Company has also purchased adjustable-rate mortgage-backed securities. At March 31, 1998, approximately $28.6 million, or 31.1% of the Company's total loans secured by real estate, were ARMs. On the same date, the Company also had $12.3 million in adjustable-rate mortgage-backed securities. The Company's ARMs and adjustable-rate mortgage-backed securities adjust to various indices. The Company monitors the mix of indices on its adjustable rate assets and seeks, consistent with market conditions, to achieve a close match in the repricing characteristics of its assets and liabilities. To increase the interest rate sensitivity of its assets, the Company has also maintained a relatively high level of short and intermediate-term investment securities and other assets. At March 31, 1998, the Company had $7.7 million of investment securities and interest-bearing deposits maturing or repricing within three years. Finally, the Company has undertaken various marketing programs from time to time over the last decade in order to extend the term of its deposit liabilities. In 1993, the Company introduced a new certificate of deposit program in an attempt to reduce deposit outflows and attract longer term deposits which were being lost as a result of the general decline in market rates of interest. This program offers two certificate products which have 4- and 5-year terms. At March 31, 1998, the Company had approximately $7.8 million in these two certificates. In the future, in managing its interest rate sensitivity, the Company intends to continue to stress the origination of ARMs, subject to market conditions, the purchase of adjustable-rate mortgage-backed securities and the maintenance of a relatively high level of short-term securities and other assets. Office of Thrift Supervision ("OTS") regulations provide a Net Portfolio Value ("NPV") approach to the quantification of interest rate risk. In essence, this approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance-sheet contracts arising from an assumed 200 basis point increase or decrease in interest rates (whichever results in the greater pro forma decrease in NPV). Under OTS regulations, an institution's "normal" level of interest rate risk in the event of this assumed change in interest rates is a decrease in the institution's NPV in an amount not to exceed 2% of the present value of its assets. Thrift institutions with greater than "normal" interest rate exposure must take a deduction from their total capital available to determine if they meet their risk-based capital requirement. The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to the 200 basis point interest rate change and (b) its "normal" level of exposure, which is 2% of the present value of its assets. Savings associations, such as First Federal, with less than $300 million in assets and a risk-based capital ratio in excess of 12% are exempt from this requirement unless the OTS determines otherwise. The OTS has postponed the implementation of the capital deduction component of this regulation until it completes its analysis of the methods of interest rate risk measurements proposed by the other banking regulators. 41 Presented below, as of March 31, 1998, is an analysis of the Association's interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up and down 200 basis points and compared to Board policy limits. The table was prepared and furnished to the Association by the Office of Thrift Supervision. Assumptions used in calculating the amounts in this table were determined by the OTS (dollars in thousands):
Net Portfolio Value Change in At March 31, 1998 Interest Rate Board Limit ------------------------------------------ (Basis Points) % Change $ Amount $ Change % Change - -------------- -------- -------- -------- -------- +200 -40% $11,166 $(2,508) (18)% +100 -25 12,627 (1,047) (8) 0 -- 13,674 -- -- -100 -25 14,007 334 2 -200 -40 13,609 (65) 0
As indicated in the table above, management has structured its assets and liabilities to minimize its exposure to interest rate risk. In the event of a 200 basis point change in interest rates, the Association would experience a 0% change in NPV in a declining rate environment and an 18% decrease in a rising rate environment. During periods of rising interest rates, the value of monetary assets and liabilities generally decline. Conversely, during periods of falling interest rates, the value of monetary assets and liabilities generally increase. However, the amount of change in value of specific assets and liabilities due to changes in interest rates is not the same in a rising interest rate environment as in a falling interest rate environment (i.e., as indicated above, the amount of value increase under a specific rate decline may not equal the amount of value decrease under an identical upward rate movement). Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. As a result, the actual effect of changing interest rates may differ from that presented in the foregoing table. Liquidity and Capital Resources of the Company The OTS requires minimum levels of liquid assets. At March 31, 1998, OTS regulations required First Federal to maintain an average daily balance of liquid assets (United States Treasury, federal agency, and other investments having maturities of five years or less) equal to at least 4.0% of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. Such requirements may be changed from time to time by OTS to reflect changing economic conditions. Such investments are intended to provide a source of relatively liquid funds upon which First Federal may rely if necessary to fund deposit withdrawals and other short-term funding needs. First Federal's regulatory liquidity at March 31, 1998 was 15.44%. First Federal normally attempts to maintain liquidity between 7% and 9%. The Company's primary sources of funds consist of deposits and loan and mortgage-backed securities repayments. Other potential sources of funds available include borrowings from the Federal Home Loan Bank ("FHLB") of Topeka. The Company uses its liquid resources principally to meet on-going commitments, to fund maturing certificates of deposit and deposit withdrawals, to invest, to fund existing and future loan commitments, to maintain liquidity, and to meet operating expenses. Management believes that loan repayments and other sources of funds will be adequate to meet the Company's foreseeable liquidity needs. 42 The Company's primary investing activity is the origination of mortgage loans and the purchase of mortgage-backed and other securities. At March 31, 1998, mortgage loans and mortgage-backed securities accounted for 85.3% of the Company's total assets. The Company has been able to generate sufficient cash through the retail deposit market, its traditional funding source, and through short-term borrowings, to provide the cash utilized in investing activities. A $9.0 million line of credit has also been established with the FHLB of Topeka with an outstanding balance of $0 at March 31, 1998. The line of credit is scheduled to mature on February 5, 1999, and will most likely be renewed for another one year term at that time. The line of credit is subject to various conditions, including the pledging of acceptable collateral. The primary purpose of the line of credit is to serve as a back-up liquidity facility for the Company, however, the Company may from time to time utilize the line of credit to purchase investment securities and fund other commitments. Liquidity management is both a daily and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-bearing deposits, and (iv) the objectives of its asset/liability management program. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. If the Company requires additional funds, beyond its internal ability to generate, it has additional borrowing capacity with the FHLB of Topeka. The Company anticipates that it will have sufficient funds available to meet current loan commitments. At March 31, 1998, the Company had outstanding commitments to extend credit which amounted to $694,000. The Company is not aware of any trends, events or uncertainties which will have or that are reasonably likely to have a material effect on the Company's liquidity, capital resources or operations. Certificates of deposit scheduled to mature in one year or less at March 31, 1998 totaled approximately $30.9 million. Management believes that a significant portion of such deposits will remain with the Company. There can be no assurance, however, that the Company can retain all such deposits. At March 31, 1998, the Company had $27.3 million in advances from the FHLB of Topeka with $6.4 million maturing in one year or less. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), among other things, mandated the adoption of new minimum capital requirements that are no less stringent than the minimum capital requirements for national banks. These minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests: the tangible capital requirement, the core capital requirement, and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as retained earnings less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus supervisory goodwill) equal to 3.0% of assets. The risk-based capital requirement provides for the maintenance of core capital plus general loss allowances (less a specified percentage of certain equity investments) equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Association multiplies the book value of each asset on its balance sheet by a defined risk-weighting factor (e.g., one- to four-family residential loans carry a risk-weighted factor of 50%). Management has reviewed these capital standards and determined that the Association is in compliance with each of the three requirements. As of March 31, 1998, the Association's tangible capital, core capital, and risk-based capital of $9.8 million, $9.8 million, and $10.4 million exceeded the applicable minimum requirements by $7.9 million, $6.1 million, and $5.8 million, respectively. The following table sets forth the Association's compliance with such requirements at March 31, 1998.
Association capital level OTS requirement at March 31, 1998 ------------------ --------------------------------- % of % of Amount Assets Amount Assets Amount of Excess ------ ------ ------ ------ --------- Capital standard (Dollars in Thousands) Tangible capital 1.50% $1,852 7.93% $ 9,787 $ 7,935 Core capital (1) 3.00 3,705 7.93 9,787 6,082 Risk-based capital 8.00 4,598 18.17 10,443 5,845
- ------------- (1) Based on current core capital requirement of 3%. 43 See Note L of Notes to Consolidated Financial Statements of the Company for additional information. Management has reviewed the restriction in FIRREA relating to loans to one borrower, qualification as a qualified thrift lender, and other restrictions on lending and investment, and has determined that, based on the Association's capital position and lending and investment policies, these restrictions have not had a material impact on the Association's operations. Effect of New Accounting Standards In June 1997, the Financial Accounting Standards Board "FASB" issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Income tax effects must also be shown. This statement is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 relates solely to disclosure provisions and therefore will not have a material impact on the results of operations or financial condition of the Company. In June 1997, The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement is effective for financial statements for periods beginning after December 15, 1997. The adoption of SFAS No. 131 relates solely to disclosure provisions and therefore will not have a material impact on the results of operations or financial condition of the Company. 44 BUSINESS OF THE COMPANY General The Company is a Delaware corporation which was formed at the direction of First Federal Savings and Loan Association of Independence ("First Federal" or the "Association") in June 1993 for the purpose of becoming the savings and loan holding company of First Federal. The Company owns all of the outstanding stock of First Federal issued on October 5, 1993 in connection with the completion of First Federal's conversion from the mutual to the stock form of organization (the "Conversion"). The Company issued 727,375 shares of common stock at a price of $10.00 per share in the Conversion. On January 24, 1997, the Common Stock was split two-for-one through the issuance of a 100% stock dividend. At December 31, 1997, the Company had total assets of $113.7 million, and stockholders' equity of $11.4 million. First Federal is a federally chartered stock savings and loan association headquartered in Independence, Kansas. First Federal was originally organized in 1905 as a state-chartered savings and loan association and later converted to a federally chartered institution. Like all federally chartered savings associations, First Federal's operations are regulated by the OTS. First Federal is a member of the FHLB System and a stockholder in the FHLB of Topeka. The Association is also a member of the SAIF and its deposit accounts are insured up to applicable limits by the FDIC. The business of the Association consists primarily of attracting deposits from the general public and using these deposits to originate one- to four-family and multi-family residential mortgage, non-residential mortgage and consumer loans. The Association also invests in mortgage-backed securities which are insured by or guaranteed by federal agencies and other investment securities. See "-- Lending Activities -- Originations, Purchases and Sales of Loans and Mortgage-Backed Securities." The principle sources of funds for the Association's lending activities include deposits, amortization and prepayment of loan principal (including mortgage-backed securities), sales or maturities of investment securities, mortgage-backed securities and short-term investments, borrowings and funds provided from operations. The Association's revenues are derived principally from interest on mortgage loans and mortgage-backed securities, interest on investment securities, dividends on FHLB stock and loan origination earnings. Community Orientation First Federal has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. The Association attracts deposits from the general public and uses such deposits, together with borrowings and other funds, to originate one- to four-family residential mortgage loans. To a much lesser extent, the Association also originates loans secured by non-residential real estate and consumer loans and a limited amount of loans secured by multi-family real estate. Subject to market conditions and loan demand in its market area, the Association expects to continue to originate the same types of loans it currently offers, which include the origination of a limited number of commercial and multi-family real estate loans secured by property located in its market area. The Association does not intend to originate or purchase interests in commercial or multi-family real estate loans secured by properties located outside of its market area. Market Area Through its offices in Independence and Coffeyville, Kansas, First Federal currently serves primarily Montgomery County, Kansas and, to a lesser extent, Wilson County and the eastern part of Chautauqua County in Kansas. The Association competes in loan originations and in attracting deposits with approximately 10 financial institutions serving its primary market area. The Association estimates its share of the savings market in Montgomery County to be approximately 15%. 45 First Federal established a loan production office in Lawrence, Kansas effective October 15, 1997. The office primarily originates construction loans in Lawrence and the surrounding area. Loan approvals are made at the Association's main office with disbursements and collections handled at the loan production office. The office is currently staffed with a loan originator and two processors. Independence, Kansas, located in southeastern Kansas, is approximately 110 miles from Wichita, Kansas. Independence is the County Seat of Montgomery County and the location of Independence Community College. Montgomery County has a population of approximately 38,000. Although the economy of southeast Kansas is closely tied to the gas, oil and agricultural industries, Montgomery County has attracted a variety of other industries. Major employers in Montgomery County include Automotive Controls Corp., Inc., a manufacturer of electronic and electrical parts, City Publishing Company, a publisher of cross-reference directories, Emerson Electric Co., a manufacturer of small electric motors, Hackney & Sons (Midwest) Inc., a manufacturer of beverage delivery truck bodies, Heartland Cement, a manufacturer of cement and Cessna Aircraft, a manufacturer of single engine airplanes. Lending Activities General. Historically, the Association originated fixed-rate mortgage loans. Since 1982, however, the Association has emphasized, subject to market conditions, the origination and holding of adjustable-rate mortgage ("ARM") loans and loans with shorter terms to maturity than traditional 30-year, fixed-rate loans. Management's strategy has been to increase the percentage of assets in its portfolio with more frequent repricing or shorter maturities. In response to customer demand, however, the Association continues to originate for its loan portfolio fixed-rate mortgages with terms not greater than 30 years. The Association's primary focus in lending activities is on the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences. Recently, a significant portion of the Association's lending has been in the form of construction loans. To a much lesser extent, the Association also originates loans secured by non-residential real estate and consumer loans and a limited amount of multi-family real estate loans. See "- Originations, Purchases and Sales of Loans and Mortgage-Backed Securities." At March 31, 1998, the Association's net loan portfolio totaled $85.3 million. All loans must be reviewed by a committee comprised of the Association's President and three other officers of the Association. The committee has authority to approve loans secured by real estate to any one borrower of up to $500,000. The executive committee has authority to approve loans up to $750,000 which provide for a personal guarantee from the borrower. Loans in excess of this limit require approval of the Board of Directors. All loan approvals made by the loan committee are ratified by the Board of Directors. The aggregate amount of loans that the Association is permitted to make under applicable federal regulations to any one borrower, including related entities, is generally equal to the greater of 15% of unimpaired capital and surplus or $500,000. At March 31, 1998, the maximum amount which the Association could have lent to any one borrower and the borrower's related entities was approximately $1.5 million. See " - Regulation - Federal Regulation of Savings Associations." 46 Loan Portfolio Composition. The following information sets forth the composition of the Association's loan portfolio in dollar amounts and in percentages (before deductions (or additions) for loans in process, deferred fees and discounts and allowances for losses) as of the dates indicated.
At September 30, March 31, ------------------------------------------------------------------- 1998 1997 1996 1995 ---------------------- -------------------- --------------------- ----------------- Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Real Estate Loans - ----------------- One- to four-family.......... $67,166 73.13% $64,152 84.30% $57,353 82.29% $50,747 82.34% Multi-family................. 1,133 1.23 1,164 1.53 1,371 1.97 1,420 2.30 Non-residential.............. 7,538 8.21 7,479 9.83 7,224 10.36 7,454 12.10 Construction................. 13,317 14.50 764 1.00 1,834 2.63 526 0.85 -------- ------- ---------- -------- --------- -------- --------- ------- Total real estate loans... 89,154 97.07 73,559 96.66 67,782 97.25 60,147 97.59 -------- ------- -------- ------- -------- ------- -------- ------- Consumer Loans: - --------------- Deposit account.............. 408 0.44 350 0.46 364 0.52 314 0.50 Automobile................... 808 0.88 705 0.93 402 0.58 269 0.44 Home equity.................. 594 0.65 550 0.72 781 1.12 641 1.04 Home improvement............. 257 0.28 274 0.36 183 0.26 102 0.17 Other........................ 621 0.68 661 0.87 185 0.27 159 0.26 ---------- -------- ---------- -------- ---------- -------- --------- ------- Total consumer loans...... 2,688 2.93 2,540 3.34 1,915 2.75 1,485 2.41 --------- -------- --------- -------- --------- -------- -------- ------- Total Loans.............. 91,842 100.00% 76,099 100.00% 69,697 100.00% 61,632 100.00% ====== ====== ====== ====== Less: - ----- Loans in process............. 5,617 572 1,050 372 Deferred fees and discounts.. 305 300 274 200 Allowance for losses......... 656 668 690 690 ---------- ---------- ---------- ---------- Total loans receivable, net.. $85,264 $74,559 $67,683 $60,370 ======= ======= ======= =======
47 The following table shows the composition of the Association's loan portfolio by fixed- and adjustable-rate categories at the dates indicated.
At September 30, March 31, -------------------------------------------------------------- 1998 1997 1996 1995 --------------------- ------------------- ------------------ ----------------- Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Fixed-Rate Loans Real estate: One- to four-family................... $41,275 44.94 $37,581 49.38% $31,231 44.81% $23,163 37.59% Multi-family.......................... 662 0.72 683 0.90 871 1.25 821 1.33 Non-residential....................... 5,315 5.79 5,055 6.64 4,835 6.94 5,304 8.61 Construction.......................... 13,317 14.50 764 1.00 -- -- 526 0.85 --------- ------- -------- -------- ------- ------- ------- ------ Total fixed-rate real estate loans.. 60,569 65.95 44,083 57.92 36,937 53.00 29,814 48.38 Consumer............................... 2,094 2.28 1,990 2.62 1,437 2.06 1,123 1.82 --------- -------- --------- -------- ------- ------- ------- ------ Total fixed-rate loans.............. 62,663 68.23 46,073 60.54 38,374 55.06 30,937 50.20 --------- ------- -------- ------- ------- ======= ------- ------ Adjustable-Rate Loans Real estate: One- to four-family................... 25,891 28.19 26,571 34.92 26,122 37.47 27,584 44.75 Multi-family.......................... 471 0.51 481 0.63 500 0.72 599 0.97 Non-residential....................... 2,223 2.42 2,424 3.19 2,389 3.43 2,150 3.49 Construction.......................... -- -- -- -- 1,834 2.63 -- -- --------- -------- ---------- ------ ------- ------- ------ ------ Total adjustable-rate real estate loans...................... 28,585 31.12 29,476 38.74 30,845 44.25 30,333 49.21 Consumer............................... 594 0.65 550 0.72 478 0.69 362 0.59 --------- -------- -------- -------- ------- -------- ------ ------ Total adjustable-rate loans........ 29,179 31.77 30,026 39.46 31,323 44.94 30,695 49.80 --------- ------- -------- ------- -------- ------- ------ ------ Total Loans........................ 91,842 100.00% 76,099 100.00% 69,697 100.00% 61,632 100.00% ====== ====== ====== ====== Less Loans in process....................... 5,617 572 1,050 372 Deferred fees and discounts............ 305 300 274 200 Allowance for losses................... 656 668 690 690 --------- -------- ------ ------ Total loans receivable, net............ $85,264 $74,559 $67,683 $60,370 ======= ======= ======= =======
48 The following schedule shows the scheduled contractual maturities of the Association's loan portfolio at March 31, 1998. Mortgages which have adjustable or renegotiable interest rates are shown as repaying in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate --------------------------------------------------------- One-to Multi-family, and Four-Family Non-Residential Construction Consumer Total ------------------ ----------------- ----------------- ----------------- ---------------- Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- (Dollars in Thousands) Due During Period Ending March 31, - ----------------- 1999(1).................... $ 366 8.45% $ 126 9.00% $11,878 9.84% $1,036 9.08% $13,406 9.74% 2000....................... 68 9.23 69 8.10 868 9.18 291 8.88 1,296 9.06 2001....................... 260 7.61 769 8.92 -- -- 339 9.38 1,368 8.79 2002 and 2003.............. 1,247 7.88 136 8.76 -- -- 757 8.89 2,140 8.29 2004 to 2008............... 6,817 7.86 1,615 8.64 -- -- 265 8.65 8,697 8.03 2009 to 2023............... 34,882 7.66 5,809 8.42 374 8.13 -- -- 41,065 7.77 2024 and following......... 23,526 7.52 147 8.25 197 7.50 -- -- 23,870 7.52 ------- ------- ------- ------ ------- Total $67,166 $8,671 $13,317 $2,688 $91,842 ======= ====== ======= ====== =======
- --------- (1) Includes demand loans, loans having no stated maturity and overdraft loans. The total amount of loans due after March 31, 1999, which have a predetermined interest rate is $49.9 million, while the total amount of loans due after such date which have a floating or adjustable interest rate is $28.6 million. 49 One- to Four-Family Residential Mortgage Lending. Residential loan originations are generated by the Association's marketing efforts, its present customers, walk-in customers and referrals from real estate brokers and builders. The Association has focused its lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, single-family residences in its market area. At March 31, 1998, the Association's one- to four-family residential mortgage loans, totaled $67.2 million, or 73.1% of the Association's loan portfolio. The Association currently makes adjustable-rate, one- to four-family residential mortgage loans in amounts up to 95% of the appraised value, or selling price, of the security property, whichever is less. For loans with a loan-to-value ratio of 90% or greater, the Association requires private mortgage insurance equal to 20% of the loan value in order to reduce the Association's exposure level. For loans with loan-to-value ratios of greater than 80% but less than 90%, the Association typically requires private mortgage insurance to reduce the Association's exposure. The determination as to whether to obtain such insurance is made on a case-by-case basis, based on a variety of factors including the borrower's payment history, the borrower's length of employment, the quality of the property, the term of the loan and the debt to income ratio of the borrower. At March 31, 1998, the Association had 508 loans totaling $27.4 million with a loan-to-value ratio of greater than 80% but less than 90% and 320 loans totaling $15.4 million with a loan-to-value ratio of 90% or greater. The Association currently offers one-year ARM loans at rates determined in accordance with market and competitive factors for a term of up to 30 years. The interest rate charged on ARM loans currently originated by the Association is based upon the one year Constant Maturity Treasury Index. The adjustable-rate loans currently originated by the Association provide for a 1% annual cap and floor, and a 5% lifetime cap on the interest rate adjustment over the rate in effect on the date of origination. The actual interest rate on these adjustable-rate loans may not be reduced below 5% over the life of the loan. The annual and lifetime caps on interest rate increases reduce the extent to which these loans can help protect the Association against interest rate risk. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company - Asset/Liability Management." Approximately 38.8% of the loans secured by one- to four-family real estate originated by the Association during fiscal 1997 were originated with adjustable rates of interest. Approximately 25.7% of the loans secured by one- to four-family real estate originated by the Association during the six months ended March 31, 1998 were originated with adjustable rates of interest. See "- Originations, Purchases and Sales of Loans and Mortgage-Backed Securities." Adjustable-rate loans decrease the risks associated with changes in interest rates but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. The Association believes that these risks, which have not had a material adverse effect on the Association to date, are more than outweighed by the benefits received by the Association in offering ARM loans. The Association also originates fixed-rate mortgage loans. Fixed-rate loans currently originated by the Association have terms of up to 30 years. Interest rates charged on these fixed-rate loans are competitively priced according to local market conditions. In underwriting residential real estate loans, the Association evaluates the borrower's ability to make monthly payments, employment history, credit history and the value of the property securing the loan. Potential borrowers are typically qualified for both adjustable- and fixed-rate loans based upon the initial or stated rate of the loan. Adjustable rate loans increase the risk of default to the extent the interest rate adjusts upward and the borrower is unable to make the payments at the increased rate. Although borrowers on adjustable-rate loans are qualified based upon the initial rate of the loan, if a borrower's debt to income ratios are marginal, the Association will take into consideration the borrower's ability to make future payments in the event the interest rate adjusts upward. Since the size of the Association's average new loan originated is approximately $50,000, management believes increases in interest rates do not generally increase payment amounts to levels that would significantly impair the borrower's ability to make monthly payments. An appraisal of the security property is obtained on all loan applications from Board-approved independent fee appraisers. In connection with the origination of residential real estate loans, the Association generally requires that 50 the borrower obtain an opinion from an attorney regarding the title to the property or title insurance and fire and casualty insurance, as well as flood insurance, where applicable, to protect the Association's interest. Approximately $2.4 million, or 3.6% of the Association's one- to four-family residential mortgage loan portfolio, was purchased by the Association. These loans are primarily secured by property located in Texas and have been in the Association's portfolio for several years. The Association has purchased only a limited amount of one- to four-family residential mortgage loans since 1989. The level of delinquencies in the Association's portfolio of purchased loans secured by one- to four-family residential real estate is consistent with that of the loans originated and retained by the Association. The Association's residential mortgage loans customarily include due-on-sale clauses giving the Association the right to declare the loan immediately due and payable in the event, among other things, the borrower sells or otherwise disposes of the property subject to the mortgage and the loan is not repaid. The Association has enforced due-on-sale clauses in its mortgage contracts for the purpose of increasing its loan portfolio yield. The yield increase is obtained through the authorization of assumptions of existing loans at higher rates of interest and the imposition of assumption fees. One- to four-family real estate loans may be assumed provided home buyers meet the Association's underwriting standards and the loan terms are modified, to the extent necessary, to conform with present yield and maturity requirements. Non-Residential/Multi-Family Real Estate Lending. In order to enhance the yield on and decrease the average term to maturity of its assets, the Association has originated and purchased permanent loans and participation interests in loans originated by other lenders secured by non-residential and multi-family real estate. The Association also has a limited amount of loans secured by land. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company - Asset/Liability Management." At March 31, 1998, the Association had $8.7 million in non-residential/ multi-family real estate loans, representing 9.4% of the Association's loan portfolio. Approximately 12.4% of the property securing the Association's non-residential/multi-family (including land) real estate loan portfolio is located outside the Association's primary market area. Many of the properties securing these purchased loans or participations are located in Texas and neighboring states. Some of these areas have experienced adverse economic conditions including a general softening in real estate markets and the local economy, which may result in increased loan delinquencies and loan losses. However, most of the Association's non-residential/multi-family real estate loan portfolio is seasoned and, during the past five years, the Association has had no significant purchases or participations in such loans. 51 The table below sets forth, by type of security property, the Association's non-residential/ multi-family real estate loans at March 31, 1998. Number Outstanding Amount of Principal Non-Performing Loans Balance or of Concern ----- ------- ------------- (Dollars in Thousands) Multi-family ........................ 6 $1,133 $ -- Small business facilities and office buildings ............... 44 4,000 21 Health care facility ................ 11 1,308 -- Churches ............................ 3 186 -- Warehouse/mini-storage .............. 3 325 -- Shopping centers .................... -- -- -- Hotel/motel ......................... 2 735 -- Land ................................ 24 984 -- ------ ------ ------ Total multi-family residential and non- residential real estate loans ..................... 93 $8,671 $ 21 ====== ====== ====== Permanent non-residential and multi-family real estate loans originated by the Association generally have terms ranging from 5 to 20 years and up to a 30-year amortization schedule. Rates on permanent loans either (i) adjust (subject, in some cases, to specified interest rate caps) at one year intervals to specified spreads over an index, (ii) float (subject, in some cases, to specified interest rate caps) with changes in a specified prime rate or (iii) carry fixed rates. Under the Association's current loan policy, multi-family/non-residential real estate loans (other than loans to facilitate) are written in amounts of up to 80% of the appraised value of the properties. Appraisals on properties securing non-residential and multi-family real estate property loans originated by the Association are performed by an independent appraiser designated by the Association at the time the loan is made. All appraisals on multi-family and non-residential real estate loans are reviewed by the Association's management. In addition, the Association's underwriting procedures generally require verification of the borrower's credit history, income and financial statements, banking relationships, references and income projections for the property. Personal guarantees are generally obtained for all or a portion of the Association's multi-family/non-residential real estate loans. While the Association continues to monitor multi-family/non-residential real estate loans on a regular basis after origination, updated appraisals are not normally obtained after closing unless the Association believes that there are questions regarding the progress of the loan or the value of the collateral. At March 31, 1998, the Association had no non-residential/multi-family real estate loans to one borrower, or group of borrowers, which had an existing carrying value in excess of $500,000, except for the loans to five unrelated borrowers or groups of borrowers described below. The first loan is secured by a hotel located in Columbia, Missouri and had an outstanding balance at March 31, 1998 of $693,000. This loan has been current since its inception in June 1991. The other loans in excess of $500,000 at March 31, 1998, included a loan to one borrower totaling $604,000 secured by an apartment building located in Rogers, Arkansas; a loan with an outstanding balance of $523,000 secured by a motel in Independence, Kansas; a loan with an outstanding balance of $541,000 secured by a guest home located in Caney, Kansas; and a loan with an outstanding balance of $721,000 secured by an apartment building located in Gladstone, Missouri. All of these loans were current at March 31, 1998. See " - Regulation - Federal Regulation of Savings Associations." Non-residential/multi-family real estate lending affords the Association an opportunity to receive interest at rates higher than that generally available from one- to four-family residential lending. Nevertheless, loans secured by such properties are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by non-residential/multi-family real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay the loan may be impaired. The Association has attempted 52 to minimize these risks through its underwriting standards and by lending primarily on existing income-producing properties. The Association also generally maintains an escrow account for most of its loans secured by real estate, in order to ensure that the borrower provides funds to cover property taxes in advance of the required payment. These accounts are analyzed annually to confirm that adequate funds are available. For loans which do not include an escrow requirement, an annual review of tax payments is performed by the Association in order to confirm payment. In order to monitor the adequacy of cash flows on income-producing properties, the borrower or lead lender is notified annually, requesting financial information including rental rates and income, maintenance costs and an update of real estate property tax payments. Construction Lending. The Association also makes a number of construction loans to builders and individuals for the construction of residences. There were $13.3 million of construction loans outstanding at March 31, 1998. Although the Association has offered construction loans for years, it recently expanded its efforts for this type of lending with the opening of its Lawrence, Kansas production office. The majority of the construction loans were originated at the Lawrence, Kansas loan production office. This office is staffed with an originator and two processors, each of whom has substantial experience in construction lending. Construction loans are made to both builders and individuals and generally have terms of six months or less and interest rates tied to the prime rate plus a margin. The borrower pays interest only during the construction period. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans, and are approved at the Association's headquarters in Independence. Construction loans are generally considered to involve a greater degree of risk than permanent one- to four-family residential mortgage loans. Risk of loss on a construction loan depends largely upon the concurrence of the initial estimate of the property's value at completion of construction and the estimated cost (including interest) of construction, as well as the availability of permanent take-out financing. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of value proves to be inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a project which, when completed, has a value which is insufficient to ensure full repayment. See "Business of the Company -- lending Activities - Construction Lending." Because of these uncertainties inherent in estimating development and construction costs, it is relatively difficult to evaluate accurately the total loan funds required to complete a project. Also, the funding of loan fees and interest during the construction phase makes the monitoring of the progress of the project particularly important, as customary early warning signals of project difficulties may not be present. Consumer Lending. Consumer loans generally have shorter terms to maturity (thus reducing First Federal's exposure to changes in interest rates) and carry higher rates of interest than do one- to four-family residential mortgage loans. In addition, management believes that the offering of consumer loan products helps to expand and create stronger ties to its existing customer base, by increasing the number of customer relationships and providing cross-marketing opportunities. At March 31, 1998, the Association's consumer loan portfolio totaled $2.7 million, or 2.9% of its loan portfolio. Under applicable federal law, the Association is authorized to invest up to 35% of its assets in consumer loans. First Federal offers a variety of secured consumer loans, including home equity loans, home improvement loans, auto loans, and loans secured by savings deposits and other consumer collateral. The Association also offers a limited amount of unsecured loans. The Association currently originates all of its consumer loans in its market area. The Association's home equity and home improvement loans comprised approximately 31.7% of the Association's total consumer loan portfolio. These loans are generally originated in amounts, together with the amount of the existing first mortgage, of up to 90% of the appraised value of the property securing the loan. The term to maturity on such loans may be up to seven years. Other consumer loan terms vary according to the type of collateral, length of contract and creditworthiness of the borrower. The Association's consumer loans generally have a fixed rate of interest, except for the home equity lines of credit which adjust based upon changes in the prime rate. At March 31, 1998, the Association had $808,000 of automobile loans. The Association's automobile loans are originated as installment loans with a fixed interest rate and terms of up to 60 months. The Association originates 53 automobile loans directly from its existing customers, for both new and used automobiles, and will lend up to 80% of the value of the automobile. The Association does not originate any consumer loans on an indirect basis (i.e., where loan contracts are purchased from retailers of goods or services which have extended credit to their customers). The underwriting standards employed by the Association for consumer loans include a determination of the applicant's payment history on other debts and an assessment of the ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured, such as checking account overdraft privilege loans, or are secured by rapidly depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Although the level of delinquencies in the Association's consumer loan portfolio has generally been low (at March 31, 1998, $49,000, or approximately 1.8% of the consumer loan portfolio, was 60 days or more delinquent), there can be no assurance that delinquencies will not increase in the future. Originations, Purchases and Sales of Loans and Mortgage-Backed Securities The Association originates real estate loans through marketing efforts, the Association's customer base, walk-in customers, and referrals from real estate brokers. The Association originates both adjustable-rate and fixed-rate loans. Its ability to originate loans is dependent upon the relative demand for fixed-rate or ARM loans in the origination market, which is affected by the term structure (short-term compared to long-term) of interest rates as well as the current and expected future level of interest rates. Historically, the Association has also purchased loans and loan participations, predominantly for non-residential real estate and one- to four-family residential loans. Such purchases have enabled First Federal to offset the relatively low level of loan demand in the Association's principal market areas, to take advantage of favorable lending opportunities in other markets, to diversify its portfolio and to limit origination expenses while generally providing the Association with a higher yield than was available on mortgage-backed securities. The Association has underwritten its loan purchases using the same criteria it uses in originating loans. Servicing of purchased loans is generally performed by the seller. At March 31, 1998, approximately $4.2 million of First Federal's loan portfolio was serviced by others. During the year ended September 30, 1997, the Association purchased loans totaling $546,000 secured by non-residential real estate, and none during the six months ended March 31, 1998. During recent years, most of the Association's loan purchase opportunities have been at yields that management believed were not sufficiently higher than the yields of comparable mortgage-backed securities that were guaranteed by a Federal agency as to principal and interest (or derived from certificates that were so guaranteed) to offset such credit protection. Accordingly, the Association has recently increased its mortgage-backed securities portfolio rather than loan purchases. See " - Investment Activities - Mortgage-Backed Securities." The Association had $2.1 million in loans serviced for others as of March 31, 1998. 54 The following table shows the loan origination, purchase, sale and repayment activities of the Association for the periods indicated.
Six Months Ended Year Ended September 30, March 31, ------------------------------------------ 1998 1997 1996 1995 ---- ---- ---- ---- (In Thousands) Originations by type - -------------------- Adjustable-rate: Real estate - one- to four-family .............................. $ 2,075 $ 6,437 $ 4,465 $ 6,144 - multi-family ................................... -- -- -- 173 - non-residential ................................ -- 633 614 921 Consumer - home equity ......................................... -- 673 314 469 -------- -------- -------- -------- Total adjustable-rate ................................... 2,075 7,743 5,393 7,707 -------- -------- -------- -------- Fixed-rate: Real estate - one- to four-family .............................. 6,006 10,167 14,879 5,886 - non-residential and land ....................... 693 1,492 320 219 - construction ................................... 11,367 -- -- -- Consumer - non-real estate ..................................... 1,117 1,965 1,429 1,234 -------- -------- -------- -------- Total fixed-rate ........................................ 19,183 13,624 16,628 7,339 -------- -------- -------- -------- Total loans originated .................................. 21,258 21,367 22,021 15,046 -------- -------- -------- -------- Purchases Real estate - non-residential .................................. -- 546 -- -- - construction .................................. 4,984 -- -- -- Mortgage-backed securities (excluding REMICs and CMOs) ............................................. -- -- 4,660 2,982 -------- -------- -------- -------- Total purchased ......................................... 4,984 546 4,660 2,982 -------- -------- -------- -------- Sales and Repayments Mortgage-backed securities ..................................... 2,576 4,412 5,237 3,041 Transfer of mortgage-backed securities to mortgage-backed securities available for sale ................ -- -- -- 968 Principal repayments(1) ........................................ 10,499 15,512 13,956 11,854 -------- -------- -------- -------- Total reductions ......................................... 13,075 19,924 19,193 15,863 Increase (decrease) in other items, net(2) ....................... (5,088) 375 (730) 287 -------- -------- -------- -------- Net increase ............................................ $ 8,079 $ 2,364 $ 6,758 $ 2,452 ======== ======== ======== ========
- ------------ (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. 55 Asset Quality When a borrower fails to make a required payment on a loan, the Association attempts to cause the delinquency to be cured by contacting the borrower. In the case of loans secured by real estate, a computer generated late notice is sent 15 days after the due date. If the delinquency is not cured between the 30th and 60th day, a personal letter is sent to the borrower and if the delinquency is not cured by the 75th day, contact with the borrower is made by phone. Additional written and verbal contacts are made with the borrower to the extent the borrower appears to be cooperative. If the delinquency is not cured or a payment plan arranged by the 90th day, the Association sends a 30-day default letter and, once that period elapses, usually institutes appropriate action to foreclose on the property. Interest income on loans at this point is reduced by the full amount of accrued and uncollected interest. If foreclosed, the property is sold at a sheriff's sale and may be purchased by the Association. Delinquent consumer loans are handled in a similar manner. If these efforts fail to bring the loan current, appropriate action may be taken to collect any loan payment that remains delinquent. The Association's procedures for repossession and sale of consumer collateral are subject to various requirements under Kansas consumer protection laws. Real estate acquired by First Federal as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate acquired through foreclosure until it is sold. When property is acquired, it is recorded at the lower of the loan's unpaid principal balance (cost) or fair value less estimated selling expenses at the date of acquisition and any write-down resulting therefrom is charged to the allowance for losses on loans. See Note A of the Notes to Consolidated Financial Statements of the Company. Upon acquisition, all costs incurred in maintaining the property are expensed. However, costs relating to the development and improvement of the property are capitalized to the extent of net realizable value. Delinquent Loans. The following table sets forth information concerning delinquent loans at March 31, 1998, in dollar amounts and as a percentage of the Association's loan portfolio. The amounts presented represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.
Loans Delinquent for: -------------------------------------------------------- Total Loans Delinquent 60-90 Days Over 90 Days 60 Days or more -------------------------- ---------------------------- ---------------------------- Percent of Percent of Percent of Total Loan Total Loan Total Loan Number Amount Portfolio Number Amount Portfolio Number Amount Portfolio ------ ------ --------- ------ ------ --------- ------ ------ --------- (Dollars in Thousands) Real Estate: One- to four-family...... 7 $335 .36% 10 $ 528 .58% 17 $ 863 .94% Non-residential.......... -- -- -- 1 21 .02 1 21 .02 Consumer. . . . . ......... 4 25 .03 2 24 .03 6 49 .06 ---- ----- ----- ---- ----- ----- ---- ------ ---- Total................. 11 $360 .39% 13 $ 573 .63% 24 $ 933 1.02% === ==== ===== ==== ===== ===== ==== ====== ====
The following table sets forth information concerning delinquent loans at September 30, 1997 in dollar amounts and as a percentage of the Association's loan portfolio. The amounts presented represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.
Loans Delinquent for: ----------------------------------------------------------- Total Loans Delinquent 60-90 Days Over 90 Days 60 Days or more ----------------------------- ---------------------------- ---------------------------- Percent of Percent of Percent of Total Loan Total Loan Total Loan Number Amount Portfolio Number Amount Portfolio Number Amount Portfolio ------ ------ --------- ------ ------ --------- ------ ------ --------- (Dollars in Thousands) Real Estate: One- to four-family .............. 8 $ 235 0.31% 27 $1,211 1.59% 35 $1,446 1.90% Non-residential .................. 2 264 0.35 1 98 0.13 3 362 0.48 Consumer ........................... 3 11 0.01 4 32 0.04 7 43 0.05 ------ ------ ---- --- ------ ---- --- ------ ---- Total ......................... 13 $ 510 0.67% 32 $1,341 1.76% 45 $1,851 2.43% ====== ====== ==== === ====== ===== === ====== ====
56 Non-Performing Assets. The table below sets forth the amounts and categories of the Association's non-performing assets. Loans are placed on non-accrual status when the collection of principal and/or interest become doubtful. As a matter of policy, the Association does not generally accrue interest on loans past due more than 90 days. For all periods presented, troubled debt restructurings (which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates) are included in the following table. Real estate acquired through foreclosure includes assets acquired in settlement of loans and reflects the lower of cost or fair value less selling expense.
September 30, March 31, --------------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (Dollars in Thousands) Non-accruing loans: One- to four-family .............................................. $ 528 $ 919 $ 148 $ 444 Non-residential real estate ...................................... 21 98 99 100 Construction ..................................................... -- -- 94 -- Consumer ......................................................... 24 32 26 11 ------ ------ ------ ------ Total non-accruing loans ...................................... 573 1,049 367 555 Accruing loans delinquent 90 days or more: One- to four-family .............................................. -- 292 183 116 Troubled debt restructurings: One- to four-family .............................................. 49 50 52 56 ------ ------ ------ ------ Total non-performing loans ......................................... 622 1,391 602 727 ------ ------ ------ ------ Real estate acquired through foreclosure: One- to four-family .............................................. 15 12 12 -- Non-residential real estate ...................................... -- -- -- 62 ------ ------ ------ ------ Total real estate acquired through foreclosure ................ 15 12 12 62 ------ ------ ------ ------ Total non-performing assets ........................................ $ 637 $1,403 $ 614 $ 789 ====== ====== ====== ====== Total as a percentage of total assets .............................. .51% 1.25% 0.57% 0.77% ====== ====== ====== ======
For the three months ended March 31, 1998, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $22,000. The amount included in interest income on such loans was $1,356 for the six months ended March 31, 1998. Included in non-accruing loans at March 31, 1998, were ten loans totaling $528,000 secured by one- to four-family real estate, one loan totaling $21,000 secured by non-residential real estate, and two consumer loans totaling $24,000. All non-accruing loans at March 31, 1998 were located in the Company's primary market area. At March 31, 1998, there were no accruing loans delinquent 90 days or more. Management has considered loans of concern in establishing the Association's allowance for loan losses. Real Estate Acquired Through Foreclosure. At March 31, 1998, the Association's real estate acquired through foreclosure consisted of two single family residences located in the Association's market area with a carrying value of $15,000, which are currently offered for sale. Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the 57 weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are placed on a "watch list" by management. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, who may order the establishment of additional general or specific loss allowances. In connection with the filing of its periodic reports with the OTS and in accordance with its classification of assets policy, the Association regularly reviews the problem loans in its portfolio to determine whether any loans require classification in accordance with applicable regulations. Classified assets of the Association all of which, at March 31, 1998, are included in the table of non-performing assets above or are described under the caption "- Other Loans of Concern" above, were as follows:
September 30, March 31, ------------------------------ 1998 1997 1996 1995 ---- ---- ---- ---- (In Thousands) Substandard .................... $ 486 $1,261 $ 676 $1,003 Doubtful ....................... 63 92 95 89 Loss ........................... -- -- -- -- ------ ------ ------ ------ Total classified assets ........ $ 549 $1,353 $ 771 $1,092 ====== ====== ====== ======
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity. Such evaluation, which includes a review of all loans for which full collectibility may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan allowance. Although management believes it uses the best information available to make such determinations, future adjustments to the allowance may be necessary, and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the initial determinations. At March 31, 1998, the Association had an allowance for loan losses of $656,000. 58 The following table sets forth an analysis of the Association's allowance for loan losses at the dates indicated.
Six Months Ended Year Ended September 30, March 31, ------------------------------------ 1998 1997 1996 1995 ---- ---- ---- ---- (Dollars In Thousands) Balance at beginning of period ....................................... $ 668 $ 690 $ 690 $ 667 Charge-offs: One- to four-family ................................................ 12 22 -- 15 Recoveries: Non-residential real estate ........................................ -- -- -- 38 ----- ----- ------ ----- Net charge-offs (recoveries)........................................ 12 22 -- (23) ----- ----- ------ ----- Balance at end of period ............................................. $ 656 $ 668 $ 690 $ 690 ===== ===== ====== ===== Ratio of net charge-offs (recoveries) during the period to total loans at end of period ............................. 0.02% 0.03% ---% (0.04)% ===== ===== ====== ===== Allowance for loan losses to total loans at end of period ............................................................. 0.77% 0.90% 1.02% 1.14% ===== ===== ====== ===== Allowance for loan losses to non-performing loans at end of period ...................................................... 105.50% 48.05% 114.62% 94.91% ===== ===== ====== =====
The distribution of the allowance for losses on loans at the dates indicated is summarized as follows:
September 30, March 31, --------------------------------------------------------------------------- 1998 1997 1996 1995 ---------------------- ----------------------- --------------------- ---------------------- Percent Percent Percent Percent of Loans of Loans of Loans of Loans in Each in Each in Each in Each Category Category Category Category to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) Real Estate: One- to four-family ..... $397 73.13% $391 84.30% $357 82.29% $343 82.34% Multi-family ............ -- 1.23 -- 1.53 -- 1.97 17 2.30 Non-residential ......... 89 8.21 92 9.83 87 10.36 87 12.10 Construction .............. 135 14.50 -- 1.00 11 2.63 -- .85 Consumer .................. 35 2.93 35 3.34 30 2.75 7 2.41 Unallocated ............... -- -- 150 -- 205 -- 236 -- ---- ------ ---- ------ ---- ------ ---- ------ Total ................. $656 100.00% $668 100.00% $690 100.00% $690 100.00% ==== ====== ==== ====== ==== ====== ==== ======
Investment Activities General. First Federal must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Association has maintained liquid assets at levels above the minimum requirements imposed by the OTS regulations and at levels believed adequate to meet the requirements 59 of normal operations, including repayments of maturing debt and potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. At March 31, 1998, the Association's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 15.44%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company Liquidity and Capital Resources" and " - Regulation - Liquidity." Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Generally, the investment policy of the Company is to invest funds among various categories of investments and maturities based upon the Company's asset/liability management policies, investment quality and marketability, liquidity needs and performance objectives. Investment Securities. At March 31, 1998, investment securities totaled $8.3 million, or 6.7% of total assets. As of such date, the Association also had a $1.4 million investment in FHLB stock, satisfying its requirement for membership in the FHLB of Topeka. It is the Company's general policy to purchase investment securities which are U.S. Government securities or federal agency obligations or other issues that are rated investment grade or have credit enhancements. At March 31, 1998, the average term to maturity or repricing of the investment portfolio was 2.4 years. 60 The following table sets forth the composition of the Company's securities portfolio at the dates indicated.
September 30, March 31, ------------------------------------------------------ 1998 1997 1996 1995 --------------- ---------------- ------------- ---------------- Book % of Book % of Book % of Book % of Value Total Value Total Value Total Value Total ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in Thousands) Securities held to maturity: Federal agency obligations ........................... $5,000 51.18% $3,000 34.56% $2,000 23.60% $1,000 11.68% ------ ----- ------ ------ ------ ------ ------ ------ Securities available for sale: U.S. Government securities ........................... 0 0.00 999 11.51 1,993 23.52 1,997 23.32 Federal agency obligations ........................... 3,009 30.80 2,985 34.39 2,934 34.62 3,981 46.48 FHLMC preferred stock ................................ -- -- -- -- -- -- 253 2.95 Other marketable equity securities(1) ................ 337 3.45 327 3.77 308 3.63 294 3.43 ------ ------ ------ ------ ------ ------ ------ ------ Total securities available for sale ............... 3,346 34.25 4,311 49.67 5,235 61.77 6,525 76.18 ------ ------ ------ ------ ------ ------ ------ ------ FHLB stock ........................................... 1,423 14.57 1,369 15.77 1,240 14.63 1,040 12.14 ------ ------ ------ ------ ------ ------ ------ ------ Total securities and FHLB stock ................... $9,769 100.00% $8,680 100.00% $8,475 100.00% $8,565 100.00% ====== ====== ====== ====== ====== ====== ====== ====== Average remaining life or term to repricing of securities (excluding FHLMC preferred stock, FHLB stock and other marketable equity securities) ....................... 4.02 yrs. 4.61 yrs. 5.04 yrs. 4.49 yrs. Other Interest-Earning Assets: Short-term money market investments .................. $5,507 100.00% $2,190 100.00% $1,010 100.00% $1,745 100.00% ====== ====== ====== ====== ====== ====== ====== ====== Average remaining life or term to repricing of securities and other interest-earning assets (excluding FHLB stock, FHLMC preferred stock and other marketable equity securities) ........................ 2.38 yrs. 3.51 yrs. 4.40 yrs. 3.59 yrs.
- ----------- (1) Represents primarily investments in mutual funds investing in U.S. Government securities and federal agency obligations. 61 The composition and maturities of the securities portfolio, excluding FHLB of Topeka stock, are indicated in the following table.
March 31, 1998 -------------------------------------- Less Than 1 to 5 Total Investment 1 Year Years Securities ---------- --------- --------------- Amortized Amortized Amortized Fair Cost Cost Cost Value ---- ---- ---- ----- (Dollars in Thousands) Held to Maturity: Federal agency obligations ............ $5,000 $5,000 $4,961 ------ ------ ------ Weighted average yield ............. 6.30% 6.30% ====== ====== Available for Sale: Federal agency obligations ............ $ 986 $1,991 $2,977 $3,009 Other marketable equity securities(1) . 337 -- 337 337 ------ ------ ------ ------ Total investment securities ........ $1,323 $1,991 $3,314 $3,346 ====== ====== ====== ====== Weighted average yield ............. 5.54% 5.86% 5.73% ====== ====== ======
- ------------ (1) Represents primarily investments in mutual funds investing in U.S. Government securities and federal agency obligations. The Company's securities portfolio at March 31, 1998, did not contain securities of any issuer with an aggregate book value in excess of 10% of the Company's stockholders' equity, excluding securities issued by the United States Government, or its agencies. The Association's securities portfolio is managed in accordance with a written investment policy adopted by the Board of Directors. Investments may be made by the Association's officers within specified limits and must be approved in advance by the Board of Directors for transactions over certain limits. Effective October 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No. 115 requires that securities and mortgage-backed securities be classified as held to maturity, available for sale or trading purposes. Under SFAS No. 115, securities that the Company has the positive intent and ability to hold until maturity are classified as held to maturity and are reported at amortized cost. Securities classified as available for sale are those the Company may sell in response to liquidity needs, for asset/liability management purposes and other reasons and are reported at fair value. Unrealized gains and losses on securities available for sale net of related taxes are reported as a separate component of equity. Trading securities are those which are purchased for sale in the near future and are reported at fair value. Unrealized gains and losses on trading securities are included in earnings. Transfers between categories are accounted for as sales and repurchases at fair value. For any sales or transfers of securities classified as held to maturity, the cost basis, the realized gain or loss, and the circumstances leading to the decision to sell are required to be disclosed. At the time of purchase of new securities, management of the Company makes a determination as to the appropriate classification of securities as available for sale or held to maturity. At March 31, 1998, the Company held no investments for trading purposes, but did hold securities available for sale with an amortized cost and market value of $3.3 million and $3.3 million, respectively. Mortgage-Backed Securities. The Association has a portfolio of mortgage-backed securities and has utilized such investments to complement its mortgage lending activities. At March 31, 1998, the Association's mortgage-backed securities totaled $20.9 million. For information regarding the carrying and fair values of First Federal's mortgage-backed securities portfolio, see Note C of the Notes to Consolidated Financial Statements of the Company. At March 31, 1998, $12.3 million, or 59.0%, of the Association's mortgage-backed securities carried adjustable-rates of interest. Under the OTS's risk-based capital requirements, Government National Mortgage Association ("GNMA") mortgage-backed securities have a zero percent risk weighting and Federal National Mortgage Association ("FNMA"), FHLMC and AA-rated mortgage-backed securities have a 20% risk weighting, in contrast to the 50% risk weighting carried by one- to four-family performing residential mortgage loans. 62 The following table sets forth the contractual maturities of the mortgage-backed securities at March 31, 1998. The Association had no mortgage-based securities available for sale at that date.
Due in March 31, 1998 -------------------------------------------------------------------- ------------ 6 months 6 months 1 to 3 to 5 5 to 10 10 to 20 Over 20 or Less to 1 Year 3 Years Years Years Years Years Book Value ------- --------- ------- ----- ----- ----- ----- ---------- (In Thousands) Held to Maturity Adjustable-Rate Mortgage-Backed Securities: Federal Home Loan Mortgage Corporation ................................ $ -- $ -- $ -- $ -- $ -- $ 167 $ 5,970 $ 6,137 Federal National Mortgage Association ................................ -- -- -- -- -- 1,297 4,895 6,192 ------- -------- -------- -------- ------- ------- ------- ------- Total adjustable-rate ...................... -- -- -- -- -- 1,464 10,865 12,329 ------- -------- -------- -------- ------- ------- ------- ------- Fixed-Rate Mortgage-Backed Securities: Federal Home Loan Mortgage Corporation .................................. -- -- -- -- 2,592 2,769 -- 5,361 Federal National Mortgage Association .................................. -- -- -- -- 2,068 1,080 -- 3,148 Government National Mortgage Association .................................. -- -- -- -- -- -- 64 64 ------- -------- -------- -------- ------- ------- ------- ------- Total fixed-rate .............................. -- -- -- -- 4,660 3,849 64 8,573 ------- -------- -------- -------- ------- ------- ------- ------- Total mortgage-backed securities held to maturity ................................. $ -- $ -- $ -- $ -- $ 4,660 $ 5,313 $10,929 $20,902 ======= ======== ======== ======== ======= ======= ======= =======
Sources of Funds General. The Company's primary sources of funds are deposits, amortization and repayment of loan principal (including mortgage-backed securities), sales or maturities of investment securities, mortgage-backed securities and short-term investments, borrowings, and funds provided from operations. Borrowings may be used on a short-term basis to compensate for seasonal reductions in deposits or deposit inflows at less than projected levels, and have been used in the past on a longer-term basis to support lending activities. The Association had $27.3 million in FHLB advances outstanding at March 31, 1998. Deposits. First Federal offers a variety of deposit accounts having a wide range of interest rates and terms. The Association's deposits consist of passbook accounts, NOW accounts, and money market and certificate accounts. The Association relies primarily on advertising, competitive pricing policies and customer service to attract and retain these deposits. First Federal solicits deposits from its market area only and does not use brokers to obtain deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and competition. The variety of deposit accounts offered by the Association has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Association has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. The Association manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Association believes that its passbook, NOW and non-interest-bearing checking accounts are relatively stable sources of deposits. However, the ability of the Association to attract and maintain certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. Effective April 1, 1993, the Association introduced a new certificate of deposit program in an attempt to reduce deposit outflows and attract longer term deposits which were lost as a result of the general decline in market rates of 63 interest. This program offers two new certificate products which have four- and five-year terms. The following table sets forth information regarding the dollar amount and percent of certificates of deposit of this program.
At March 31, 1998 % of Total Certificates ----------------- ----------------------- (Dollars in Thousands) Four-Year Certificate...... $1,503 2.88% Five-Year Certificate...... 6,300 12.06
The following table sets forth the dollar amount of savings deposits in the various types of deposit programs offered by the Association for the dates indicated and the rates offered. See Note H of the Notes to Financial Statements of the Company for weighted average nominal rates.
September 30, March 31, ------------------------------------------------------------ 1998 1997 1996 1995 ------------------- ----------------- ----------------- ----------------- Percent Percent Percent Percent of of of of Amount Total Amount Total Amount Total Amount Total ------ ----- ------ ----- ------ ----- ------ ----- (Dollars In Thousands) Transactions and Savings Deposits: - ---------------------------------- Passbook Demand (2.85%).................. $ 2,951 3.50% $2,703 3.54% $ 2,649 3.82% $ 2,752 4.05% NOW Accounts (2.00-2.50%)................ 4,025 4.78 3,763 4.93 3,232 4.66 2,899 4.26 Money Market Accounts (2.50-5.75%)....... 24,939 29.59 20,702 27.13 15,553 22.40 11,694 17.20 ------- ------ ------ ------ ------- ----- ------ ------ Total Transactions and Savings Deposits 31,915 37.87 27,168 35.60 21,434 30.88 17,345 25.51 ------- ------ ------ ------ ------- ----- ------ ------ Certificates: - ------------- 0.00 - 3.99%........................... -- -- 5 0.01 9 0.01 804 1.18 4.00 - 4.99%........................... 1,770 2.10 2,189 2.87 4,216 6.07 10,498 15.44 5.00 - 5.99%........................... 45,786 54.33 39,911 52.30 30,296 43.64 16,882 24.83 6.00 - 6.99%........................... 4,675 5.55 6,930 9.08 13,367 19.25 22,351 32.87 7.00% and over.......................... 26 0.03 26 0.03 34 0.05 47 0.07 ------- ------ ------ ------ ------- ----- -------- ------- Total Certificates........................ 52,257 62.01 49,061 64.29 47,922 69.02 50,582 74.39 ------- ------ ------ ------ ------- ----- ------ ------ Accrued Interest.......................... 96 0.12 82 0.11 70 0.10 70 0.10 ------- ------ ------ ------ ------- Total Deposits............................ $84,268 100.00% $76,311 100.00% $69,426 100.00% $67,997 100.00% ======= ====== ======= ====== ======= ====== ======= ======
64 The following table sets forth the savings flows at the Association during the periods indicated. Net increase refers to the amount of deposits during a period less the amount of withdrawals during the period.
Six Months Ended Year Ended September 30, March 31, ----------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (Dollars In Thousands) Opening balance ........ $ 76,229 $ 69,356 $ 67,927 $ 64,384 Deposits ............... 51,789 86,304 65,771 61,024 Withdrawals ............ (45,361) (82,247) (67,067) (59,578) Interest credited ...... 1,515 2,816 2,725 2,097 -------- -------- -------- -------- Ending balance ......... $ 84,172 $ 76,229 $ 69,356 $ 67,927 ======== ======== ======== ======== Net increase ........... $ 7,943 $ 6,873 $ 1,429 $ 3,543 ======== ======== ======== ======== Percent increase ....... 10.42% 9.91% 2.10% 5.50% ======== ======== ======== ========
The following table shows rate and maturity information for the Association's certificates of deposit as of March 31, 1998.
4.00- 5.00- 6.00- 7.00- Percent 4.99% 5.99% 6.99% 7.99% Total of Total ----- ----- ----- ----- ----- -------- (Dollars in Thousands) Certificate accounts maturing in quarter ending: - --------------------------- June 30, 1998 ............. $ 708 $ 5,575 $ 13 $ -- $ 6,296 12.05% September 30, 1998 ........ 605 8,909 105 -- 9,619 18.41 December 31, 1998 ......... 308 5,976 177 -- 6,461 12.36 March 31, 1999 ............ 149 8,312 36 -- 8,497 16.26 June 30, 1999 ............. -- 5,773 65 -- 5,838 11.17 September 30, 1999 ........ -- 7,589 669 -- 8,258 15.80 December 31, 1999 ......... -- 438 428 -- 866 1.66 March 31, 2000 ............ -- 1,164 725 26 1,915 3.66 June 30, 2000 ............. -- 758 151 -- 909 1.74 September 30, 2000 ........ -- 641 192 -- 833 1.59 December 31, 2000 ......... -- 96 572 -- 668 1.28 March 31, 2001 ............ -- 233 -- -- 233 .45 June 30, 2001 ............. -- 113 75 -- 188 .36 Thereafter ................ -- 209 1,467 -- 1,676 3.21 ------- ------- ------- ------- ------- ------ Total .................. $ 1,770 $45,786 $ 4,675 $ 26 $52,257 100.00% ======= ======= ======= ======= ======= ====== Percent of total ....... 3.39% 87.61% 8.95% .05% ======= ======= ======= ======
65 The following table indicates the amount of the Association's certificates of deposit and other deposits by time remaining until maturity as of March 31, 1998.
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 ......... $ 5,440 $ 7,567 $13,518 $20,067 $46,592 Certificates of deposit of $100,00 or more ......... 200 403 747 1,136 2,486 Public funds(1) ............. 656 1,649 694 180 3,179 ------- ------- ------- ------- ------- Total certificates of deposit $ 6,296 $ 9,619 $14,959 $21,383 $52,257 ======= ======= ======= ======= =======
- ----------- (1) Deposits from governmental and other public entities. Borrowings. Although deposits are the Company's primary source of funds, the Company's policy has been to utilize borrowings when they are a less costly source of funds or can be invested at a positive rate of return. In addition, the Association has relied upon borrowings for short-term liquidity needs. First Federal may obtain advances from the FHLB of Topeka upon the security of certain of its mortgage loans and mortgage-backed securities. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. At March 31, 1998, the Association had $27.3 million in FHLB advances outstanding. The following table sets forth the maximum month-end balance and average balance of the Association's FHLB advances and other borrowings at the dates and for the periods indicated.
At and for the Six Months Ended At and for the Year Ended September 30, March 31, --------------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (In Thousands) Maximum Balance: FHLB advances ..... $27,300 $25,000 $24,400 $19,900 Average Balance: FHLB advances ..... $24,850 $23,583 $19,133 $17,275
The following table sets forth certain information as to the Association's FHLB advances at the dates indicated.
At and for the Six Months Ended At September 30, March 31, ---------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (In Thousands) FHLB advances ........ $27,300 $23,700 $24,300 $18,800 Weighted average interest rate of FHLB advances .......... 5.751% 5.930% 5.682% 5.933%
66 Competition First Federal faces strong competition, both in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from commercial banks, credit unions, mortgage bankers and brokers. The Association attracts all of its deposits, primarily from Montgomery County where the Association's offices are located; therefore, competition for those deposits is principally from the 10 commercial banks and credit unions located in the same communities. The Association competes for these deposits by offering a variety of deposit accounts at competitive rates and convenient business hours. The Association estimates its share of the savings market in its primary market area to be approximately 15%. Employees At March 31, 1998, the Association had a total of 27 full-time employees and one part-time employee. The Association's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Property The Company owns its offices located at Myrtle and Sixth in Independence, Kansas and McArthur and Eleventh in Coffeyville, Kansas. The total net book value of the Company's premises and equipment at March 31, 1998, was $1,307,769. First Federal established a loan production office in Lawrence, Kansas effective October 15, 1997. The office primarily originates construction loans in Lawrence and the surrounding area. Loan approvals are made at the Association's main office with disbursements and collections handled at the loan production office. The office is currently staffed with a loan originator and two processors. The Company maintains depositor and borrower customer files on an on-line basis with the FiServ Data Processing System, Milwaukee, Wisconsin. The net book value of the data processing and computer equipment utilized by the Company at March 31, 1998, was approximately $109,000. Legal Proceedings First Federal is involved as plaintiff or defendant in various legal actions arising in the normal course of their business. While the ultimate outcome of these proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing First Federal in the proceedings, that the resolution of these proceedings should not have a material effect on the Company's results of operations. The Company was not involved in any legal proceedings at March 31, 1998. 67 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NEODESHA General Neodesha is a community oriented financial institution engaged primarily in attracting deposits from the general public and using such deposits to originate one- to four-family residential mortgage and, to a lesser extent, non-residential and consumer loans primarily in its market area. Neodesha's revenues are derived principally from interest earned on loans and, to a lesser extent, from interest earned on investments securities. The operations of Neodesha are influenced significantly by general economic conditions and by policies of financial institution regulatory agencies, including the OTS and the FDIC. Neodesha's cost of funds is influenced by interest rates on competing investments and general market interest rates. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financings may be offered. Neodesha's net interest income is dependent primarily upon the difference or spread between the average yield earned on loans receivable and investments and the average rate paid on deposits, as well as the relative amounts of such assets and liabilities. Neodesha, like other thrift institutions, is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different times, or on a different basis, than its interest-earning assets. Financial Condition of Neodesha Comparison of March 31, 1998 and September 30, 1997 Assets. The total assets at March 31, 1998 were $13,679,000 as compared to total assets of $14,155,000 at September 30, 1997. This decrease in assets was primarily a result of a $380,000 decrease in loans. Liabilities. Total liabilities at March 31, 1998 were $12,556,000 as compared to $13,063,000 at September 30, 1997. This decrease was primarily attributable to a $789,000 decrease in deposits, partially offset by a $300,000 increase in borrowings. Comparison of September 30, 1997 and September 30, 1996 Assets. As of September 30, 1997, Neodesha's assets totaled $14,155,000 as compared to $14,411,000 as of September 30, 1996. The three largest factors in this $256,000 decrease were a decrease of cash and cash equivalents of $137,000, a decrease in securities holdings of $98,000 and a decrease in loans of $21,000. Liabilities. The liabilities as of September 30, 1997 totaled $13,063,000 as compared to $13,396,000 as of September 30,1996. Deposits increased by $156,000 during the year, but this increase was more than offset by a decrease in FHLB advances of $400,000. Results of Operations of Neodesha Neodesha's results of operations depend primarily upon the level of net interest income, which is the difference between the interest income earned on its interest-earning assets such as loans and securities, and the costs of Neodesha's interest-bearing liabilities, primarily deposits and borrowings. Results of operations are also dependent upon the level of Neodesha's noninterest income, including fee income and service charges, and affected by the level of its noninterest expenses, including its general and administrative expenses. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them, respectively. 68 Comparison of the Six Months Ended March 31, 1997 and March 31, 1998 General. The net earnings for the six months ended March 31, 1998 were $30,000 as compared to net earnings of $38,000 for the six months ended March 31, 1997. This decrease was due primarily to a decrease in net interest income. Net Interest Income. Net interest income for the six months ended March 31, 1998 was $236,000 as compared to $245,000 for the six months ended March 31, 1997. This decrease was due primarily to a reduction in the average balance of interest-earning assets in the fiscal 1998 period. Interest Income. Total interest income for the six months ended March 31, 1998 was $508,000, as compared to $519,000 for the six months ended March 31, 1997. This decrease was due to a $316,000 decrease in the average balance of interest-earning assets during the 1998 period, partially offset by a 3 basis point increase in the weighted average yield on interest-earning assets. Interest Expense. Total interest expense for the six months ended March 31, 1998 was $271,000 as compared to $274,000 for the six months ended March 31, 1997. This decrease was primarily due to a $364,000 decrease in the average balance of interest-bearing liabilities, partially offset by an 8 basis point increase in the weighted average rate paid on such liabilities. Provision of Loan Losses. The loan loss provision was $3,000 for both six month periods ended March 31, 1998 and December 31, 1997. Non-Interest Income. The non-interest income for the six months ended March 31, 1998 was $61,000 as compared to the non-interest income for the six months ended March 31, 1997 of $64,000. Non-Interest Expense. For the six months ended March 31, 1998, the non-interest expense was $253,000 as compared to $255,000 for the six months ended March 31, 1997. This decrease was due to a decrease in FDIC insurance premiums. Income Tax Expense. The income tax expense for the six months ended March 31, 1998 was $11,000 as compared to $13,000 for the six months ended March 31, 1997. Comparison of Years Ended September 30, 1996 and September 30, 1997 General. Net earnings for the year ended September 30, 1997 were $77,000 as compared to net earnings for the year ended September 30, 1996 of $3,000. This increase was primarily due to a non-recurring expense of $79,000 related to the SAIF assessment at September 30, 1996. Net Interest Income. Net interest income for fiscal 1997 was $486,000 as compared to $474,000 for fiscal 1996. The increase was primarily due to a decrease in interest expense on deposits and FHLB advances. Interest Income. Interest income remained stable during the periods with interest income of $1,046,000 in both fiscal 1997 and fiscal 1996. Interest Expense. Interest expense during fiscal 1997 was $560,000 compared to $571,000 for fiscal 1996. The decrease was primarily due to a reduction in average deposits and FHLB advances during fiscal 1997, partially offset by a 6 basis point increase in average rates paid on interest-bearing liabilities for the comparative periods. Provision for Loan Losses. The provision for loan losses during each of fiscal 1997 and fiscal 1996 was $6,000. Non-Interest Income. Non-interest income during fiscal 1997 was $135,000 as compared to $140,000 for fiscal 1996. This decrease was partially due to the sale of Financial Information Trust (FIT), which was a co-op data 69 processor of which Neodesha was a member. All members shared in the sale of FIT to FISERV and Neodesha's share of the proceeds was approximately $10,000, which was received during fiscal 1996. Non-Interest Expense. Non-interest expense during fiscal 1997 was $510,000 as compared to non-interest expense during fiscal 1996 of $605,000. The two major components of this decrease were the non-recurring SAIF assessment of $79,000 in fiscal 1996 and the annual FDIC deposit insurance premium decrease of $16,000 from 1996 to 1997. Income Tax Expense. Income tax expense during fiscal 1997 was $28,000 as compared to $1,000 for fiscal 1996. This increase was due to an increase in earnings during 1997, as Neodesha paid the SAIF assessment of $79,000 in 1996. Analysis of Net Interest Income of Neodesha Net interest income represents the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income depends on the volumes of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. 70 The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made. All average balances are monthly average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.
Six Months Ended March 31, Year Ended September 30, --------------------------------------------------------- ----------------------------- 1998 1997 1997 --------------------------- ---------------------------- ----------------------------- Average Interest Average Interest Average Interest Outstanding Earned Yield/ Outstanding Earned Yield/ Outstanding Earned Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate ------- ---- ---- ------- ---- ---- ------- ---- ---- (Dollars in Thousands) Interest-earning assets: Loans receivable(1)............ $ 9,267 $408 8.81% $ 9,430 $417 8.85 $ 9,548 $ 843 8.82 Mortgage-backed securities..... 250 7 5.95 253 8 6.07 253 15 6.07 Investment securities.......... 3,017 84 5.56 3,215 87 5.40 3,199 174 5.45 FHLB stock..................... 137 5 7.75 128 4 6.50 130 9 6.79 Interest-bearing deposits...... 339 3 1.66 300 3 1.26 317 5 1.55 ------ ---- ------- ---- ------- ----- Total earning assets.......... 13,010 507 7.81 13,326 519 7.77 13,447 1,046 7.78 ---- ---- ----- Non-interest earning assets.... 812 801 806 ------- ------- ------- Total assets................... $13,822 $14,127 $14,253 ======= ======= ======= Interest-bearing liabilities: Savings deposits............... $ 1,762 27 3.03 $ 1,783 27 2.99 $ 1,852 56 3.02 Demand and NOW................. 2,351 29 2.49 2,393 40 3.35 2,431 84 3.46 MMDA........................... 1,801 36 3.99 1,735 21 2.40 1,743 42 2.39 Certificates of deposit........ 6,190 167 5.39 6,407 172 5.38 6,381 343 5.39 FHLB advances................. 467 12 5.31 617 14 4.54 633 35 5.48 -------- ---- ------- ---- ------- ---- Total interest-bearing liabilities ................ 12,571 271 4.31 12,935 274 4.23 13,040 560 4.30 ---- ---- ---- Non-interest-bearing liabilities 133 151 151 -------- ------- ------- Total liabilities............ 12,704 13,086 13,191 Equity.......................... 1,118 1,041 1,062 -------- ------- ------- Total liabilities and equity. $13,822 $14,127 $14,253 ======== ======= ======= Net interest/spread............. $236 3.49% $245 3.54% $486 3.48% ==== ==== ==== ==== ==== Margin.......................... 3.63% 3.66% 3.61% ==== ==== ==== Assets to liabilities........... 103.49% 103.02% 103.12% ======= ======= =======
Year Ended September 30, ----------------------------------------------------------- 1996 1995 ---------------------------- --------------------------- Average Interest Average Interest Outstanding Earned Yield/ Outstanding Earned Yield/ Balance Paid Rate Balance Paid Rate ------- ---- ---- ------- ---- ---- (Dollars in Thousands) Interest-earning assets: Loans receivable(1)............ $ 9,250 $830 8.98% $ 9,047 $ 803 8.87% Mortgage-backed securities..... 253 15 6.07 253 15 6.08 Investment securities.......... 3,216 173 5.39 3,308 179 5.40 FHLB stock..................... 122 8 6.40 151 9 6.11 Interest-bearing deposits...... 640 19 2.94 250 3 1.16 ------- ----- ------- ----- Total earning assets.......... 13,481 1,045 7.76 13,009 1,009 7.76 ----- ----- Non-interest earning assets.... 842 872 ------- ------- Total assets................... $14,323 $13,881 ======= ======= Interest-bearing liabilities: Savings deposits............... $ 1,723 52 3.05 $ 1,771 54 3.06 Demand and NOW................. 2,304 73 3.17 2,422 63 2.58 MMDA........................... 1,684 48 2.88 1,832 67 3.65 Certificates of deposit........ 6,650 358 5.38 6,063 275 4.54 FHLB advances................. 742 40 5.33 650 37 5.79 ------- ----- ------- ----- Total interest-bearing liabilities ................ 13,103 571 4.36 12,738 496 3.90 ----- ----- Non-interest-bearing liabilities 180 171 ------- ------- Total liabilities............ 13,283 12,909 Equity.......................... 1,040 972 ------- ------- Total liabilities and equity. $14,323 $13,881 ======= ======= Net interest/spread............. $474 3.40% $513 3.86% ===== ==== ===== ==== Margin.......................... 3.52% 3.94% ==== ==== Assets to liabilities........... 102.88% 102.13% ======= =======
- ------------- (1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves. 71 The following table presents the weighted average yields earned on loans, securities and other interest-earning assets, and the weighted average rates paid on savings deposits and the resultant interest rate spreads at the dates indicated. Non-accruing loans have been included in the table as carrying a zero yield.
At September 30, March 31, ------------------------ 1998 1997 1996 1995 Weighted average yield on: Loans receivable ...................... 8.79% 8.85% 8.87% 9.06% Mortgage-backed securities ............ 6.08 6.08 6.08 6.09 Investment securities ................. 5.55 5.49 5.44 5.38 Other interest-earning assets ......... 5.04 7.88 4.91 5.34 Combined weighted average yield on interest-earning assets .......................... 7.81 7.98 7.82 7.95 Weighted average rate paid on: Passbook Savings ...................... 3.01 3.01 3.01 3.01 NOW ................................... 2.56 2.39 2.33 2.63 MMDA .................................. 4.00 3.91 3.90 3.85 Certificate accounts .................. 5.42 5.43 5.42 5.17 Borrowings ............................ 6.28 6.56 6.03 6.65 Combined weighted average rate paid on interest- bearing liabilities ............... 4.37 4.25 4.33 4.34 Spread ................................. 3.44% 3.73% 3.49% 3.61%
72 The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Six Months Ended March 31, Year Ended September 30, 1998 vs. 1997 1997 vs. 1996 -------------------------------- ---------------------------------- Increase Increase (Decrease) (Decrease) Due to Total Due to Total ------------------- Increase --------------------- Increase Volume Rate (Decrease) Volume Rate (Decrease) ------ ---- ---------- ------ ---- ---------- (Dollars in Thousands) Interest-earning assets: Loans receivable................... $ (7) $ (2) $ (9) $ 27 $ (14) $ 13 Mortgage-backed securities......... 0 (1) (1) 0 0 0 Investment securities.............. (4) 1 (3) (1) 2 1 FHLB stock......................... 0 1 1 1 0 1 Interest-bearing deposits.......... 0 0 0 (7) (7) (14) --------- -------- -------- --------- ---------- --------- Total interest-earning assets.... $ (11) $ (1) (12) $ 20 $ (19) 1 ======== ========= -------- ======= ======== --------- Interest-bearing liabilities: Savings deposits................... $ 0 $ 0 0 $ 4 $ 0 4 Demand and NOW..................... (1) (10) (11) 4 7 11 MMDA............................... 1 14 15 2 (8) (6) Certificates of Deposit............ (5) 0 (5) (16) 1 (15) FHLB advances...................... (3) 1 (2) (6) 1 (5) ---------- -------- ---------- ---------- -------- ---------- Total interest-bearing liabilities $ (8) $ 5 (3) $ (12) $ 1 (11) ========= ======= ---------- ======== ======= --------- Net interest/spread................. $ (9) $ 12 ========= =======
73 Asset/Liability Management of Neodesha The measurement and analysis of the exposure of Neodesha to changes in the interest rate environment is referred to as asset/liability management. In an attempt to manage its exposure to changes in interest rates, management monitors Neodesha's interest rate risk. The Board of Directors meets at least quarterly to review Neodesha's interest rate risk position and profitability. The Board of Directors also reviews Neodesha's portfolio, formulates investment strategies and oversees the timing and implementation of transactions to assure attainment of Neodesha's objectives in the most effective manner. In managing its asset/liability mix, Neodesha, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, often places more emphasis on managing net interest margin than on better matching the interest rate sensitivity of its assets and liabilities in an effort to enhance net interest income. Management believes that the increased net interest income resulting from a mismatch in the maturity of its asset and liability portfolios can, during periods of declining or stable interest rates, provide high enough returns to justify the increased exposure to sudden and unexpected increases in interest rates. Neodesha stresses the origination of ARMs in an effort to manage its exposure to changes in interest rates. At March 31, 1998, approximately $5.1 million, or 55.7% of Neodesha's total loan portfolio, was ARMs. In addition, the primary objective of Neodesha's investment strategy is to provide liquidity necessary to meet funding needs as well as to address daily, cyclical and long-term changes in the asset/liability mix, while contributing to profitability by providing a stable flow of dependable earnings. Investments generally include interest-bearing deposits in other federally insured financial institutions, FHLB stock and U.S. Government securities. Generally, the investment policy of Neodesha is to invest funds among various categories of investments and maturities based upon Neodesha's need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, to provide collateral for borrowings, and to fulfill Neodesha's asset/liability management policies. Neodesha's cost of funds responds to changes in interest rates due to the relatively short-term nature of its deposit portfolio. Consequently, the results of operations are heavily influenced by the levels of short-term interest rates. Neodesha offers a range of maturities on its deposit products at competitive rates and monitors the maturities on an ongoing basis. One approach used by management to quantify interest rate risk is the net portfolio value ("NPV") analysis. In essence, this approach calculates the difference between the present value of liabilities, expected cash flows from assets and cash flows from off balance sheet contracts. Under OTS regulations, an institution's "normal" level of interest rate risk in the event of an immediate and sustained 200 basis point change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Pursuant to this regulation, thrift institutions with greater than "normal" interest rate exposure must take a deduction from their total capital available to meet their risk-based capital requirement. The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to the 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of the present value of its assets. Savings institutions, however, with less than $300 million in assets and a total capital ratio in excess of 12%, will be exempt from this requirement unless the OTS determines otherwise. The OTS has postponed the implementation of the rule until further notice. Based upon its asset size and capital level at March 31, 1998, Neodesha would qualify for an exemption from this rule. 74 The following table sets forth, at March 31, 1998, an analysis of Neodesha's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (+/-200 basis points, measured in 100 basis point increments). Net Portfolio Value Change in At March 31, 1998 Interest Rate ------------------------------------------ Basis Points) $ Amount $ Change % Change --------------- ---------- ---------- --------- (Dollars in Thousands) +200 $ 1,355 $ (73) (5)% +100 1,405 (23) (2) -- 1,428 -- -- -100 1,442 14 1 -200 1,495 67 5 Certain assumptions utilized in assessing the interest rate risk of thrift institutions were employed in preparing the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under the various interest rate scenarios. It was also assumed that delinquency rates will not change as a result of changes in interest rates although there can be no assurance that this will be the case. Even if interest rates change in the designated amounts, there can be no assurance that Neodesha's assets and liabilities would perform as set forth above. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to the NPV than indicated above. Liquidity and Capital Resources of Neodesha Neodesha's primary sources of funds are deposits, proceeds from principal and interest payments on loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Nodesha generally manages the pricing of its deposits to be competitive and increase core deposit relationships. Federal regulations require Neodesha to maintain minimum levels of liquid assets. The required percentage has varied from time to time based upon economic conditions and savings flows and is currently 4% of net withdrawable savings deposits and borrowings payable on demand or in one year or less during the preceding calendar month. Liquid assets for purposes of this ratio include cash, certain time deposits, U.S. Government, government agency and corporate securities and other obligations generally having remaining maturities of less than five years. Neodesha has historically maintained its liquidity ratio for regulatory purposes at levels in excess of those required. At March 31, 1998, Neodesha's liquidity ratio for regulatory purposes was 19.09%. Neodesha's cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities. Cash flows provided by operating activities were $23,000 for the six months ended March 31, 1998, and $66,000 for the year ended September 30, 1997. Net cash from investing activities consisted primarily of disbursements for loan originations and the purchase of investment securities, offset by principal collections on loans and proceeds from maturation of securities. Net cash from financing activities consisted primarily of activity in deposit accounts and borrowings. The net change in deposits was a $790,000 decrease for the six months ended March 31, 1998 and a $156,000 increase for the year ended September 30, 1997. Neodesha's most liquid assets are cash and short-term investments. The levels of these assets are dependent on Neodesha's operating, financing, lending and investing activities during any given period. At March 31, 1998, cash and short-term investments totaled $650,000. Neodesha has other sources of liquidity if a need for additional funds arises, including securities maturing within one year and the repayment of loans. Neodesha may also utilize Federal Home Loan Bank advances as a source of funds. 75 At March 31, 1998, Neodesha had outstanding commitments to originate loans of $129,000, all of which had adjustable interest rates. These loans are to be secured by properties located in its market area. Neodesha anticipates that it will have sufficient funds available to meet its current loan commitments. Liquidity management is both a daily and long-term responsibility of management. Neodesha adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of its asset/liability management program. Excess liquidity is invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. Government and agency obligations and mortgage-backed securities of short duration. If Neodesha requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB of Topeka. Neodesha is subject to various regulatory capital requirements imposed by the OTS. At March 31, 1998, Neodesha was in compliance with all applicable capital requirements. See "Regulation - Regulatory Capital Requirements." Neodesha's principal sources of funds are deposits, amortization and prepayment of loan principal and mortgage-backed securities, maturities of investment securities and operations. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are more influenced by interest rates, floors and caps on loan rates, general economic conditions and competition. Neodesha generally manages the pricing of its deposits to be competitive and increase core deposit relationships, but has from time to time decided not to pay deposit rates that are as high as those of its competitors. Impact of New Accounting Standards In June 1997, the Financial Accounting Standards Board "FASB" issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Income tax effects must also be shown. This statement is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 relates solely to disclosure provisions and therefore will not have a material impact on the results of operations or financial condition of Neodesha. In June 1997, The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement is effective for financial statements for periods beginning after December 15, 1997. The adoption of SFAS No. 131 relates solely to disclosure provisions and therefore will not have a material impact on the results of operations or financial condition of Neodesha. 76 BUSINESS OF NEODESHA General As a community-oriented financial institution, Neodesha seeks to serve the financial needs of the Neodesha, Kansas community. Neodesha's business involves attracting deposits from the general public and using such deposits, together with other funds, to originate primarily one- to four-family residential mortgage loans and, to a lesser extent, consumer and non-residential real estate loans in its market area. Neodesha also invests in U.S. Treasury and other securities. Neodesha offers a variety of accounts having a range of interest rates and terms. Neodesha's deposits include passbook savings, NOW, Super NOW and money market accounts and certificates of deposit with terms of three months to 48 months. Neodesha solicits deposits only in its primary market area and does not accept brokered deposits. Market Area Neodesha's office is located in Neodesha, Kansas in the southeast corner of Kansas in Wilson County. Agriculture is the primary industry in Neodesha. In addition, Neodesha is home to an industrial park with such varied businesses as Cobalt Boats, M-E-C Company, Prestige Cabinets, Neodesha Plastics, Airosol Company and Berwind Railway Service Co. Wilson County has a population of approximately 10,500. Neodesha estimates its share of the savings market in Wilson County to be less than 10%. Lending Activities General. The principal lending activity of Neodesha is originating for its portfolio adjustable rate ("ARM") and, to a lesser extent, fixed rate mortgage loans secured by one- to four-family residences located primarily in their market area. To a lesser extent, Neodesha also originates consumer and commercial real estate loans in its market area. At March 31, 1998, Neodesha's loans receivable, net totaled $9.1 million. See "- Originations of Loans." 77 Loan Portfolio Composition. The following table sets forth the composition of Neodesha's loan portfolio in dollar amounts and in percentages (before deductions (or additions) for loans in process, deferred fees and discounts and allowances for losses) as of the dates indicated.
At September 30, March 31, ----------------------------------------------------------------------- 1998 1997 1996 1995 ------------------- ------------------- -------------------- -------------------- Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Real Estate Loans: One- to four-family............... $6,992 76.19% $7,237 75.70% $7,455 77.18% $7,282 79.43% Multi-family...................... -- -- -- -- 5 .05 9 .10 Commercial........................ 50 .55 72 .75 105 1.09 196 2.13 Construction or development....... -- -- -- -- 70 .72 -- -- ------- ----- ------ ----- ------ ----- ------ ----- Total real estate loans......... 7,042 76.74 7,309 76.45 7,635 79.04 7,487 81.66 ------- ----- ------ ----- ------ ----- ------ ----- Consumer loans: Deposit account................... 116 1.26 123 1.29 142 1.47 153 1.67 Automobile........................ 1,797 19.58 1,872 19.58 1,606 16.63 1,261 13.76 Unsecured......................... 110 1.20 118 1.23 109 1.13 79 .86 Other............................. 112 1.22 139 1.45 167 1.73 188 2.05 -------- ----- ------ ----- ------ ----- ------ ----- Total consumer loans............ 2,135 23.26 2,252 23.55 2,024 20.96 1,681 18.34 ------- ----- ------ ----- ------ ----- ------ ----- Total loans..................... 9,177 100.00% 9,561 100.00% 9,659 100.00% 9,168 100.00% ====== ====== ====== ====== Less: Loans in process.................. -- -- 57 1 Deferred fees and discounts....... 4 4 12 11 Allowance for losses.............. 85 89 101 107 ------- ------ ------ ------ Total loans receivable, net..... $9,088 $9,468 $9,489 $9,049 ====== ====== ====== ======
78 The following table shows the composition of Neodesha's loan portfolio by fixed- and adjustable-rate categories at the dates indicated.
At September 30, March 31, --------------------------------------------------------- 1998 1997 1996 1995 ------------------- ---------------- ----------------- ----------------- Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Fixed-Rate Loans: Real estate: One- to four-family................. $1,882 20.51% $2,162 22.61% $2,591 26.82% $2,947 32.14% Multi-family........................ -- -- -- -- 5 0.05 9 .10 Non-residential..................... 50 .54 72 .76 105 1.09 196 2.14 ------ ----- ------ ----- ------ ------ ------ ------ Total fixed -rate real estate loans............ 1,932 21.05 2,234 23.37 2,701 27.96 3,152 34.38 Consumer............................ 2,135 23.26 2,252 23.55 2,024 20.95 1,681 18.34 ------ ----- ------ ----- ------ ------ ------ ------ Total fixed-rate loans............ 4,067 44.31 4,486 46.92 4,725 48.91 4,833 52.72 ------ ----- ------ ----- ------ ------ ------ ------ Adjustable-Rate Loans Real estate: One-to four-family.................. 5,110 55.69 5,075 53.08 4,864 50.36 4,335 47.28 Construction........................ -- -- -- -- 70 0.73 -- -- Total adjustable-rate loans....... 5,110 55.69 5,075 53.08 4,934 51.09 4,335 47.28 ------ ----- ------ ----- ------ ------ ------ ------ Total loans....................... 9,177 100.00% 9,561 100.00% 9,659 100.00% 9,168 100.00% ====== ====== ====== ====== Less: Loans in process.................... -- -- 57 1 Deferred fees and discounts......... 4 4 12 11 Allowance for losses................ 85 89 101 107 ------ ----- ------ ------ Total loans receivable, net....... $9,088 $9,468 $9,489 $9,049 ====== ====== ====== ======
79 The following schedule shows the scheduled contractual maturities of Neodesha's loan portfolio at March 31, 1998. Mortgages which have adjustable or renegotiable interest rates are shown as repaying in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate ----------------------------------------- Multi-family and One- to four-family Non-Residential Consumer Total --------------------- ------------------ ------------------ ------------------- Weighted Weighted Weighted Weighted Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- ------ ---- (Dollars in Thousands) Due During Periods Ending March 31, --------- 1999(1) .............................. $ 6 7.75% $ 7 7.75% $524 10.82% $ 537 10.76% 2000 ................................. 17 8.53 -- -- 287 11.35 304 11.14 2001 ................................. 38 10.87 -- -- 620 10.50 658 10.51 2002 and 2003 ........................ 240 7.99 27 7.75 654 9.42 921 9.23 2004 to 2008 ......................... 1,739 9.00 16 7.75 34 9.22 1,789 9.03 2009 to 2023 ......................... 4,051 8.51 -- -- 16 10.21 4,067 8.37 2024 and following ................... 901 7.87 -- -- -- -- 901 7.87 ------ --- ------ ------ Total ............................. $6,992 $50 $2,135 $9,177 ====== === ====== ======
- ----------- (1) Includes demand loans, loans having no stated maturity and overdraft loans. The total amount of loans due after March 31, 1999 which have predetermined interest rates is $3.6 million while the total amount of loans due after such dates which have floating or adjustable interest rates is $5.1 million. Under federal law, the aggregate amount of loans that Neodesha is permitted to make to any one borrower or group of related borrowers is generally limited to the greater of $500,000 or 15% of unimpaired capital and surplus (25% if the security for such loan has a "readily ascertainable" value). At March 31, 1998, based on the above, Neodesha's regulatory loans-to-one borrower limit was approximately $500,000. On the same date, Neodesha had no borrowers with outstanding balances in excess of this amount. As of March 31, 1998, the largest dollar amount outstanding or committed to be lent to one borrower, or group of related borrowers, related to a one- to four-family loan totaling $109,000 located in Neodesha. Neodesha's second largest lending relationship was four loans to one borrower secured by real estate located in Neodesha with an aggregate carrying value of $102,000. At March 31, 1998, both loans were performing in accordance with their terms. As of the same date, there were no other loans or lending relationships with carrying values in excess of $100,000. All of Neodesha's lending is subject to its written underwriting standards and to loan origination procedures. Decisions on loan applications are made on the basis of detailed applications and property valuations (consistent with Neodesha's appraisal policy). The loan applications are designed primarily to determine the borrower's ability to repay and the more significant items on the application are verified through use of credit reports, financial statements, tax returns or confirmations. All loans originated by Neodesha are approved by the loan committee and ratified by the full Board of Directors. Neodesha requires title insurance or other evidence of title on its mortgage loans, as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. The Association also requires flood insurance to protect the property securing its interest when the property is located in a flood plain. One- to Four-Family Residential Real Estate Lending. The cornerstone of Neodesha's lending program is the origination of loans secured by mortgages on owner-occupied one- to four-family residences. Substantially all of Neodesha's one- to four-family residential mortgage originations are secured by properties located in its market area. All mortgage loans currently originated by Neodesha are retained and serviced by it. 80 Historically, Neodesha offered fixed-rate mortgage loans with maturities up to 30 years. However, in 1991, Neodesha stopped originating fixed rate loans. As of March 31, 1998, Neodesha had $1.9 million of fixed rate residential mortgage loans. See "- Originations of Loans." Neodesha offers ARMs which carry interest rates which adjust annually based on the Home Mortgage Rate published monthly by the FHLB. Such loans may carry terms to maturity of up to 30 years. The ARM loans currently offered by Neodesha provide for an annual interest rate change cap of up to 100 basis point and a lifetime cap generally of 300 basis points over the initial rate. Neodesha's ARMs do not permit negative amortization of principal, and do not contain prepayment penalties. At March 31, 1998, one- to four-family ARMs totaled $5.1 million or 55.69% of Neodesha's total loan portfolio. Neodesha will generally lend up to 90% of the lesser of the sales price or appraised value of the security property on owner occupied one- to four-family loans. In underwriting one- to four-family residential real estate loans, Neodesha currently evaluates both the borrower's ability to make principal, interest and escrow payments, the value of the property that will secure the loan and debt to income ratios. Residential loans do not currently include prepayment penalties, are non-assumable and do not produce negative amortization. Neodesha originates mortgage loans for its portfolio only. Neodesha's residential mortgage loans customarily include due-on-sale clauses giving Neodesha the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the property subject to the mortgage and the loan is not repaid. Non-Residential Real Estate Lending. Occasionally, in order to increase the yield of its loan portfolio and to complement residential lending opportunities, Neodesha originates commercial real estate loans secured by properties in its primary market area. At March 31, 1998, Neodesha had commercial real estate loans totaling $50,000, or 0.54% of Neodesha's total loan portfolio. Commercial real estate loans may present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. While Neodesha has experienced losses on commercial real estate loans in the past, as of March 31, 1998, there were no commercial real estate loans delinquent 90 days or more. Consumer Lending. Management believes that offering consumer loan products helps to expand Neodesha's customer base and to create stronger ties to its existing customer base. In addition, because consumer loans generally have shorter terms to maturity and carry higher rates of interest than do residential mortgage loans, they can be valuable asset/liability management tools. Neodesha originates a variety of different types of consumer loans, but primarily automobile and deposit account loans. At March 31, 1998 consumer loans totaled $2.1 million or 23.26% of total loans. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. Neodesha primarily originates loans secured by certificates of deposit and automobile loans. Neodesha's automobile loans are originated as installment loans with a fixed interest rate and terms of up to 60 months for new vehicles and up to 48 months for used vehicles. Neodesha originates its automobile loans directly from its existing customers and will loan up to 100% of the value of the automobile. The underwriting standards employed by Neodesha for consumer loans include a determination of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the 81 borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Originations of Loans Real estate loans are originated by Neodesha's staff through referrals from existing customers or real estate agents. Neodesha's ability to originate loans is dependent upon customer demand for loans in its market and to a limited extent, various marketing efforts. Demand is affected by both the local economy and the interest rate environment. See "- Market Area." Under current policy, all loans originated by Neodesha are retained in Neodesha's portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Neodesha - Asset/Liability Management." The following table shows the loan origination, purchase, sale and repayment activities of Neodesha for the periods indicated.
Year Ended September 30, March 31, ----------------------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (In Thousands) Originations by type: Adjustable rate: Real estate - one- to four-family......... $ 350 $ 1,159 $ 1,518 $ 1,106 Fixed rate: Consumer - non-real estate................ 1,189 2,755 2,361 2,013 ------- -------- -------- -------- Total loans originated.............. 1,539 3,914 3,879 3,119 Repayments Principal repayments (1).................. 1,935 4,012 3,388 3,053 Increase (decrease) in other items, net (2). 3 77 (51) 43 --------- -------- -------- -------- Net increase (decrease)............ $ (393) $ (21) $ 440 $ 109 ========= ========= ======== ========
- ---------- (1) Includes transfers to real estate acquired through foreclosure. (2) Consists of loans in process, net deferred origination costs, unamortized discounts and allowance for loan losses. Delinquencies and Non-Performing Assets Delinquency Procedures. When a borrower fails to make a required payment on a loan, Neodesha attempts to cure the delinquency by contacting the borrower. Generally, Neodesha personnel work with the delinquent borrower on a case by case basis to solve the delinquency. Generally, a late notice is sent on all delinquent loans followed by a phone call after the thirtieth day of delinquency. Additional written and verbal contacts may be made with the borrower between 30 and 60 days after the due date. If the loan is contractually delinquent for 90 days, Neodesha may institute appropriate action to foreclose on the property. After 120 days, foreclosure procedures are initiated. If foreclosed, the property is sold at public sale and may be purchased by Neodesha. Real estate acquired by Neodesha as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired by foreclosure or deed in lieu of foreclosure, it is recorded at the lower of cost or fair value less estimated selling costs. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized. 82 Delinquent Loans. The following table sets forth information concerning delinquent loans at March 31, 1998, in dollar amounts and as a percentage of Neodesha's loan portfolio. The amounts presented represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.
Loans Delinquent for: ---------------------------------------------------------- Total Loans Delinquent 60-90 Days Over 90 Days 60 Days or more --------------------------- ----------------------------- ------------------------------ Percent of Percent of Percent of Total Loan Total Loan Total Loan Number Amount Portfolio Number Amount Portfolio Number Amount Portfolio ------ ------ --------- ------ ------ --------- ------ ------ --------- (Dollars in Thousands) Real Estate: One- to four-family... 5 $109 1.19% 4 $ 93 1.01% 9 $ 202 2.20% Consumer................ 6 22 .24 36 80 .87 42 102 1.11 ----- ----- ----- ----- ------ ---- ----- ---- ---- Total.............. 11 $131 1.43% 40 $ 173 1.88% 51 $ 304 3.31% ==== ==== ==== ===== ====== ==== ===== ===== ====
The following table sets forth information concerning delinquent loans at September 30, 1997, in dollar amounts and as a percentage of Neodesha's loan portfolio. The amounts presented represent the total remaining principal balances of the related loans, rather than the actual payment amounts which are overdue.
Loans Delinquent for: ------------------------------------------------------------ Total Loans Delinquent 60-90 Days Over 90 Days 60 Days or more ---------------------------- ---------------------------- ------------------------------ Percent of Percent of Percent of Total Loan Total Loan Total Loan Number Amount Portfolio Number Amount Portfolio Number Amount Portfolio ------ ------ --------- ------ ------ --------- ------ ------ --------- (Dollars in Thousands) Real Estate: One- to four-family. 2 $ 34 .36% 3 $ 85 .89% 5 $ 119 1.25% Consumer.............. 13 43 .45 30 72 .75 43 115 1.20 ----- ----- ---- ----- ----- ---- ---- ----- ----- Total............ 15 $ 77 .81% 33 $ 157 1.64% 48 $234 2.45% ===== ====== ===== ===== ===== ==== ==== ===== =====
Classification of Assets. Federal regulations require that each savings institution classify its own assets on a regular basis. In addition, in connection with examinations of savings institutions, OTS and FDIC examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: Substandard, Doubtful and Loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that Neodesha will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of Substandard assets, with the additional characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified Loss is considered uncollectible and of such little value that continuance as an asset on the balance sheet of the institution is not warranted. Assets classified as Substandard or Doubtful require the institution to establish prudent general allowances for loan losses. If an asset or portion thereof is classified as a loss, the institution charges off such amount against the loan loss allowance. If an institution does not agree with an examiner's classification of an asset, it may appeal this determination to the District Director of the OTS. At March 31, 1998, Neodesha had $125,000 in loans classified as substandard, $9,000 classified as doubtful and no loans classified as loss. 83 Non-Performing Assets. The table below sets forth the amounts and categories of Neodesha's non-performing assets. Loans are placed on non-accrual status when the collection of principal and/or interest becomes doubtful. As a matter of policy, Neodesha does not generally accrue interest on loans past due more than 90 days. For all periods presented, Neodesha had no troubled debt restructurings (which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of the market rates). Repossessed assets includes assets acquired in settlement of loans and reflects the lower of cost or fair value less selling expense.
September 30, March 31, ----------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (Dollars in Thousands) Non-accruing loans: One- to four-family..................... $93 $ 85 $ 60 $ 89 Non-residential real estate............ --- --- --- 58 Consumer................................ 80 72 71 39 ------ ------- -------- -------- Total non-accruing loans............ 173 157 131 186 Real estate acquired through foreclosure... One- to four-family..................... --- --- --- 22 Non-residential......................... --- --- --- 8 Repossessed assets....................... 22 25 --- 4 ------ ------- -------- --------- Total non-performing assets................ $195 $ 182 $ 131 $ 220 ==== ===== ===== ===== Total as a percentage of total assets...... 1.43% 1.29% .91% 1.59% ===== ==== ====== =====
For the year ended September 30, 1997 and for the six months ended March 31, 1998, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $10,000 and $5,000, respectively. The amounts that were included in interest income on such loans were $5,000 and $4,000 for the year ended September 30, 1997, and for the six months ended March 31, 1998, respectively. Other Loans of Concern. In addition to the non-performing assets set forth in the table above, as of March 31, 1998, there were no loans with respect to which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have concerns as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. Management considers Neodesha's non-performing and "of concern" assets in establishing its allowance for loan losses. 84 The following table sets forth an analysis of Neodesha's allowance for loan losses at the dates indicated.
Six months ended Year Ended September 30, March 31, ---------------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (Dollars in Thousands) Balance at beginning of period................ $ 89 $101 $107 $151 Charge-offs: One- to four-family......................... -- -- -- (37) Consumer.................................... (9) (21) (14) (13) Recoveries: Consumer.................................... 2 3 2 -- ------ ------ ------ ----- Net charge-offs............................. (7) (18) (12) (50) Provision for the period...................... 3 6 6 6 ------ ------ ------ ----- Balance at end of period...................... $ 85 $ 89 $ 101 $ 107 ==== ===== ===== ===== Ratio of net charge-offs during the period to average loans outstanding during the period. .08% .19% .13% .55% ===== ===== ===== ===== Allowance for loan losses to total loans at end of period.................................. .93% .93% 1.05% 1.17% ===== ===== ==== ==== Allowance for loan losses to non-performing loans at end of period........................... 49.13% 56.69% 77.10% 57.53% ===== ===== ===== =====
The distribution of the allowance for losses on loans at the dates indicated is summarized as follows:
September 30, ------------------------------------------------------------------------ March 31, 1998 1997 1996 1995 ------------------- --------------------- -------------------- --------------------- Percent Percent of Percent of Percent of of Loans Loans in Loans in Loans in in Each Each Each Each Category Category Category Category to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- (In Thousands) Real Estate One- to four-family.. $ 31 76.19% $ 32 75.70% $ 33 77.18% $ 35 79.43% Multi-family......... -- -- -- -- -- .05 -- .10 Non-residential...... -- .55 -- .75 -- 1.09 -- 2.13 Construction......... -- -- -- -- -- .72 -- -- Consumer................ 24 23.26 24 23.55 10 20.96 8 18.34 Unallocated............. 30 -- 33 -- 58 -- 64 -- ------ ----- ----- ----- ------ ----- ------- ----- Total.............. $ 85 100.00% $ 89 100.00% $ 101 100.00% $ 107 100.00% ====== ====== ====== ====== ====== ====== ======= ======
The allowance for loan losses is established through a provision for loan losses charged to earnings based on management's evaluation of the risk inherent in its entire loan portfolio. Such evaluation, which includes a review of all loans of which full collectibility may not be reasonably assured, considers the market value of the underlying collateral, growth and composition of the loan portfolio, delinquency trends, adverse situations that may affect the borrower's ability to repay, prevailing and projected economic conditions and other factors that warrant recognition in providing for an adequate allowance for loan losses. In determining the general reserves under these policies, historical charge-offs and recoveries, changes in the mix and levels of the various types of loans, net realizable values, the current and prospective loan portfolio and current economic conditions are considered. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen economic and market conditions could result in adjustments to the allowance for loan losses, and net 85 earnings could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Investment Activities General. Neodesha must maintain minimum levels of investments and other assets that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, Neodesha has maintained liquid assets at levels above the minimum requirements imposed by the OTS regulations and above levels believed adequate to meet the requirements of normal operations, including potential deposit outflows. At March 31, 1998, Neodesha's liquidity ratio for regulatory purposes was 19.09%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Neodesha - Asset/Liability Management" and "- Liquidity and Capital Resources." Generally, the investment policy of Neodesha is to invest funds among categories of investments and maturities based upon the Neodesha's asset/liability management policies, investment quality, loan and deposit volume, liquidity needs and performance objectives. As required by SFAS 115, securities are classified into three categories: trading, held-to-maturity and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in trading account activities in the statement of operations. Securities that Neodesha has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities not classified as trading or held-to-maturity are classified as available-for-sale. At March 31, 1998, Neodesha had no securities which were classified as trading and no securities classified as available-for-sale. At March 31, 1998, all of Neodesha's securities were classified as held-to-maturity. Securities. Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. In order to complement its lending activities and to increase its holding of short and medium term assets, Neodesha invests in liquidity investments and in high-quality investments, such as U.S. Treasury and agency obligations. At March 31, 1998, Neodesha's securities portfolio totaled $3.4 million. At March 31, 1998, Neodesha did not own any investment securities of a single issuer which exceeded 10% of Neodesha's retained earnings, other than federal agency obligations. See Notes B and C of the Notes to Financial Statements of Neodesha for additional information regarding Neodesha's securities portfolio. 86 The following table sets forth the composition of the Association's securities portfolio at the dates indicated.
September 30, March 31, --------------------------------------------------------- 1998 1997 1996 1995 ----------------- ----------------- ---------------- ---------------- Book % of Book % of Book % of Book % of Value Total Value Total Value Total Value Total ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in Thousands) Securities held-to-maturity: US Treasury........................... $ 898 26.44% $ 897 25.60% $1,097 30.52% $1,098 30.61% Federal agency obligations............ 1,517 44.67 1,617 46.15 1,516 42.18 1,516 42.26 Municipals............................ 603 17.76 603 17.21 602 16.75 602 16.79 Mortgage-backed securities:........... 237 7.01 253 7.22 253 7.04 253 7.05 ------ ------- ------ ----- ------ ------ ------ ----- Total securities held to maturity.. 3,256 95.88 3,370 96.18 3,468 96.49 3,469 96.71 FHLB stock............................ 140 4.12 134 3.82 126 3.51 118 3.29 ------ -------- ------- ----- ------ ------ ------ ----- Total securities and FHLB stock.... $3,396 100.00% $3,504 100.00% $3,594 100.00% $3,587 100.00% ====== ====== ====== ====== ====== ====== ====== ====== Average remaining life or term to repricing of securities (excluding FHLB stock)........................... 2.00 years 2.12 years 2.67 years 3.54 years Other Interest-Earning Assets: Interest-bearing deposits:............ $ 467 100.00% $ 423 100.00% $ 519 100.00% $ 382 100.00% ======= ====== ====== ====== ====== ====== ====== ======
The composition and maturities of the securities portfolio, excluding FHLB of Topeka stock, are indicated in the following table.
March 31, 1998 --------------------------------------------------------------------------- Less Than 1 to 5 5 to 10 Total Investment 1 Year Years Years Securities --------- --------- --------- -------------------------- Amortized Amortized Amortized Amortized Cost Cost Cost Cost Fair Value ---- ---- ---- ---- ---------- (Dollars in Thousands) Held to Maturity: U.S. Treasury.................... $ 698 $ 200 $ -- $ 898 $ 899 Federal agency obligations....... 500 1,017 -- 1,517 1,527 Municipals....................... -- 410 193 603 604 -------- -------- ------- ------- ------- Total investment securities... $ 1,198 $1,627 $ 193 $ 3,018 $3,030 ======== ====== ======== ======= ====== Weighted average yield........ 5.42% 5.70% 4.55% 5.48% ======== ====== ======== =======
Sources of Funds General. Neodesha's primary sources of funds are deposits, payments (including prepayments) of loan principal, interest earned on loans and securities, repayments of securities, borrowings and funds provided from operations. Deposits. Neodesha offers deposit accounts having a wide range of interest rates and terms. Neodesha's deposits consist of passbook, NOW, money market and various certificate accounts. Neodesha relies primarily on competitive pricing and customer service to attract and retain these deposits. Neodesha's customers may access their accounts through Neodesha's main office. Neodesha only solicits deposits in its market area and does not currently use brokers to obtain deposits. Neodesha has attempted to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. As a result, as customers have become more interest rate conscious, Neodesha has become more susceptible to short-term fluctuations in deposit flows. Neodesha intends to utilize customer service and marketing initiatives in an effort to maintain the volume of such deposits. However, there can be no assurance as to whether Neodesha will be able to maintain or increase its core deposits in the future. 87 The following table sets forth the savings flows at Neodesha during the periods indicated. Net increase refers to the amount of deposits during a period less the amount of withdrawals during the period.
Six Months Ended Year Ended September 30, March 31, ---------------------------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (Dollars in Thousands) Opening balance ................................ $ 12,854 $ 12,698 $ 11,673 $ 12,742 Deposits ....................................... 18,056 44,637 43,553 40,035 Withdrawals .................................... (19,001) (44,854) (42,887) (41,480) Interest credited .............................. 156 373 359 376 -------- -------- -------- -------- Ending balance ................................. $ 12,065 $ 12,854 $ 12,698 $ 11,673 ======== ======== ======== ======== Net increase (decrease) ........................ $ (789) $ 156 $ 1,025 $ (1,069) ======== ======== ======== ======== Percent increase (decrease) .................... (6.14)% 1.23% 8.78% (8.39)% ======== ======== ======== ========
The following table sets forth the dollar amount of savings deposits in the various types of deposit programs offered by Neodesha for the dates indicated and the rates offered. See Note G of the Notes to the Financial Statements of Neodesha for weighted average nominal rates.
September 30, March 31, ----------------------------------------------------------------------- 1998 1997 1996 1995 ---------------------- --------------------- --------------------- ---------------------- Percent Percent Percent Percent of of of of Amount Total Amount Total Amount Total Amount Total ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) Transactions and Savings Deposits Passbook Demand (3.00%)........ $ 1,806 14.96% $ 2,000 15.55% $ 1,778 13.98% $ 1,754 15.01% NOW Accounts (2.75-3.25%)...... 2,302 19.07 2,453 19.07 2,549 20.05 2,286 19.56 Money Market Accounts (2.75-3.50%).............. 1,733 14.35 2,074 16.12 1,623 12.77 1,741 14.90 -------- ------ ------ ------ ----- ------ ------ ------ Total Transactions and Savings Deposits.................. 5,841 48.38 6,527 50.74 5,950 46.80 5,781 49.47 -------- ------ ------ ------ ----- ------ ------ ------ Certificates: 0.00 - 3.99%................... -- -- -- -- -- -- 74 .63 4.00 - 4.99%................... 819 6.78 1,395 10.85 2,164 17.02 1,808 15.47 5.00 - 5.99%................... 4,041 33.47 3,045 23.67 2,540 19.98 3,038 26.00 6.00 - 6.99%................... 1,364 11.30 1,887 14.67 2,044 16.08 972 8.32 -------- ------ ------- ------ ------ ----- ------ ------- Total Certificates............. 6,224 51.55 6,327 49.19 6,748 53.08 5,892 50.42 -------- ------ ------- ------ ------ ------ ------ ------ Accrued Interest............... 8 0.07 9 0.07 15 0.12 13 0.11 --------- ------- -------- ------- ------ ------ ------- ------- Total Deposits................. $12,073 100.00% $12,863 100.00% $12,713 100.00% $11,686 100.00% ======= ====== ======= ====== ======= ====== ======= ======
88 The following table shows rate and maturity information for Neodesha's certificates of deposit as of March 31, 1998.
Certificate accounts 4.00- 5.00- 6.00- Percent of maturing in quarter ending: 4.99% 5.00% 6.99% Total Total - --------------------------- ----- ----- ----- ----- ----- (Dollars in Thousands) June 30, 1998 ........ $ 517 $ 480 $ 195 $1,192 19.15% September 30, 1998 ... 302 939 434 1,675 26.92 December 31, 1998 .... -- 340 82 422 6.78 March 31, 1999 ....... -- 813 11 824 13.24 June 30, 1999 ........ -- 287 17 304 4.88 September 30, 1999 ... -- 283 30 313 5.03 December 31, 1999 .... -- 203 223 426 6.84 March 31, 2000 ....... -- 75 373 448 7.20 June 30, 2000 ........ -- 111 -- 111 1.78 September 30, 2000 ... -- 327 -- 327 5.25 December 31, 2000 .... -- 32 -- 32 .52 March 31, 2001 ....... -- 22 -- 22 .35 June 30, 2001 ........ -- 11 -- 11 .18 Thereafter ........... -- 117 -- 117 1.88 ------ ------ ------ ------ ------ Total ................ $ 819 $4,040 $1,365 $6,224 100.00% ====== ====== ====== ====== ====== Percent of total ..... 13.16% 64.93% 21.91% ====== ====== ======
The following table indicates the amount of Neodesha's certificates of deposit and other deposits by time remaining until maturity as of March 31, 1998.
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 ................... $ 892 $ 961 $1,246 $1,710 $4,809 Certificates of deposit $100,000 or more ..................... 100 314 -- 401 815 Public funds(1) .............................................. 200 400 -- -- 600 ------ ------ ------ ------ ------ Total certificates of deposit ........................... $1,192 $1,675 $1,246 $2,111 $6,224 ====== ====== ====== ====== ======
- ------- (1) Deposits from governmental and other public entities. For additional information regarding the composition of Neodesha's deposits, see Note G of the Notes to Financial Statements of Neodesha. Borrowings. Neodesha's other available sources of funds include advances from the FHLB of Topeka and other borrowings. As a member of the FHLB of Topeka, the Association is required to own capital stock in the FHLB of Topeka and is authorized to apply for advances from the FHLB of Topeka. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB of Topeka may prescribe the acceptable uses for these advances, as well as limitations on the size of the advances and repayment provisions. See Note H of the Notes to Financial Statements of Neodesha. 89 The following table sets forth the maximum month-end balance and average balance of Neodesha's FHLB advances and other borrowings at and for the dates indicated.
At and for the Six Months At and for the Year Ended September 30, ended March 31, --------------------------------------- 1998 1997 1996 1995 ---- ---- ---- ---- (Dollars in Thousands) Maximum Balance: FHLB Advances............. $ 600 $1,100 $1,100 $ 950 Average Balance: FHLB Advances............. $ 467 $ 633 $ 742 $ 650
The following table sets fort certain information as to Neodesha's FHLB advances at the dates indicated.
September 30, March 31, ------------------------------------------- 1998 1997 1996 1995 ------ ------ ------ ----- (Dollars in Thousands) FHLB advances....................... $400 $100 $500 $950 Weighted average interest rate of FHLB advances.................... 6.28% 6.56% 6.03% 6.65%
Subsidiary Activities As a federally chartered savings and loan association, Neodesha is permitted by OTS regulations to invest up to 2% of its assets in the stock of, or loans to, service corporation subsidiaries, and may invest an additional 1% of its assets in service corporations where such additional funds are used for inner-city or community development purposes. In addition to investments in service corporations, federal institutions are permitted to invest an unlimited amount in operating subsidiaries engaged solely in activities which a federal savings association may engage in directly. At March 31, 1998, Neodesha did not have any subsidiaries. Competition Neodesha faces strong competition both in originating real estate loans and in attracting deposits. Competition in originating loans comes primarily from commercial banks, credit unions, mortgage bankers and other savings institutions, which also make loans secured by real estate located in Neodesha's market area. Neodesha competes for loans principally on the basis of the interest rates and loan fees it charges, the types of loans it originates and the quality of services it provides to borrowers. Competition for deposits is principally from commercial banks, credit unions, mutual funds, securities firms and other savings institutions located in the same communities. The ability of Neodesha to attract and retain deposits depends on providing an investment opportunity that satisfies the requirements of investors as to rate of return, liquidity, risk, convenient locations and other factors. Neodesha competes for these deposits by offering competitive rates, convenient business hours and a customer oriented staff. Employees At March 31, 1998, Neodesha had a total of 8 employees. None of Neodesha's employees are represented by any collective bargaining agreement. Management considers its employee relations to be good. Properties Neodesha believes that its current facilities are adequate to meet its present and foreseeable future needs. 90 Neodesha's depositor and borrower customer files are maintained by an independent data processing company. The net book value of the data processing and computer equipment utilized by Neodesha at March 31, 1998 was approximately $50,000. Legal Proceedings From time to time, Neodesha is involved as plaintiff or defendant in various legal proceedings arising in the normal course of its business. While the ultimate outcome of these various legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on the Holding Company's and Neodesha's financial position or results of operations. REGULATION General. First Federal and Neodesha are federally chartered savings and loan associations, the deposits of which are federally insured and backed by the full faith and credit of the United States Government. Accordingly, First Federal and Neodesha are subject to broad federal regulation and oversight extending to all its operations. First Federal and Neodesha are members of the FHLB of Topeka and are subject to certain limited regulation by the Federal Reserve Board. As the savings and loan holding company of First Federal, the Company also is subject to federal regulation and oversight. The purpose of the regulation of the Company and other holding companies is to protect subsidiary savings associations. First Federal and Neodesha are members of SAIF, which together with the BIF are the two deposit insurance funds administered by the FDIC, and the deposits of First Federal are insured by the FDIC. As a result, the FDIC has certain regulatory and examination authority over First Federal. Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document. Federal Regulation of Savings Associations. The OTS has extensive authority over the operations of savings associations. As part of this authority, First Federal is required to file periodic reports with the OTS and is subject to periodic examinations by the OTS and the FDIC. The last regular OTS and FDIC examinations of First Federal and Neodesha were commenced as of July 1996 and October 1992, and June 1997 and June 1990, respectively. Under agency scheduling guidelines, it is likely that another examination will be initiated in the near future. When these examinations are conducted by the OTS and the FDIC, the examiners may require First Federal or Neodesha to provide for higher general or specific loan loss reserves. All savings associations are subject to a semi-annual assessment, based upon the savings association's total assets, to fund the operations of the OTS. First Federal's and Neodesha's OTS assessment for the fiscal year ended September 30, 1997, was $33,415 and $4,997, respectively. The OTS also has extensive enforcement authority over all savings institutions and their holding companies, including First Federal, Neodesha and the Company. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OTS. Except under certain circumstances, public disclosure of final enforcement actions by the OTS is required. In addition, the investment, lending and branching authority of First Federal and Neodesha is prescribed by federal laws, and they are prohibited from engaging in any activities not permitted by such laws. For instance, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal associations in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the OTS. Federal savings associations are also generally authorized to branch nationwide. First Federal and Neodesha are in compliance with the noted restrictions. First Federal's and Neodesha's general permissible lending limit for loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At March 31, 1998, First 91 Federal's and Neodesha's lending limit under this restriction was approximately $1.5 million, and $500,000, respectively. At March 31, 1998, the Association and Neodesha had no loans in excess of their loans-to-one borrower limits. The OTS, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan. A failure to submit a plan or to comply with an approved plan will subject the institution to further enforcement action. Insurance of Accounts and Regulation by the FDIC. First Federal and Neodesha are members of the SAIF, which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices, or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions will be made by the FDIC for each semi-annual assessment period. The FDIC is authorized to increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The FDIC may also impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. Regulatory Capital Requirements. Federally insured savings associations, such as First Federal and Neodesha, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual associations on a case by case basis. The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and retained earnings, and certain noncumulative perpetual preferred stock and related earnings. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital. At March 31, 1998, neither the Association nor Neodesha had any intangible assets. The OTS regulations establish special capitalization requirements for savings associations that own subsidiaries. In determining compliance with the capital requirements, all subsidiaries engaged solely in activities permissible for national banks or engaged in certain other activities solely as agent for its customers are "includable" subsidiaries that are consolidated for capital purposes in proportion to the association's level of ownership. For excludable subsidiaries, the debt and equity investments in such subsidiaries are deducted from assets and capital. At March 31, 1998, neither the Association nor Neodesha had any subsidiaries. 92 At March 31, 1998, First Federal had tangible capital of $9.8 million, or 7.93% of adjusted total assets, which is approximately $7.9 million above the minimum requirement of 1.50% of adjusted total assets in effect on that date. At March 31, 1998, Neodesha had tangible capital of $1.1 million, or 8.20% of adjusted total assets, which is approximately $919,00 above the minimum requirement of 1.5% of adjusted total assets in effect on that date. The capital standards also require core capital equal to at least 3% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card relationships. As a result of the prompt corrective action provisions discussed below, however, a savings association must maintain a core capital ratio of at least 4% to be considered adequately capitalized unless its supervisory condition is such to allow it to maintain a 3% ratio. At March 31, 1998, First Federal and Neodesha each had no intangibles which were subject to these tests. At March 31, 1998, First Federal had core capital equal to $9.8 million, or 7.93% of adjusted total assets, which is $6.1 million above the minimum leverage ratio requirement of 3% in effect on that date. At that date, Neodesha had core capital equal to $1.1 million or 8.20% of adjusted total assets, which is $714,000 above the minium leverage ratio requirement of 3% in effect on that date. The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings association to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. At March 31, 1998, First Federal and Neodesha had no capital instruments that qualify as supplementary capital and $656,000 and $85,000 of general loss reserves, respectively, of which neither was in excess of 1.25% of risk-weighted assets, respectively. Certain exclusions from capital and assets are required to be made for the purpose of calculating total capital. Such exclusions consist of equity investments (as defined by regulation) and that portion of land loans and non-residential construction loans in excess of an 80% loan-to-value ratio and reciprocal holdings of qualifying capital instruments. First Federal and Neodesha had no such exclusions from capital and assets at March 31, 1998. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan to value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the FNMA or FHLMC. OTS regulations also require that every savings association with more than normal interest rate risk exposure to deduct from its total capital, for purposes of determining compliance with such requirement, an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The rule will not become effective until the OTS evaluates the process by which savings associations may appeal an interest rate risk deduction determination. It is uncertain as to when this evaluation may be completed. Any savings association with less than $300 million in assets and a total capital ratio in excess of 12%, such as the Association and Neodesha, is exempt from this requirement unless the OTS determines otherwise. On March 31, 1998, First Federal had total risk-based capital of $10.4 million (including $9.8 million in core capital and $656,000 in qualifying supplementary capital) and risk-weighted assets of $57.5 million; or total capital of 18.17% of risk-weighted assets. This amount was $5.8 million above the 8% requirement in effect on that date. 93 On March 31, 1998, Neodesha had total risk-based capital of $1.2 million (including $1.1 million in core capital and $85,000 in qualifying supplementary capital) and risk-weighted assets of $7.0 million; or total capital of 17.3% of risk-weighted assets. This amount was $651,000 above the 8% requirement in effect on that date. The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS is authorized to impose the additional restrictions that are applicable to significantly undercapitalized associations. As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized association must agree that it will enter into a limited capital maintenance guarantee with respect to the institution's achievement of its capital requirements. Any savings association that fails to comply with its capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be made subject to one or more of additional specified actions and operating restrictions which may cover all aspects of its operations and include a forced merger or acquisition of the association. An association that becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized associations. In addition, the OTS must appoint a receiver (or conservator with the concurrence of the FDIC) for a savings association, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized association is also subject to the general enforcement authority of the OTS and the FDIC, including the appointment of a conservator or receiver. The OTS is also generally authorized to reclassify an association into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OTS or the FDIC of any of these measures on First Federal may have a substantial adverse effect on First Federal's operations and profitability and the value of the Company's common stock. Company shareholders do not have preemptive rights, and therefore, if the Company is directed by the OTS or the FDIC to issue additional shares of common stock, such issuance may result in the dilution in the percentage of ownership of the Company's shareholders. Limitations on Dividends and Other Capital Distributions. OTS regulations impose various restrictions on savings associations with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. OTS regulations also prohibit a savings association from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the regulatory capital of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. Generally, savings associations, such as First Federal and Neodesha, that before and after the proposed distribution meet their capital requirements, may make capital distributions during any calendar year equal to the greater of 100% of net income for the year-to-date plus 50% of the amount by which the lesser of the association's tangible, core or risk-based capital exceeds its capital requirement for such capital component, as measured at the beginning of the calendar year, or 75% of its net income for the most recent four quarter period. However, an association deemed to be in need of more than normal supervision by the OTS may have its dividend authority restricted by the OTS. The Company may be paid dividends in accordance with this general authority. Savings associations proposing to make any capital distribution need only submit written notice to the OTS 30 days prior to such distribution. Savings associations that do not, or would not meet their current minimum capital requirements following a proposed capital distribution, however, must obtain OTS approval prior to making such 94 distribution. The OTS may object to the distribution during that 30-day period notice based on safety and soundness concerns. See "- Regulatory Capital Requirements." The OTS has proposed regulations that would revise the current capital distribution restrictions. Under the proposal a savings association may make a capital distribution without notice to the OTS (unless it is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2 rating, is not of supervisory concern, and would remain adequately capitalized (as defined in the OTS prompt corrective action regulations) following the proposed distribution. Savings associations that would remain adequately capitalized following the proposed distribution but do not meet the other noted requirements must notify the OTS 30 days prior to declaring a capital distribution. The OTS stated it will generally regard as permissible that amount of capital distributions that do not exceed 50% of the institution's excess regulatory capital plus net income to date during the calendar year. A savings association may not make a capital distribution without prior approval of the OTS and the FDIC if it is undercapitalized before, or as a result of, such a distribution. As under the current rule, the OTS may object to a capital distribution if it would constitute an unsafe or unsound practice. No assurance may be given as to whether or in what form the regulations may be adopted. Liquidity. All savings associations, including First Federal and Neodesha, are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. For a discussion of what the Association and Neodesha include in liquid assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company - Liquidity and Capital Resources." This liquid asset ratio requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At the present time, the minimum liquid asset ratio is 4%. At March 31, 1998, First Federal and Neodesha were both in compliance with this requirement, with liquid asset ratios of 15.44% and 19.09%, respectively. Accounting. An OTS policy statement applicable to all savings associations clarifies and re-emphasizes that the investment activities of a savings association must be in compliance with approved and documented investment policies and strategies, and must be accounted for in accordance with generally accepted accounting principles ("GAAP"). Under the policy statement, management must support its classification of and accounting for loans and securities (i.e., whether held for investment, sale or trading) with appropriate documentation. First Federal and Neodesha are in compliance with these amended rules. OTS accounting regulations, which may be made more stringent than GAAP by the OTS, require that transactions be reported in a manner that best reflects their underlying economic substance and inherent risk and that financial reports must incorporate any other accounting regulations or orders prescribed by the OTS. Qualified Thrift Lender Test. All savings associations, including First Federal and Neodesha, are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, such assets primarily consist of residential housing related loans and investments. At March 31, 1998, First Federal and Neodesha met the test and have always met the test since its effectiveness. At March 31, 1998, First Federal's and Neodesha's QTL percentage was 89.8% and 91.6%, respectively. Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding 95 company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "- Holding Company Regulation." Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of First Federal and Neodesha, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by First Federal and Neodesha. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. The federal banking agencies, including the OTS, have recently revised the CRA regulations and the methodology for determining an institution's compliance with the CRA. Due to the heightened attention being given to the CRA in the past few years, the Association and Neodesha may be required to devote additional funds for investment and lending in its local community. The Association was last examined for CRA compliance in September 1995 and received a rating of satisfactory. Neodesha was last examined for CRA compliance in April 1996 and received a rating of satisfactory. Transactions with Affiliates. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of First Federal include the Company and any company which is under common control with First Federal. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. First Federal's subsidiaries are not deemed affiliates; however, the OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis. Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals. Holding Company Regulation. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Association or any other SAIF-insured savings association) would become subject to such restrictions, unless such other associations each qualify as a QTL and were acquired in a supervisory acquisition. If First Federal fails the QTL test, the Company must obtain the approval of the OTS prior to continuing after such failure, directly or through its other subsidiaries, any business activity other than those approved for multiple savings and loan holding companies or their subsidiaries. In addition, within one year of such failure the Company must register as, and will become subject to, the restrictions applicable to bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a unitary or multiple savings and loan holding company. See "- Qualified Thrift Lender Test." The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company 96 controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal Securities Law. The stock of the Company is registered with the SEC under the Exchange Act. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Company stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). At March 31, 1998, First Federal and Neodesha were in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS. See "- Liquidity." Savings associations are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve Board regulations require associations to exhaust other reasonable alternative sources of funds, including FHLB borrowings, before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System. First Federal and Neodesha are members of the FHLB of Topeka, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures, established by the board of directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As members, First Federal and Neodesha are required to purchase and maintain stock in the FHLB of Topeka. At March 31, 1998, First Federal and Neodesha had $1.4 million and $140,000, respectively, in FHLB stock, which was in compliance with this requirement. In past years, First Federal and Neodesha have received substantial dividends on their FHLB stock. Over the past five fiscal years such dividends have averaged 6.56% and such dividends were 6.84% for fiscal year 1997. Under federal law, the FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to low- and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of FHLB stock may result in a corresponding reduction in capital. For the fiscal year ended September 30, 1997, dividends paid by the FHLB of Topeka to First Federal and Neodesha totaled $89,181 and $8,600, which constitute an $18,783 and $1,000 increase, respectively, over the amount of dividends received in fiscal year 1996. Federal Taxation. Savings associations such as the Association and Neodesha that met certain definitional tests relating to the composition of assets and other conditions prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), were permitted to establish reserves for bad debts and to make annual additions thereto which could, within specified formula limits, be taken as a deduction in computing taxable income for federal income tax purposes for taxable years beginning prior to January 1, 1997. The amount of the bad debt reserve deduction for "non-qualifying loans" was computed under the experience method. The amount of the bad debt reserve deduction for "qualifying real 97 property loans" (generally loans secured by improved real estate) could be computed under either the experience method or the percentage of taxable income method (based on an annual election). Under the experience method, the bad debt reserve deduction was an amount determined under a formula based generally upon the bad debts actually sustained by the savings association over a period of years. The percentage of specially computed taxable income that was used to compute a savings association's bad debt reserve deduction under the percentage of taxable income method (the "percentage bad debt deduction") was 8%. The percentage bad debt deduction thus computed was reduced by the amount permitted as a deduction for non-qualifying loans under the experience method. The availability of the percentage of taxable income method permitted qualifying savings associations to be taxed at a lower effective federal income tax rate than that applicable to corporations generally (approximately 31.3% assuming the maximum percentage bad debt deduction). Under the percentage of taxable income method, the percentage bad debt deduction could not exceed the amount necessary to increase the balance in the reserve for "qualifying real property loans" to an amount equal to 6% of such loans outstanding at the end of the taxable year or the greater of (i) the amount deductible under the experience method or (ii) the amount which when added to the bad debt deduction for "non-qualifying loans" equaled the amount by which 12% of the amount comprising savings accounts at year end exceeded the sum of surplus, undivided profits and reserves at the beginning of the year. In August 1996, legislation was enacted that repeals the above-described reserve method of accounting (including the percentage of taxable income method) used by many thrift institutions to calculate their bad debt reserve for federal income tax purposes. Thrift institutions with $500 million or less in assets may, however, continue to use the experience method. As a result, First Federal must recapture that portion of the reserve that exceeds the amount that could have been taken under the experience method for post-1987 tax years. Neodesha does not have an excess reserve subject to this provision and no recapture is required The legislation also requires thrifts to account for bad debts for federal income tax purposes on the same basis as commercial banks for tax years beginning after December 31, 1995. The recapture will occur over a six-year period commencing with the year ended September 30, 1997. The legislation also requires thrift institutions to account for bad debts for federal income tax purposes on the same basis as commercial banks for tax years beginning after December 31, 1995. In addition to the regular income tax, corporations, including savings associations such as the Association, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable income. For taxable years beginning after 1986 and before 1997, corporations, including savings associations such as First Federal and Neodesha, are also subject to an environmental tax equal to .12% of the excess of alternative minimum taxable income for the taxable year (determined without regard to net operating losses and the deduction for the environmental tax) over $2 million. To the extent earnings appropriated to a savings association's bad debt reserves for "qualifying real property loans" and deducted for federal income tax purposes exceed the allowable amount of such reserves computed under the experience method and to the extent of the association's supplemental reserves for losses on loans ("Excess"), such Excess may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). As of September 30, 1997, the Association's and Neodesha's Excess for tax purposes totaled approximately $2.5 million and $47,000, respectively. The Company and the Association file consolidated federal income tax returns on a fiscal year basis using the accrual method of accounting. Thrift institutions, such as the Association, that file federal income tax returns as part of a consolidated group are required by applicable Treasury regulations to reduce their taxable income for purposes of computing the percentage bad debt deduction for losses attributable to activities of the non-savings association members of the consolidated group that are functionally related to the activities of the savings association member. 98 Neither the Company nor Neodesha has been audited by the Internal Revenue Service for the last 10 years and both have federal income tax returns which are open and subject to audit for the years 1994 through 1996. In the opinion of their respective managements, any examination of still open returns would not result in a deficiency which could have a material adverse effect on the financial condition of the Company or Neodesha. Kansas Taxation. The Company and Association file separate Kansas income and Kansas privilege tax returns on a fiscal year basis using the accrual method of accounting. Kansas law permits savings and loan associations to deduct from net income, a reserve established for the sole purpose of meeting or absorbing losses, in the amount of five percent of such net income determined without the benefit of such deduction, or, in the alternative, a reasonable addition to a reserve for losses based on past experiences. The Kansas privilege tax is computed on the basis of 4.5% of taxable income, plus 2.25% of taxable income in excess of $25,000 for tax years commencing prior to January 1, 1998. For years commencing on or after January 1, 1998, the Kansas privilege tax is computed on the basis of 2.5% of taxable income, plus 2.25% of taxable income in excess of $25,000. Neither the Company nor Neodesha has been audited by the Kansas Department of Revenue for the last ten years and both have Kansas privilege tax returns which are open and subject to audit for the years 1994 through 1996. In the opinion of their respective managements, any examination of such open returns would not result in a deficiency which could have a material adverse effect on the financial condition of the Company or Neodesha. Delaware Taxation. As a Delaware holding company, the Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual fee to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware. For additional information regarding taxation, see Note K of the Notes to the Consolidated Financial Statements of the Company and Note I of the Financial Statements of Neodesha. 99 VOTING SECURITIES AND PRINCIPAL HOLDINGS THEREOF As of March 31, 1998, First Independence had 955,693 shares of Common Stock issued and outstanding. No persons other than those listed below are known by management to own beneficially more than 5% of the outstanding shares of the Company's Common Stock.
Shares Percent Beneficially of Beneficial Owner Owned(1) Class ---------------- -------- ----- First Independence Corporation Employee Stock Ownership Plan Myrtle and Sixth Streets Independence, Kansas 67301 101,832(2) 10.66 John Hancock Mutual Life Insurance Company John Hancock Place P.O. Box 111 Boston, Massachusetts 02117 71,000(3) 7.43 Athena Capital Management, Inc. 621 E. Germantown Pike Plymouth Valley, Pennsylvania 19401 78,236(4) 8.19 Jeffrey Gendell 31 West 52nd Street 17th Floor New York, New York 10019 97,800(7) 10.23 Larry G. Spencer President, Chief Executive Officer and Director 901 Birdie Drive Independence, Kansas 67301 68,975(5) 7.00 Directors and executive officers as a group (10 persons) 260,680(6) 24.60
- ----------------------- (1) Reflects a two-for-one stock split which occurred in fiscal 1997. (2) The amount reported represents shares held by the Employee Stock Ownership Plan (the "ESOP"), 58,190 of which have been allocated to accounts of participants. First Bankers Trust Company, Quincy, Illinois, the trustee of the ESOP, may be deemed to beneficially own the shares held by the ESOP which have not been allocated to the accounts of participants. (3) As reported by John Hancock Mutual Life Insurance Company ("John Hancock") and certain of John Hancock's subsidiaries, including John Hancock Advisors, Inc. ("JHA"), a registered investment adviser, and John Hancock Freedom Regional Bank Fund ("JHFRBF") in an amended Schedule 13G dated February 2, 1996. JHA reported sole voting and investment power with respect to the 35,500 shares held through JHFRBF. (4) As reported by Athena Capital Management, Inc. in a Schedule 13G dated January 26, 1998. Athena Capital Management, Inc., a registered investment adviser, reported sole voting and investment power with respect to 836 shares of the Common Stock and shared voting and investment power with respect to 77,400 shares of the Common Stock. (5) Includes 26,256 shares held directly, 600 shares held solely by Mr. Spencer's spouse, 600 shares held by minor children of Mr. Spencer, 3,492 shares awarded under the Company's Recognition and Retention Plan (the "RRP") which have not vested and over which shares Mr. Spencer has sole voting but no dispositive power, 8,933 shares allocated to Mr. Spencer's account under the ESOP and 29,094 shares subject to options granted to Mr. Spencer under the 1993 Stock Option and Incentive Plan (the "Stock Option Plan"), which are exercisable within 60 days of the date hereof. (6) Includes shares held directly, as well as shares held jointly with family members, shares held in retirement accounts, held in a fiduciary capacity or by certain family members, with respect to which shares the listed individuals or group members may be deemed to have sole or shared voting and/or investment power. This amount includes the shares held by Larry G. Spencer and listed separately on this table. This amount also includes an aggregate of 103,844 shares subject to options granted under the Stock Option Plan, 26,868 shares allocated to the accounts of participants under the ESOP, 100 as well as an aggregate of 7,860 shares awarded under the RRP to the group members which have not vested and over which such persons have sole voting but no dispositive power. (7) As reported by Jeffrey L. Gendell, in a Schedule 13D dated January 9, 1998. Mr. Gendell serves as the Managing Member of Tontine Management, L.L.C. and Tontine Overseas Associates, LTD. The principal business of Tontine Management is serving as general partner to Tontine Financial Partners, L.P. and to Tontine Partners, L.P., an affiliated private investment limited partnership. Tontine Financial Partners, L.P. reported shared voting and investment power with respect to 72,800 shares of the Common Stock. Tontine Overseas Associates, L.L.C. reported shared voting and investment power with respect to 25,000 shares of the Common Stock. MANAGEMENT OF THE COMPANY General The Company's Board of Directors currently consists of seven members. Except for Directors Strecker and Smith, who have served on the Board since January 1994, each of the current directors of the Company has served in such capacity since its incorporation in June 1993. The Board is divided into three classes, each of which contains approximately one-third of the Board. Approximately one-third of the Board is elected annually. Directors of the Company are generally elected to serve for a three-year period or until their respective successors are elected and qualified.
Shares of Common Term Stock Percent Director to Beneficially of Name Age Position(s) Held in the Company Since(1) Expire Owned(2) Class ---- --- ------------------------------- -------- ------ -------- ----- William T. Newkirk II 41 Director 1992 2001 9,818(3) (4) Joseph M. Smith 52 Director 1993 2001 5,878(5) (4) Larry G. Spencer 50 President, Chief Executive Officer and Director 1993 2000 68,975(6) 6.85% Harold L. Swearingen 60 Director 1992 2000 9,418(7) (4) Donald E. Aitken 71 Chairman of the Board 1968 1999 28,818(8) 2.93 John T. Updegraff 70 Vice Chairman of the Board 1979 1999 14,518(9) 1.48 Lavern W. Strecker 56 Director 1993 1999 6,118(10) (4)
- ------------- (1) Includes service as a director of the Association. (2) Reflects a two-for-one stock split which occurred in fiscal 1997. Amounts include shares held directly and jointly with family members, as well as shares which are held in retirement accounts, or held by certain members of the named individuals' families, or held by trusts of which the named individual is a trustee or substantial beneficiary, with respect to which shares the respective directors may be deemed to have sole or shared voting and/or investment power. Amounts also include 29,094 and 5,818 shares subject to options granted under the Stock Option Plan to Mr. Spencer and each non-employee director, respectively, (except Mr. Swearingen, who has 5,658 remaining options) which were exercisable within 60 days of the Record Date. (3) Includes 4,000 shares held directly and 5,818 shares subject to options, as described in footnote 2. (4) Less than 1.0%. (5) Includes 60 shares held jointly with Mr. Smith's spouse and 5,818 shares subject to options, as described in footnote 2. (6) See footnote 7 under "Voting Securities and Certain Holders Thereof" for information regarding Mr. Spencer's stock ownership. (7) Amount includes 3,360 shares held in a trust of which Mr. Swearingen is a trustee, 400 shares held by children of Mr. Swearingen and 5,658 shares subject to options, as described in footnote 2. (8) Includes 5,360 shares held through an IRA, 13,060 shares held jointly with Mr. Aitken's spouse, 1,580 shares held by Mr. Aitken's spouse, 3,000 shares held by children of Mr. Aitken and 5,818 shares subject to options, as described in footnote 2. (9) Includes 7,500 shares held through an IRA, 900 shares held jointly by Mr. and Mrs. Updegraff and certain family members, 300 shares held in custodial accounts for the benefit of Mr. Updegraff's grandchildren and 5,818 shares subject to options, as described in footnote 2. (10) Represents 300 shares held in a trust, for the benefit of Mr. Strecker's wife, for which Mr. Strecker is a co-trustee, and 5,818 shares subject to options, as described in footnote 2. 101 The principal occupation of each director of the Company is set forth below. All directors have held their present position for at least five years unless otherwise indicated. William T. Newkirk II. Mr. Newkirk is an insurance agent with the Newkirk, Dennis & Buckles Insurance Co. located in Independence, Kansas. Mr. Newkirk has been in the insurance business for 18 years. Joseph M. Smith. Mr. Smith is currently the County Extension Agent-Agriculture and Coordinator with the Montgomery County Extension Council. Mr. Smith has been employed by the Montgomery County Extension Council for the past 24 years. Larry G. Spencer. Mr. Spencer is President and Chief Executive Officer of the Company and the Association. Mr. Spencer has been employed by the Association since 1974 and has held a variety of positions including Executive Vice President. Mr. Spencer was promoted to his present position in 1990. Mr. Spencer received a degree in Business Administration from Pittsburgh State University and served in the U.S. Army for three years. He has served on the board of the Chamber of Commerce, Main Street, the Independence Community College Endowment Association and the Community Chest and is presently a member of the board of Junior Achievement, Hartland Community Bankers, USD#446 Endowment Association, Independence Food Bank and Independence Industries. He is also a member of the Rotary Club. Harold L. Swearingen. Prior to his retirement in 1992, Mr. Swearingen was employed as a telecommunications manager by ARCO Pipe Line Company, Independence, Kansas. Mr. Swearingen had been employed by Atlantic Richfield Co. and its subsidiaries since 1960. He is a graduate of Kansas State University (Manhattan). Mr. Swearingen is a member of the Institute of Electrical and Electronic Engineers. Donald E. Aitken. Mr. Aitken is currently retired. Prior to his retirement in 1996, he was the manager of City Publishing Co., Inc., a publishing company located in Independence, Kansas, a position he had held for 29 years. John T. Updegraff. Mr. Updegraff is currently retired. Prior to his retirement in 1990, Mr. Updegraff was Vice President and Senior Counsel for ARCO Pipe Line Company, a wholly owned subsidiary of Atlantic Richfield Company, located in Independence, Kansas, a position he had held for 15 years. Lavern W. Strecker. Mr. Strecker is currently retired. Prior to his retirement in 1992, Mr. Strecker was employed by ARCO Pipe Line Company for 26 years with his last position being Manager of Accounting and Control. Meetings and Committees of the Board of Directors Meetings and Committees of the Company. Meetings of the Company's Board of Directors are generally held on a quarterly basis. The Board of Directors met five times during fiscal 1997. During fiscal 1997, no incumbent director of the Company attended fewer than 75% of the aggregate of the total number of Board meetings and the total number of meetings held by the committees of the Board of Directors on which he served. The Board of Directors of the Company has standing Executive, Audit and Compensation Committees. The Executive Committee is comprised of Chairman Aitken and Directors Strecker and Updegraff, with Director Newkirk serving as an alternate. The Executive Committee meets on an as needed basis and exercises the power of the Board of Directors between Board meetings to the extent permitted by Delaware law. This committee did not meet during fiscal 1997. The Audit Committee recommends independent auditors to the Board, reviews the results of the auditors' services, reviews with management and the internal auditors the systems of internal control and internal audit reports and assures that the books and records of the Company are kept in accordance with applicable accounting principles and standards. The members of the Audit Committee are Chairman Aitken and Directors Strecker and Updegraff. During the fiscal year ended September 30, 1997, this committee did not meet; however, the entire Board of Directors performed its function during fiscal 1997. 102 The Compensation Committee is composed of Chairman Aitken and Directors Strecker and Updegraff. This Committee is responsible for administering the Stock Option Plan and RRP and also reviews compensation and benefit matters. This committee did not meet during the fiscal year ended September 30, 1997. The entire Board of Directors acts as a nominating committee for selecting nominees for election as directors. While the Board of Directors of the Company will consider nominees recommended by stockholders, the Board has not actively solicited such nominations. Pursuant to the Company's Bylaws, nominations by stockholders must be delivered in writing to the Secretary of the Company at least 30 days before the date of the Meeting. Meetings and Committees of the Association. The Association's Board of Directors meets monthly and may have additional special meetings upon the written request of the Chairman of the Board or at least three directors. The Board of Directors met 13 times during the fiscal year ended September 30, 1997. During fiscal 1997, no incumbent director of the Association attended fewer than 75% of the aggregate of the total number of Board meetings and the total number of meetings held by the committees of the Board of Directors on which he served. The Association has standing Executive, Investment/Interest Rate Risk, Loan and Asset Review Committees. The Association's Executive Committee exercises the powers of the full Board of Directors between board meetings, except that this committee does not have the authority of the board to amend the charter or bylaws, adopt a plan of merger, consolidation, dissolution, or provide for the disposition of all or substantially all of the property and assets of the Association. The Executive Committee also serves as the Association's Audit Committee and selects the Association's independent accountants and meets with the accountants to discuss the scope and to review the results of the annual audit. The Executive Committee is composed of Chairman Aitken and Directors Strecker and Updegraff, with Director Newkirk serving as an alternate. The Executive Committee met two times during the fiscal year ended September 30, 1997. The Investment/Interest Rate Risk Committee is comprised of Director Spencer, Senior Vice President and Senior Loan Officer Gary L. Overfield and Vice President and Chief Financial Officer James B. Mitchell. The Investment Committee is responsible for the formulation of the Association's strategy and monitoring its investment performance and implementation of the Association's interest rate risk management strategy. This committee met four times during fiscal 1997. The Loan Committee is composed of Director Spencer, Mr. Overfield, Vice President and Asset Manager Jim L. Clubine and Vice President Gregg S. Webster. This committee meets weekly to evaluate and approve all loan applications. During fiscal 1997, this committee met 52 times. The Asset Review Committee is comprised of Director Spencer, Messrs. Overfield, Clubine and Webster and Ms. Lori L. Kelley, an Assistant Vice President of the Association. This committee identifies and reviews the Association's problem assets. This committee met four times during fiscal 1997. Director Compensation The Company's directors are not paid fees for their service in such capacity. Directors of the Association are paid a fee of $500 per month plus $500 per special Association Board meeting and $300 per Association Executive Committee meeting attended. With the exception of the Association's Executive Committee, no fee is paid for membership on the Association's committees. 103 Executive Officers of the Company The following table sets forth certain information with respect to each of the executive officers of the Company. NAME AGE(1) POSITION(S) HELD ---- ------ ---------------- Larry G. Spencer 50 President and Chief Executive Officer Gary L. Overfield 46 Senior Vice President and Secretary James B. Mitchell 43 Vice President and Chief Financial Officer - ---------------- (1) At March 31, 1998. Executive Officers of the Association The following table sets forth certain information with respect to each of the executive officers of the Association. NAME AGE(1) POSITION(S) HELD ---- ------ ---------------- Larry G. Spencer 50 President and Chief Executive Officer and Director Gary L. Overfield 46 Senior Vice President, and Secretary and Chief Loan Officer Jim L. Clubine 45 Vice President and Asset Manager James B. Mitchell 43 Vice President and Chief Financial Officer - ---------------- (1) At March 31, 1998. Larry G. Spencer. Mr. Spencer is President and Chief Executive Officer of the Association. Mr. Spencer has been employed by First Federal since 1974 and has held a variety of positions including Executive Vice President. Mr. Spencer was promoted to his present position in 1990. Mr. Spencer received a degree in Business Administration from Pittsburgh State University and served in the U.S. Army for three years. He has served on the board of the Chamber of Commerce, Main Street, the Independence Community College Endowment Association and the Community Chest and is presently a member of the board of Junior Achievement, Heartland Community Bankers, USD #446 Endowment Association, Independence Food Bank, and Independence Industries. He is also a member of the Rotary Club. Gary L. Overfield. Mr. Overfield is Senior Vice President, Secretary and Chief Loan Officer of the Association, a position he has held since 1990. Mr. Overfield has been employed by First Federal since 1976 and has held a variety of positions including Vice President and Loan Officer from 1985 to 1990. Mr. Overfield is a graduate of Pittsburgh State University. He is currently licensed by the State of Kansas as a Life and Accident and Health Insurance agent. He was a member of the Board of Directors and previous Secretary of the Independence Rotary Club, a youth coach for the Independence Recreation Commission, previous Treasurer for the local chapter of Duck's Unlimited, and previous Director and Treasurer for the Independence Chamber of Commerce. Jim L. Clubine. Mr. Clubine is Vice President and Asset Manager, a position he has held since 1990. Prior to joining First Federal, he was employed as Branch Manager by MidAmerica Federal of Parsons, Kansas from 1979 to 1990. Mr. Clubine is a member of Independence Chamber of Commerce (Ambassador Club), Mercy Hospital Foundation Fund Raising Committee, Eisenhower Site Council team, Chairman of the Airport Advisory Board, Carnival Chairman for Neewolah, and a member of the Rotary Club and served on the board of the Chamber of Commerce, Community Chest and Junior Achievement. He was a Previous Chairman of the March of Dimes. Mr. Clubine is a graduate of Kansas State University. James B. Mitchell. Mr. Mitchell is Vice President and Chief Financial Officer of the Association, a position he has held since March 1992. Prior to joining First Federal, he was employed by Eureka Savings Bank, Eureka, 104 Kansas, in the capacity of Strategic Asset Manager from 1988 to 1991 and Chief Financial Officer from 1991 to 1992. From 1976 to 1988, Mr. Mitchell was Chief Financial Officer for Peoples Savings and Loan, Parsons, Kansas. Mr. Mitchell has an accounting degree from Pittsburgh State University. Executive Compensation The Company has not paid any compensation to its executive officers since its formation. The Company does not presently anticipate paying any compensation to such persons until it becomes actively involved in the operation or acquisition of businesses other than the Association. The following table sets forth information regarding compensation paid by the Company and the Association to their Chief Executive Officer for services rendered during the fiscal year ended September 30, 1997. No other executive officer made $100,000 or more during the fiscal year ended September 30, 1997.
====================================================================================================================== SUMMARY COMPENSATION TABLE ====================================================================================================================== Long-Term Compensation ---------------------- Annual Compensation(1) Awards - ---------------------------------------------------------------------------------------------------------------------- Restricted Stock Options/ All Other Salary Bonus Award(s) SARs Compensation Name and Principal Position Year ($)(2) ($) ($) (#) ($) - ---------------------------------------------------------------------------------------------------------------------- Larry G. Spencer, President and Chief 1997 $99,837 $9,184 $ --- --- $11,119(3) Executive Officer 1996 89,434 8,919 --- --- 11,185 1995 83,542 9,593 --- --- 11,643 ======================================================================================================================
- ----------------------- (1) Pursuant to Securities and Exchange Commission rules, perquisites equal to the lesser of either $50,000 or 10% of salary and bonus are excluded from the table above. (2) Includes directors' fees of $5,575, $4,800 and $5,400 during fiscal 1997, 1996 and 1995, respectively. (3) Includes the dollar value of 2,141 shares allocated to Mr. Spencer's account under the ESOP and excess group life insurance premiums of $414 paid by the Association. No stock appreciation rights ("SARs") were granted during fiscal 1997. The following table sets forth certain information concerning the number and value of unexercised stock options held by the Company's Chief Executive Officer at September 30, 1997. No options were exercised during fiscal 1997. 105
==================================================================================================================== AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES - -------------------------------------------------------------------------------------------------------------------- Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/SARs Options/SARs at FY-End (#) at FY-End ($)(1) ------------------------------------------------------------- Shares Acquired Value Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - -------------------------------------------------------------------------------------------------------------------- Larry G. Spencer N/A N/A 29,094 N/A $276,393 N/A ====================================================================================================================
- -------------------- (1) Represents the aggregate market value (market price of the Common Stock less the exercise price) of the option granted based upon the average of the bid and asked prices of $14.50 per share of the Common Stock on September 30, 1997. Employment Agreements The Association has entered into employment agreements with Mr. Spencer and two other executive officers. The employment agreements are designed to assist the Association in maintaining a stable and competent management team upon which the continued success of the Association depends. These agreements were filed with, and approved by, the Office of Thrift Supervision ("OTS") as part of the Association's application for conversion from mutual to stock form. The employment agreements provide for annual base salary in an amount not less than the employee's current salary and an initial term of three years. Each agreement provides for extensions of one year, in addition to the then-remaining term under the agreement, on each anniversary of the effective date of the agreement, subject to a formal performance evaluation performed by disinterested members of the Board of Directors of the Association. The agreements provide for termination upon the employee's death, for cause or in certain events specified by OTS regulations. The employment agreements are also terminable by the employee upon 90 days' notice to the Association. The employment agreements provide for payment to the employee of his salary for the remainder of the term of the agreement, plus up to 299% of the employee's base compensation, in the event there is a "change in control" of the Association where employment terminates involuntarily in connection with such change in control or within twelve months thereafter. This termination payment is subject to reduction by the amount of all other compensation to the employee deemed for purposes of the Internal Revenue Code of 1986, as amended (the "Code") to be contingent on a "change in control," and may not exceed three times the employee's average annual compensation over the most recent five year period or be non-deductible by the Association for federal income tax purposes. For the purposes of the employment agreements, a "change in control" is defined as any event which would require the filing of an application for acquisition of control or notice of change in control pursuant to 12 C.F.R. ss. 574.3 or 574.4. Such events are generally triggered prior to the acquisition or control of 10% of the Common Stock. The agreements also guarantee participation in an equitable manner in employee benefits applicable to executive personnel. Certain Transactions The Association has followed a policy of granting consumer loans and loans secured by the borrower's personal residence to officers, directors and employees. Loans to employees, executive officers and directors are made in the ordinary course of business and on the same terms and conditions, including interest rates and collateral, as those of comparable transactions prevailing at the time with other persons, in accordance with the Association's underwriting guidelines, and do not involve more than the normal risk of collectibility or present other unfavorable features, which is consistent with current federal requirements. Loans to executive officers and directors must be approved by a majority of the disinterested directors and loans to other officers and employees must be approved by the Association's loan committee. 106 MANAGEMENT OF NEODESHA Directors and Executive Officers of Neodesha Prior to the Conversion, the direction and control of Neodesha, as a mutual savings institution, was vested in its Board of Directors. Upon conversion of Neodesha to stock form, each of the directors of Neodesha will continue to serve as a director until consummation of the acquisition. The Board of Directors of Neodesha currently consists of six members. Each director of Neodesha has served as such at least since 1990. The directors serve three-year staggered terms so that approximately one-third of the directors are elected at each annual meeting of members. The following table sets forth certain information regarding the directors of Neodesha.
Director Term Name Position(s) Held With Neodesha Age(1) Since Expires - -------------------------------------------------------------------------------------------------------------------- JoVonnah Boecker Chairman of the Board 50 1990 1999 Patrick Porter Director 58 1982 2001 Loren Peck Director 69 1979 2000 Jerry Webster Director 59 1983 1999 Doug Buckles Director 46 1988 2001 Richard Stewart Director 57 1976 2000
- ------------ (1) At December 31, 1997 The business experience of each director for at least the past five years is set forth below. JoVonnah Boecker. Ms. Boecker is the City Clerk of Neodesha, a position she has held for approximately 18 years. Patrick Porter. Mr. Porter is a pharmacist and owner of the Porter Drug Store located in Neodesha, Kansas. Loren Peck. Mr. Peck is a semi-retired associate of the Loran Fawcett Funeral Home located in Neodesha, Kansas. Mr. Peck has been affiliated with the funeral home for more than 35 years. Jerry Webster. Mr. Webster is a retired superintendent of the Neodesha school system. Doug Buckles. Mr. Buckles is an insurance agent and owner of an insurance agency located in Neodesha, Kansas. He is also a partner with the Newkirk, Dennis Buckles Insurance Agency of Independence, Kansas. Richard Stewart. Mr. Stewart is the former owner of a lumber yard located in Neodesha, Kansas. Currently, he is employed with Woods Lumber of Independence, Kansas. Meetings and Committees of Board of Directors Neodesha. Neodesha's Board of Directors meets on a monthly basis. The Board of Directors met 12 times during the fiscal year ended September 30, 1997. During fiscal 1997, no director of Neodesha attended fewer than 75% of the aggregate of the total number of Board meetings and the total number of meetings held by the committees of the Board of Directors on which he served. Neodesha has standing Executive, Loan and Asset Liability Committees. The Executive Committee provides oversight of Board-related matters in-between regularly scheduled Board Meetings. The Executive Committee is comprised of the entire Board of Directors. This committee met approximately 40 times during calendar 1998. 107 The Loan Committee is comprised of the entire Board of Directors, and approves all real estate loans and consumer loans. This committee met 40 times during fiscal 1998. The Asset Liability Committee is comprised of the entire Board of Directors. This committee met 6 times during fiscal 1998. Director Compensation Directors of Neodesha are paid $75 per board meeting. Directors do not receive any additional compensation for committee meetings attended. Executive Officers who are not Directors Franklin C. Miller, age 52. Mr. Miller has been President of Neodesha since 1986. In his capacity as President, Mr. Miller oversees the day-to-day operations of Neodesha. Diane K. Holmquist, age 48. Ms. Holmquist is currently serving as Vice President and Secretary of Neodesha, a position she has held since 1984. In her capacity as such, she is primarily responsible for real estate lending. Executive Compensation The following table sets forth information concerning the compensation accrued for services in all capacities to Neodesha for the fiscal year ended September 30, 1997 for the President. No executive officer's aggregate annual compensation (salary plus bonus) exceeded $100,000 in fiscal 1997.
==================================================================================================================================== Summary Compensation Table - ------------------------------------------------------------------------------------------------------------------------------------ Long Term Annual Compensation (1) Compensation Awards ---------------------------------------------------------------------------------------------- All Other Other Annual Restricted Stock Options/ Compensation Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Award ($) SARs (#) ($) - ------------------------------------------------------------------------------------------------------------------------------------ Frank Miller, President 1997 49,169 4,097 6,085 N/A N/A --- ====================================================================================================================================
- -------------- (1) In accordance with the transitional provisions applicable to the revised rules on executive officer and director compensation disclosure adopted by the SEC, as informally interpreted by the SEC's Staff, Summary Compensation information is excluded for the fiscal years ended September 30, 1996 and 1995. Employment Agreement The Plan provides for a three year employment agreement between the Association and Mr. Miller. The employment agreement provides for annual base salary in an amount not less than the employee's current salary and a term of three years. The agreement provides, among other things, for participation in an equitable manner in employee benefits available to Association employees at equivalent levels. In addition, the contract provides Mr. Miller with the use of a car during the term of the agreement. The agreement also provides for termination upon the employee's death, for cause or in certain events specified by OTS regulation. The employment agreement is also terminable by the employee upon 90 days' notice to the Association. The employment agreement provides for payment to the employee of his salary for the remainder of the term of the agreement, plus up to 299% of the employee's base compensation, in the event there is a "change in control" of the Association where employment terminates involuntarily in connection with such change in control or within twelve months thereafter. This termination payment is subject to reduction by the amount of all other compensation to the employee deemed for purposes of the Internal Revenue Code of 1986, as amended (the "Code") to be contingent on a "change in control," and may not exceed three times the employee's average annual compensation over the most recent five year period or be non-deductible by the Association for federal income tax purposes. For the purposes of the employment agreements, a "change in control" is defined as any event which would require the filing of an application for acquisition of control or notice of change in control pursuant to 12 C.F.R. ss. 574.3 or 574.4. Such events are 108 generally triggered prior to the acquisition or control of 10% of the Common Stock. The agreements also guarantee participation in a equitable manner in employee benefits applicable to executive personnel. See also "The Merger Conversion -- Business Purposes." Benefit Plans Neodesha currently provides insurance benefits to its employees, including health insurance, subject to certain deductibles and copayments. Certain Transactions Neodesha follows a policy of granting its loans to its directors, officers and employees. The loans to executive officers and directors are made in the ordinary course of business and on the same terms and conditions as those of comparable transactions prevailing at the time, in accordance with Neodesha's underwriting guidelines and do not involve more than the normal risk of collectibility or present other unfavorable terms. Loans to all directors and executive officers and their associates, including outstanding balances and commitments totaled $46,000 at March 31, 1998, which was 4.1% of Neodesha's retained earnings at that date. At March 31, 1998, there were no loans to any single director, executive officer or their affiliates made at preferential rates or terms which in the aggregate exceeded $60,000 during the three years ended March 31, 1998. RESTRICTIONS ON ACQUISITIONS OF THE COMPANY As discussed below, federal and Delaware law and the Company's certificate of incorporation include certain provisions to protect the interests of the Company and its stockholders from hostile takeovers which the Board of Directors of the Company believe would not be in the best interests of the Company, the Association or the Company's stockholders. The following description of certain of these provisions is general and not necessarily complete, with respect to provisions contained in the Company's certificate of incorporation and bylaws. Reference should be made in each case to the document in question, each of which is part of Neodesha's and the Company's application to the OTS and the Company's Registration Statement filed with the SEC. See "Additional Information." Provisions of the Company's Certificate of Incorporation and Bylaws Directors. Certain provisions of the Company's certificate of incorporation and bylaws may impede changes in majority control of the Board of Directors. The Company's certificate of incorporation provides that the Board of Directors of the Company will be divided into three classes, with directors in each class elected for three-year staggered terms. Thus, it would take two annual elections to replace a majority of the Company's Board. The certificate of incorporation provides that any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, shall be filled for the remainder of the unexpired term by a majority vote of the directors then in office. Finally, the bylaws impose certain notice and information requirements in connection with the nomination by stockholders of candidates for election to the Board of Directors or the proposal by stockholders of business to be acted upon at an annual meeting of stockholders. The certificate of incorporation provides that a director may only be removed for cause by the affirmative vote of a majority of the directors then in office and the affirmative vote of 80% of the shares eligible to vote at a duly constituted meeting of the stockholders called for that purpose. Restrictions on Call of Special Meetings. The certificate of incorporation of the Company provides that a special meeting of stockholders may be called at any time but only by the chairman of the board, the president or a majority of the directors then in office. Stockholders are not authorized to call a special meeting. Absence of Cumulative Voting. The Company's certificate of incorporation does not provide for cumulative voting rights in the election of directors. 109 Authorization of Preferred Stock. The certificate of incorporation of the Company authorizes 500,000 shares of serial preferred stock, par value $.01 per share. The Company is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the Board of Directors is authorized to fix the designations, powers, preferences and relative participating, optional and other special rights of such shares, including voting rights (which could be multiple or as a separate class) and conversion rights. In the event of a proposed merger, tender offer or other attempt to gain control of the Company that the Board of Directors does not approve, it might be possible for the Board of Directors to authorize the issuance of a series of preferred stock with rights and preferences that would impede the completion of such a transaction. If the Company issued any preferred stock which disparately reduced the voting rights of the Common Stock within the meaning of Rule 19c-4 under the Exchange Act, the Company Common Stock could be required to be delisted from the Nasdaq System. An effect of the possible issuance of preferred stock, therefore, may be to deter a future takeover attempt. The Board of Directors has no present plans or understandings for the issuance of any preferred stock and does not intend to issue any preferred stock except on terms which the Board of Directors deems to be in the best interests of the Company and its stockholders. Limitation on Voting Rights. The certificate of incorporation of the Company provides that in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the then outstanding shares of Common Stock (the "Limit"), be entitled or permitted to any vote in respect of the shares held in excess of the Limit. This limitation would not inhibit any person from soliciting (or voting) proxies from other beneficial owners for more than 10% of the Common Stock or from voting such proxies. Beneficial ownership is to be determined pursuant to Rule 13d-3 of the General Rules and Regulations of the Exchange Act, and in any event includes shares beneficially owned by any affiliate of such person, shares which such person or his affiliates (as defined in the certificate of incorporation) have the right to acquire upon the exercise of conversion rights or options and shares as to which such person and his affiliates have or share investment or voting power but shall not include shares beneficially owned by directors, officers and employees of the Association or the Company. This provision will be enforced by the Board of Directors to limit the voting rights of persons beneficially owning more than 10% of the stock and thus could be utilized in a proxy contest or other solicitation to defeat a proposal that is desired by a majority of the stockholders. Procedures for Certain Business Combinations. The Company's certificate of incorporation requires that certain business combinations between the Company (or any majority-owned subsidiary thereof) and a 10% or more stockholder either (i) be approved by at least 80% of the total number of outstanding voting shares of the Company or (ii) approved by a majority of the continuing Board of Directors (i.e., persons serving prior to the 10% stockholder becoming such) or (iii) involve consideration per share generally equal to that paid by such 10% stockholder when the block of stock was acquired. Amendment to Certificate of Incorporation and Bylaws. Amendments to the Company's certificate of incorporation must be approved by a two-thirds vote of the Company's Board of Directors and also by a majority of the outstanding shares of the Company's voting stock, provided, however, that approval by 80% of the outstanding voting stock is generally required for certain provisions (i.e., provisions relating to number, classification, election and removal of directors; amendment of bylaws; call of special stockholder meetings; offers to acquire and acquisitions of control; certain business combinations; stockholder action without a meeting; and amendments to provisions relating to the foregoing in the certificate of incorporation). The bylaws of the Company may be amended by either a majority vote of the Board of Directors or at least 80% of the total votes eligible to be voted at a duly constituted meeting of stockholders. Purpose and Takeover Defensive Effects of the Company's Certificate of Incorporation and Bylaws. The Board of Directors of the Company believes that the provisions described above are prudent and reduce the Company's vulnerability to takeover attempts and certain other transactions which have not been negotiated with and approved by its Board of Directors. The Board of Directors believes these provisions are in the best interest of the Company and its stockholders. In the judgment of the Board of Directors, the Company's Board will be in the best position to determine the true value of the Company and to negotiate more effectively for what may be in the best interests of its stockholders. Accordingly, the Board of Directors believes that it is in the best interests of the Company and its stockholders to encourage potential acquirors to negotiate directly with the Board of Directors of the Company and that these provisions 110 will encourage such negotiations and discourage hostile takeover attempts. It is also the view of the Board of Directors that these provisions should not discourage persons from proposing a merger or other transaction at prices reflective of the true value of the Company and which is in the best interests of all stockholders. Attempts to take over financial institutions and their holding companies have recently become increasingly common. Takeover attempts which have not been negotiated with and approved by the Board of Directors present to stockholders the risk of a takeover on terms which may be less favorable than might otherwise be available. A transaction which is negotiated and approved by the Board of Directors, on the other hand, can be carefully planned and undertaken at an opportune time in order to obtain maximum value for the Company and its stockholders, with due consideration given to matters such as the management and business of the acquiring corporation and maximum strategic development of the Company's assets. An unsolicited takeover proposal can seriously disrupt the business and management of a corporation and cause it great expense. Although a tender offer or other takeover attempt may be made at a price substantially above then current market prices, such offers are sometimes made for less than all of the outstanding shares of a target company. As a result, stockholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise which is under different management and whose objectives may not be similar to those of the remaining stockholders. The concentration of control, which could result from a tender offer or other takeover attempt, could also deprive the Company's remaining stockholders of the benefits of certain protective provisions of the Exchange Act, if the number of beneficial owners becomes less than the 300 required for Exchange Act registration. Despite the belief of the Company as to the benefits to stockholders of these provisions of the Company's certificate of incorporation and bylaws, these provisions may also have the effect of discouraging a future takeover attempt which would not be approved by the Company's Board, but pursuant to which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have any opportunity to do so. Such provisions will also render the removal of the Company's Board of Directors and of management more difficult. The Board will enforce the voting limitation provisions of the charter in proxy solicitations and accordingly could utilize these provisions to defeat proposals that are favored by a majority of the stockholders. The Boards of Directors of the Company, however, have concluded that the potential benefits outweigh the possible disadvantages. Pursuant to applicable law, at any annual or special meeting of its stockholders, the Company may adopt additional charter provisions regarding the acquisition of its equity securities that would be permitted to a Delaware corporation. The Company does not presently intend to propose the adoption of further restrictions on the acquisition of the Company's equity securities. Other Restrictions on Acquisitions of Stock Delaware Anti-Takeover Statute. The Delaware General Corporation Law (the "DGCL") provides that buyers who acquire more than 15% of the outstanding stock of a Delaware corporation, such as the Company, are prohibited from completing a hostile takeover of such corporation for three years. However, the takeover can be completed if (i) the buyer, while acquiring the 15% interest, acquires at least 85% of the corporation's outstanding stock (the 85% requirement excludes shares held by directors who are also officers and certain shares held under employee stock plans), or (ii) the takeover is approved by the target corporation's board of directors and two-thirds of the shares of outstanding stock of the corporation (excluding shares held by the bidder). However, these provisions of the DGCL do not apply to Delaware corporations with less than 2,000 stockholders or which do not have voting stock listed on a national exchange or listed for quotation with a registered national securities association. The Company is currently listed on the Nasdaq Stock Market. Federal Regulation. A federal regulation prohibits any person prior to the completion of a merger conversion from transferring, or entering into any agreement or understanding to transfer, the legal or beneficial ownership of the subscription rights issued under a plan of merger conversion or the stock to be issued upon their exercise. This 111 regulation also prohibits any person prior to the completion of a merger conversion from offering, or making an announcement of an offer or intent to make an offer, to purchase such subscription rights or stock. Federal law provides that no company, "directly or indirectly or acting in concert with one or more persons, or through one or more subsidiaries, or through one or more transactions," may acquire "control" of a savings association at any time without the prior approval of the OTS. In addition, federal regulations require that, prior to obtaining control of a savings association, a person, other than a company, must give 60 days' prior notice to the OTS and have received no OTS objection to such acquisition of control. Any company that acquires such control becomes a "savings and loan holding company" subject to registration, examination and regulation as a savings and loan holding company. Under federal law (as well as the regulations referred to below) the term "savings association" includes state and federally chartered SAIF-insured institutions and federally chartered savings banks whose accounts are insured by the FDIC's BIF and holding companies thereof. Control, as defined under federal law, in general means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of a savings association's directors, or a determination by the OTS that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings association's voting stock, if the acquiror also is subject to any one of eight "control factors," constitutes a rebuttable determination of control under the OTS regulations. Such control factors include the acquiror being one of the two largest stockholders. The determination of control may be rebutted by submission to the OTS, prior to the acquisition of stock or the occurrence of any other circumstances giving rise to such determination, of a statement setting forth facts and circumstances which would support a finding that no control relationship will exist and containing certain undertakings. The OTS regulations provide that persons or companies which acquire beneficial ownership exceeding 10% or more of any class of a savings association's stock must file with the OTS a certification that the holder is not in control of such institution, is not subject to a rebuttable determination of control and will take no action which would result in a determination or rebuttable determination of control without prior notice to or approval of the OTS, as applicable. 112 DESCRIPTION OF CAPITAL STOCK The 3,000,000 shares of capital stock authorized by the Company certificate of incorporation are divided into two classes consisting of 2,500,000 shares of common stock (par value $.01 per share) and 500,000 shares of serial preferred stock (par value $.01 per share). Each share of the common stock has the same relative rights and is identical in all respects with each other share of the common stock. The common stock of the Company represents non-withdrawable capital, is not of an insurable type and is not insured by the SAIF. Under Delaware law, the holders of the common stock possess exclusive voting power in the Company. Each stockholder is entitled to one vote for each share held on all matters voted upon by stockholders. If the Company issues preferred stock subsequent to the Merger Conversion, holders of the preferred stock may also possess voting rights. In the unlikely event of the liquidation or dissolution of the Company, the holders of the common stock will be entitled to receive -- after payment or provision for payment of all debts and liabilities of the Company (including all deposits in the Resulting Institution and accrued interest thereon) -- all assets of the Company available for distribution, in cash or in kind. See "The Merger Conversion - Effects on Depositors and Borrowers of Neodesha - Liquidation Rights." If preferred stock is issued subsequent to the Merger Conversion, the holders thereof may have a priority over the holders of common stock in the event of liquidation or dissolution. Holders of the common stock are not entitled to preemptive rights with respect to any shares which may be issued. The common stock is not subject to call for redemption, and, upon receipt by the Company of the full purchase price therefor, each share of the common stock will be validly issued, fully paid and nonassessable. The Board of Directors of the Company is authorized to issue preferred stock in series and to fix and state the voting powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. Preferred stock may rank prior to the common stock as to dividend rights, liquidation preferences, or both, and may have full or limited voting rights. The holders of preferred stock may be entitled to vote as a separate class or series under certain circumstances, regardless of any other voting rights which such holders may have. Except as discussed above, the Company has no present plans for the issuance of the additional authorized shares of common stock or for the issuance of any shares of preferred stock. In the future, the authorized but unissued and unreserved shares of common stock will be available for general corporate purposes, including but not limited to possible issuance as stock dividends or stock splits, in future mergers or acquisitions, in a future underwritten or other public offering, or under an employee stock ownership plan. The authorized but unissued shares of preferred stock will similarly be available for issuance in future mergers or acquisitions, in a future underwritten public offering or private placement or for other general corporate purposes. Except as described above or as otherwise required to approve the transaction in which the additional authorized shares of common stock or authorized shares of preferred stock would be issued, no stockholder approval will be required for the issuance of these shares. Accordingly, the Board of Directors of the Company, without stockholder approval, can issue preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of common stock. As of May 4, 1998, the Company had 957,319 shares of issued and outstanding capital stock. The Company's Common Stock is quoted on the Nasdaq SmallCap Market under the symbol "FFSL." See "Common Stock Prices and Dividends." See "Restrictions on Acquisitions of Stock and Related Takeover Defensive Provisions - Provisions of the Company's Certificate of Incorporation and Bylaws" for a description of certain provisions of the Company's certificate of incorporation and bylaws which may affect the ability of the Company's stockholders to participate in certain transactions relating to acquisitions of control of the Company. Also, see "Common Stock Prices and Dividends" for a description of certain matters relating to the possible future payment of dividends on the Company's common stock. 113 The Company's stock transfer agent and registrar is Registrar and Transfer Company, Cranford, New Jersey. LEGAL OPINIONS The validity of the issuance of the Common Stock and the federal income tax consequences of the Merger Conversion will be passed upon for Neodesha and the Company by the firm of Silver, Freedman & Taff, L.L.P. (a limited liability partnership including professional corporations), 7th Floor, East Tower, 1100 New York Avenue, N.W., Washington, D.C. Matters of Kansas tax law will be passed upon for the Company by Grant Thornton, LLP, 100 N. Broadway, Suite 800, Wichita, Kansas. Silver, Freedman & Taff, L.L.P. and Grant Thornton, LLP, have consented to the references herein to their opinions. Trident has been represented in the Merger Conversion by Elias, Matz, Tiernan & Herrick, 734 15th Street, N.W., Washington, D.C. EXPERTS The Consolidated Financial Statements of the Company and the Financial statements of Neodesha as of September 30, 1997 and 1996 and for each of the years in the two year period ended September 30, 1997 included in this Prospectus have been audited by Grant Thornton, LLP, independent auditors, as indicated in their reports which are included herein, and have been so included in reliance upon such reports, given upon their authority as experts in accounting and auditing. Ferguson has consented to the inclusion herein of the summary of its letter to Neodesha setting forth its opinion as to the estimated pro forma market value of Neodesha as converted and to the reference to its opinion that subscription rights received by Eligible Account Holders, Supplemental Eligible Account Holders and other eligible subscribers do not have any economic value. ADDITIONAL INFORMATION The Company has filed with the SEC a Registration Statement under the Securities Act with respect to the Common Stock offered hereby. As permitted by the rules and regulations of the SEC, this Prospectus does not contain all the information set forth in the Registration Statement. However, the prospectus does contain a description of the material provisions of the documents contained therein. Such information can be examined without charge at the public reference facilities of the SEC located at 450 Fifth Street, NW, Washington, DC 20549, and copies of such material can be obtained from the SEC at prescribed rates. In addition, the SEC maintains a Web site. The address of the SEC's Web site is "http://www.sec.gov." The statements contained herein as to the contents of any contract or other document filed as an exhibit to the Registration Statement are, of necessity, brief descriptions thereof which describe only the material provisions of such documents; each such statement is qualified by reference to such contract or document. Neodesha has filed an Application for Approval of Merger Conversion with the OTS with respect to the Merger Conversion. Pursuant to the rules and regulations of the OTS, this Prospectus omits certain information contained in that application. The application may be examined at the principal offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552, at the Midwest Regional Office of the OTS, 122 W. John Carpenter Freeway, Suite 600, Irving, Texas 75039, without charge. The Common Stock is registered with the SEC under Section 12(g) of the Exchange Act. The Company is subject to the informational requirements of the Exchange Act in accordance therewith files reports and other information with the SEC. The holders of the Company's Common Stock are and will continue to be subject to the reporting requirements and restrictions on stock purchases and sales by directors, officers and greater than 10% stockholders and certain other requirements of the Exchange Act. Under the Plan, the Company has undertaken that it will not terminate such registration for a period of at least three years following the Merger Conversion. 114 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors First Independence Corporation and Subsidiary We have audited the accompanying consolidated balance sheets of First Independence Corporation and Subsidiary as of September 30, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Independence Corporation and Subsidiary as of September 30, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with generally accepted accounting principles. Wichita, Kansas October 24, 1997 First Independence Corporation and Subsidiary CONSOLIDATED BALANCE SHEETS ASSETS
September 30, March 31, --------------------------- 1998 1997 1996 ------------ ------------ ------------ (Unaudited) Cash and due from banks .......................... $ 869,625 $ 961,350 $ 753,134 Federal funds sold ............................... 5,300,000 1,600,000 400,000 Other interest-bearing deposits .................. 207,117 589,877 610,295 ------------ ------------ ------------ Cash and cash equivalents .................... 6,376,742 3,151,227 1,763,429 Investment securities held to maturity (estimated fair value $4,960,950 at March 31, 1998; $2,996,300 at September 30, 1997; $1,970,980 at September 30, 1996) .............. 5,000,000 3,000,000 2,000,000 Investment securities available for sale ......... 3,346,443 4,311,406 5,235,073 Mortgage-backed securities held to maturity (estimated fair value $21,093,661 at March 31, 1998; $23,748,569 at September 30, 1997; $27,873,630 at September 30, 1996) ............. 20,902,199 23,527,689 28,039,314 Mortgage-backed securities available for sale .... -- 471,618 659,207 Loans receivable ................................. 85,263,856 74,558,783 67,682,920 Premises and equipment ........................... 1,307,769 1,297,500 910,813 Federal Home Loan Bank stock, at cost ............ 1,422,800 1,368,900 1,239,500 Accrued interest receivable ...................... 736,675 712,298 667,920 Real estate acquired through foreclosure ......... 15,320 12,131 11,845 Deferred income taxes ............................ -- -- 173,904 Other ............................................ 122,179 111,107 155,304 ------------ ------------ ------------ $124,493,983 $112,522,659 $108,539,229 ============ ============ ============
The accompanying notes are an integral part of these statements. LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, March 31, --------------------------- 1998 1997 1996 ------------ ------------ ------------ (Unaudited) Deposits ......................................... $ 84,171,855 $ 76,229,176 $ 69,356,422 Advances from borrowers for taxes and insurance ...................................... 733,076 693,069 678,072 Checks issued in excess of cash items ............ 280,881 -- 492,627 Deferred income taxes ............................ 85,815 34,048 -- Advances from Federal Home Loan Bank ............. 27,300,000 23,700,000 24,300,000 Accrued expenses and other ....................... 368,649 337,085 709,599 ------------ ------------ ------------ Total liabilities .......................... 112,940,276 100,993,378 95,536,720 Stockholders' equity Preferred stock, $.01 par value, 500,000 shares authorized; none issued ...................... -- -- -- Common stock, $.01 par value, 2,500,000 shares authorized; 1,498,392 shares issued in 1998 and 1997 and 749,196 shares issued in 1996 ... 14,984 14,984 7,492 Additional paid-in capital ..................... 7,188,447 7,122,744 7,053,143 Retained earnings--substantially restricted .... 9,689,322 9,441,054 8,960,098 Unrealized gain (loss) on securities available for sale, net of related taxes ............... 19,955 15,112 (11,293) Required contributions for shares acquired by Employee Stock Ownership Plan (ESOP) ......... (181,843) (218,212) (290,949) Unearned stock compensation--recognition and retention plan (RRP) ......................... (21,812) (43,634) (87,278) Treasury stock, 542,699 shares at March 31, 1998, 520,059 shares at September 30, 1997 and 331,550 shares at September 30, 1996-- at cost ...................................... (5,155,346) (4,802,767) (2,628,704) ------------ ------------ ------------ Total stockholders' equity ................. 11,553,707 11,529,281 13,002,509 ------------ ------------ ------------ $124,493,983 $112,522,659 $108,539,229 ============ ============ ============
2 First Independence Corporation and Subsidiary CONSOLIDATED STATEMENTS OF EARNINGS
Six months ended Year ended March 31 September 30, ----------------------- ----------------------- 1998 1997 1997 1996 ---------- ---------- ---------- ---------- (Unaudited) Interest income Loans ................................. $3,332,484 $2,778,864 $5,684,053 $5,189,361 Mortgage-backed securities ............ 728,843 884,811 1,726,754 1,929,927 Investment securities ................. 199,976 234,081 513,223 478,990 Interest-bearing deposits and other ... 115,505 72,161 145,016 174,825 ---------- ---------- ---------- ---------- Total interest income ............... 4,376,808 3,969,917 8,069,046 7,773,103 Interest expense Deposits .............................. 1,944,157 1,781,023 3,659,320 3,581,799 Borrowed funds ........................ 735,448 706,940 1,399,263 1,087,249 ---------- ---------- ---------- ---------- Total interest expense .............. 2,679,605 2,487,963 5,058,583 4,669,048 ---------- ---------- ---------- ---------- Net interest income ..................... 1,697,203 1,481,954 3,010,463 3,104,055 Other income Service charges ....................... 75,976 83,445 199,459 178,949 Real estate operations ................ (1,003) 1,412 34,179 94,199 Other ................................. 38,049 21,021 46,795 58,292 Gain on sale of investment securities . -- -- -- 250,945 ---------- ---------- ---------- ---------- 113,022 105,878 280,433 582,385 General, administrative and other expense Employee compensation and benefits .... 659,977 600,983 1,239,516 1,093,509 Occupancy and equipment ............... 117,677 73,435 167,944 131,172 Data processing fees .................. 90,177 75,364 150,896 138,659 Federal deposit insurance premiums .... 23,831 42,216 65,626 591,677 Other operating ....................... 255,236 258,145 487,516 429,304 ---------- ---------- ---------- ---------- 1,146,898 1,050,143 2,111,498 2,384,321 ---------- ---------- ---------- ---------- Earnings before income taxes ............ 663,327 537,689 1,179,398 1,302,119 Income tax expense ...................... 288,091 205,415 467,718 486,826 ---------- ---------- ---------- ---------- NET EARNINGS ........................ $ 375,236 $ 332,274 $ 711,680 $ 815,293 ========== ========== ========== ========== Earnings per share Basic ................................. $.41 $.33 $.73 $.72 Diluted ............................... .38 .31 .68 .68
The accompanying notes are an integral part of these statements. 3 First Independence Corporation and Subsidiary CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Six months ended March 31, 1998 (unaudited) and years ended September 30, 1997 and 1996
Unrealized gain Required (loss) on contri- Unearned securities butions stock Additional available for shares compen- Common paid-in Retained for sale, acquired sation Treasury stock capital earnings net by ESOP --RRP stock Total ------- ---------- ---------- --------- --------- --------- ----------- ----------- Balance at October 1, 1995 .......... $ 7,492 $6,998,314 $8,358,681 $ 176,580 $(363,686) $(130,922) $(1,446,524) $13,599,935 Net earnings for the year ended September 30, 1996 ................ -- -- 815,293 -- -- -- -- 815,293 Cash dividends of $.188 per share ... -- -- (213,876) -- -- -- -- (213,876) Common stock options exercised ...... -- (5,250) -- -- -- -- 25,250 20,000 Depreciation of securities available for sale .......................... -- -- -- (187,873) -- -- -- (187,873) ESOP loan repayments ................ -- -- -- -- 72,737 -- -- 72,737 Fair value adjustment on ESOP shares committed for release ...... -- 60,079 -- -- -- -- -- 60,079 Amortization of unearned stock compensation ...................... -- -- -- -- -- 43,644 -- 43,644 Purchase of 125,846 shares of treasury stock .................... -- -- -- -- -- -- (1,207,430) (1,207,430) ------- ---------- ---------- --------- --------- --------- ----------- ----------- Balance at September 30, 1996 ....... 7,492 7,053,143 8,960,098 (11,293) (290,949) (87,278) (2,628,704) 13,002,509 Net earnings for the year ended September 30, 1997 ................ -- -- 711,680 -- -- -- -- 711,680 Cash dividends of $.238 per share ... -- -- (230,724) -- -- -- -- (230,724) Common stock options exercised ...... -- (12,499) -- -- -- -- 59,769 47,270 Appreciation of securities available for sale .......................... -- -- -- 26,405 -- -- -- 26,405 ESOP loan repayments ................ -- -- -- -- 72,737 -- -- 72,737 Fair value adjustment on ESOP shares committed for release ...... -- 89,592 -- -- -- -- -- 89,592 Amortization of unearned stock compensation ...................... -- -- -- -- -- 43,644 -- 43,644 Purchase of 197,963 shares of treasury stock .................... -- -- -- -- -- -- (2,233,832) (2,233,832) Two-for-one stock split ............. 7,492 (7,492) -- -- -- -- -- -- ------- ---------- ---------- --------- --------- --------- ----------- ----------- Balance at September 30, 1997 ....... 14,984 7,122,744 9,441,054 15,112 (218,212) (43,634) (4,802,767) 11,529,281
4 First Independence Corporation and Subsidiary CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- CONTINUED Six months ended March 31, 1998 (unaudited) and years ended September 30, 1997 and 1996
Unrealized gain Required (loss) on contri- Unearned securities butions stock Additional available for shares compen- Common paid-in Retained for sale, acquired sation Treasury stock capital earnings net by ESOP --RRP stock Total ------- ---------- ---------- --------- --------- --------- ----------- ----------- Net earnings for the six months ended March 31, 1998 (unaudited) .. $ -- $ -- $ 375,236 $ -- $ -- $ -- $ -- $ 375,236 Cash dividends of $.1375 per share .. -- -- (126,968) -- -- -- -- (126,968) Common stock options exercised ...... -- (2,558) -- -- -- -- 11,858 9,300 Appreciation of securities available for sale .......................... -- -- -- 4,843 -- -- -- 4,843 ESOP loan repayments ................ -- -- -- -- 36,369 -- -- 36,369 Fair value adjustment on ESOP shares committed for release ...... -- 68,261 -- -- -- -- -- 68,261 Amortization of unearned stock compensation ...................... -- -- -- -- -- 21,822 -- 21,822 Purchase of 24,500 shares of treasury stock .................... -- -- -- -- -- -- (364,437) (364,437) ------- ---------- ---------- --------- --------- --------- ----------- ----------- Balance at March 31, 1998 (unaudited) ....................... $14,984 $7,188,447 $9,689,322 $ 19,955 $(181,843) $ (21,812) $(5,155,346) $11,553,707 ======= ========== ========== ========= ========= ========= =========== ===========
The accompanying notes are an integral part of these statements. 5 First Independence Corporation and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended Year ended March 31, September 30, ------------------------- ------------------------- 1998 1997 1997 1996 ----------- ----------- ----------- ----------- (Unaudited) Cash flows from operating activities Net earnings ...................................... $ 375,236 $ 332,274 $ 711,680 $ 815,293 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation .................................. 52,893 37,406 84,077 55,895 Amortization of premiums and discounts on investments and mortgage-backed securities .. 37,309 65,717 88,993 106,967 Gain on sale of investment securities ......... -- -- -- (250,945) Amortization of deferred loan origination fees (74,853) (30,784) (60,988) (64,119) Amortization of expense related to employee benefit plans ............................... 126,452 97,286 205,973 176,460 Gain on sale of real estate acquired through foreclosure ......................... (2,499) (436) (41,216) (111,956) Deferred income taxes ......................... 48,807 15,809 191,768 (38,769) Other ......................................... -- -- 229 3,402 Increase (decrease) in cash due to changes in Accrued interest receivable ................. (24,377) (4,796) (44,378) (49,482) Other assets ................................ (67,281) 39,357 22,957 (4,829) Accrued expenses and other liabilities ...... (51,343) (547,535) (369,995) 503,251 Income taxes payable ........................ 139,268 140,820 50,864 (123,286) ----------- ----------- ----------- ----------- Net cash provided by operating activities . 559,612 145,118 839,964 1,017,882 Cash flows from investing activities Proceeds from sale of available for sale securities -- -- -- 263,145 Proceeds from maturities and repayment of securities Available for sale ............................ 1,466,371 2,075,706 2,188,741 3,167,307 Held to maturity .............................. 5,576,007 3,074,425 6,412,465 5,236,916 Purchase of securities Available for sale ............................ (63,705) (1,097,163) (1,154,129) (2,217,489) Held to maturity .............................. (5,000,000) (2,000,000) (3,000,000) (5,790,535) Net increase in loans ............................. (10,631,244) (2,566,948) (6,830,223) (7,215,690) Capital expenditures .............................. (63,162) (407,445) (470,993) (308,867) Proceeds from sale of real estate acquired through foreclosure ............................. 174 10,194 24,136 37,669 Other ............................................. -- -- -- 2,219 ----------- ----------- ----------- ----------- Net cash used in investing activities ..... (8,715,559) (911,231) (2,830,003) (6,825,325)
6 First Independence Corporation and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
Six months ended Year ended March 31, September 30, ------------------------- ------------------------- 1998 1997 1997 1996 ----------- ----------- ----------- ----------- (Unaudited) Cash flows from financing activities Net increase in deposits .......................... $ 7,942,679 $ 4,784,477 $ 6,872,754 $ 1,429,794 Net increase (decrease) in advances from borrowers for taxes and insurance ............... 40,007 (3,998) 14,996 (564,868) Net increase (decrease) in checks issued in excess of cash items ............................ 280,881 (267,374) (492,627) 492,627 Advances from Federal Home Loan Bank .............. 15,500,000 9,800,000 17,500,000 20,900,000 Repayment of Federal Home Loan Bank advances ...... (11,900,000) (11,600,000) (18,100,000) (15,400,000) Cash dividends paid ............................... (126,968) (112,683) (230,724) (213,876) Purchase of treasury stock ........................ (364,437) (1,860,978) (2,233,832) (1,207,430) Stock options exercised ........................... 9,300 38,180 47,270 20,000 ----------- ----------- ----------- ----------- Net cash provided by financing activities ....... 11,381,462 777,624 3,377,837 5,456,247 ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents .................................. 3,225,515 11,511 1,387,798 (351,196) Cash and cash equivalents at beginning of period .... 3,151,227 1,763,429 1,763,429 2,114,625 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period .......... $ 6,376,742 $ 1,774,940 $ 3,151,227 $ 1,763,429 =========== =========== =========== =========== Supplemental disclosures of cash flow information Cash paid during the period for Income taxes .................................... $ 148,823 $ 64,595 $ 225,086 $ 648,881 Interest ........................................ 2,642,896 2,480,221 4,935,024 4,669,113 Noncash investing and financing activities Transfer from loans to real estate acquired through foreclosure ........................... 56,574 8,781 88,772 11,845 Issuance of loans receivable in connection with the sale of real estate acquired through foreclosure ........................... 55,550 -- 51,600 45,000
The accompanying notes are an integral part of these statements. 7 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE A -- SUMMARY OF ACCOUNTING POLICIES First Independence Corporation (the "Corporation") is a savings and loan holding company whose activities are primarily limited to holding the stock of First Federal Savings and Loan Association of Independence (the "Association"). Future references to the Corporation or the Association are utilized herein as the context requires. The Association conducts a general banking business in southeastern Kansas which consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, consumer and nonresidential purposes and the purchase of investment and mortgage-backed securities. The Association's profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) and the interest expense paid on interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Association can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management's control. The consolidated financial information presented herein has been prepared in accordance with generally accepted accounting principles (GAAP) and general accounting practices within the financial services industry. In preparing consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. The financial statements as of March 31, 1998, and for the six-month periods ended March 31, 1998 and 1997 are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of financial position and results of operations have been made. The following is a summary of the Corporation's significant accounting policies which have been consistently applied in the preparation of the accompanying consolidated financial statements. 1. Principles of consolidation --------------------------- The consolidated financial statements include the accounts of First Independence Corporation and its wholly-owned subsidiary, First Federal Savings and Loan Association of Independence. All significant intercompany balances and transactions have been eliminated. 8 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- Continued 2. Cash equivalents ---------------- For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, federal funds sold and other overnight deposits. 3. Investment securities and mortgage-backed securities ---------------------------------------------------- Investment securities and mortgage-backed securities are classified in three categories and accounted for as follows: (a) debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost, (b) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings and (c) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available for sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. Premiums and discounts on investment securities are amortized to operations over the term of the security using the level yield method. Premiums and discounts on mortgage-backed securities are amortized and accreted to operations using the level yield method over the estimated life of the underlying loans collateralizing the securities. Gains and losses on the sale of securities designated as available for sale are recorded using the specific identification method. 4. Loans receivable ---------------- Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance, adjusted for any charge-offs, the allowance for loan losses, unearned discounts and net deferred loan origination fees. The allowance for loan losses is increased by charges to operations and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Association's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current economic conditions. 9 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- Continued Specific reserves are established for any impaired nonresidential loan for which the recorded investment in the loan exceeds the measured value of the loan. Loans subject to impairment valuation are defined as nonaccrual loans or any other loan where it is probable that all amounts due according to the contractual terms will not be collected, exclusive of smaller balance homogenous loans such as home equity, consumer and 1-4 family residential real estate loans. The values of loans subject to impairment valuation are determined based on the present value of expected future cash flows, the market price of the loans, or the fair values of the underlying collateral if the loan is collateral dependent. Uncollectible interest on loans that are contractually past due is charged off or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued. Income is subsequently recognized only to the extent cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. If the collection of principal in whole or in part is in doubt, all payments received on nonaccrual loans are credited to principal until such doubt is eliminated. 5. Loan origination fees and related costs --------------------------------------- Loan origination fees received, net of certain direct origination costs are deferred on a loan-by-loan basis and amortized to interest income using the interest method, giving effect to actual loan prepayments. Loan origination costs are considered to be direct costs attributable to originating a loan. 6. Real estate acquired through foreclosure ---------------------------------------- Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in real estate operations. 7. Premises and equipment ---------------------- Premises and equipment are carried at cost less accumulated depreciation. Depreciation is included in occupancy and equipment expense and is provided by the straight-line method over the following estimated useful lives: Years ----- Building ........................................... 8-50 Furniture, fixtures and equipment .................. 5-20 Automobiles ........................................ 5 10 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- Continued The costs of maintenance and repairs are charged to operations as incurred. The costs of significant additions, renewals and betterments to depreciable properties are capitalized and depreciated over the remaining or extended estimated useful lives of the properties. Gains and losses on disposition of property and equipment are included in operations. 8. Employee stock ownership plan ----------------------------- The Corporation sponsors a leveraged employee stock ownership plan (ESOP). The ESOP holds company stock which serves as collateral for the ESOP debt. As shares are released from collateral, the Corporation reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings-per-share ("EPS") computations. Dividends on released and allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as compensation cost. 9. Stock-based compensation ------------------------ The Company uses the intrinsic value based method of accounting for stock options. Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock over the excise price at the measurement date. 10. Income taxes ------------ First Independence Corporation and its subsidiary file a consolidated federal income tax return. Deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized. 11. Earnings per share ------------------ Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the periods. 11 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE A -- SUMMARY OF ACCOUNTING POLICIES -- Continued Diluted earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period plus the common share equivalents related to outstanding stock options. Weighted average common shares outstanding and diluted shares deemed outstanding were as follows: Six months ended Year ended March 31, September 30, ------------------- --------------------- 1998 1997 1997 1996 ------- --------- --------- --------- (Unaudited) Weighted average common shares outstanding ............. 924,407 1,014,119 980,858 1,136,610 Common share equivalents related to outstanding stock options ... 71,193 63,819 70,658 54,762 ------- --------- --------- --------- Adjusted weighted average common shares deemed to be outstanding 995,600 1,077,938 1,051,516 1,191,372 ======= ========= ========= ========= Common shares outstanding exclude unallocated and uncommitted shares held by the ESOP trust. 12. Common stock split ------------------ On December 18, 1996, the Corporation's Board of Directors announced a two-for-one stock split effected in the form of a stock dividend to stockholders of record as of January 10, 1997. All references in the financial statements to number of shares, per share amounts and market prices of the Corporation's common stock have been retroactively restated to reflect the increased number of common shares outstanding. NOTE B -- INVESTMENT SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investment securities are as follows: March 31, 1998 (unaudited) ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair Held to maturity cost gains losses value ---------------- ---------- ---------- ---------- ---------- U.S. Government agency obligations ................ $5,000,000 $ -- $39,050 $4,960,950 ========== ======= ======= ========== Available for sale ------------------ Intermediate term liquidity portfolio .................. $ 336,823 $ 621 $ -- $ 337,444 U.S. Government agency obligations ................ 2,977,435 31,564 -- 3,008,999 ---------- ------- ------- ---------- $3,314,258 $32,185 $ -- $3,346,443 ========== ======= ======= ========== 12 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE B -- INVESTMENT SECURITIES -- Continued September 30, 1997 ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair Held to maturity cost gains losses value ---------------- ---------- ---------- ---------- ---------- U.S. Government agency obligations ................ $3,000,000 $ 2,860 $ 6,560 $2,996,300 ========== ======= ======= ========== Available for sale ------------------ Intermediate term liquidity portfolio .................. $ 327,017 $ 639 $ -- $ 327,656 U.S. Government agency obligations ................ 3,961,757 29,213 7,220 3,983,750 ---------- ------- ------- ---------- $4,288,774 $29,852 $ 7,220 $4,311,406 ========== ======= ======= ========== September 30, 1996 ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair Held to maturity cost gains losses value ---------------- ---------- ---------- ---------- ---------- U.S. Government agency obligations ................ $2,000,000 $ -- $29,020 $1,970,980 ========== ======= ======= ========== Available for sale ------------------ Intermediate term liquidity portfolio .................. $ 308,102 $ -- $ 579 $ 307,523 U.S. Government agency obligations ................ 4,934,938 29,016 36,404 4,927,550 ---------- ------- ------- ---------- $5,243,040 $29,016 $36,983 $5,235,073 ========== ======= ======= ========== The amortized cost and estimated fair value of U.S. Government and agency obligations at September 30, 1997, by term to maturity are as follows: Estimated Amortized fair Held to maturity cost value ---------------- ---------- ---------- Due in two to five years ................. $1,000,000 $1,001,250 Due in five to ten years ................. 2,000,000 1,995,050 ---------- ---------- $3,000,000 $2,996,300 ========== ========== 13 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE B -- INVESTMENT SECURITIES -- Continued Estimated Amortized fair Available for sale cost value ------------------ ---------- ---------- Due in one year or less .................. $ 993,777 $ 998,750 Due in one to two years .................. 978,149 995,000 Due in two to five years ................. 1,989,831 1,990,000 ---------- ---------- $3,961,757 $3,983,750 ========== ========== During the year ended September 30, 1996 the Association sold FHLMC stock designated as available for sale for total proceeds of $263,145 realizing a gain of $250,945. The intermediate term liquidity portfolio does not have a contractual due date. Investment securities with a fair value of $993,440 at September 30, 1997 were pledged to secure government deposits. NOTE C -- MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of mortgage-backed securities are summarized as follows: March 31, 1998 (unaudited) ------------------------------------------------ Gross Gross Estimated Amortized unrealized unrealized fair Held to maturity cost gains losses value ---------------- ----------- ---------- ---------- ----------- GNMA certificates ............ $ 63,519 $ 5,989 $ -- $ 69,508 FHLMC certificates ........... 8,216,103 81,794 15,931 8,281,966 FNMA certificates ............ 5,542,879 120,511 22,725 5,640,665 Collateralized mortgage obligations ................ 7,079,698 39,923 18,099 7,101,522 ----------- -------- -------- ----------- $20,902,199 $248,217 $ 56,755 $21,093,661 =========== ======== ======== =========== 14 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE C -- MORTGAGE-BACKED SECURITIES -- Continued September 30, 1997 ------------------------------------------------ Gross Gross Estimated Amortized unrealized unrealized fair Held to maturity cost gains losses value ---------------- ----------- ---------- ---------- ----------- GNMA certificates ............ $ 88,687 $ 8,094 $ -- $ 96,781 FHLMC certificates ........... 8,304,231 145,519 10,514 8,439,236 FNMA certificates ............ 6,535,590 154,284 29,048 6,660,826 Collateralized mortgage obligations ................ 8,599,181 64,924 112,379 8,551,726 ----------- -------- -------- ----------- $23,527,689 $372,821 $151,941 $23,748,569 =========== ======== ======== =========== Available for sale ------------------ FHLMC certificates ........... $ 469,874 $ 1,744 $ -- $ 471,618 =========== ======== ======== =========== September 30, 1996 ------------------------------------------------ Gross Gross Estimated Amortized unrealized unrealized fair Held to maturity cost gains losses value ---------------- ----------- ---------- ---------- ----------- GNMA certificates ............ $ 122,921 $ 10,687 $ -- $ 133,608 FHLMC certificates ........... 10,066,669 60,422 62,866 10,064,225 FNMA certificates ............ 8,912,022 118,258 47,439 8,982,841 Collateralized mortgage obligations ................ 8,937,702 -- 244,746 8,692,956 ----------- -------- -------- ----------- $28,039,314 $189,367 $355,051 $27,873,630 =========== ======== ======== =========== Available for sale ------------------ FHLMC certificates ........... $ 669,454 $ -- $ 10,247 $ 659,207 =========== ======== ======== =========== Mortgage-backed securities generally mature ratably over the 30-year term of the underlying loans collateralizing the securities. Expected maturities on mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 15 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE C -- MORTGAGE-BACKED SECURITIES -- Continued Mortgage-backed securities with a fair value of $16,055,495, $13,295,170 and $11,005,909 at March 31, 1998, September 30, 1997 and 1996, respectively, are pledged to secure government and other deposits. NOTE D -- LOANS RECEIVABLE Loans receivable are summarized as follows: September 30, March 31, ---------------------------- 1998 1997 1996 ---- ---- ---- (Unaudited) First mortgage loans Secured by one-to-four family residences ............ $ 67,166,512 $ 64,152,604 $ 57,352,844 Secured by multi-family residences ................... 1,132,658 1,164,442 1,370,715 Nonresidential ................ 7,537,343 7,478,908 7,223,602 Construction .................. 13,317,376 763,712 1,833,750 ------------ ------------ ------------ Total first mortgage loans ... 89,153,889 73,559,666 67,780,911 Consumer and other loans Savings ....................... 407,968 349,531 364,011 Automobile .................... 808,379 704,519 402,592 Home equity and second mortgages .................... 593,799 550,008 781,199 Unsecured home improvement .... 257,178 274,267 183,630 Other ......................... 620,719 661,209 184,723 ------------ ------------ ------------ Total consumer and other loans 2,688,043 2,539,534 1,916,155 Less Allowance for loan losses ..... (655,745) (668,185) (690,009) Loans in process .............. (5,617,371) (571,808) (1,050,012) Unearned discounts ............ (2,619) (2,726) (2,929) Deferred loan origination fees (302,341) (297,698) (271,196) ------------ ------------ ------------ (6,578,076) (1,540,417) (2,014,146) ------------ ------------ ------------ Net loans receivable ....... $ 85,263,856 $ 74,558,783 $ 67,682,920 ============ ============ ============ 16 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE D - LOANS RECEIVABLE - Continued Activity in the allowance for loan losses is summarized as follows: Six months ended Year ended March 31, September 30, --------------------- ---------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Balance at beginning of period $ 668,185 $ 690,009 $ 690,009 $ 690,009 Loans charged off ............ (12,440) -- (21,824) -- --------- --------- --------- --------- Balance at end of period ..... $ 655,745 $ 690,009 $ 668,185 $ 690,009 ========= ========= ========= ========= The Association's lending efforts have historically focused on one-to-four family residential real estate loans, which comprise approximately 73%, 84% and 82% of the total loan portfolio at March 31, 1998, September 30, 1997 and 1996, respectively. Approximately 4%, 4% and 5% of the Association's one-to-four family residential real estate loans are secured by properties located outside of the primary lending area of Montgomery and surrounding Kansas counties at March 31, 1998, September 30, 1997 and 1996, respectively. Generally, such loans have been underwritten on the basis of 80% to 90% loan-to-value ratio or mortgage insurance was required. The Association, as with any lending institution, is subject to the risk that real estate values could deteriorate in its primary lending area thereby impairing collateral values. Management believes, however, that real estate values in the Association's primary lending area are currently stable or increasing. Approximately 9%, 11% and 12% of the loan portfolio is comprised of nonresidential and multi-family real estate loans with approximately 12%, 13% and 20% of this total collateralized by properties located outside the Association's primary lending area at March 31, 1998, September 30, 1997 and 1996, respectively. During the six months ended March 31, 1998 the Association began originating construction loans at its new loan production office in Lawrence, Kansas. These construction loans generally have terms of six months or less with permanent financing provided by other lenders. Loans serviced under a County Mortgage Revenue Bond totaled $1,275,551, $1,471,229 and $1,606,982 at March 31, 1998, September 30, 1997 and 1996, respectively. In the normal course of business, the Association makes loans to directors, executive officers and related entities. An analysis of aggregate loan activity with this group is as follows: Six months ended Year ended March 31, September 30, 1998 1997 ---- ---- (Unaudited) Loans outstanding at beginning of period ................... $ 527,884 $ 563,082 New loans .......................... 48,500 37,528 Repayments ......................... (46,083) (72,726) --------- --------- Loans outstanding at end of period ......................... $ 530,301 $ 527,884 ========= ========= 17 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE D - LOANS RECEIVABLE - Continued Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. The recorded investment in these loans and the valuation allowance for losses related to loan impairment are as follows: September 30, March 31, --------------------- 1998 1997 1996 ---- ---- ---- (Unaudited) Principal amount of impaired loans ...... $199,511 $206,691 $210,309 Less valuation allowance ................ 62,511 69,691 73,309 -------- -------- -------- $137,000 $137,000 $137,000 ======== ======== ======== The Association has provided an allowance for loan losses on all impaired loans. Interest income of $5,502, $5,527, $9,537 and $17,267 was recognized and collected on impaired loans during the six months ended March 31, 1998 and 1997 and the years ended September 30, 1997 and 1996, respectively. Nonaccrual loans totaled $572,455, $1,049,367 and $366,832 at March 31, 1998, September 30, 1997 and 1996, respectively. Interest income that would have been recorded under the original terms of such loans approximated $22,000, $17,000, $40,000 and $20,000 for the six months ended March 31, 1998 and 1997 and the years ended September 30, 1997 and 1996, respectively. Interest income that was recorded was insignificant for all periods presented. The Association is not committed to make additional loans to borrowers whose loans have been modified. NOTE E - ACCRUED INTEREST RECEIVABLE Accrued interest receivable is summarized as follows: September 30, March 31, ----------------------- 1998 1997 1996 ---- ---- ---- (Unaudited) Loans receivable ..................... $531,265 $450,257 $404,266 Mortgage-backed securities ........... 121,746 171,729 205,389 Investment securities ................ 83,664 90,312 58,265 -------- -------- -------- $736,675 $712,298 $667,920 ======== ======== ======== 18 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE F - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: September 30, March 31, ------------------------ 1998 1997 1996 ---- ---- ---- (Unaudited) Land.................................. $ 74,958 $ 74,958 $ 74,958 Building ............................. 1,306,679 1,281,916 923,518 Furniture, fixtures and equipment .... 420,407 383,148 307,821 Automobiles .......................... 43,579 43,579 38,729 ---------- ---------- ---------- 1,845,623 1,783,601 1,345,026 Less accumulated depreciation ........ 537,854 486,101 434,213 ---------- ---------- ---------- $1,307,769 $1,297,500 $ 910,813 ========== ========== ========== NOTE G - REAL ESTATE OPERATIONS A summary of real estate operations is as follows: Six months ended Year ended March 31, September 30, ---------------------- ---------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Net gain on sale of real estate acquired through foreclosure ................ $ 2,499 $ 436 $ 41,216 $ 111,956 Net operating income (expense) .................. (3,502) 976 (7,037) (17,757) --------- --------- --------- --------- Income (expense) from real estate operations ..... $ (1,003) $ 1,412 $ 34,179 $ 94,199 ========= ========= ========= ========= Real estate operations of the Association consist primarily of paying property taxes and general maintenance expenses on the properties held. 19 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE H - DEPOSITS Interest-bearing deposits are summarized as follows:
Weighted September 30, average ------------------------------------------------- rate at March 31, 1998 1997 1996 March 31, ------------------------- ---------------------- ----------------------- 1998 Amount Percent Amount Percent Amount Percent ---- ------ ------- ------ ------- ------ ------- (Unaudited) (Unaudited) NOW accounts ......................... 2.05% $ 2,166,518 2.57% $ 2,058,500 2.70% $ 1,631,512 2.35% First Super NOW accounts ............. 2.21 1,858,017 2.21 1,704,678 2.24 1,600,400 2.31 First Money Fund accounts ............ 4.63 24,939,413 29.63 20,702,177 27.15 15,552,973 22.43 ----------- ------ ----------- ------ ----------- ------ Total demand deposits .......... 4.19 28,963,948 34.41 24,465,355 32.09 18,784,885 27.09 Passbook savings accounts ............ 2.89 2,950,487 3.51 2,702,740 3.55 2,649,720 3.82 Certificates of deposit 3.00% to 3.99% .................... -- -- -- 4,539 .01 8,565 .01 4.00% to 4.99% .................... 4.78 1,769,782 2.10 2,189,277 2.87 4,216,378 6.08 5.00% to 5.99% .................... 5.64 45,786,217 54.40 39,910,696 52.36 30,296,166 43.68 6.00% to 6.99% .................... 6.28 4,674,963 5.55 6,930,530 9.09 13,366,636 19.27 7.00% to 7.99% .................... 7.00 26,458 .03 26,039 .03 25,241 .04 8.00% to 8.99% .................... -- -- -- -- -- 8,831 .01 ----------- ------ ----------- ------ ----------- ------ Total certificates of deposit ........ 5.67 52,257,420 62.08 49,061,081 64.36 47,921,817 69.09 ----------- ------ ----------- ------ ----------- ------ Total deposits ...................... 5.06 $84,171,855 100.00% $76,229,176 100.00% $69,356,422 100.00% =========== ====== =========== ====== =========== ======
20 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE H - DEPOSITS - Continued The aggregate amount of certificates of deposit and savings with a minimum denomination of $100,000 was $5,664,218, $3,844,877 and $2,489,514 at March 31, 1998 and September 30, 1997 and 1996, respectively. Scheduled maturities of certificates of deposit are as follows:
March 31, 1998 -------------- (Unaudited) Less than One to Three to one year three years five years Total -------- ----------- ---------- ----- 4.00% to 4.99% $ 1,769,782 $ -- $ -- $ 1,769,782 5.00% to 5.99% 28,772,717 16,691,141 322,359 45,786,217 6.00% to 6.99% 3,132,733 1,542,230 -- 4,674,963 7.00% to 7.99% -- 26,458 -- 26,458 ----------------- ----------------- ---------------- ---------------- $ 33,675,232 $ 18,259,829 $ 322,359 $ 52,257,420 ================= ================= ================ ================ September 30, 1997 ------------------ Less than One to Three to one year three years five years Total -------- ----------- ---------- ----- 3.00% to 3.99% $ 4,539 $ -- $ -- $ 4,539 4.00% to 4.99% 1,734,025 455,252 -- 2,189,277 5.00% to 5.99% 23,918,436 15,493,876 498,384 39,910,696 6.00% to 6.99% 2,351,745 2,411,600 2,167,185 6,930,530 7.00% to 7.99% -- 26,039 -- 26,039 ----------------- ----------------- ---------------- ---------------- $ 28,008,745 $ 18,386,767 $ 2,665,569 $ 49,061,081 ================= ================= ================ ================ September 30, 1996 ------------------ Less than One to Three to one year three years five years Total -------- ----------- ---------- ----- 3.00% to 3.99% $ 8,565 $ -- $ -- $ 8,565 4.00% to 4.99% 3,420,783 795,595 -- 4,216,378 5.00% to 5.99% 19,637,400 9,795,294 863,472 30,296,166 6.00% to 6.99% 7,903,547 3,068,176 2,394,913 13,366,636 7.00% to 7.99% -- -- 25,241 25,241 8.00% to 8.99% 8,831 -- -- 8,831 ----------------- ----------------- ---------------- ---------------- $ 30,979,126 $ 13,659,065 $ 3,283,626 $ 47,921,817 ================= ================= ================ ================
21 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE H - DEPOSITS - Continued Interest expense on deposits is summarized as follows:
Six months ended Year ended March 31, September 30, ----------------------------------- ----------------------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Certificates of deposit $ 1,418,829 $ 1,361,386 $ 2,745,188 $ 2,819,977 NOW accounts 505,456 402,297 878,302 730,627 Demand deposits 19,872 17,340 35,830 31,195 --------------- --------------- --------------- ---------------- $ 1,944,157 $ 1,781,023 $ 3,659,320 $ 3,581,799 =============== =============== =============== ================
NOTE I - ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank consist of the following:
September 30, March 31, ---------------------------------------------------------------- 1998 1997 1996 ------------------------------- ----------------------------- ------------------------------ Rates Amount Rates Amount Rates Amount ----- ------ ----- ------ ----- ------ Variable rates 5.71% - 6.00% $ 4,400,000 5.67% - 6.00% $ 8,400,000 5.40% - 5.75% $ 10,600,000 Fixed rates 4.87 - 7.06 22,900,000 4.92 - 7.06 15,300,000 4.92 - 7.06 13,700,000 ------------- -------------- --------------- $ 27,300,000 $ 23,700,000 $ 24,300,000 ============= ============== ===============
The Company has a line of credit with the Federal Home Loan Bank totaling $9,000,000. There were no borrowings on this line at March 31, 1998. Aggregate maturities for the years following September 30, 1997 are as follows: 1998 $ 12,800,000 1999 2,900,000 2001 3,000,000 2002 5,000,000 ----------------- $ 23,700,000 ================= Assets of the Association are subject to a blanket pledge agreement to collateralize the advances. 22 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE J - EMPLOYEE BENEFITS The Corporation sponsors a leveraged employee stock ownership plan ("ESOP") that covers all full-time employees. All employees of the Corporation are eligible to participate in the ESOP after they attain age 21 and complete one year of service during which they work at least 1,000 hours. The Corporation makes annual contributions to the ESOP equal to the ESOP's debt service. All dividends received by the ESOP are credited to the employee's stock ownership account. The unallocated ESOP shares are pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. Accordingly, unpaid ESOP debt is reflected as a deduction from stockholders' equity. ESOP compensation expense was $110,358 and $81,440 for the six months ended March 31, 1998 and 1997 and $174,215 and $145,360 for the years ended September 30, 1997 and 1996, respectively. The ESOP shares were as follows: March 31, September 30, 1998 1997 ---- ---- (Unaudited) Allocated shares ............................. 65,464 58,190 Unreleased shares ............................ 36,368 43,642 -------- -------- Total ESOP shares ........................ 101,832 101,832 ======== ======== Fair value of unreleased shares .............. $531,882 $610,988 ======== ======== Additionally, the Corporation has a Recognition and Retention Plan (RRP) as a means of providing directors and certain key employees of the Association with an ownership interest in a manner designed to compensate such directors and key employees for services to the Corporation. During fiscal 1994 the RRP purchased 43,642 shares of common stock. Such shares are earned and allocated ratably to participants over five years. Expense under the RRP totaled $21,822 for each of the six months ended March 31, 1998 and 1997 and $43,644 for each of the years ended September 30, 1997 and 1996. The Company has adopted a Stock Option and Incentive Plan (SOP) for designated participants. The SOP provides for up to 145,474 shares of common stock to be issued to participants. The option price of any options granted may not be less than the market value of the common stock on the date of the grant and unless otherwise specified, the options expire ten years from the date of the grant. A summary of the Company's stock option plan as of March 31, 1998 and September 30, 1997 and 1996 and changes during the periods ended as of those dates is presented below: 23 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE J - EMPLOYEE BENEFITS - Continued Weighted average exercise Shares price ------ --------- Outstanding at October 1, 1995 ...................... 125,276 $ 5.14 Exercised ....................................... 4,000 5.00 ------- Outstanding at September 30, 1996 ................... 121,276 5.14 Exercised ....................................... 9,454 5.00 ------- Outstanding at September 30,1997 .................... 111,822 5.15 Issued ........................................... 1,000 14.62 Exercised ........................................ 1,860 5.00 ------- Outstanding at March 31, 1998 (unaudited) ........... 110,962 5.24 ======= All options outstanding at September 30, 1997 were exercisable and can be summarized as follows: Exercise Remaining Shares price life ------ -------- --------- 98,186 $ 5.00 6 years 11,636 6.19 6 years 4 months 2,000 6.69 6 years 10 months ------- 111,822 ======= The Association participates in a defined benefit multi-employer pension plan. Substantially all employees are eligible and benefits are based on the employee's salary and years of service. No contribution was made or required to be made by the Association for any of the periods presented due to the plan's overfunded status. Separate actuarial disclosure information is not available due to the plan being a multi-employer pension plan. NOTE K - INCOME TAXES Income tax expense consists of the following: Six months Year ended ended March 31, September 30, ------------------------ ------------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Current ........... $ 239,284 $ 189,606 $ 275,950 $ 525,595 Deferred .......... 48,807 15,809 191,768 (38,769) --------- --------- --------- --------- $ 288,091 $ 205,415 $ 467,718 $ 486,826 ========= ========= ========= ========= 24 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE K - INCOME TAXES - Continued Reconciliation of income tax expense computed at the federal statutory rate of 34% and income tax expense is as follows: Six months ended Year ended March 31, September 30, --------------------- ----------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Income tax expense at statutory rate ............ $ 225,531 $ 182,814 $ 400,995 $ 442,720 Kansas privilege tax, net of federal tax benefit ................... 33,708 27,741 52,542 51,434 State contribution credit .. (16,635) (14,438) (28,875) (28,875) Nondeductible ESOP fair value adjustment ..... 23,209 13,292 30,461 20,427 Other ...................... 22,278 (3,994) 12,595 1,120 --------- --------- --------- --------- $ 288,091 $ 205,415 $ 467,718 $ 486,826 ========= ========= ========= ========= The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows: September 30, March 31, ---------------------- 1998 1997 1996 ---- ---- ---- (Unaudited) Deferred tax assets Allowance for loan losses ............... $ 238,800 $ 241,667 $ 226,927 SAIF recapitalization assessment ........ -- -- 171,156 Accrued bonuses ......................... 9,530 8,327 7,138 State contribution credit ............... -- 18,924 28,875 Other ................................... 2,781 5,780 4,710 --------- --------- --------- Total deferred tax assets ........... 251,111 274,698 438,806 --------- --------- --------- Deferred tax liabilities Securities available for sale ........... 27,522 23,393 20,232 Depreciation of property and equipment .. 34,924 34,622 29,191 Federal Home Loan Bank stock dividends .. 274,480 250,731 215,479 --------- --------- --------- Total deferred tax liabilities ...... 336,926 308,746 264,902 --------- --------- --------- Net deferred tax asset (liability) .. $ (85,815) $ (34,048) $ 173,904 ========= ========= ========= 25 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE K - INCOME TAXES - Continued The Association was allowed a special bad debt deduction based on a percentage of earnings, generally limited to 8% of otherwise taxable income and subject to certain limitations based on aggregate loans and savings account balances at the end of the year. This percentage of earnings bad debt deduction had accumulated to approximately $2.7 million as of March 31, 1998. If the amounts that qualify as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate. The approximate amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction is $850,000 at March 31, 1998. See Note M for additional information regarding future percentage of earnings bad debt deductions. NOTE L - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL The Association is subject to various regulatory capital requirements administered by the Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Association's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Association's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Association's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios (set forth in the table below) of total risk-based and Tier 1 capital to risk-weighted assets and of Tier 1 (core) capital and tangible capital to adjusted total assets. Management believes, as of March 31, 1998, that the Association meets all capital adequacy requirements to which it is subject. As of March 31, 1998, the most recent notification from the OTS categorized the Association as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Association's category. To be categorized as well capitalized the Association must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 (core) ratios as set forth in the table below. 26 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE L - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL - Continued
For capital To be well capitalized under Actual adequacy purposes prompt corrective action provisions ----------------- ----------------------------------- ----------------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of March 31, 1998 (unaudited) Total risk-based capital $ 10,443 18.2% $ 4,598 greater or equal to 8.0% $ 5,748 greater or equal to 10.0% Tier 1 risk-based capital 9,787 17.0 2,299 greater or equal to 4.0 3,449 greater or equal to 6.0 Tier 1 (core) capital 9,787 7.9 3,705 greater or equal to 3.0 6,175 greater or equal to 5.0 Tangible capital 9,787 7.9 1,852 greater or equal to 1.5 -- -- For capital To be well capitalized under Actual adequacy purposes prompt corrective action provisions ------------------ ---------------------------------- ----------------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 1997 Total risk-based capital $ 9,989 19.5% $ 4,093 greater or equal to 8.0% $ 5,116 greater or equal to 10.0% Tier 1 risk-based capital 9,349 18.3 2,046 greater or equal to 4.0 3,069 greater or equal to 6.0 Tier 1 (core) capital 9,349 8.4 3,333 greater or equal to 3.0 5,555 greater or equal to 5.0 Tangible capital 9,349 8.4 1,666 greater or equal to 1.5 -- -- For capital To be well capitalized under Actual adequacy purposes prompt corrective action provisions ------------------ ---------------------------------- ----------------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 1996 Total risk-based capital $ 11,129 23.8% $ 3,746 greater or equal to 8.0% $ 4,682 greater or equal to 10.0% Tier 1 risk-based capital 10,542 22.5 1,873 greater or equal to 4.0 2,809 greater or equal to 6.0 Tier 1 (core) capital 10,542 9.9 3,204 greater or equal to 3.0 5,339 greater or equal to 5.0 Tangible capital 10,542 9.9 1,602 greater or equal to 1.5 -- --
Regulations of the OTS impose limitations on the payment of dividends and other capital distributions by savings associations. Under such regulations a savings association that immediately prior to and on a pro forma basis, after giving effect to a proposed capital distribution, has total capital (as defined by OTS regulation) that is equal to or greater than the amount of its fully phased-in capital requirement is generally permitted without OTS approval (but subsequent to 30 days prior notice to the OTS of the planned dividend) to make capital distributions during a calendar year in the amount of up to the greater of (1) 100% of its net earnings to date during the year plus an amount equal to one-half of the amount by which its total capital to assets ratio exceeded its fully phased-in capital to assets ratio at the beginning of the year or (2) 75% of its net income for the most recent four quarters. Pursuant to such OTS dividend regulations, the Association had the ability to pay dividends of approximately $3,200,000 to First Independence Corporation at March 31, 1998. 27 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE M - RECENT LEGISLATIVE DEVELOPMENTS The deposit accounts of the Association and other savings associations are insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The reserves of the SAIF were below the level required by law, because a significant portion of the assessments paid into the fund were used to pay the cost of prior thrift failures. The deposit accounts of commercial banks are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the extent such banks have acquired SAIF deposits. The reserves of the BIF met the level required by law in May 1995. As a result of the respective reserve levels of the funds, deposit insurance assessments paid by healthy savings associations exceeded those paid by healthy commercial banks by approximately $.19 per $100 in deposits in 1995. In 1996 and 1997, no BIF assessments were required for healthy commercial banks except for a $2,000 minimum fee. Legislation was enacted to recapitalize the SAIF that provides for a special assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. The Association had $65.7 million in deposits at March 31, 1995, resulting in an assessment of approximately $431,000, or $260,000 after tax, which was charged to operations in the fourth quarter of fiscal 1996. A component of the recapitalization plan provides for the merger of the SAIF and BIF on January 1, 1999. However, the SAIF recapitalization legislation currently provides for an elimination of the thrift charter or of the separate federal regulation of thrifts prior to the merger of the deposit insurance funds. As a result, the Association would be regulated as a bank under federal laws which would subject it to the more restrictive activity limits imposed on national banks. Under separate legislation related to the recapitalization plan, the Association is required to recapture as taxable income approximately $115,000 of its bad debt reserve, which represents the post-1987 additions to the reserve and will be unable to utilize the percentage of earnings method to compute its reserve in the future. The Association has provided deferred taxes for this amount and will be permitted to amortize the recapture of its bad debt reserve over six years. NOTE N - COMMITMENTS The Association is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of the commitments reflect the extent of the Association's involvement in such financial instruments. 28 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE N - COMMITMENTS - Continued The Association's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Association uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance sheet instruments. The Association's commitments to extend credit at March 31, 1998 include loans in process as disclosed in Note D and first mortgage loans with fixed rates ranging from 7.00% to 7.5% aggregating $501,025 and $193,440 of variable rate loans at 6.5%. Collateral for loans in process and commitments are the same as for other Association loans. The commitment period is generally for forty-five days. NOTE O - ACQUISITION On February 18, 1998, the Boards of Directors of the Corporation and The Neodesha Savings and Loan Association, FSA (Neodesha) adopted a Plan of Merger Conversion. Pursuant to the Plan, Neodesha will combine with the Association and through the conversion of Neodesha from a mutual savings and loan association to a stock savings and loan association and the simultaneous merger of Neodesha into the Association. The transaction is subject to approval by regulatory authorities. Pursuant to the conversion merger transaction the Corporation will issue new common shares with a fair value equal to the appraised value of Neodesha. The appraised value of Neodesha is currently anticipated to range from $1,530,000 to $2,070,000. At the date of conversion, the merged association will establish a liquidation account equal to the amount of retained earnings contained in the offering circular. The liquidation account will be maintained for the benefit of the merged association's eligible savings account holders who maintain deposit accounts in the Association after conversion. In the event of a complete liquidation (and only in such event), each eligible savings account holder will be entitled to receive a pro rata liquidation distribution from the liquidation account in the amount of the then current adjusted balance of deposit accounts held, before any liquidation distribution may be made with respect to common stock. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of such retained earnings by the Association. Subsequent to consummation of the transaction, the Association may not declare or pay a cash dividend on or repurchase any of its common stock, if the effect thereof would cause stockholders' equity to be reduced below either the amount required for the combined liquidation accounts or the regulatory capital requirements for insured institutions. 29 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments. Cash and cash equivalents: The balance sheet carrying amounts for cash and short-term instruments approximate the estimated fair values of such assets. Investment securities and mortgage-backed securities: Fair values for investment securities and mortgage-backed securities are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: For variable rate loans that reprice frequently and which entail no significant change in credit risk, fair values are based on the carrying values. The estimated fair values of fixed rate loans are estimated based on discounted cash flow analyses using prepayment assumptions and interest rates currently offered for loans with similar terms to borrowers of similar credit quality. Nonperforming loans have not been discounted. The carrying amount of accrued interest receivable approximates its fair value. Commitments to extend credit: No premium or discount was ascribed to loan commitments because when funded virtually all funding will be at current market rates. Federal Home Loan Bank stock: The balance sheet carrying amount approximates the stocks fair value. Deposit liabilities: The fair values estimated for demand deposits, NOW accounts, savings and certain types of money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values of fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly time deposit maturities. The carrying amount of accrued interest payable approximates its fair value. Advances from Federal Home Loan Bank: For variable rate advances fair values are considered equal to their carrying values. The estimated fair value of fixed rate advances are estimated based on discounted cash flow analysis using interest rates currently offered for advances with similar terms. 30 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued The following table provides summary information on the fair value of financial instruments. Such information does not purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies and subjective considerations, which vary widely among different financial institutions and which are subject to change. The carrying amounts are the amounts at which the financial instruments are reported in the consolidated financial statements. March 31, 1998 --------------------------------- (Unaudited) Carrying Estimated amount of fair value assets and of assets and (liabilities) (liabilities) ------------- ------------- Cash and cash equivalents .............. $ 6,376,742 $ 6,376,742 Investment securities available for sale .................... 3,346,443 3,346,443 Investment securities held to maturity ...................... 5,000,000 4,960,950 Mortgage-backed securities held to maturity ...................... 20,902,199 21,093,661 Loans .................................. 85,919,601 86,769,718 Federal Home Loan Bank stock ........... 1,422,800 1,422,800 Deposits ............................... (84,171,855) (83,959,552) Advances from Federal Home Loan Bank ........................ (27,300,000) (27,351,895) 1997 --------------------------------- Carrying Estimated amount of fair value assets and of assets and (liabilities) (liabilities) ------------- ------------- Cash and cash equivalents .............. $ 3,151,227 $ 3,151,227 Investment securities available for sale .................... 4,311,406 4,311,406 Investment securities held to maturity ...................... 3,000,000 2,996,300 Mortgage-backed securities available for sale .................... 471,618 471,618 Mortgage-backed securities held to maturity ...................... 23,527,689 23,748,569 Loans .................................. 75,226,968 75,929,533 Federal Home Loan Bank stock ........... 1,368,900 1,368,900 Deposits ............................... (76,229,176) (75,926,401) Advances from Federal Home Loan Bank ........................ (23,700,000) (23,736,269) 31 First Independence Corporation and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued 1996 --------------------------------- Carrying Estimated amount of fair value assets and of assets and (liabilities) (liabilities) ------------- ------------- Cash and cash equivalents .............. $ 1,763,429 $ 1,763,429 Investment securities available for sale .................... 5,235,073 5,235,073 Investment securities held to maturity ...................... 2,000,000 1,970,980 Mortgage-backed securities available for sale .................... 659,207 659,207 Mortgage-backed securities held to maturity ...................... 28,039,314 27,873,630 Loans .................................. 68,372,929 67,768,345 Federal Home Loan Bank stock ........... 1,239,500 1,239,500 Deposits ............................... (69,356,422) (68,999,524) Advances from Federal Home Loan Bank ........................ (24,300,000) (24,204,628) 32 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors The Neodesha Savings and Loan Association, FSA We have audited the accompanying balance sheets of The Neodesha Savings and Loan Association, FSA as of September 30, 1997 and 1996, and the related statements of earnings, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Association's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Neodesha Savings and Loan Association, FSA as of September 30, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Wichita, Kansas April 3, 1998 The Neodesha Savings and Loan Association, FSA BALANCE SHEETS ASSETS
September 30, March 31, ------------------------------ 1998 1997 1996 ---- ---- ---- (Unaudited) Cash and due from banks $ 650,484 $ 635,237 $ 772,095 Investment securities held to maturity (estimated fair value $3,029,696 at March 31, 1998; $3,116,637 at September 30, 1997; $3,168,720 at September 30, 1996) 3,018,273 3,116,975 3,215,380 Mortgage-backed securities held to maturity (estimated fair value $234,444 at March 31, 1998; $248,950 at September 30 ,1997; $245,325 at September 30, 1996) 237,651 252,598 252,674 Loans receivable 9,088,127 9,467,986 9,489,296 Premises and equipment 375,536 383,884 399,326 Federal Home Loan Bank stock, at cost 139,500 134,300 125,700 Accrued interest receivable 120,051 124,832 127,719 Repossessed assets 22,305 24,533 -- Other 26,812 15,075 28,904 ----------------- ----------------- ----------------- $ 13,678,739 $ 14,155,420 $ 14,411,094 ================= ================= ================= LIABILITIES AND RETAINED EARNINGS Deposits $ 12,064,758 $ 12,854,278 $ 12,698,322 Advances from borrowers for taxes and insurance 48,857 47,638 65,768 Advances from Federal Home Loan Bank 400,000 100,000 500,000 Accrued expenses and other 42,786 61,224 131,694 ----------------- ----------------- ----------------- Total liabilities 12,556,401 13,063,140 13,395,784 Retained earnings (substantially restricted) 1,122,338 1,092,280 1,015,310 ----------------- ----------------- --------------- $ 13,678,739 $ 14,155,420 $ 14,411,094 ================= ================= ===============
The accompanying notes are an integral part of these statements. 2 The Neodesha Savings and Loan Association, FSA STATEMENTS OF EARNINGS
Six months ended Year ended March 31, September 30, -------------------------------- -------------------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Interest income Loans $ 408,181 $ 417,126 $ 842,621 $ 830,180 Investment securities 89,125 90,963 183,129 181,257 Mortgage-backed securities 7,438 7,682 15,362 15,366 Interest-bearing deposits and other 2,826 3,048 4,904 18,802 ------------- ------------- -------------- ------------- Total interest income 507,570 518,819 1,046,016 1,045,605 Interest expense Deposits 258,796 259,857 525,789 531,698 Borrowed funds 12,387 14,001 34,678 39,528 ------------- ------------- -------------- ------------- Total interest expense 271,183 273,858 560,467 571,226 ------------- ------------- --------------- ------------- Net interest income 236,387 244,961 485,549 474,379 Provision for loan losses 3,000 3,000 6,000 6,000 ------------- ------------- --------------- ------------- Net interest income after provision for loan losses 233,387 241,961 479,549 468,379 Other income Service charges 57,242 57,842 119,886 120,388 Other 3,646 5,933 15,315 19,734 ------------- ------------- --------------- ------------- 60,888 63,775 135,201 140,122 General, administrative and other expense Employee compensation and benefits 131,480 127,833 254,264 248,426 Occupancy and equipment 31,561 29,114 62,102 65,479 Data processing fees 17,471 16,233 33,564 35,666 Federal deposit insurance premiums 6,514 10,393 16,787 111,577 Other operating 66,191 71,656 143,336 143,889 ------------- ------------- --------------- ------------- 253,217 255,229 510,053 605,037 ------------- ------------- --------------- ------------- Earnings before income taxes 41,058 50,507 104,697 3,464 Income tax expense 11,000 13,000 27,727 654 ------------- ------------- --------------- ------------- NET EARNINGS $ 30,058 $ 37,507 $ 76,970 $ 2,810 ============= ============= =============== =============
The accompanying notes are an integral part of these statements. 3 The Neodesha Savings and Loan Association, FSA STATEMENT OF RETAINED EARNINGS Balance at October 1, 1995 $ 1,012,500 Net earnings for the year ended September 30, 1996 2,810 ---------------- Balance at September 30, 1996 1,015,310 Net earnings for the year ended September 30, 1997 76,970 ---------------- Balance at September 30, 1997 1,092,280 Net earnings for the six months ended March 31, 1998 (unaudited) 30,058 ---------------- Balance at March 31, 1998 (unaudited) $ 1,122,338 ================ The accompanying notes are an integral part of this statement. 4 The Neodesha Savings and Loan Association, FSA STATEMENTS OF CASH FLOWS
Six months ended Year ended March 31, September 30, ------------------------------ ------------------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Cash flows from operating activities Net earnings $ 30,058 $ 37,507 $ 76,970 $ 2,810 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation 14,741 14,973 30,495 30,946 Provision for loan losses 3,000 3,000 6,000 6,000 Amortization of premiums and discounts on investments and mortgage-backed securities 482 638 965 1,220 Deferred income taxes (259) 228 1,905 (1,785) Loss on sale of repossessed assets -- -- 5,274 6,730 Increase (decrease) in cash due to changes in Accrued interest receivable 4,781 9,160 2,887 (3,617) Other assets (11,737) (1,606) 12,953 18,610 Accrued expenses and other liabilities (18,179) (89,004) (71,499) 78,958 ------------- ----------- ------------- ------------- Net cash provided by (used in) operating activities 22,887 (25,104) 65,950 139,872 Cash flows from investing activities Proceeds from maturities and repayment of held-to-maturity securities 113,167 -- 400,000 200,000 Purchase of held-to-maturity securities -- -- (302,484) (200,313) Purchase of Federal Home Loan Bank stock (5,200) (4,000) (8,600) (7,600) Net (increase) decrease in loans 379,087 (231,691) (15,997) (446,441) Capital expenditures (6,393) (2,829) (15,053) (39,720) Proceeds from sale of repossessed assets -- -- 1,500 30,755 ------------- ----------- --------------- ------------- Net cash provided by (used in) investing activities 480,661 (238,520) 59,366 (463,319) Cash flows from financing activities Net increase (decrease) in deposits (789,520) (477,477) 155,956 1,025,887 Net increase (decrease) in advances from borrowers for taxes and insurance 1,219 (23,656) (18,130) (39,028) Net increase (decrease) in Federal Home Loan Bank advances 300,000 600,000 (400,000) (450,000) ------------- ----------- ------------- ------------- Net cash provided by (used in) financing activities (488,301) 98,867 (262,174) 536,859 ------------- ----------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 15,247 (164,757) (136,858) 213,412 Cash and cash equivalents at beginning of period 635,237 772,095 772,095 558,683 ------------- ----------- ------------- ------------- Cash and cash equivalents at end of period $ 650,484 $ 607,338 $ 635,237 $ 772,095 ============= =========== ============= ==========
5 The Neodesha Savings and Loan Association, FSA STATEMENTS OF CASH FLOWS - CONTINUED
Six months ended Year ended March 31, September 30, ------------------------------ ----------------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Supplemental disclosures of cash flow information Cash paid during the period for Income taxes $ 19,915 $ -- $ -- $ 2,642 Interest 272,075 280,536 566,352 568,759 Noncash investing and financing activities Transfer from loans to real estate acquired through foreclosure 2,522 26,825 41,838 -- Issuance of loans receivable in connection with the sale of real estate acquired through foreclosure -- -- 10,531 34,377
The accompanying notes are an integral part of these statements. 6 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE A - SUMMARY OF ACCOUNTING POLICIES The Neodesha Savings and Loan Association, FSA (the "Association") conducts a general banking business in southeastern Kansas which consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, consumer and nonresidential purposes and the purchase of investment and mortgage-backed securities. The Association's profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e., loans and investments) and the interest expense paid on interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Association can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management's control. The financial information presented herein has been prepared in accordance with generally accepted accounting principles (GAAP) and general accounting practices within the financial services industry. In preparing financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. The financial statements as of March 31, 1998, and for the six-month periods ended March 31, 1998 and 1997 are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of financial position and results of operations have been made. The following is a summary of the Association's significant accounting policies which have been consistently applied in the preparation of the accompanying financial statements. 1. Cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, and other interest-bearing deposits. 2. Investment securities and mortgage-backed securities Investment securities and mortgage-backed securities are classified as held-to-maturity securities as the Association has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are reported at amortized cost. 7 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued Premiums and discounts on investment securities are amortized to operations over the term of the security using the level yield method. Premiums and discounts on mortgage-backed securities are amortized and accreted to operations using the level yield method over the estimated life of the underlying loans collateralizing the securities. 3. Loans receivable Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance, adjusted for any charge-offs, the allowance for loan losses, unearned discounts and net deferred loan origination fees. The allowance for loan losses is increased by charges to operations and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Association's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current economic conditions. Specific reserves are established for any impaired nonresidential loan for which the recorded investment in the loan exceeds the measured value of the loan. Loans subject to impairment valuation are defined as nonaccrual loans or any other loan where it is probable that all amounts due according to the contractual terms will not be collected, exclusive of smaller balance homogenous loans such as home equity, consumer and 1-4 family residential real estate loans. The values of loans subject to impairment valuation are determined based on the present value of expected future cash flows, the market price of the loans, or the fair values of the underlying collateral if the loan is collateral dependent. Uncollectible interest on loans that are contractually past due is charged off or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued. Income is subsequently recognized only to the extent cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. If the collection of principal in whole or in part is in doubt, all payments received on nonaccrual loans are credited to principal until such doubt is eliminated. 8 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued 4. Real estate acquired through foreclosure Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. 5. Premises and equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is included in occupancy and equipment expense and is provided by the straight-line method over the following estimated useful lives: Years ----- Building 15-45 Furniture, fixtures and equipment 5-7 Automobile 5 The costs of maintenance and repairs are charged to operations as incurred. The costs of significant additions, renewals and betterments to depreciable properties are capitalized and depreciated over the remaining or extended estimated useful lives of the properties. Gains and losses on disposition of property and equipment are included in operations. 6. Income taxes Deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized. 9 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE B - INVESTMENT SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of held-to-maturity investment securities are as follows: March 31, 1998 (unaudited) ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---------- ---------- ---------- ---------- U.S. Government agency obligations ................ $2,414,701 $13,078 $ 2,179 $2,425,600 Obligations of states and political subdivisions ..... 603,572 1,072 548 604,096 ---------- ------- ------- ---------- $3,018,273 $14,150 $ 2,727 $3,029,696 ========== ======= ======= ========== September 30, 1997 ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---------- ---------- ---------- ---------- U.S. Government agency obligations ................ $2,513,864 $ 8,718 $ 4,679 $2,517,903 Obligations of states and political subdivisions ..... 603,111 16 4,393 598,734 ---------- ------- ------- ---------- $3,116,975 $ 8,734 $ 9,072 $3,116,637 ========== ======= ======= ========== September 30, 1996 ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---------- ---------- ---------- ---------- U.S. Government agency obligations ................ $2,613,030 $ 3,699 $29,442 $2,587,287 Obligations of states and political subdivisions ..... 602,350 -- 20,917 581,433 ---------- ------- ------- ---------- $3,215,380 $ 3,699 $50,359 $3,168,720 ========== ======= ======= ========== 10 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE B - INVESTMENT SECURITIES - Continued The amortized cost and estimated fair value of investment securities at September 30, 1997, by contractual maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized fair Held to maturity cost value ---------------- ---------- ---------- Due in one year or less .................. $ 899,917 $ 899,621 Due in two to five years ................. 2,024,218 2,027,296 Due after five years ..................... 192,840 189,720 ---------- ---------- $3,116,975 $3,116,637 ========== ========== Investment securities with a fair value of $1,325,557, $1,721,868 and $1,477,253 at March 31, 1998, September 30, 1997 and 1996, respectively, were pledged to secure government and other public deposits. NOTE C - MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of held-to-maturity mortgage-backed securities are summarized as follows: Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---------- ---------- ---------- --------- Collateralized mortgage obligations March 31, 1998 (unaudited) ...... $237,651 $ -- $3,207 $234,444 September 30, 1997 .............. 252,598 -- 3,648 248,950 September 30, 1996 .............. 252,674 -- 7,349 245,325 Mortgage-backed securities generally mature ratably over the 30-year term of the underlying loans collateralizing the securities. Expected maturities on mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 11 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE D - LOANS RECEIVABLE Loans receivable are summarized as follows: September 30, March 31, ---------------------- 1998 1997 1996 ----------- ---- ---- (Unaudited) First mortgage loans Secured by one-to-four family residences ....................... $6,992,641 $7,237,089 $7,455,070 Secured by multi-family residences . -- -- 5,029 Nonresidential ..................... 49,917 72,328 105,392 Construction ....................... -- -- 70,000 ---------- ---------- ---------- Total first mortgage loans ....... 7,042,558 7,309,417 7,635,491 Consumer and other loans Savings ............................ 115,990 123,254 142,200 Automobile ......................... 1,797,388 1,871,580 1,606,000 Unsecured term ..................... 109,575 118,108 108,890 Other .............................. 111,895 138,569 167,122 ---------- ---------- ---------- Total consumer and other loans ... 2,134,848 2,251,511 2,024,212 Less Allowance for loan losses .......... (84,572) (88,954) (101,324) Loans in process ................... -- -- (57,092) Unearned discounts ................. (4,707) (3,988) (11,991) ---------- ---------- ---------- (89,279) (92,942) (170,407) ---------- ---------- ---------- Net loans receivable ............. $9,088,127 $9,467,986 $9,489,296 ========== ========== ========== Activity in the allowance for loan losses is summarized as follows: Six months ended Year ended March 31, September 30, ------------------ ------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Balance at beginning of period ...... $88,954 $101,324 $101,324 $107,410 Provision charged to operations ..... 3,000 3,000 6,000 6,000 Loans charged off, net .............. (7,382) (10,851) (18,370) (12,086) ------- -------- -------- -------- Balance at end of period ............ $84,572 $ 93,473 $ 88,954 $101,324 ======= ======== ======== ======== 12 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE D - LOANS RECEIVABLE - Continued The Association's lending efforts have historically focused on one-to-four family residential real estate loans, which comprise approximately 76%, 76% and 77% of the total loan portfolio at March 31, 1998 and September 30, 1997 and 1996, respectively. Approximately 16%, 17% and 19% at March 31, 1998 and September 30, 1997 and 1996, respectively, of the Association's one-to-four family residential real estate loans are secured by properties located outside of the primary lending area of Wilson and surrounding Kansas counties. Generally, such loans have been underwritten on the basis of 80% to 90% loan-to-value ratio. The Association, as with any lending institution, is subject to the risk that real estate values could deteriorate in its primary lending area thereby impairing collateral values. Management believes, however, that real estate values in the Association's primary lending area are currently stable or increasing. Approximately 24%, 24% and 23% at March 31, 1998 and September 30, 1997 and 1996, respectively, of the loan portfolio is comprised of consumer and other nonresidential loans. In the normal course of business, the Association makes loans to directors, executive officers and related entities. An analysis of aggregate loan activity with this group is as follows: Six months ended Year ended March 31, September 30, 1998 1997 ----------- ------------- (Unaudited) Loans outstanding at beginning of period ....... $41,940 $ 31,377 New loans .................................... 6,273 29,889 Repayments ................................... (2,210) (19,326) ------- -------- Loans outstanding at end of period ............. $46,003 $ 41,940 ======= ======== The Association has no impaired loans which are not included in smaller balance homogeneous home equity, consumer and 1-4 family residential real estate loans. Nonaccrual loans totaled $173,030, $156,989 and $131,249 at March 31, 1998 and September 30, 1997 and 1996, respectively. Interest income that would have been recorded under the original terms of such loans approximated $5,200, $5,300, $9,900 and $8,600 for the six months ended March 31, 1998 and 1997 and the years ended September 30, 1997 and 1996, respectively. Interest income that was recorded was insignificant for all periods presented. The Association is not committed to make additional loans to borrowers whose loans have been modified. 13 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE E - ACCRUED INTEREST RECEIVABLE Accrued interest receivable is summarized as follows: September 30, March 31, --------------------- 1998 1997 1996 ----------- ---- ---- (Unaudited) Loans receivable ...................... $ 68,717 $ 71,656 $ 77,809 Investment securities ................. 50,124 51,889 48,624 Mortgage-backed securities ............ 1,210 1,287 1,286 --------- --------- --------- $ 120,051 $ 124,832 $ 127,719 ========= ========= ========= NOTE F - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: September 30, March 31, --------------------- 1998 1997 1996 ----------- ---- ---- (Unaudited) Land .................................. $ 67,121 $ 67,121 $ 67,121 Building .............................. 402,031 398,586 389,711 Furniture, fixtures and equipment ..... 236,363 233,414 227,237 Automobile ............................ 25,436 25,436 25,436 --------- --------- --------- 730,951 724,557 709,505 Less accumulated depreciation ......... (355,415) (340,673) (310,179) --------- --------- --------- $ 375,536 $ 383,884 $ 399,326 ========= ========= ========= 14 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE G - DEPOSITS Deposits are summarized as follows:
Weighted September 30, average ------------------------------------------ rate at March 31, 1998 1997 1996 March 31, -------------------- -------------------- -------------------- 1998 Amount Percent Amount Percent Amount Percent ----------- ------ ------- ------ ------- ------ ------- (Unaudited) (Unaudited) Noninterest-bearing ................. --% $ 260,591 2.16% $ 448,753 3.49% $ 511,085 4.03% NOW accounts ........................ 2.75 1,553,901 12.88 1,440,289 11.20 1,484,231 11.69 Super NOW accounts .................. 3.23 487,383 4.04 563,740 4.39 554,140 4.36 Money market accounts ............... 4.00 1,732,764 14.36 2,074,067 16.14 1,623,114 12.78 ---- ----------- ------ ----------- ------ ----------- ------ Total demand deposits ........... 3.17 4,034,639 33.44 4,526,849 35.22 4,172,570 32.86 Passbook savings accounts ........... 3.00 1,806,445 14.97 2,000,521 15.56 1,777,783 14.00 Certificates of deposit 4.00% to 4.99% .................... 4.68 818,855 6.79 1,395,349 10.85 2,163,632 17.04 5.00% to 5.99% .................... 5.29 4,040,307 33.49 3,044,573 23.69 2,540,390 20.00 6.00% to 6.99% .................... 6.23 1,364,512 11.31 1,886,986 14.68 2,043,947 16.10 ---- ----------- ------ ----------- ------ ----------- ------ Total certificates of deposit ... 5.42 6,223,674 51.59 6,326,908 49.22 6,747,969 53.14 ---- ----------- ------ ----------- ------ ----------- ------ Total deposits .................. 4.31% $12,064,758 100.00% $12,854,278 100.00% $12,698,322 100.00% ==== =========== ====== =========== ====== =========== ======
15 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE G - DEPOSITS - Continued The aggregate amount of certificates of deposit and savings with a minimum denomination of $100,000 was $1,414,683, $1,312,324 and $1,326,272 at March 31, 1998 and September 30, 1997 and 1996, respectively. Scheduled maturities of certificates of deposit are as follows: March 31, 1998 (unaudited) -------------------------- Less than One to Three to one year three years five years Total --------- ----------- ---------- ----- 4.00% to 4.99% ........... $ 818,855 $ -- $ -- $ 818,855 5.00% to 5.99% ........... 2,572,475 1,340,299 127,534 4,040,308 6.00% to 6.99% ........... 721,651 642,860 -- 1,364,511 ---------- ---------- -------- ---------- $4,112,981 $1,983,159 $127,534 $6,223,674 ========== ========== ======== ========== September 30, 1997 ------------------ Less than One to Three to one year three years five years Total --------- ----------- ---------- ----- 4.00% to 4.99% ........... $1,395,349 $ -- $ -- $1,395,349 5.00% to 5.99% ........... 1,846,962 1,164,262 33,349 3,044,573 6.00% to 6.99% ........... 1,254,166 632,820 -- 1,886,986 ---------- ---------- -------- ---------- $4,496,477 $1,797,082 $ 33,349 $6,326,908 ========== ========== ======== ========== September 30, 1996 ------------------ Less than One to Three to one year three years five years Total --------- ----------- ---------- ----- 4.00% to 4.99% ........... $2,034,797 $ 128,835 $ -- $2,163,632 5.00% to 5.99% ........... 1,708,281 750,110 81,999 2,540,390 6.00% to 6.99% ........... 195,676 1,359,742 488,529 2,043,947 ---------- ---------- -------- ---------- $3,938,754 $2,238,687 $570,528 $6,747,969 ========== ========== ======== ========== 16 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE G - DEPOSITS - Continued Interest expense on deposits is summarized as follows: Six months ended Year ended March 31, September 30, ------------------ ------------------- 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Certificates of deposit ........ $166,796 $172,222 $344,253 $357,796 NOW accounts ................... 65,310 60,955 55,836 52,510 Demand deposits ................ 26,690 26,680 125,700 121,392 -------- -------- -------- -------- $258,796 $259,857 $525,789 $531,698 ======== ======== ======== ======== NOTE H - ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank consist of the following: Rate Amount ---- ------ March 31, 1998 ........................... 6.28% $400,000 September 30, 1997 ....................... 6.56 100,000 September 30, 1996 ....................... 6.03 500,000 Advances from the Federal Home Loan Bank are on a renewable line of credit with a maximum borrowing amount of $2,638,000 at March 31, 1998 and September 30, 1997, and $2,474,000 at September 30, 1996. The line matures July 15, 1998. Interest is due monthly at a rate which varies with the New York Federal Funds rate. Assets of the Association are subject to a blanket pledge agreement to collateralize the advances. NOTE I - INCOME TAXES Income tax expense consists of the following: Six months ended Year ended March 31, September 30, ----------------- ------------------ 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Current ........................ $11,259 $12,772 $25,822 $ 2,439 Deferred ....................... (259) 228 1,905 (1,785) ------- ------- ------- ------- $11,000 $13,000 $27,727 $ 654 ======= ======= ======= ======= 17 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE I - INCOME TAXES - Continued Reconciliation of income tax expense computed at the federal statutory rate of 34% and income tax expense is as follows: Six months ended Year ended March 31, September 30, ----------------- ------------------ 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) Income tax expense at statutory rate ................. $13,960 $17,172 $ 32,456 $1,178 Kansas privilege tax, net of federal tax benefit ............ 1,827 2,248 4,664 154 Effective rate differential ...... (5,875) (5,850) (11,750) (658) Other ............................ 1,088 (570) 2,357 (20) ------- ------- -------- ------ $11,000 $13,000 $ 27,727 $ 654 ======= ======= ======== ====== The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows: September 30, March 31, ----------------- 1998 1997 1996 ----------- ---- ---- (Unaudited) Deferred tax assets Allowance for loan losses ............... $25,372 $25,786 $26,497 Depreciation of property and equipment .. 2,738 2,738 645 Other ................................... 4,780 2,547 3,254 ------- ------- ------- Total deferred tax assets ............. 32,890 31,071 30,396 Deferred tax liabilities Federal Home Loan Bank stock dividends .. 33,660 32,100 29,520 ------- ------- ------- Net deferred tax asset (liability) .... $ (770) $(1,029) $ 876 ======= ======= ======= 18 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE I - INCOME TAXES - Continued The Association was allowed a special bad debt deduction based on a percentage of earnings, generally limited to 8% of otherwise taxable income and subject to certain limitations based on aggregate loans and savings account balances at the end of the year. This percentage of earnings bad debt deduction had accumulated to approximately $328,600 as of March 31, 1998. If the amounts that qualify as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate. The approximate amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction is $110,000 at March 31, 1998. NOTE J - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL The Association is subject to various regulatory capital requirements administered by the Office of Thrift Supervision (OTS). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Association's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of the Association's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Association's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios (set forth in the table below) of total risk-based and Tier 1 capital to risk-weighted assets and of Tier 1 (core) capital and tangible capital to adjusted total assets. Management believes, as of March 31, 1998, that the Association meets all capital adequacy requirements to which it is subject. 19 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE J - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL - Continued As of March 31, 1998, the most recent notification from the OTS categorized the Association as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Association's category. To be categorized as well capitalized the Association must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 (core) ratios as set forth in the table below.
To be well capitalized under Actual For capital adequacy purposes prompt corrective action provisions ------------------ ---------------------------------- ----------------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of March 31, 1998 (unaudited) Total risk-based capital ...... $1,209,000 17.3% $558,000 greater or equal to 8.0% $698,000 greater or equal to 10.0% Tier 1 risk-based capital ..... 1,124,000 16.1 279,000 greater or equal to 4.0 419,000 greater or equal to 6.0 Tier 1 (core) capital ......... 1,124,000 8.2 410,000 greater or equal to 3.0 684,000 greater or equal to 5.0 Tangible capital .............. 1,124,000 8.2 205,000 greater or equal to 1.5 -- --
To be well capitalized under Actual For capital adequacy purposes prompt corrective action provisions ------------------ ---------------------------------- ----------------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 1997 Total risk-based capital ...... $1,181,000 16.4% $577,000 greater or equal to 8.0% $722,000 greater or equal to 10.0% Tier 1 risk-based capital ..... 1,092,000 15.1 289,000 greater or equal to 4.0 433,000 greater or equal to 6.0 Tier 1 (core) capital ......... 1,092,000 7.7 425,000 greater or equal to 3.0 708,000 greater or equal to 5.0 Tangible capital .............. 1,092,000 7.7 212,000 greater or equal to 1.5 -- --
To be well capitalized under Actual For capital adequacy purposes prompt corrective action provisions ------------------ ---------------------------------- ----------------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 1996 Total risk-based capital ...... $1,106,000 15.3% $578,000 greater or equal to 8.0% $722,000 greater or equal to 10.0% Tier 1 risk-based capital ..... 1,015,000 14.1 289,000 greater or equal to 4.0 433,000 greater or equal to 6.0 Tier 1 (core) capital ......... 1,015,000 7.0 432,000 greater or equal to 3.0 721,000 greater or equal to 5.0 Tangible capital .............. 1,015,000 7.0 216,000 greater or equal to 1.5 -- --
20 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE K - RECENT LEGISLATIVE DEVELOPMENTS The deposit accounts of the Association and other savings associations are insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The reserves of the SAIF were below the level required by law, because a significant portion of the assessments paid into the fund were used to pay the cost of prior thrift failures. The deposit accounts of commercial banks are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the extent such banks have acquired SAIF deposits. The reserves of the BIF met the level required by law in May 1995. As a result of the respective reserve levels of the funds, deposit insurance assessments paid by healthy savings associations exceeded those paid by healthy commercial banks by approximately $.19 per $100 in deposits in 1995. In 1996 and 1997, no BIF assessments were required for healthy commercial banks except for a $2,000 minimum fee. Legislation was enacted to recapitalize the SAIF that provides for a special assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. The Association had $12.0 million in deposits at March 31, 1995, resulting in an assessment of approximately $79,000, or $55,000 after tax, which was charged to operations in the fourth quarter of fiscal 1996. A component of the recapitalization plan provides for the merger of the SAIF and BIF on January 1, 1999. However, the SAIF recapitalization legislation currently provides for an elimination of the thrift charter or of the separate federal regulation of thrifts prior to the merger of the deposit insurance funds. As a result, the Association would be regulated as a bank under federal laws which would subject it to the more restrictive activity limits imposed on national banks. NOTE L - COMMITMENTS The Association is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of the commitments reflect the extent of the Association's involvement in such financial instruments. The Association's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Association uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance- sheet instruments. The Association's commitments to extend credit at March 31, 1998 include first mortgage loans with variable rates of 7.62% to 7.96% totaling $128,400. 21 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE M - MERGER/CONVERSION On February 18, 1998, the Boards of Directors of The Neodesha Savings and Loan Association, FSA (Neodesha) and First Independence Corporation and its subsidiary, First Federal Savings and Loan Association of Independence, adopted a Plan of Merger Conversion. Pursuant to the Plan, Neodesha will combine with First Federal Savings and Loan through the conversion of Neodesha from a mutual savings and loan association to a stock savings and loan association and the simultaneous merger of Neodesha into First Federal Savings and Loan. The transaction is subject to approval by regulatory authorities. Pursuant to the conversion merger transaction First Independence Corporation will issue new common shares with a fair value equal to the appraised value of Neodesha. The appraised value of Neodesha is currently anticipated to range from $1,530,000 to $2,070,000. At the date of conversion, the merged association will establish a liquidation account equal to the amount of retained earnings contained in the offering circular. The liquidation account will be maintained for the benefit of the merged association's eligible savings account holders who maintain deposit accounts in First Federal Savings and Loan after conversion. In the event of a complete liquidation (and only in such event), each eligible savings account holder will be entitled to receive a pro rata liquidation distribution from the liquidation account in the amount of the then current adjusted balance of deposit accounts held, before any liquidation distribution may be made with respect to common stock. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of such retained earnings by the First Federal Savings and Loan. Subsequent to consummation of the transaction, the First Federal Savings and Loan may not declare or pay a cash dividend on or repurchase any of its common stock, if the effect thereof would cause stockholders' equity to be reduced below either the amount required for the combined liquidation accounts or the regulatory capital requirements for insured institutions. NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments at March 31, 1998 and September 30, 1997 and 1996. 22 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED Cash and cash equivalents: The balance sheet carrying amounts for cash and short-term instruments approximate the estimated fair values of such assets. Investment securities and mortgage-backed securities: Fair values for investment securities and mortgage-backed securities are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: For variable rate loans that reprice frequently and which entail no significant change in credit risk, fair values are based on the carrying values. The estimated fair values of fixed rate loans are estimated based on discounted cash flow analyses using prepayment assumptions and interest rates currently offered for loans with similar terms to borrowers of similar credit quality. Nonperforming loans have not been discounted. The carrying amount of accrued interest receivable approximates its fair value. Commitments to extend credit: No premium or discount was ascribed to loan commitments because when funded virtually all funding will be at current market rates. Federal Home Loan Bank stock: The balance sheet carrying amount approximates the stocks fair value. Deposit liabilities: The fair values estimated for demand deposits, NOW accounts, savings and certain types of money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values of fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly time deposit maturities. The carrying amount of accrued interest payable approximates its fair value. Advances from Federal Home Loan Bank: Variable rate advances fair values are considered equal to their carrying values. 23 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued The following table provides summary information on the fair value of financial instruments. Such information does not purport to represent the aggregate net fair value of the Association. Further, the fair value estimates are based on various assumptions, methodologies and subjective considerations, which vary widely among different financial institutions and which are subject to change. The carrying amounts are the amounts at which the financial instruments are reported in the financial statements. March 31, 1998 (unaudited) ---------------------------- Carrying Estimated amount of fair value assets and of assets and (liabilities) (liabilities) ------------- ------------- Cash and cash equivalents .................... $ 650,484 $ 650,484 Investment securities held to maturity ....... 3,018,273 3,029,699 Mortgage-backed securities held to maturity .. 237,651 234,444 Loans ........................................ 9,172,699 9,262,923 Federal Home Loan Bank stock ................. 139,500 139,500 Deposits ..................................... (12,064,758) (12,073,870) Advances from Federal Home Loan Bank ......... (400,000) (400,000) September 30, 1997 ---------------------------- Carrying Estimated amount of fair value assets and of assets and (liabilities) (liabilities) ------------- ------------- Cash and cash equivalents .................... $ 635,237 $ 635,237 Investment securities held to maturity ....... 3,116,975 3,116,637 Mortgage-backed securities held to maturity .. 252,598 248,950 Loans ........................................ 9,556,940 9,639,390 Federal Home Loan Bank stock ................. 134,300 134,300 Deposits ..................................... (12,854,278) (12,856,144) Advances from Federal Home Loan Bank ......... (100,000) (100,000) 24 The Neodesha Savings and Loan Association, FSA NOTES TO FINANCIAL STATEMENTS - CONTINUED March 31, 1998 and 1997 (unaudited) and September 30, 1997 and 1996 NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued September 30, 1996 ---------------------------- Carrying Estimated amount of fair value assets and of assets and (liabilities) (liabilities) ------------- ------------- Cash and cash equivalents .................... $ 772,095 $ 772,095 Investment securities held to maturity ....... 3,215,380 3,168,720 Mortgage-backed securities held to maturity .. 252,674 245,325 Loans ........................................ 9,590,620 9,675,574 Federal Home Loan Bank stock ................. 125,700 125,700 Deposits ..................................... (12,698,322) (12,714,492) Advances from Federal Home Loan Bank ......... (500,000) (500,000) 25 No person has been authorized to give any information or to make any representation other than as contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by First Independence Corporation. This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any security other than the shares of Common Stock offered hereby to any person in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale hereunder shall, under any circumstances, create any implication that information herein is correct as of any time subsequent to the date hereof. Table of Contents Page ---- Until the later of ___________, 1998 or 25 days after the commencement of the Offering, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as under writers and with respect to their unsold allotments or subscriptions. First Independence Corporation 185,590 Shares of Common Stock (Anticipated Maximum) PROSPECTUS Trident Securities, Inc. _______________ ___, 1998 THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED OR GUARANTEED PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers Article Eleventh of the Holding Company's Certificate of Incorporation provides for indemnification of directors and officers of the Holding Company against any and all liabilities, judgments, fines and reasonable settlements, costs, expenses and attorneys' fees incurred in any actual, threatened or potential proceeding, except to the extent that such indemnification is limited by Delaware law and such law cannot be varied by contract or bylaw. Article Eleventh also provides for the authority to purchase insurance with respect thereto. Section 145 of the General Corporation Law of the State of Delaware authorizes a corporation's Board of Directors to grant indemnity under certain circumstances to directors and officers, when made, or threatened to be made, parties to certain proceedings by reason of such status with the corporation, against judgments, fines, settlements and expenses, including attorneys' fees. In addition, under certain circumstances such persons may be indemnified against expenses actually and reasonably incurred in defense of a proceeding by or on behalf of the corporation. Similarly, the corporation, under certain circumstances, is authorized to indemnify directors and officers of other corporations or enterprises who are serving as such at the request of the corporation, when such persons are made, or threatened to be made, parties to certain proceedings by reason of such status, against judgments, fines, settlements and expenses, including attorneys' fees; and under certain circumstances, such persons may be indemnified against expenses actually and reasonably incurred in connection with the defense or settlement of a proceeding by or in the right of such other corporation or enterprise. Indemnification is permitted where such person (i) was acting in good faith; (ii) was acting in a manner he reasonably believed to be in or not opposed to the best interests of the corporation or other corporation or enterprise, as appropriate; (iii) with respect to a criminal proceeding, has no reasonable cause to believe his conduct was unlawful; and (iv) was not adjudged to be liable to the corporation or other corporation or enterprise (unless the court where the proceeding was brought determines that such person is fairly and reasonably entitled to indemnity). Unless ordered by a court, indemnification may be made only following a determination that such indemnification is permissible because the person being indemnified has met the requisite standard of conduct. Such determination may be made (i) by the Board of Directors of the Holding Company by a majority vote of a quorum consisting of directors not at the time parties to such proceeding; or (ii) if such a quorum cannot be obtained or the quorum so directs, then by independent legal counsel in a written opinion; or (iii) by the stockholders. Section 145 also permits expenses incurred by directors and officers in defending a proceeding to be paid by the corporation in advance of the final disposition of such proceedings upon the receipt of an undertaking by the director or officer to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the corporation against such expenses. Item 25. Other Expenses of Issuance and Distribution Set forth below is an estimate of the amount of fees and expenses (other than underwriting discounts and commissions) to be incurred in connection with the issuance of the shares. Counsel fees and expenses.............................................. $150,000 Accounting fees and expenses........................................... 60,000 Appraisal and business plan preparation fees and expenses............. 30,000 Conversion Agent fees and expenses..................................... 10,000 Underwriting fees(1) (including financial advisory fee and expenses)... 85,000 Underwriter's counsel fees and expenses................................ 47,500 Printing, postage and mailing.......................................... 30,000 Registration and Filing Fees........................................... 15,000 Blue Sky fees and expenses............................................. 6,000 Stock Transfer Agent and Certificates.................................. 6,000 Other expenses(1)...................................................... 10,500 -------- TOTAL............................................................. $450,000 ======== - ------------------ (1) Based on maximum of Estimated Valuation Range. Item 26. Recent Sales of Unregistered Securities The Registrant is newly incorporated, solely for the purpose of acting as the holding company of The Neodesha Savings & Loan Association, F.S.A., pursuant to the Plan of Conversion (filed as Exhibit 2 herein), and no sales of its securities have occurred to date. II-2 Item 27. Exhibits and Financial Statement Schedules (a) Exhibits: 1.1 Letter Agreement Regarding Marketing Agent 1.2 Form of Agency Agreement(1) 2.1 Plan of Merger Conversion 2.2 Agreement and Plan of Merger and Reorganization 3.1 Certificate of Incorporation of the Holding Company(2) 3.2 Bylaws of the Holding Company(2) 4 Form of Stock Certificate of the Holding Company(2) 5 Opinion of Silver, Freedman & Taff, L.L.P. with Respect to Legality of Stock 8.1 Form of Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal income tax consequences of the Merger Conversion 8.2 Form of Opinion of Grant Thornton with respect to Kansas income tax consequences of the Merger Conversion 10.1 1994 Stock Option and Incentive Plan(3) 10.2 Recognition and Retention Plan(3) 10.3 Employment Agreements(3) 10.4 Employment Agreement with Franklin C. Miller 21 Subsidiaries of the Registrant(3) 23.1 Consent of Silver, Freedman & Taff, L.L.P. 23.2 Consent of Grant Thornton 23.3 Consent of Ferguson & Company 24 Power of Attorney (set forth on signature page) 27 Financial Data Schedule 99.1 Appraisal(1) 99.2 Stock Order Form and Order Form Instructions(1) 99.3 Certification(1) 99.4 Question and Answer Brochure 99.5 Advertising, Training and Community Informational Meeting Materials 99.6 Letter of Appraiser with respect to Subscription Rights - ----------- 1 To be filed supplementally or by amendment. 2 Filed as exhibits to the Company's Form S-1 registration statement filed on June 22, 1994 (File No. 33-64812) pursuant to Section 5 of the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. 3 Filed as an exhibit to the Company's Annual Report on Form 10-KSB filed on December 29, 1994 (File No. 0-22184) pursuant to the Securities Exchange Act of 1934. II-3 Item 28. Undertakings The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any Prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and it will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. II-4 (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB- 2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of Independence, State of Kansas, on July 1, 1998. FIRST INDEPENDENCE CORPORATION By: /s/ Larry G. Spencer --------------------------------- Larry G. Spencer, President and Chief Executive Officer (Duly Authorized Representative) KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Larry G. Spencer his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents or their substitutes or substitute may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. II-6 /s/ Larry G. Spencer /s/ Gary L. Overfield - ------------------------------ --------------------------------------- Larry G. Spencer Gary L. Overfield President, Chief Executive Senior Vice President and Secretary Officer and Director July 1, 1998 July 1, 1998 - ------------------------------ --------------------------------------- /s/ James B. Mitchel /s/ Donald E. Aitker - ------------------------------ --------------------------------------- James B. Mitchel Donald E. Aitker Vice President and Chief Director Financial Officer July 1, 1998 July 1, 1998 - ------------------------------ --------------------------------------- /s/ John T. Updegraff /s/ William T. Newkirk, II - ------------------------------ --------------------------------------- John T. Updegraff William T. Newkirk, II Vice Chairman of the Board Director July 1, 1998 July 1, 1998 - ------------------------------ --------------------------------------- /s/ Joseph M. Smith /s/ Harold L. Swearinsen - ------------------------------ --------------------------------------- Joseph M. Smith Harold L. Swearinsen Director Director July 1, 1998 July 1, 1998 - ------------------------------ --------------------------------------- /s/ Lavern W. Strecker - ------------------------------ Lavern W. Strecker Director July 1, 1998 - ------------------------------ II-7 EX-1 2 EXHIBIT 1.1 Exhibit 1.1 EXHIBIT 1.1 LETTER AGREEMENT REGARDING MARKETING AGENT TRIDENT SECURITIES, INC. 4601 SIX FORKS ROAD, SUITE 400 RALEIGH, NORTH CAROLINA 27609 TELEPHONE (919) 781-8900 FACSIMILE (919) 787-1670 March 3, 1998 Board of Directors First Independence Corporation Myrtle & Sixth Streets Post Office Drawer 947 Independence, Kansas 67301 RE: Merger/Conversion Stock Marketing Services Gentlemen: This letter sets forth the terms of the proposed engagement between Trident Securities, Inc., Raleigh, North Carolina ("Trident") and First Independence Corporation ("First Independence"), Independence, Kansas concerning certain investment banking services in connection with the conversion of Neodesha Savings and Loan Association, FSA ("Neodesha Savings") from the mutual to the capital stock form of organization and the simultaneous acquisition of Neodesha Savings by First Independence. Trident is prepared to assist First Independence in connection with the offering of its shares of common stock during the subscription and community offering period as such terms are defined in Neodesha Savings= Plan of Conversion. The specific terms of the services contemplated hereunder shall be set forth in a Definitive Agreement between Trident and First Independence to be executed on the date the Prospectus is declared effective by the appropriate regulatory authorities. The price of the shares during the subscription and community offering period will be the value established for Neodesha Savings by an independent appraisal firm (the "Appraiser") at a price established by First Independence=s Board of Directors, based upon an Appraiser=s Report as approved by the appropriate regulatory authorities, provided such price is mutually acceptable to Trident and First Independence. In connection with the subscription and community offering, Trident will act as financial advisor and exercise its best efforts to assist First Independence in the sale of common stock during the subscription and community offering period. Further, Trident will establish a stock information center at Neodesha Savings and coordinate the activities in such center. Additionally, Trident may enter into agreements with other National Association of Securities Dealers, Inc. ("NASD") member firms to act as selected dealers, assisting in the sale of the common stock. Trident and First Independence will determine the selected dealers to assist First Independence during the community offering. At the appropriate time, Trident will conduct an examination of the relevant documents and records of First Independence and Neodesha Savings as Trident deems necessary and appropriate. First Independence and Neodesha Savings will make all documents, records and other information deemed necessary by Trident and deemed to be reasonable by First Independence available upon request. Board of Directors March 3, 1998 Page 2 For its services hereunder, Trident will receive the following compensation and reimbursement from First Independence: 1. A management fee in the amount of $85,000. 2. For stock sold by other NASD member firms under selected dealer=s agreements, the commission shall not exceed a fee to be agreed upon jointly by Trident and the Company to reflect market requirements at the time of the stock allocation in a Syndicated Community Offering. 3. The foregoing fees and commissions are to be payable to Trident at Closing as defined in the Definitive Sales Agency Agreement to be entered into between Trident and First Independence. 4. Trident shall be reimbursed for allocable expenses incurred by them, including legal fees, whether or not the Agreement is consummated. Trident's out-of-pocket expenses will not exceed $12,500 and its legal fees will not exceed $35,000. Allocable expenses will be billed on a monthly basis as incurred. First Independence shall forward to Trident a check in the amount of $10,000 as an advance payment to defray the allocable expenses of Trident. It is further understood that First Independence will pay all other expenses of the conversion including, but not limited to its attorneys= fees, National Association of Securities Dealers ("NASD") filing fees, fees relating to any required auditing and accounting, filing and registration fees and fees of either Trident=s attorneys or First Independence=s attorneys relating to any required state securities law filings, telephone charges, air freight, rental equipment, supplies, transfer agent charges and costs of printing all documents necessary in connection with the foregoing. For purposes of Trident=s obligation to file certain documents and to make certain representations to the NASD in connection with the conversion, First Independence will warrant on the date the Application for Conversion is filed with the OTS that: (a) First Independence has not privately placed any securities within the last 18 months; (b) there have been no material dealings within the last 12 months between First Independence and any NASD member or any person related to or associated with any such member; (c) none of the officers of directors of First Independence are affiliated or associated with the NASD; (d) except as contemplated by this engagement letter with Trident and any agreements with Trident=s affiliates, First Independence has no agreements outstanding with any other person relating to the provision of investment banking or underwriting services; (e) First Independence has not granted Trident a right of first refusal with respect to the underwriting of any future offering of First Independence=s stock; and , (f) there has been no intermediary between Trident and First Independence in connection with the public offering of First Independence=s shares, and no person is being compensated in any manner for providing such service. Board of Directors March 3, 1998 Page 3 This letter is merely a statement of intent and is not a binding legal agreement except as to Paragraph (4) above with regard to the obligation to reimburse Trident for allocable expenses to be incurred prior to the execution of a Definitive Agreement. While Trident and First Independence agree in principle to the contents hereof and propose to proceed promptly, and in good faith, to work out the arrangements with respect to the proposed offering, any legal obligation among Trident and First Independence shall be only as set forth in a duly executed Definitive Agreement. Such Definitive Agreement shall be in form and content satisfactory to Trident and First Independence, as well as their counsel, and Trident=s obligations thereunder shall be subject to, among other things, there being in Trident=s opinion no material adverse change in the condition or obligations of First Independence and Neodesha Savings. In the event that First Independence enters into an agreement to complete a merger/conversion with another institution prior to the effective date of the Prospectus, and where First Independence wishes to combine the offerings involving Neodesha Savings with another institution, Trident will re-negotiate this letter of intent to reflect the changed circumstances. Please acknowledge your agreement to the foregoing by signing below and returning to Trident one copy of this letter, along with the advance payment of $10,000. This proposal is open for your acceptance for a period of thirty (30) days from the date hereof. Yours very truly TRIDENT SECURITIES, INC. By: /s/ R. Lee Burrows, Jr. ----------------------------- R. Lee Burrows, Jr. Managing Director RLB/cs First Independence Corporation By: /s/ Larry G. Spencer --------------------------- Larry G. Spencer Chief Executive Officer Date: March 5, 1998 --------------------------- EX-2 3 EXHIBIT 2.1 Exhibit 2.1 EXHIBIT 2.1 PLAN OF MERGER CONVERSION PLAN OF MERGER CONVERSION OF NEODESHA SAVINGS & LOAN ASSOCIATION, FSA WITH FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF INDEPENDENCE I. GENERAL On February 18, 1998 the Boards of Directors of Neodesha, the Holding Company and First Federal, respectively, adopted and approved a Plan of Conversion whereby Neodesha would convert from a federal mutual savings and loan association to a federal stock savings and loan association pursuant to the Rules and Regulations of the Office of Thrift Supervision (the "OTS"). The Plan includes, as part of the conversion, the concurrent merger of Neodesha with and into First Federal. The Board of Directors of Neodesha has concluded, in consultation with its advisors, that the Merger Conversion is in the best interests of Neodesha, the depositors and borrowers of Neodesha, and the communities served by Neodesha. The Merger Conversion will enhance Neodesha's competitive position and further the interests of the depositors and borrowers of Neodesha and the communities served by Neodesha by promoting a program of sound growth, increasing funds and capital available for lending, and providing additional resources for expansion of services, as well as by providing an enhanced opportunity for attracting and retaining qualified personnel. This Plan is subject to the approval of the OTS and the Members of Neodesha. If appropriate or required under applicable law and regulations, the Plan, as an exhibit to the related Agreement among Neodesha, First Federal and the Holding Company, also will be submitted for approval by the stockholders of the Holding Company. II. DEFINITIONS Acting in Concert: The term "acting in concert" shall have the same meaning given it in ss.574.2(c) of the Rules and Regulations of the OTS. Actual Purchase Price: The price per share, determined as provided in Section V of the Plan, at which Holding Company Conversion Stock will be sold in the Merger Conversion. Affiliate: An "affiliate" of, or a Person "affiliated" with, a specified Person, is a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, the Person specified. Aggregate Subscription Amount: As to each subscriber in the Subscription Offering and each purchaser in the Direct Community Offering, the total dollar amount submitted (or subject to a valid withdrawal authorization submitted as provided in Section V.G. of the Plan) by such subscriber or purchaser in payment for the total number of shares of Holding Company Conversion Stock covered by the subscription or purchase order submitted by such subscriber or purchaser. Agreement: The Agreement and Plan of Merger and Reorganization to which this Plan is an exhibit. Associate: The term "associate," when used to indicate a relationship with any Person, means (i) any corporation or organization (other than Neodesha, First Federal, the Holding Company or majority-owned subsidiary of the Holding Company) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of Neodesha, First Federal, the Holding Company or any subsidiary of the Holding Company; provided, however, that to the extent provided in Section V hereof, any Tax-Qualified Employee Plan of Neodesha, First Federal or the Holding Company shall not be deemed to be an Associate of any director or officer of Neodesha, First Federal or the Holding Company. Deposit Account: Any withdrawable or repurchasable account or deposit in Neodesha, including Savings Accounts and demand deposits. Direct Community Offering: The offering to the general public of any unsubscribed shares which may be effected as provided in Section V.C.2 hereof. Eligibility Record Date: The close of business on December 31, 1996. Eligible Account Holder: Any Person holding a Qualifying Deposit in Neodesha on the Eligibility Record Date. Exchange Act: The Securities Exchange Act of 1934, as amended. First Federal: First Federal Savings & Loan Association of Independence, a federally chartered savings institution headquartered in Independence, Kansas. Holding Company: First Independence Corporation, a Delaware corporation, which, upon completion of the Merger Conversion, shall own all of the outstanding common stock of the Resulting Association. Holding Company Conversion Stock: Shares of common stock, par value $.01 per share, to be issued and sold by the Holding Company as a part of the Merger Conversion. Market Maker: A dealer (i.e., any Person who engages directly or indirectly as agent, broker or principal in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another Person) who, with respect to a particular security, (i) regularly publishes bona fide, competitive bid and offer quotations in a recognized inter-dealer quotation system; or (ii) furnishes bona fide competitive bid and offer quotations on request; and (iii) is ready, willing, and able to effect transactions in reasonable quantities at his quoted prices with other brokers or dealers. Member: Any Person or entity that qualifies as a member of Neodesha pursuant to its charter and bylaws. Merger Conversion: The change of Neodesha's charter and bylaws to a federal stock charter and bylaws, merger of Neodesha with and into First Federal, and sale by the Holding Company of Holding Company Conversion Stock, all as provided for in this Plan and in the Agreement. Neodesha: Neodesha Savings & Loan Association, FSA, a federally chartered savings institution headquartered in Neodesha, Kansas. Non-Tax-Qualified Employee Plan: Any defined benefit plan or defined contribution plan of Neodesha, First Federal or the Holding Company, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which with its related trust does not meet the requirements to be "qualified" under Section 401 of the Internal Revenue Code. Officer: An executive officer of Neodesha, including the Chairman of the Board, President, Senior Vice Presidents in charge of principal business functions, Secretary and Treasurer. Order Forms: Forms to be used to exercise Subscription Rights in the Subscription Offering and to submit purchase orders in the Direct Community Offering. Other Members: Members of Neodesha, other than Eligible Account Holders, Tax-Qualified Employee Plans or Supplemental Eligible Account Holders, as of the Voting Record Date. P-2 OTS: Office of Thrift Supervision, Department of the Treasury. Person: An individual, a corporation, a partnership, an association, a joint-stock company, a trust, any unincorporated organization, or a government or political subdivision thereof. Plan: This Plan of Merger Conversion of Neodesha, including any amendment approved as provided in this Plan. Public Offering: The offering for sale by the Underwriters to the general public of any shares of Holding Company Conversion Stock not subscribed for in the Subscription Offering or the Direct Community Offering. Public Offering Price: The price per share at which any unsubscribed shares of Holding Company Conversion Stock are initially offered for sale in the Public Offering. Qualifying Deposit: The aggregate balance of all Deposit Accounts of an Eligible Account Holder as of the Eligibility Record Date or of a Supplemental Eligible Account Holder as of the Supplemental Eligibility Record Date. Resulting Association: First Federal, which shall be the surviving or resulting association in the Merger Conversion. SAIF: Savings Association Insurance Fund. Savings Account: Any withdrawable account in Neodesha, except a demand deposit. SEC: Securities and Exchange Commission. Special Meeting: The Special Meeting of Members of Neodesha called for the purpose of considering and voting upon the Plan. Subscription Offering: The offering of shares of Holding Company Conversion Stock for subscription and purchase pursuant to Section V.B. of the Plan. Subscription Rights: Non-transferable, non-negotiable, personal rights of Eligible Account Holders, Tax- Qualified Employee Plans, Supplemental Eligible Account Holders, Other Members, and of Neodesha's directors, Officers and employees, to subscribe for shares of Holding Company Conversion Stock in the Subscription Offering. Supplemental Eligibility Record Date: The last day of the calendar quarter preceding approval of the Plan by the OTS. Supplemental Eligible Account Holder: Any person holding a Qualifying Deposit in Neodesha (other than an officer or director and their associates) on the Supplemental Eligibility Record Date. Tax-Qualified Employee Plan: Any defined benefit plan or defined contribution plan of Neodesha, First Federal or the Holding Company, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which with its related trust meets the requirements to be "qualified" under Section 401 of the Internal Revenue Code. Underwriters: The investment banking firm or firms agreeing to purchase Holding Company Conversion Stock in order to offer and sell such Holding Company Conversion Stock in the Public Offering. Voting Record Date: The date set by the Board of Directors of Neodesha in accordance with federal regulations for determining Members eligible to vote at the Special Meeting. P-3 III. STEPS PRIOR TO SUBMISSION OF PLAN OF MERGER CONVERSION TO THE MEMBERS FOR APPROVAL Prior to submission of the Plan of Merger Conversion to its Members for approval, Neodesha must under current law receive from the OTS approval of the Application for Approval of Conversion to convert to the stock form of organization by merger with First Federal. The following steps must be taken prior to such regulatory approval: A. The Board of Directors shall adopt the Plan by not less than a two-thirds vote. B. Neodesha shall notify its Members of the adoption of the Plan by publishing a statement in a newspaper having a general circulation in each community in which Neodesha maintains an office. C. Copies of the Plan adopted by the Board of Directors shall be made available for inspection at each office of Neodesha. D. Neodesha and First Federal will promptly cause an Application for Approval of Conversion on Form AC to be prepared and filed with the OTS, an Application on Form H-(e)3 (including related applications) to be prepared and filed with the OTS, and a Registration Statement pursuant to the Securities Act of 1933 to be prepared and filed with the SEC. E. At the time and in the manner prescribed by regulations of the OTS, Neodesha, First Federal and the Holding Company, as applicable, shall post in their offices and publish in newspapers of general circulation notices of the filing of the applications made by them. IV. MERGER CONVERSION PROCEDURE Following approval of the Merger Conversion application by the OTS, the Agreement and the Plan will be submitted by Neodesha to a vote of its Members at the Special Meeting. If appropriate or required, the Agreement will also be submitted to the stockholders of the Holding Company for approval at an annual or special meeting of the Holding Company. The Holding Company Conversion Stock will be offered for sale in the Subscription Offering to Tax- Qualified Employee Plans, Supplemental Eligible Account Holders and Other Members and to Eligible Account Holders, directors, officers and employees. The Subscription Offering will commence prior to or within 45 days after the date of the Special Meeting. The Holding Company may, either concurrently with, at any time during, or promptly after the Subscription Offering, also offer the Holding Company Conversion Stock to and receive purchase orders from other Persons in a Direct Community Offering; provided that Eligible Account Holders, Tax- Qualified Employee Plans, Supplemental Eligible Account Holders, Other Members and Neodesha's directors, Officers and employees shall have the priority rights to subscribe for Holding Company Conversion Stock set forth in Section V of this Plan. The Holding Company and Neodesha may delay commencing the Subscription Offering beyond such 45 day period in the event there exists unforeseen material adverse market or financial conditions. If the Subscription Offering commences prior to the Special Meeting, subscriptions will be accepted subject to the approval of the Plan at the Special Meeting. The period for the Subscription Offering and the Direct Community Offering will be not less than 20 days nor more than 45 days, unless extended by Neodesha and the Holding Company. Upon completion of the Subscription Offering and the Direct Community Offering, if any, any unsubscribed shares of Holding Company Conversion Stock will, if feasible, be sold to the Underwriters for resale to the general public in the Public Offering. If for any reason the Public Offering of all shares not sold in the Subscription Offering and the Direct Community Offering cannot be effected, the Holding Company and Neodesha will use their best efforts to obtain other purchasers, subject to OTS approval. Completion of the sale of all shares of Holding Company Conversion Stock not sold in the Subscription Offering and the Direct Community Offering is required within 45 days after termination of the Subscription Offering, subject to extension of such 45 day period by the Holding Company and Neodesha with the approval of the OTS. The Holding Company and Neodesha may jointly seek one or more P-4 extensions of such 45 day period if necessary to complete the sale of all shares of Holding Company Conversion Stock. In connection with any such extensions, subscribers and other purchasers will be permitted to increase, decrease or rescind their subscriptions or purchase orders to the extent required by the OTS in approving the extensions. Completion of the sale of all shares of Holding Company Conversion Stock is required within 24 months after the date of the Special Meeting. V. STOCK OFFERING A. Total Dollar Amount of Shares and Purchase Price of Conversion Stock All shares of Holding Company Conversion Stock sold in the Merger Conversion shall be sold at the same price per share. The total dollar amount for which all shares will be sold in the Merger Conversion shall be within the valuation range, established by an independent appraisal of the estimated total pro forma market value of Neodesha, stated in the approval or amended approval of the Plan by the OTS. Such appraisal shall be performed in accordance with OTS guidelines, shall be updated as appropriate under federal regulations and shall be made by an independent investment banking or financial consulting firm which is experienced and expert in the area of thrift institution appraisals and has been selected for such purpose by Neodesha and the Holding Company. The total dollar amount of shares of Holding Company Conversion Stock to be offered in the Merger Conversion shall also be subject to increase in connection with any option granted to Underwriters to cover over-allotments in the Public Offering or oversubscriptions in the Subscription Offering or Direct Community Offering. The total dollar amount of shares of Holding Company Conversion Stock to be offered in the Subscription Offering and the Direct Community Offering shall be determined jointly by the Boards of Directors of Neodesha and the Holding Company, prior to the commencement of the Subscription Offering, on the basis of the appraised valuation of Neodesha and subject to adjustment if necessitated by market or financial conditions prior to consummation of the Merger Conversion. Each subscriber in the Subscription Offering and each prospective purchaser in the Direct Community Offering shall submit with his subscription or purchase order an Aggregate Subscription Amount (or a valid account withdrawal authorization, in accordance with Section V.G. of the Plan, for the Aggregate Subscription Amount), which shall be the total dollar amount of the shares of Holding Company Conversion Stock covered by such subscription or purchase order. The Actual Purchase Price per share of the Holding Company Conversion Stock will be determined at the time of the final pricing, which will be after completion of the Subscription Offering or, if later, the Direct Community Offering. The Actual Purchase Price will be a price equal to 95% of the average of the last sale price (or average of the closing bid and closed asked quotations if there is no last sale price) on the Nasdaq SmallCap Market System of a share of Common Stock for the ten trading days ending on the date of expiration of the Subscription Offering or the Community Offering, whichever is later, rounded to the nearest cent (with any amount equal to $.005 rounded to the next higher $.01). If all of the Holding Company Conversion Stock is not subscribed for in the Subscription Offering and the Direct Community Offering, a Public Offering may be effected. The Public Offering Price will be a price negotiated among Neodesha, the Holding Company and the Underwriters. The price paid to the Holding Company by the Underwriters for each unsubscribed share will be the Public Offering Price less a negotiated underwriting discount. In such event, the Actual Purchase Price per share for each share of Holding Company Conversion Stock will be the Public Offering Price. The number of shares to be sold to each subscriber in the Subscription Offering, and to each purchaser in the Direct Community Offering, shall be determined by dividing the Aggregate Subscription Amount submitted by each subscriber or purchaser by the Actual Purchase Price, with a refund in the amount of any fractional remainder. B. Subscription Rights Non-transferable Subscription Rights to purchase shares will be issued without payment therefor to Eligible Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account Holders, Other Members and directors, Officers and employees of Neodesha as set forth below. P-5 1. Preference Category No. 1: Eligible Account Holders Each Eligible Account Holder shall receive non-transferable Subscription Rights to subscribe for shares of Holding Company Conversion Stock in an amount equal to the greater of $100,000, one-tenth of one percent (.10%) of the total offering of shares, or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders in Neodesha in each case on the Eligibility Record Date. If sufficient shares are not available, shares shall be allocated first to permit each subscribing Eligible Account Holder to purchase to the extent possible 100 shares, and thereafter among each subscribing Eligible Account Holder pro rata in the same proportion that his Qualifying Deposit bears to the total Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unsatisfied. Non-transferable Subscription Rights to purchase Holding Company Conversion Stock received by directors and Officers of Neodesha and their Associates, based on their increased deposits in Neodesha in the one year period preceding the Eligibility Record Date, shall be subordinated to all other subscriptions involving the exercise of non-transferable Subscription Rights of Eligible Account Holders. 2. Preference Category No. 2: Tax-Qualified Employee Plans Each Tax-Qualified Employee Plan shall be entitled to receive non-transferable Subscription Rights to purchase up to 10% of the shares of Holding Company Conversion Stock, provided that singly or in the aggregate such plans (other than that portion of such plans which is self-directed) shall not purchase more than 10% of the shares of the Holding Company Conversion Stock. Subscription Rights received pursuant to this Category shall be subordinated to all rights received by Eligible Account Holders to purchase shares pursuant to Category No. 1; provided, however, that notwithstanding any other provision of this Plan to the contrary, the Tax-Qualified Employee Plans shall have a first priority Subscription Right to the extent that the total number of shares of Holding Company Conversion Stock sold in the Merger Conversion exceeds the maximum of the appraisal range as set forth in the subscription prospectus. 3. Preference Category No. 3: Supplemental Eligible Account Holders Each Supplemental Eligible Account Holder shall receive non-transferable Subscription Rights to subscribe for shares of Holding Company Conversion Stock in an amount equal to the greater of $100,000, one-tenth of one percent (.10%) of the total offering of shares, or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders in Neodesha in each case on the Supplemental Eligibility Record Date. Subscription Rights received pursuant to this category shall be subordinated to all Subscription Rights received by Eligible Account Holders and Tax-Qualified Employee Plans pursuant to Category Nos. 1 and 2 above. Any non-transferable Subscription Rights to purchase shares received by an Eligible Account Holder in accordance with Category No. 1 shall reduce to the extent thereof the Subscription Rights to be distributed to such person pursuant to this Category. In the event of an oversubscription for shares under the provisions of this subparagraph, the shares available shall be allocated first to permit each subscribing Supplemental Eligible Account Holder to the extent possible, to purchase a number of shares sufficient to make his total allocation (including the number of shares, if any, allocated in accordance with Category No. 1) equal to 100 shares, and thereafter among each subscribing Supplemental Eligible Account Holder pro rata in the same proportion that his Qualifying P-6 Deposit bears to the total Qualifying Deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unsatisfied. 4. Preference Category No. 4: Other Members Each Other Member shall receive non-transferable Subscription Rights to subscribe for shares of Holding Company Conversion Stock remaining after satisfying the subscriptions provided for under Category Nos. 1 through 3 above, subject to the following conditions: a. Each Other Member shall be entitled to subscribe for an amount of shares equal to the greater of $100,000 or one-tenth of one percent (.10%) of the total offering of shares of common stock in the Conversion, to the extent that Holding Company Conversion Stock is available. b. In the event of an oversubscription for shares under the provisions of this subparagraph, the shares available shall be allocated among the subscribing Other Members pro rata in the same proportion that his number of votes on the Voting Record Date bears to the total number of votes on the Voting Record Date of all subscribing Other Members on such date. Such number of votes shall be determined based on the Association's mutual charter and bylaws in effect on the date of approval by members of this Plan of Conversion. 5. Preference Category No. 5: Directors, Officers and Employees Each director, Officer and employee of Neodesha as of the date of the commencement of the Subscription Offering shall be entitled to receive non-transferable Subscription Rights to purchase shares of the Holding Company Conversion Stock to the extent that shares are available after satisfying subscriptions under Category Nos. 1 through 4 above. The shares which may be purchased under this Category are subject to the following conditions: a. The total number of shares which may be purchased under this Category may not exceed 25% of the number of shares of Holding Company Conversion Stock. b. The maximum amount of shares which may be purchased under this Category by any Person is $100,000 of Holding Company Conversion Stock. In the event of an oversubscription for shares under the provisions of this subparagraph, the shares available shall be allocated pro rata among all subscribers in this Category. C. Public Offering or Direct Community Offering 1. The amount, if any, of Holding Company Conversion Stock not subscribed for in the Subscription Offering may be offered for sale in a Direct Community Offering. This will involve an offering of the unsubscribed amount directly to the general public. The Direct Community Offering, if any, shall be for a period of not less than 20 days nor more than 45 days unless extended by the Holding Company and Neodesha, and shall commence concurrently with, during or promptly after the Subscription Offering. The purchase price per share to the general public in the Direct Community Offering shall be the same as the Public Offering Price. The Holding Company and Neodesha may use an investment banking firm or firms on a best efforts basis to sell Holding Company Conversion Stock in the Subscription Offering and the Direct Community Offering. The Holding Company and Neodesha may pay a commission or other fee to such investment banking firm or firms as to the shares sold by such firm or firms in the Subscription Offering and the Direct Community Offering and may also reimburse such firm or firms for expenses incurred in connection with the sale. The Holding Company Conversion Stock will be offered and sold in the Direct Community Offering, in accordance with OTS regulations, so as to achieve the widest distribution of the Holding Company Conversion Stock. P-7 Neodesha and the Holding Company, in their sole discretion, may reject, in whole or in part, purchase orders received from any Person under this Section V.C.1. Further, Neodesha and the Holding Company may limit total purchase orders under this Section V.C.1. so as to assure that at least a specified amount of Holding Company Conversion Stock remains available for the Public Offering. In the event that the dollar amount of Holding Company Conversion Stock for which purchase orders are received under this Section V.C.1. exceeds the dollar amount of available shares, the available shares shall be allocated (to the extent shares remain available) first to cover orders of natural Persons residing in any county in which Neodesha has an office, then to cover the orders of any other Person subscribing for shares in the Direct Community Offering so that each such Person may receive 1,000 shares; and thereafter, by allocating the remaining shares pro rata among such Persons based on the amount of their respective subscriptions. 2. Any shares of Holding Company Conversion Stock not sold in the Subscription Offering or in the Direct Community Offering, if any, shall then be sold to the Underwriters for resale to the general public at the Public Offering Price in the Public Offering. It is expected that the Public Offering will commence as soon as practicable after termination of the Subscription Offering and the Direct Community Offering, if any. The Public Offering shall be completed within 45 days after the termination of the Subscription Offering, unless such period is extended as provided in Section IV hereof. The Public Offering Price and the underwriting discount shall be determined as provided in Section V.A. hereof and set forth in an underwriting agreement between the Holding Company, Neodesha and the Underwriters. 3. If for any reason a Public Offering of unsubscribed shares of Holding Company Conversion Stock cannot be effected and any shares remain unsold after the Subscription Offering and the Direct Community Offering, if any, the Boards of Directors of the Holding Company and Neodesha will seek to make other arrangements for the sale of the remaining shares. Such other arrangements will be subject to the approval of the OTS and to compliance with applicable securities laws, and may provide for purchases by directors and Officers of Neodesha and their Associates and other Persons in excess of the limitations provided in this Section V. If such other purchase arrangements cannot be made, the Plan will terminate. D. Additional Limitations Upon Purchases of Shares of Holding Company Conversion Stock The following additional limitations shall be imposed on all purchases of Holding Company Conversion Stock in the Merger Conversion: 1. No Person, by himself or herself, or with an Associate or group of Persons acting in concert, may subscribe for or purchase either (a) an amount of Holding Company Conversion Stock so as to own upon consummation of the Merger Conversion more than 10% of the issued and outstanding common stock of the Holding Company, without having first complied with all legal and regulatory requirements applicable to the acquisition or proposed acquisition of such amount of stock, or (b) more than $100,000 of Holding Company Conversion Stock. For purposes of this paragraph, an Associate of a Person does not include a Tax-Qualified or Non-Tax Qualified Employee Plan in which the person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity. Moreover, for purposes of this paragraph, shares held by one or more Tax-Qualified or Non-Tax Qualified Employee Plans attributed to a Person shall not be aggregated with shares purchased directly by or otherwise attributable to that Person. 2. Directors and Officers of Neodesha and their Associates may not purchase in all categories in the Merger Conversion an aggregate of more than 35% of the Holding Company Conversion Stock. For purposes of this paragraph, an Associate of a Person does not include any Tax-Qualified Employee Plan. Moreover, any shares attributable to the Officers and directors of Neodesha and their Associates, but held by one or more Tax-Qualified Employee Plans, shall not be included in calculating the number of shares which may be purchased under the limitation in this paragraph. P-8 3. The minimum dollar amount of Holding Company Conversion Stock that may be purchased by any Person in the Conversion is $250, provided sufficient shares are available. Depending upon market and financial conditions, the Boards of Directors of the Holding Company and Neodesha, with the approval of the OTS and without further approval of the Members, may increase any of the above purchase limitations. For purposes of this Section V, the directors and officers of the Holding Company, First Federal and Neodesha shall not be deemed to be Associates or a group acting in concert solely as a result of their serving in such capacities. Each Person purchasing Holding Company Conversion Stock in the Merger Conversion shall be deemed to confirm that such purchase does not conflict with the above purchase limitations. E. Restrictions and Other Characteristics of Holding Company Conversion Stock Being Sold 1. Transferability. Holding Company Conversion Stock purchased by Persons other than directors and Officers of Neodesha will be transferable without restriction. Shares purchased by directors or Officers of Neodesha shall not be sold or otherwise disposed of for value for a period of one year from the date of Conversion, except for any disposition of such shares (i) following the death of the original purchaser, or (ii) resulting from an exchange of securities in a merger or acquisition approved by the applicable regulatory authorities. The certificates representing shares of Holding Company Conversion Stock issued to directors and Officers of Neodesha shall bear a legend giving appropriate notice of the one-year holding period restriction. Appropriate instructions shall be given to the transfer agent for such stock with respect to the applicable restrictions relating to the transfer of restricted stock. Any shares of common stock of the Holding Company subsequently issued as a stock dividend, stock split, or otherwise, with respect to any such restricted stock, shall be subject to the same holding period restrictions for Neodesha directors and Officers as may be then applicable to such restricted stock. No director or Officer of Neodesha, or Associate of such a director or Officer, shall purchase any outstanding shares of capital stock of the Holding Company for a period of three years following the Merger Conversion without the prior written approval of the OTS, except through a broker or dealer registered with the SEC or in a "negotiated transaction" involving more than one percent of the then-outstanding shares of common stock of the Holding Company. As used herein, the term "negotiated transaction" means a transaction in which the securities are offered and the terms and arrangements relating to any sale are arrived at through direct communications between the seller or any Person acting on its behalf and the purchaser or his investment representative. The term "investment representative" shall mean a professional investment advisor acting as agent for the purchaser and independent of the seller and not acting on behalf of the seller in connection with the transaction. 2. Voting Rights. Upon completion of the Merger Conversion, holders of deposit accounts will not have voting rights in the Resulting Association or the Holding Company. Exclusive voting rights as to the Resulting Association will be vested in the Holding Company, as the sole stockholder of the Resulting Association. Voting rights as to the Holding Company will be held exclusively by its stockholders. F. Exercise of Subscription Rights; Order Forms 1. If the Subscription Offering occurs concurrently with the solicitation of proxies for the Special Meeting, the subscription prospectus and Order Form may be sent to each Eligible Account Holder, Tax-Qualified Employee Plan, Supplemental Eligible Account Holder, Other Member, and director, Officer and employee of Neodesha, at their last known address as shown on the records of Neodesha. However, Neodesha may, and if the Subscription Offering commences after the Special Meeting Neodesha shall, furnish a subscription prospectus and Order Form only to Eligible Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account Holders, Other Members, and directors, Officers and employees of Neodesha, who have returned to Neodesha by P-9 a specified date prior to the commencement of the Subscription Offering a post card or other written communication requesting a subscription prospectus and Order Form. In such event, Neodesha shall provide a postage-paid post card for this purpose and make appropriate disclosure in its proxy statement for the solicitation of proxies to be voted at the Special Meeting and/or letter sent in lieu of the proxy statement to those Eligible Account Holders, Tax- Qualified Employee Plans and Supplemental Eligible Account Holders who are not Members on the Voting Record Date. 2. Each Order Form will be preceded or accompanied by a subscription prospectus describing the Holding Company and the Resulting Association and the shares of Holding Company Conversion Stock being offered for subscription and containing all other information required by the OTS or the SEC or otherwise necessary to enable Persons to make informed investment decisions regarding the purchase of Holding Company Conversion Stock. 3. The Order Forms (or accompanying instructions) used for the Subscription Offering will contain, among other things, the following: (i) A clear and intelligible explanation of the Subscription Rights granted under the Plan to Eligible Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account Holders, Other Members, and to the directors, Officers and employees of Neodesha; (ii) A specified expiration date by which Order Forms must be returned to and actually received by Neodesha, the Holding Company or their representative for purposes of exercising Subscription Rights, which date will be not less than 20 days after the Order Forms are initially mailed to potential subscribers; (iii) A statement of the minimum and maximum dollar amounts of Holding Company Conversion Stock that may be subscribed for under the Plan; (iv) A specifically designated blank space for indicating the dollar amount of shares being subscribed for and a statement of the arrangements for refunding any amount in lieu of fractional shares; (v) A set of detailed instructions as to how to complete the Order Form, including a statement as to the available alternative methods of payment for the shares being subscribed for; (vi) Specifically designated blank spaces for dating and signing the Order Form; (vii) An acknowledgement that the subscriber has received the subscription prospectus; (viii) A statement of the consequences of failing to properly complete and return the Order Form, including a statement that the Subscription Rights will expire on the expiration date specified on the Order Form unless such expiration date is extended by the Holding Company and Neodesha, and that the Subscription Rights may be exercised only by delivering the Order Form, properly completed and executed, to the Holding Company, Neodesha or their representative by the expiration date, together with required payment of the Aggregate Subscription Amount for all Holding Company Conversion Stock subscribed for; (ix) A statement that the Subscription Rights are non-transferable and that all shares of Holding Company Conversion Stock subscribed for upon exercise of Subscription Rights must be purchased on behalf of the Person exercising the Subscription Rights for his own account; and (x) A statement that, after receipt by the Holding Company, Neodesha or their representative, a subscription may not be modified, withdrawn or cancelled without the consent of the Holding Company or Neodesha. P-10 G. Method of Payment Payment for all shares of Holding Company Conversion Stock subscribed for must be received in full by the Holding Company or Neodesha, together with properly executed and completed Order Forms. Payment may be made in cash (if presented in Person), by check or money order, or, if the subscriber has a Deposit Account in Neodesha (including a certificate of deposit), the subscriber may authorize Neodesha to charge the subscriber's account. If a subscriber authorizes Neodesha to charge his or her account, the funds will continue to earn interest, but may not be used by the subscriber until all Holding Company Conversion Stock has been sold or the Plan of Merger Conversion is terminated, whichever is earlier. Neodesha will allow subscribers to purchase shares by withdrawing funds from certificate accounts without the assessment of early withdrawal penalties with the exception of prepaid interest in the form of promotional gifts. In the case of early withdrawal of only a portion of such account, the certificate evidencing such account shall be cancelled if the remaining balance of the account is less than the applicable minimum balance requirement, in which event the remaining balance will earn interest at the passbook rate. This waiver of the early withdrawal penalty is applicable only to withdrawals made in connection with the purchase of Holding Company Conversion Stock under the Plan of Merger Conversion. Interest will also be paid, at not less than the then-current passbook rate, on all orders paid in cash, by check or money order, from the date payment is received until consummation of the Merger Conversion. Payments made in cash, by check or money order will be placed by Neodesha in an escrow or other account established specifically for this purpose. In the event of an unfilled amount of any subscription order, the Holding Company or Neodesha will make an appropriate refund or cancel an appropriate portion of the related withdrawal authorization. If for any reason the Merger Conversion is not consummated, purchasers will have refunded to them all payments made and all withdrawal authorizations will be cancelled in the case of subscription payments authorized from accounts at Neodesha. If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans subscribe for shares during the Subscription Offering, such plans will not be required to pay for the shares subscribed for at the time they subscribe, but may pay for such shares of Holding Company Conversion Stock subscribed for upon consummation of the Merger Conversion. In the event that, after the completion of the Subscription Offering, the amount of shares to be issued is increased above the maximum of the appraisal range included in the subscription prospectus, the Tax- Qualified and Non-Tax-Qualified Employee Plans shall be entitled to increase their subscriptions by a percentage equal to the percentage increase in the amount of shares to be issued above the maximum of the appraisal range provided that such subscriptions shall continue to be subject to applicable purchase limits and stock allocation procedures. H. Undelivered, Defective or Late Order Forms; Insufficient Payment The Boards of Directors of the Holding Company and Neodesha shall have the absolute right, in their sole discretion, to reject any Order Form submitted in either the Subscription Offering or the Direct Community Offering, including but not limited to, any Order Forms which (i) are not delivered or are returned by the United States Postal Service (or the addressee cannot be located); (ii) are not received back by the Holding Company, Neodesha or their representative, or are received after the termination date specified thereon; (iii) are defectively completed or executed; (iv) are not accompanied by the total required payment for the shares of Holding Company Conversion Stock subscribed for (including cases in which the subscribers' Deposit Accounts or certificate accounts are insufficient to cover the authorized withdrawal for the required payment); or (v) are submitted by or on behalf of a Person whose representations the Boards of Directors of the Holding Company or Neodesha believe to be false or who they otherwise believe, either alone or acting in concert with others, is violating, evading or circumventing, or intends to violate, evade or circumvent, the terms and conditions of this Plan. In such event, the Subscription Rights, if any, of the Person to whom such rights have been granted will not be honored and will be treated as though such Person failed to return the completed Order Form within the time period specified therein. Neodesha and the Holding Company may, but will not be required to, waive any irregularity relating to any Order Form or require submission of corrected Order Forms or the remittance of full payment for subscribed shares by such date as Neodesha and the Holding Company may specify. The interpretation by the Holding Company and Neodesha P-11 of the terms and conditions of this Plan and of the proper completion of the Order Form will be final, subject to the authority of the OTS. I. Members in Non-qualified States or in Foreign Countries The Holding Company and Neodesha will make reasonable efforts to comply with the securities laws of all states in the United States in which Persons entitled to subscribe for Holding Company Conversion Stock pursuant to the Plan reside. However, no shares will be offered or sold under the Plan of Merger Conversion to any such Person who (1) resides in a foreign country or (2) resides in a state of the United States in which a small number of Persons otherwise eligible to subscribe for shares under the Plan of Merger Conversion reside or as to which the Holding Company and Neodesha determine that compliance with the securities laws of such state would be impracticable for reasons of cost or otherwise, including, but not limited to, a requirement that the Holding Company or Neodesha or any of their officers, directors or employees register, under the securities laws of such state, as a broker, dealer, salesman or agent. No payments will be made in lieu of the granting of Subscription Rights to any such Person. VI. FEDERAL STOCK CHARTER AND BYLAWS As part of the Merger Conversion, the charter and bylaws of First Federal will become the charter and bylaws of the Resulting Association. VII. CONTRIBUTIONS TO TAX-QUALIFIED EMPLOYEE PLANS The Resulting Association and the Holding Company may in their discretion make scheduled contributions to any Tax-Qualified Employee Plans, provided that such contributions do not cause the Resulting Association to fail to meet its regulatory capital requirements. VIII. STATUS OF DEPOSIT ACCOUNTS AND LOANS SUBSEQUENT TO THE MERGER CONVERSION Each Deposit Account holder shall retain, without payment, a withdrawable Deposit Account or Accounts in the Resulting Association, equal in amount to the withdrawable value of such account holder's Deposit Account or Accounts in Neodesha prior to the Merger Conversion. All Deposit Accounts will continue to be insured by the Federal Deposit Insurance Corporation up to the applicable limits of insurance coverage, and shall be subject to the same terms and conditions (except as to voting and liquidation rights) as such Deposit Account in Neodesha at the time of the Merger Conversion. All loans shall retain the same status after the Merger Conversion as these loans had prior to the Merger Conversion (except as to voting rights, if any). IX. LIQUIDATION ACCOUNT For purposes of granting to Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain Deposit Accounts at the Resulting Association a priority in the event of a complete liquidation of the Resulting Association, the Resulting Association will, at the time of the Merger Conversion, establish a liquidation account in an amount equal to the net worth of Neodesha as shown on its latest statement of financial condition contained in the final prospectus used in connection with the Merger Conversion. The creation and maintenance of the liquidation account will not operate to restrict the use or application of any of the regulatory capital accounts of the Resulting Association; provided, however, that such regulatory capital accounts will not be voluntarily reduced below the required dollar amount of the liquidation account. Each Eligible Account Holder and Supplemental Eligible Account Holder shall, with respect to the Deposit Account held, have a related inchoate interest in a portion of the liquidation account balance ("subaccount balance"). The initial subaccount balance of a Deposit Account held by an Eligible Account Holder or Supplmental Eligible Account Holder shall be determined by multiplying the opening balance in the liquidation account by a fraction of which the numerator is the amount of the Qualifying Deposit in the Deposit Account on the Eligibility Record Date or the Supplemental Eligibility Record Date and the denominator is the total amount of the Qualifying Deposits in Neodesha of all Eligible Account Holders and Supplemental Eligible Account Holders on such record P-12 dates. Such initial subaccount balance shall not be increased, and it shall be subject to downward adjustment as provided below. If the deposit balance in any Deposit Account of an Eligible Account Holder or Supplemental Eligible Account Holder at the close of business on any annual closing date subsequent to the record date is less than the lesser of (i) the deposit balance in such Deposit Account at the close of business on any other annual closing date subsequent to the Eligibility Record Date or the Supplemental Eligibility Record Date or (ii) the amount of the Qualifying Deposit in such Deposit Account on the Eligibility Record Date or Supplemental Eligiblity Record Date, the subaccount balance shall be reduced in an amount proportionate to the reduction in such deposit balance. In the event of a downward adjustment, the subaccount balance shall not be subsequently increased, notwithstanding any increase in the deposit balance of the related Deposit Account. If all funds in such Deposit Account are withdrawn, the related subaccount balance shall be reduced to zero. In the event of a complete liquidation of the Resulting Association (and only in such event), each Eligible Account Holder and Supplemental Eligible Account Holder shall be entitled to receive a liquidation distribution from the liquidation account in the amount of the then-current adjusted subaccount balances for Deposit Accounts then held before any liquidation distribution may be made to stockholders. No merger, consolidation, bulk purchase of assets with assumptions of Deposit Accounts and other liabilities, or similar transactions with another institution the accounts of which are insured by the Federal Deposit Insurance Corporation, shall be considered to be a complete liquidation. In such transactions, the liquidation account shall be assumed by the surviving institution. X. AMENDMENT OR TERMINATION OF PLAN If necessary or desirable, the Plan may be amended at any time prior to submission of the Plan and proxy materials to the Members of Neodesha by a two-thirds vote of the Boards of Directors of Neodesha, First Federal and the Holding Company. After submission of the Plan and proxy materials to the Members, the Plan may be amended by a two-thirds vote of the Board of Directors of Neodesha, First Federal and the Holding Company only with the concurrence of the OTS. Any amendments to the Plan made after approval by the Members with the concurrence of the OTS shall not necessitate further approval by the Members unless otherwise required. The Plan may be terminated by a two-thirds vote of the Boards of Directors of Neodesha, First Federal and the Holding Company at any time prior to the Special Meeting of Members, and at any time following such Special Meeting with the concurrence of the OTS. In their discretion, the Boards of Directors of Neodesha, First Federal and the Holding Company may modify or terminate the Plan upon the order or with the approval of the OTS, and without further approval by Members. The Plan shall terminate if the sale of all shares of Holding Company Conversion Stock is not completed within 24 months of the date of the Special Meeting. A specific resolution approved by a majority of the Boards of Directors of Neodesha, First Federal and the Holding Company is required in order for Neodesha, First Federal and the Holding Company to terminate the Plan prior to the end of such 24 month period. XI. EXPENSES OF THE MERGER CONVERSION Neodesha, First Federal and the Holding Company shall use their best efforts to assure that expenses incurred by them in connection with the Merger Conversion shall be reasonable. XII. TAX RULING Consummation of the Merger Conversion is expressly conditioned upon prior receipt of either a ruling of the United States Internal Revenue Service or an opinion of tax counsel with respect to federal taxation, and either a ruling of the Kansas taxation authorities or an opinion of tax counsel or accountants with respect to Kansas taxation, to the effect that consummation of the transactions contemplated herein will not be taxable to the Holding Company, First Federal or Neodesha. XIII. EXTENSION OF CREDIT FOR PURCHASE OF STOCK Neither Neodesha nor First Federal shall knowingly loan funds or otherwise extend credit to any Person to purchase in the Merger Conversion shares of Holding Company Conversion Stock. P-13 EX-2 4 EXHIBIT 2.2 Exhibit 2.2 EXHIBIT 2.2 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION AGREEMENT AND PLAN OF MERGER AND REORGANIZATION THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is entered into as of February 18, 1998, by and among Neodesha Savings and Loan Association, FSA ("Neodesha"), a federally chartered mutual savings and loan association, First Federal Savings and Loan Association of Independence ("First Federal"), a federally chartered stock savings and loan association, and First Independence Corporation (the "Holding Company"), a Delaware corporation that owns all of the issued and outstanding capital stock of First Federal. WITNESSETH: WHEREAS, Neodesha desires to convert to the stock form of organization through a conversion to the stock form of organization and simultaneous merger with First Federal; and WHEREAS, this simultaneous conversion and merger ("Merger Conversion") shall be accomplished in accordance with this Agreement and with the Plan of Merger Conversion ("Plan"), attached hereto as Exhibit A and incorporated by reference herein, and in accordance with all applicable laws, rules and regulations. NOW, THEREFORE, for and in consideration of the premises and the mutual promises herein set forth, Neodesha, First Federal and the Holding Company do hereby mutually AGREE as follows: 1. Merger Conversion. Subject to the provisions and conditions herein specified and the receipt of all required regulatory approvals, Neodesha shall convert to a federally chartered capital stock savings and loan association and, simultaneously therewith, Neodesha shall merge with First Federal, with First Federal to be the resulting institution ("Resulting Institution"). Certain savings account holders of Neodesha shall receive a proportionate interest in a liquidation account to be established for their benefit in the event of a complete liquidation of the Resulting Institution in accordance with the Plan and Office of Thrift Supervision ("OTS") regulations. Members of Neodesha shall receive the right to subscribe for shares of common stock to be issued by the Holding Company in connection with this Merger Conversion in accordance with the Plan and OTS regulations. Upon consummation of the Merger Conversion, the corporate existence of First Federal and the Holding Company shall be continued, and the Resulting Institution shall be a continuation of the entity of Neodesha, the separate corporate existence of which shall cease. This Merger Conversion shall be accomplished in accordance with Federal statutes, the regulations of the OTS and the Plan adopted by Neodesha. 2. Approval by Boards of Directors. At least two-thirds of each of the respective boards of directors of Neodesha, First Federal and the Holding Company shall approve the Merger Conversion as evidenced by the Plan and this Agreement. 3. Filing of Required Regulatory Applications. Upon the execution and delivery of this Agreement, Neodesha, with the cooperation of First Federal and the Holding Company, shall cause to be prepared and filed with the OTS, and any other appropriate regulatory agency, an application for approval of the Plan and such other applications as shall be necessary to consummate the transactions contemplated hereby. These applications shall be in such forms as may be prescribed by the respective regulatory authorities and shall contain such information as they may require. 4. Approval by Members. Upon approval of the Plan and requisite applications by the applicable regulatory authorities, this Agreement and the Plan shall be duly submitted to the members of Neodesha. The Merger Conversion shall be subject to approval by the requisite vote of the members of Neodesha. Neodesha shall use its best efforts to obtain the required approval of its members to the transactions contemplated herein. To the extent required or appropriate pursuant to applicable regulations, the Merger Conversion shall also be submitted for approval to the 2 stockholders of the Holding Company. The parties hereto, through their respective officers and directors, shall execute and file with the appropriate regulatory agencies all documents and papers necessary or required by such agencies. The parties hereto shall take every reasonable and necessary step and action to secure and to comply with such approvals as may be required by the statutes, rules and regulations of the agencies having jurisdiction over this Agreement and the transactions contemplated hereby. 5. Effective Date of Merger Conversion. The merger and conversion provided for herein shall become effective on the Closing Date. The Closing Date shall be the date upon which the last of the following occurs: (a) all required regulatory approvals have been received in connection with the conversion of Neodesha to a federally chartered capital stock savings and loan association; (b) all required regulatory approvals have been received in connection with the merger of Neodesha with First Federal; (c) all required regulatory approvals have been received by the Holding Company in connection with the conversion, merger, stock offering and associated transactions; (d) all shares of the Holding Company required to be sold under the Plan have been sold; (e) all approvals of members of Neodesha (and, if applicable, stockholders of the Holding Company) have been received; and (f) all representations, warranties, covenants and conditions set forth in this Agreement have been complied with or otherwise satisfied in all material respects, unless waived in writing by the parties hereto. 3 6. Resulting Institution and Holding Company. On the Closing Date, the separate existence of Neodesha shall cease and such association shall be merged with and into First Federal. First Federal shall be the federally chartered stock savings and loan association resulting from the Merger Conversion. 7. Offices. The location of the home office of the Resulting Institution shall be Myrtle & Sixth Streets, Independence, Kansas. The present branch offices of First Federal and the office of Neodesha will be operated as branch offices of the Resulting Institution. The location of all branch offices of the Resulting Institution will be as provided in Schedule A hereto. 8. Savings Accounts. All savings accounts of Neodesha shall be and become savings accounts in the Resulting Institution without change in their respective contractual terms, maturity or withdrawal value. As of the Closing Date, each savings account of Neodesha shall be considered for dividend or interest purposes as if it had been a savings account of the Resulting Institution at the time said savings account was opened and at all times thereafter until such account ceases to be a savings account of the Resulting Institution. Appropriate evidence of savings account ownership interest in the Resulting Institution shall be provided by the Resulting Institution to each savings account holder of Neodesha. Holders of savings accounts in the Resulting Institution shall not have any voting rights in the Resulting Institution nor will they have any other equity rights or rights to share in the remaining assets of the Resulting Institution, except with respect to the rights of certain savings account holders of Neodesha and First Federal in the liquidation accounts established and to be established by the Resulting Institution pursuant to OTS regulations in connection with the Plan and the prior conversion of First Federal. 9. Transfer of Assets and Assumption of Liabilities. Upon the consummation of the Merger Conversion, all of the assets and property of every kind and character, real, personal and mixed, 4 tangible and intangible, choses in action, rights, and credits then owned by Neodesha, or which would inure to Neodesha, shall immediately by operation of law and without any conveyance or transfer and without any further act or deed, be vested in and become the property of the Resulting Institution which shall have, hold and enjoy the same in its own right as fully and to the same extent as the same were possessed, held and enjoyed by Neodesha immediately prior to the consummation of the Merger Conversion. The Resulting Institution shall be deemed to be and shall be a continuation of the entity of Neodesha and the rights and obligations of Neodesha shall remain unimpaired. Upon the consummation of the Merger Conversion, the Resulting Institution shall assume and succeed to all of such rights, obligations, duties and liabilities of Neodesha. 10. Board of Directors of the Resulting Institution. Upon consummation of the Merger Conversion, the Board of Directors of the Resulting Institution shall be the Board of Directors of First Federal until their respective successors shall be duly elected and qualified or otherwise duly selected. 11. Employees and Employee Benefits. (a) Upon the Closing Date, it is intended that the employees of Neodesha shall become employees of the Resulting Institution. Their service with Neodesha shall be deemed credited service with First Federal for purposes of the eligibility and vesting requirements and criteria under First Federal's employee benefit plans and policies, and they will be integrated on an equitable basis into First Federal's salary evaluation system. (b) Not later than the Closing Date, First Federal will enter into an employment contract (in substantially the form previously delivered to Neodesha) with Franklin C. Miller, the President of Neodesha. 5 (c) Not later than the Closing Date, the Holding Company will grant to Mr. Miller an option to purchase 3,000 shares, to Diane Holmquist an option to purchase 1,500 shares and to each non-employee director of Neodesha who elects to serve on the Resulting Institution's Neodesha area advisory board an option to purchase 1,000 shares of common stock of the Holding Company. Each such option shall have an exercise price equal to the fair market value of the stock on the date of grant and a maximum term of ten years. The stock options granted to Mr. Miller, Ms. Holmquist and the non-employee directors shall be pursuant to the terms of the Holding Company's 1993 Stock Option and Incentive Plan (the "Option Plan"). 12. Senior Officers. The senior officers of the Resulting Institution from and after the Closing Date shall be as set forth in Schedule B hereto. Such officers shall continue to hold office for the term specified in the Bylaws of the Resulting Institution. 13. Charter and Bylaws of Resulting Institution and Holding Company. Following consummation of the Merger Conversion, the Charter and Bylaws of First Federal, and the Certificate of Incorporation and Bylaws of the Holding Company, each as in effect on the Closing Date, shall be and remain the Charter and Bylaws of the Resulting Institution and the Certificate of Incorporation and Bylaws of the Holding Company, respectively. 14. Liquidation Account. On the Closing Date, the Resulting Institution shall establish on its books a liquidation account, in accordance with the Plan and 12 C.F.R. Section 563b.3(f), for the benefit of certain savings account holders of Neodesha who retain their savings accounts in the Resulting Institution. The function of this liquidation account is to establish a priority in the unlikely event of liquidation of the Resulting Institution. The existence of the liquidation account shall not 6 otherwise operate to restrict the use or application of any of the regulatory capital accounts of the Resulting Institution. 15. Representations and Warranties of the Holding Company and First Federal. The Holding Company and First Federal each hereby represent and warrant the following, the truth and accuracy of each of which shall constitute a condition precedent to the obligations of Neodesha hereunder. All representations and warranties of the Holding Company and First Federal are as of the date of this Agreement and through the Closing Date, unless such representations and warranties refer to a specified date. (a) Organization and Standing. The Holding Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. All of the issued and outstanding shares of First Federal are owned by the Holding Company free and clear of any liens, encumbrances, claims, security agreements, options, charges and restrictions. The Holding Company has no subsidiaries other than First Federal. First Federal is a capital stock savings and loan association and First Federal is duly organized and validly existing under the laws of the United States of America. The Holding Company and First Federal have all requisite corporate power and authority and are duly qualified and licensed to own, lease and operate their properties and to carry on their business as now being conducted. The savings accounts of First Federal, to the extent insurable, are insured by the FDIC. Their respective Charter, Certificate of Incorporation and Bylaws, which are attached hereto as Exhibit 15A, are complete and correct as of the date of this Agreement. (b) Capitalization. On the date of this Agreement, the authorized capital stock of the Holding Company consists solely of 2,500,000 shares of Common Stock, $0.01 par value per share ("Holding Company Common Stock"), and 500,000 shares of preferred stock. On 7 such date, not more than 953,993 shares of Holding Company Common Stock are validly issued and outstanding, and no shares of preferred stock are issued or outstanding. All outstanding shares of capital stock are validly issued, fully paid and nonassessable and possess no preemptive rights. (c) Authority for Agreement. The Holding Company and First Federal each have full and requisite corporate power and authority to execute and deliver this Agreement and, subject to the approval of regulatory authorities (including without limitation, the OTS and the U.S. Department of Justice and the Federal Trade Commission under the Hart-Scott- Rodino Antitrust Improvements Act of 1976), to consummate the Merger Conversion and to carry out their respective obligations hereunder and under the Plan. The execution and delivery of this Agreement, and the consummation of the Merger Conversion and the other transactions contemplated hereby and by the Plan, have been duly authorized by the Boards of Directors of the Holding Company and First Federal, and, subject to the requisite approvals outlined above (including the approval of the Holding Company's stockholders, if applicable), this Agreement constitutes the valid and legally binding obligation of the Holding Company and First Federal enforceable in accordance with its terms. The execution and delivery of this Agreement and the consummation of the Merger Conversion and the other transactions contemplated hereby and by the Plan will not conflict with or result in any violation of, or constitute a default under, any provision of the Certificate of Incorporation, Charter or Bylaws of the Holding Company or First Federal, or any material mortgage, indenture, lease, agreement (including, but not limited to, any agreement with any governmental agency or instrumentality having jurisdiction over the business or properties of the Holding Company or First Federal) or other material instrument, permit, concession, 8 grant, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Holding Company or First Federal or any of their respective properties. For purposes of this paragraph, a material mortgage, indenture, lease, agreement, instrument, permit, concession, grant, franchise or license excludes any mortgage, indenture, lease, agreement, instrument, permit, concession, grant, franchise or license having a term expiring less than six months from the date of this Agreement or which does not require the annual expenditure of more than $50,000 (but shall include any mortgage, indenture, lease, agreement, instrument, permit, concession, grant, franchise or license pursuant to which credit has been extended by First Federal). (d) Financial Statements and Reports. The Holding Company has delivered to Neodesha accurate and complete copies of the audited Consolidated Balance Sheet at the close of the Holding Company's audit year in each of the years 1995, 1996 and 1997 (collectively, the "Balance Sheets"); and its Consolidated Statements of Earnings, Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flows and the notes pertaining to the above for each of the fiscal years then ended, in each case accompanied by the report thereon of the firm of independent certified public accountants who examined such statements. The Balance Sheets and the related Consolidated Statements of Earnings, Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flows and notes thereto for the Holding Company fairly present the consolidated financial position of the Holding Company as of their respective dates, and the consolidated results of its operations and consolidated changes in its cash flows for the periods indicated, all in accordance with generally accepted accounting principles on a basis consistent with 9 prior periods, except as otherwise stated therein or as required by federal or state laws or regulations. (e) Absence of Certain Changes. Since the date of the most recent Balance Sheet delivered or to be delivered pursuant to subparagraph (d) above, and except as set forth in Exhibit 15E hereto, neither the Holding Company nor First Federal has undergone any material adverse change in its condition (financial or otherwise), properties, assets, liabilities, business or operations, other than changes in the ordinary course of business which have not been materially adverse to the Holding Company and First Federal, taken as a whole, provided that changes in the economy of the United States of America or Kansas generally or the thrift industry in Kansas (including, without limitations, general changes in the availability of credit to financial institutions, general changes in the real estate industry, general changes in interest rates, money supply levels or the discount rate of the Federal Reserve System) and changes in the financial condition, results of operations or assets of the Holding Company and First Federal, its subsidiaries and joint ventures, taken as a whole, that are caused directly or indirectly, substantially and primarily by such changes in the United States or Kansas economy or are applicable generally to the thrift industry in Kansas, shall not be deemed to be material adverse changes for purposes of this Section 15(e). (f) FDIC Insurance. First Federal's accounts are insured up to applicable limits by the FDIC and First Federal has paid all premiums required to be paid and is in substantial compliance with the applicable insurance regulations of the FDIC. (g) Litigation. Except as otherwise disclosed in Exhibit 15G hereto, there are no judicial or administrative actions, suits, proceedings or investigations pending or, to the knowledge of the Holding Company or First Federal, threatened, which might result in any 10 materially adverse change in the condition (financial or otherwise), properties, assets, business or operations of the Holding Company and First Federal, taken as a whole, or which seek to invalidate or enjoin this Agreement or the Plan or any action taken or to be taken in connection herewith or therewith. (h) Compliance with Laws; Government Authorizations. Except as otherwise described in Exhibit 15H hereto, the Holding Company and First Federal are in compliance in all material respects with all statutes, laws, ordinances, rules, regulations, judgments, orders and decrees which apply to their business or properties. All permits, concessions, grants, franchises, licenses and other governmental authorizations and approvals necessary for the conduct of the business of the Holding Company and First Federal have been duly obtained and are in full force and effect, and there are no proceedings pending or, to the knowledge of the Holding Company or First Federal, threatened, which may result in the revocation, cancellation or suspension, or any materially adverse modification, of any thereof. The consummation of the Merger Conversion and the other transactions contemplated hereby and by the Plan will not result in any such revocation, cancellation, suspension or modification. (i) Disclosure. Neither this Agreement, the Plan, the Exhibits hereto, nor any letter, certificate or other document furnished by the Holding Company or First Federal to Neodesha, insofar as it relates to the Holding Company or First Federal and their respective operations, properties, financial condition or prospects, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein and therein not misleading. There is no fact relating specifically to the Holding Company or First Federal or any of its or their respective operations, properties, financial 11 condition or prospects known to the Holding Company or First Federal which materially adversely affects, or, to the knowledge of the Holding Company or First Federal, in the future may materially adversely affect, the conditions, properties, assets, liabilities, business or operations of the Holding Company or First Federal which have not previously been disclosed in writing to Neodesha. (j) Proxy Statement/Prospectus. At the time the Proxy Statement/Prospectus is mailed to eligible members of Neodesha and at all times subsequent to such mailing, up to and including the time of the completion of the sale of Holding Company Common Stock to be sold in the Merger Conversion, such Proxy Statement/Prospectus (including any supplements thereto), with respect to all information relating specifically to the Holding Company or First Federal and provided to Neodesha by the Holding Company or First Federal expressly for inclusion in the Proxy Statement/Prospectus, will: (a) comply in all material respects with applicable provisions of the 1934 Act and the rules and regulations thereunder and the rules and regulations of the OTS; and (b) not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not false or misleading, or necessary to correct any statement in an earlier communication with respect to such matters which has become false or misleading. 16. Representations and Warranties of Neodesha. Neodesha hereby represents and warrants the following, the truth and accuracy of each of which shall constitute a condition precedent to the 12 obligations of First Federal and the Holding Company hereunder. All representations and warranties of Neodesha are as of the date of this Agreement and through the Closing Date, unless such representations and warranties refer to a specified date. (a) Organization and Standing. Neodesha is a mutual savings and loan association duly chartered and validly existing under the laws of the United States of America. Neodesha has no subsidiaries. Neodesha has all requisite corporate power and authority and is duly qualified and licensed to own, lease and operate its properties and to carry on its business as now being conducted. The savings accounts of Neodesha, to the extent insurable, are insured by the FDIC. The Charter and Bylaws of Neodesha, copies of which are attached hereto as Exhibit 16A, are complete and correct as of the date of this Agreement. (b) Capitalization. As a mutual savings and loan association, Neodesha has no shares of capital stock authorized, issued or outstanding. (c) Authority for Agreement. Neodesha has full and requisite corporate power and authority to execute and deliver this Agreement and the Plan, and, subject to the requisite approval of the members of Neodesha and federal regulatory authorities (including, without limitation, the OTS and the U.S. Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976), to consummate the Merger Conversion and to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Plan, and the consummation of the Merger Conversion and the other transactions contemplated hereby and thereby, have been duly authorized by the Board of Directors of Neodesha, and, subject to the requisite approvals outlined above, this Agreement and the Plan constitute valid and legally binding obligations of Neodesha enforceable in accordance with their terms. The execution and delivery of this 13 Agreement and the Plan and the consummation of the Merger Conversion and the other transactions contemplated hereby and thereby will not conflict with or result in any violation of, or constitute a default under, any provision of the Charter or Bylaws of Neodesha, or any material mortgage, indenture, lease, agreement (including, but not limited to, any agreement with any governmental agency or instrumentality having jurisdiction over the business or properties of Neodesha) or other material instrument, permit, concession, grant, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Neodesha, or any of its or their respective properties. For purposes of this paragraph, a material mortgage, indenture, lease, agreement, instrument, permit, concession, grant, franchise or license excludes any mortgage, indenture, lease, agreement, instrument, permit, concession, grant, franchise or license having a term expiring less than six months from the date of this Agreement or which does not require the annual expenditure of more than $50,000 (but shall include any mortgage, indenture, lease, agreement, instrument, permit, concession, grant, franchise or license pursuant to which credit has been extended by Neodesha). (d) Financial Statements. Neodesha has delivered to the Holding Company accurate and complete copies of the audited Consolidated Statement of Financial Condition at the close of its audit year in each of the years 1995, 1996 and 1997 (collectively, the "Balance Sheets"); and its Consolidated Statements of Operations, Consolidated Statements of Retained Income, Consolidated Statements of Cash Flows and the notes pertaining to the above for each of the fiscal years then ended, in each case accompanied by the report thereon of the firm of independent certified public accountants who examined such statements. The Balance Sheets and the related Consolidated Statements of Operations, Consolidated 14 Statements of Retained Income, Consolidated Statements of Cash Flows and notes thereto for Neodesha fairly present, or upon delivery will fairly present, the consolidated financial position of Neodesha as of their respective dates, and the consolidated results of its operations and consolidated changes in its cash flows for the periods indicated, all in accordance with generally accepted accounting principles on a basis consistent with prior periods, except as otherwise stated therein or as required by federal or state laws or regulations. The audits of Neodesha have been conducted in accordance with generally accepted auditing standards. Neodesha has delivered or will deliver to the Holding Company upon written request thereof, accurate and complete copies of the Auditor's Reports on Internal Control for each of the fiscal years of the Balance Sheets. (e) Absence of Certain Changes. Since the date of the most recent Balance Sheet delivered or to be delivered pursuant to subparagraph (d) above, and except as set forth in Exhibit 16E hereto, neither Neodesha nor any joint venture of Neodesha has: (i) undergone any material adverse change in its condition (financial or otherwise), properties, assets, liabilities, business or operations, other than changes in the ordinary course of business which have not been materially adverse to Neodesha and its joint ventures, taken as a whole, provided that changes in the economy of the United States of America or Kansas generally or the thrift industry in Kansas (including, without limitations, general changes in the availability of credit to financial institutions, general changes in the real estate industry, general changes in interest rates, money supply levels or the discount rate of the Federal Reserve System) and changes in the financial condition, results of operations or assets of Neodesha that are caused directly or indirectly, substantially and primarily by such 15 changes in the United States or Kansas economy or are applicable generally to the thrift industry in Kansas, shall not be deemed to be material adverse changes for purposes of this Section 16(e)(i); and (ii) except as heretofore disclosed to the Holding Company in writing, incurred any indebtedness for borrowed money or issued or sold any debt securities, or made any commitments with respect to the foregoing, other than in the ordinary course of the business of Neodesha or its joint ventures and not exceeding an aggregate of $100,000. (f) Tax Matters. Neodesha has duly and properly filed all federal, state, local and other tax returns required to be filed by it and has made timely payments of all taxes shown by such returns to be due and payable, or which are otherwise due and payable, whether disputed or not; the current status of audits of such returns by the Internal Revenue Service and other applicable agencies is as set forth in Exhibit 16F; and there is no agreement by Neodesha for the extension of time for the assessment or payment of any taxes payable. Neodesha has provided or will provide to the Holding Company complete and correct copies of all such tax returns for the fiscal years ended 1994, 1995, 1996 and 1997. (g) FDIC Insurance. Neodesha's accounts are insured up to applicable limits by the FDIC and Neodesha has paid all premiums required to be paid and is in substantial compliance with the applicable insurance regulations of the FDIC. (h) Examination Reports. Neodesha will provide to the Holding Company complete and correct copies of (i) all examination reports by the OTS or FDIC forwarded to Neodesha during the calendar years 1994, 1995, 1996 and 1997 and through the Closing Date, (ii) any correspondence between Neodesha and such agencies relating thereto during such periods, 16 and (iii) any agreements, arrangements or understandings between Neodesha and such agencies entered into as a result of matters raised in such examination reports or correspondence (or summaries of all oral agreements, arrangements or understandings with such agencies). (i) Litigation. Except as otherwise disclosed in Exhibit 16I hereto, there are no judicial or administrative actions, suits, proceedings or investigations pending or, to Neodesha's knowledge threatened, which might result in any materially adverse change in the condition (financial or otherwise), properties, assets, business or operations of Neodesha or which seek to invalidate or enjoin this Agreement or the Plan or any action taken or to be taken in connection herewith or therewith. (j) Compliance with Laws; Government Authorizations. Except as otherwise described in Exhibit 16J hereto, Neodesha is in compliance in all material respects with all statutes, laws, ordinances, rules, regulations, judgments, orders and decrees which apply to its business or properties. All permits, concessions, grants, franchises, licenses and other governmental authorizations and approvals necessary for the conduct of the business of Neodesha have been duly obtained and are in full force and effect, and there are no proceedings pending or, to Neodesha's knowledge, threatened which may result in the revocation, cancellation or suspension, or any materially adverse modification, of any thereof. The consummation of the Merger Conversion and the other transactions contemplated hereby and by the Plan will not result in any such revocation, cancellation, suspension or modification. (k) Disclosure. Neither this Agreement, the Plan, the Exhibits hereto, nor any letter, certificate or other document furnished by Neodesha to the Holding Company, insofar as it 17 relates to Neodesha or its joint ventures and their respective operations, properties, financial condition or prospects, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein and therein not misleading. There is no fact relating specifically to Neodesha, its joint ventures or any of its or their respective operations, properties, financial condition or prospects known to Neodesha which materially adversely affects, or, to the knowledge of Neodesha, in the future may materially adversely affect, the conditions, properties, assets, liabilities, business or operations of Neodesha which have not previously been disclosed in writing to the Holding Company. (l) Proxy Statement/Prospectus. At the time the Proxy Statement/Prospectus is mailed to the members of Neodesha for the solicitation of proxies for the approval of the Merger Conversion and at all times subsequent to such mailings up to and including the time of the completion of the sale of the Common Stock of the Holding Company to be sold in the Merger Conversion, such Proxy Statement/Prospectus (including any supplements thereto), with respect to all information set forth therein relating to Neodesha, this Agreement or the contemplated transactions, will: (a) comply in all material respects with applicable provisions of the 1934 Act and rules and regulations thereunder and the rules and regulations of the OTS; and (b) not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not false or misleading, or necessary to correct any statement in an earlier communication with respect to the 18 solicitation of a proxy for the same meeting or subject matter which has become false or misleading. (m) Employee Benefit Plans. All employee benefit plans operating for the benefit of employees of Neodesha are in compliance with the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the rules and regulations promulgated under ERISA. The present value of all benefits vested under each such employee benefit plan does not exceed the value of the assets of such plans allocable to such vested benefits. Neither any such plan, any trust created thereunder nor any trustee or administrator thereof has engaged in a "prohibited transaction," as defined in ERISA, which may materially adversely affect the condition, financial or otherwise, of Neodesha. (n) Environmental Matters. Neodesha has not received any notice, citation, claim, assessment, proposed assessment or demand for abatement alleging that it (either directly or as a successor-in-interest in connection with the enforcement of remedies to realize the value of properties serving as collateral for outstanding loans) is responsible for the correction or clean-up of any condition resulting from the violation of any law, ordinance or other governmental regulation regarding environmental health matters. Neodesha has not emitted, generated, disposed of or stored any toxic or hazardous substances and materials, and no such substances or materials have been emitted, generated, disposed of or stored on any property which is owned by Neodesha or in respect of which Neodesha may be responsible or incur liability, in any manner that violates or, after the lapse of time may violate, any presently existing federal, state or local law or regulation, United States or foreign, governing or pertaining to such substances which would have a material adverse effect on the business, operations, properties, assets or financial condition of Neodesha. To 19 the best information and belief of Neodesha, none of the real properties which is owned by Neodesha or in respect of which Neodesha may be responsible or incur any liability contains any asbestos and there are no underground storage tanks on or under any such premises, except as set forth in Schedule 16(n). 17. Covenants of the Holding Company and First Federal. (a) Conduct of Business. Unless otherwise agreed to in writing by Neodesha, from the date hereof until the Merger Conversion shall become effective, the Holding Company and First Federal will: (i) carry on its business in, and only in, the usual, regular and ordinary course and, to the extent consistent with such business, use all reasonable efforts to preserve intact its present business organization; (ii) not take, or permit to be taken, any action which would cause the representations and warranties contained in Paragraph 15 of this Agreement to be inaccurate in any material respect as of the Closing Date referred to in this Agreement; (iii) promptly advise Neodesha in writing of any materially adverse change in the condition (financial or otherwise), operations or business of the Holding Company or First Federal, its subsidiaries or joint ventures; (iv) promptly advise Neodesha in writing of any correspondence or communication with any governmental agency having jurisdiction over the Holding Company or First Federal relating to any examination, report, inquiry or investigation of the Holding Company or First Federal; 20 (v) not take any action for or on behalf of any subsidiary or cause any such action to be taken which would result in a material breach of this Agreement or any provision hereof if such action were taken by the Holding Company and/or First Federal directly; and (vi) cooperate with Neodesha in the preparation of all information and materials reasonably requested by Neodesha or necessary in order to effectuate the transactions contemplated by this Agreement and the Plan, including (a) the preparation of proxy materials for mailing to stockholders entitled to vote on the Merger Conversion, if applicable; (b) the filing of all required or reasonably requested materials with the appropriate regulatory authorities; (c) cooperating with Neodesha in obtaining all required regulatory approvals; (d) obtaining a comfort letter from its accounting firm for use in connection with transactions referred to herein; and (e) mailing proxy and stock offering materials to members of Neodesha and others upon receipt of required regulatory approvals. (b) Advisory Board. First Federal shall cause the Resulting Institution to establish an advisory board comprised of those persons serving as directors of Neodesha immediately prior to the Closing Date who desire to serve on such Advisory Board, for the purpose of consulting with management of the Resulting Institution concerning the operations of the Resulting Institution's offices in the Neodesha area. The Resulting Institution will compensate members of such advisory board in the amount of $1,000 per annum. Subject to 12 C.F.R. Section 571.5(d)(5), it is the present intent of First Federal to continue such advisory board on a year to year basis for up to a five year period. 21 18. Covenants of Neodesha. (a) Conduct of Business. Unless otherwise agreed to in writing by the Holding Company or First Federal, from the date hereof until the Merger Conversion shall become effective, Neodesha will: (i) carry on its business in, and only in, the usual, regular and ordinary course and, to the extent consistent with such business, use all reasonable efforts to preserve intact its present business organization; (ii) not amend its Charter or Bylaws, except as may be requested by counsel for First Federal for the purpose of effectuating the Merger Conversion; (iii) not, without the prior written approval of the Holding Company or First Federal, merge or consolidate with, or negotiate with or agree to merge or consolidate with, or purchase substantially all the assets of, or otherwise acquire any business of, any corporation, partnership, association or other business organization or division thereof, except as contemplated hereby; (iv) not solicit, directly or indirectly, any offer to merge with or acquire Neodesha; (v) not, without the prior written approval of the Holding Company or First Federal, acquire or sell any contracts for the purchase or sale of financial or other futures or any put or call options relating to cash, securities or any commodities whatsoever, except in the ordinary course of business, consistent with past practice, to maintain or adjust existing hedge positions against liabilities; (vi) not take, or permit to be taken, any action which would cause the representations and warranties contained in Paragraph 16 of this Agreement to be 22 inaccurate in any material respect as of the Closing Date referred to in this Agreement; (vii) promptly advise the Holding Company or First Federal in writing of any materially adverse change in the condition (financial or otherwise), operations or business of Neodesha or its joint ventures; (viii) promptly advise the Holding Company or First Federal in writing of any correspondence or communication with any governmental agency having jurisdiction over Neodesha relating to any examination, report, inquiry or investigation of Neodesha; (ix) not take any action for or on behalf of any other entity or cause any such action to be taken which would result in a material breach of this Agreement or any provision hereof if such action were taken by Neodesha directly; and (x) cooperate with the Holding Company and First Federal in the preparation of all information and materials reasonably requested by the Holding Company or First Federal or necessary in order to effectuate the transactions contemplated by this Agreement and the Plan, including (a) the preparation of proxy materials for mailing to members entitled to vote on the Merger Conversion; (b) the filing of all required or reasonably requested materials with the appropriate regulatory authorities; (c) obtaining all required regulatory approvals; (d) obtaining a comfort letter from its accounting firm for use in connection with transactions referred to herein; and (e) mailing proxy and stock offering materials to members and others upon receipt of required regulatory approvals. 23 (b) Access and Information. Neodesha shall give, and shall use its best efforts to cause any joint ventures to give, to the Holding Company or First Federal and its representatives full access, during normal business hours and upon reasonable notice, to its properties, books, records, contracts and commitments, and will furnish promptly to the Holding Company or First Federal all such information and documents relating to its properties and businesses as the Holding Company or First Federal shall reasonably request, including all interim financial statements and reports as they are prepared and become available; provided, however, that any such review will not unduly interfere with the conduct of Neodesha's business and provided further that the right of access and examination granted hereby is subject to the requirements of financial privacy laws or similar laws relating to account holders and other records. (c) Compensation. Neodesha shall not, without the prior written approval of the Holding Company or First Federal, which approval shall not be unreasonably withheld, increase the compensation payable to any director, officer or employee from the amount payable as of January 1, 1998, except for increases in the ordinary course of business. 19. Conditions Precedent to the Obligations of Neodesha. The obligations of Neodesha under this Agreement shall be subject to fulfillment, at or prior to the Closing Date, of each of the following conditions (unless waived in writing by Neodesha in the manner provided in Paragraph 21 hereof): (a) Approval by Members. This Agreement and the Plan shall have been duly approved by the affirmative vote of the members of Neodesha in accordance with applicable law. 24 (b) Governmental Consents; No Governmental Action. All requisite consents and final approvals necessary for consummation of the Merger Conversion by applicable regulatory authorities shall have been obtained and all waiting or notice periods under applicable law shall have expired. There shall not be pending or threatened any action, proceeding or investigation by the United States Government or any state government or any department or agency of either of the foregoing, for any injunction, writ, preliminary restraining order, or for any order of any court or governmental agency, domestic or foreign, of competent jurisdiction, directing or requesting that the Merger Conversion or any of the other transactions contemplated by this Agreement or the Plan or any of them not be consummated, or otherwise challenging the legality of any thereof. There shall not have been issued and remain in effect any such injunction, writ, preliminary restraining order, or such other order, nor shall any such action or other proceeding be pending or threatened before any court or governmental agency in which it is sought to obtain other relief in connection with the Merger Conversion or such other transactions contemplated hereby or by the Plan. (c) Representations, Warranties and Covenants; Performance by the Holding Company and First Federal. The representations, warranties and covenants of the Holding Company and First Federal contained in Paragraphs 15 and 17 of this Agreement shall be true and correct in all material respects at and as of the Closing Date, with the same force and effect as though made at and as of the Closing Date, except where such representations, warranties and covenants speak as of a specified date. The Holding Company and First Federal shall duly perform and comply with all agreements and conditions required by this Agreement to be complied with prior to or at the Closing Date. The Holding Company and 25 First Federal shall each have delivered to Neodesha a certificate, dated as of the Closing Date, and signed by the President or Executive Vice President thereof, to the foregoing effect. (d) Compliance with the Plan. All conditions and requirements of the Plan shall have been complied with and satisfied including, without limitation, the sale of all required shares of common stock offered by the Holding Company pursuant to the Plan ("Conversion Stock"). 20. Conditions Precedent to the Obligations of the Holding Company and First Federal. The obligations of the Holding Company and First Federal under this Agreement shall be subject to the fulfillment, at or prior to the Closing Date, of each of the following conditions (unless waived in writing by the Holding Company or First Federal in the manner provided in Paragraph 21 hereof): (a) Approval by Members. This Agreement and the Plan shall have been duly approved by the requisite vote of the members of Neodesha in accordance with applicable law. The Merger Conversion shall have been duly approved by the requisite vote of the stockholders of the Holding Company, if applicable. (b) Governmental Consents; No Governmental Action. All requisite consents and final approvals necessary for consummation of the Merger Conversion by applicable regulatory authorities shall have been obtained, and all waiting or notice periods under applicable law shall have expired. There shall not be pending or threatened any action, proceeding or investigation by the United States Government or any state government or any department or agency of either of the foregoing, for any injunction, writ, preliminary restraining order, or for any order of any court or governmental agency, domestic or foreign, of competent jurisdiction, directing or requesting that the Merger Conversion or any of the 26 other transactions contemplated by this Agreement or the Plan or any of them not be consummated, or otherwise challenging the legality of any thereof. There shall not have been issued and remain in effect any such injunction, writ, preliminary restraining order or such other order, nor shall any such action or other proceeding be pending or threatened before any court or governmental agency in which it is sought to obtain other relief in connection with the Merger Conversion or such other transactions contemplated hereby or by the Plan. (c) Representations, Warranties and Covenants; Performance by Neodesha. The representations, warranties and covenants of Neodesha contained in Paragraphs 16 and 18 of this Agreement shall be true and correct in all material respects at and as of the Closing Date, with the same force and effect as though made at and as of the Closing Date, except where such representations, warranties and covenants speak as of a specified date. Neodesha shall have duly performed and complied with all agreements and conditions required by this Agreement to be complied with by it prior to or at the Closing Date. Neodesha shall have delivered to the Holding Company or First Federal a certificate, dated as of the Closing Date, and signed by the President thereof, to the foregoing effect. (d) Tax-Free Reorganization. The Holding Company or First Federal shall have received a formal ruling from the Internal Revenue Service or an opinion of counsel that the transactions contemplated herein constitute a tax-free reorganization to the Holding Company, First Federal and Neodesha pursuant to the applicable provisions of the Internal Revenue Code of 1986. 27 (e) Compliance with the Plan. All conditions and requirements of the Plan shall have been complied with and satisfied including, without limitation, the sale of all Conversion Stock offered by the Holding Company pursuant to the Plan. 21. Termination, Amendment and Waiver. (a) Termination. This Agreement and the Plan may be terminated, and the Merger Conversion abandoned, at any time prior to the Closing Date (whether before or after the approval thereof by the members of Neodesha and, if applicable, stockholders of the Holding Company and First Federal): (i) by mutual consent of the Boards of Directors of the Holding Company, First Federal and Neodesha evidenced by appropriate resolutions; (ii) by the Board of Directors of Neodesha if (A) the representations, warranties, covenants or conditions precedent set forth in Paragraphs 15, 17 and 19 hereof shall not be accurate and satisfied in all material respects, (B) any application for approval of or consent to the Merger Conversion filed with any governmental agency has been denied and such denial has not been withdrawn within 60 days, or (C) the Merger Conversion is not consummated by December 31, 1998; and (iii) by the Holding Company and First Federal if (A) the representations, warranties, covenants or conditions precedent set forth in Paragraphs 16, 18 and 20 hereof shall not be accurate and satisfied in all material respects, (B) any application for approval of or consent to the Merger Conversion filed with any governmental agency has been denied and such denial has not been withdrawn within 60 days, or (C) the Merger Conversion is not consummated by December 31, 1998. 28 (b) Amendment. This Agreement may be amended by action of the Boards of Directors of the parties at any time before or after approval of this Agreement by the members of Neodesha and, if applicable, the stockholders of the Holding Company and First Federal, provided that after any such approval, no amendment shall be made which shall affect the rights of the members or stockholders giving such approval in a manner which, in the judgment of the Board of Directors of the party the members or stockholders of which have given such approval, is materially adverse to such members or stockholders without the further approval of such members or stockholders. This Agreement may not be amended except by an instrument in writing duly executed and delivered on behalf of each of the parties hereto. (c) Waiver. At any time prior to the Closing Date, the Board of Directors of the Holding Company, First Federal or Neodesha may each on their own behalf waive (i) any inaccuracies in the representations and warranties of any other party contained herein or in any document or instrument pursuant hereto and (ii) compliance with any of the agreements, covenants or conditions contained herein. Any agreement on the part of a party hereto to any such waiver shall be valid only if set forth in an instrument in writing duly executed and delivered on behalf of such party. 22. Miscellaneous. (a) Confidentiality. Except to the extent required by law or the rules or regulations of any governmental agency or instrumentality in connection with the preparation of a proxy statement, prospectus or tax ruling (tax opinion), the filing and prosecution of applications for approval of the transactions contemplated hereby, or the requirements of the federal securities laws, all information concerning each of the parties hereto which is furnished to 29 the other party hereto, will be held in strict confidence by it, and all copies thereof will be returned promptly to the respective party at its request in the event the Merger Conversion is not consummated. (b) Amendment. First Federal shall assume and bear 662/3% of all reasonable expenses, costs and fees incurred by each party in the preparation and execution of this Agreement and the Plan and in complying with the agreements, covenants, and conditions herein and therein, including the preparation, printing and mailing of the Proxy Statement/Offering Prospectus, whether or not the Merger Conversion contemplated hereby and thereby shall be consummated, with the remainder of such expenses (which remainder shall not exceed $150,000) to be borne by Neodesha; provided, however, that in the event of a termination of this Agreement by any party hereto otherwise than in accordance with Section 21(a) hereof, or of a material breach of this Agreement by any party hereto which is not waived by the other party or cured by the breaching party within 30 days after notice thereof to the breaching party, all such costs, expenses and fees of the parties shall be assumed and borne by the breaching party. (c) Finder's and Other Fees. Except with respect to commissions, discounts and similar fees which may be paid or allowed to securities firms in connection with the sale of stock in the Merger Conversion, each party represents that it has neither incurred nor is liable for any finder's, broker's or other similar fees to any third party whatsoever as a result of the execution and delivery of this Agreement or the Plan or the consummation of the transactions contemplated hereby or thereby and each party hereby indemnifies and holds harmless each other party hereto against any claim for a broker's or finder's fee based on alleged retention of a broker or finder by it. 30 (d) Further Acts. The parties hereto hereby agree to perform, at any time and from time to time, any and all necessary acts, or to prepare and to execute or cause to be executed any and all instruments in writing, which shall be advisable or necessary to implement fully the intent and terms of this Agreement, including but not limited to applications and other documentation required to obtain approvals of the Merger Conversion and the Plan (including proxy materials and offering materials contemplated by the Plan) and such conveyances and assignments as may be required. In this regard First Federal and its counsel shall assume responsibility for the preparation of all applications, proxy statements, offering circulars and other documentation required to facilitate and obtain the requisite regulatory approval of this Merger Conversion, and Neodesha and its counsel shall assist First Federal and its counsel in preparing such applications and documentation and shall promptly furnish to First Federal and its counsel all information reasonably requested in connection with the preparation of the applications, proxy statements, offering circulars and related documents. All such information shall be accurate and complete in all material respects. (e) Notices. All notices and other communications pursuant to this Agreement shall be deemed to have been duly given if in writing and delivered personally or if mailed, first class, postage pre-paid, as follows: If to Neodesha, to: with a copy to: Franklin C. Miller Dennis Depew, Esq. President The Depew Law Firm Neodesha Savings and Loan Association 620 Main Street 801 Main Street P.O. Box 313 P.O. Box 509 Neodesha, Kansas 66757-0313 Neodesha, Kansas 66757-1635 31 If to the Holding Company or First Federal, to: with a copy to: Larry G. Spencer Martin L. Meyrowitz, P.C. President and Chief Executive Officer Silver, Freedman & Taff, L.L.P. First Independence Corporation 1100 New York Ave., N.W., Myrtle & Sixth Streets 7th Floor East Tower Independence, Kansas 67301 Washington, D.C. 20005 (f) Headings; Entire Agreement. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes and replaces any prior written or oral agreements or understandings between them relating to the subject matter hereof. (g) Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same instrument. (h) Binding Effect. This Agreement shall inure to the benefit and be binding upon the successors of the Holding Company, First Federal and Neodesha. This Agreement shall not otherwise be assignable by the Holding Company, First Federal or Neodesha. (i) Amendments. This Agreement and the Plan shall not be amended, modified, changed or supplemented except by an instrument in writing signed by the parties hereto. (j) Survival of Warranties. The representations, warranties and covenants contained herein shall not survive the Closing Date. (k) Governing Law. This Agreement shall be governed by and construed in accordance with the federal laws and regulations, except to the extent certain matters may 32 be governed as a matter of law by the laws of the State of Delaware (as the state of incorporation of the Holding Company). IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. NEODESHA SAVINGS & LOAN ATTEST: ASSOCIATION, FSA Diane Holmquist /s/ Franklin C. Miller - -------------------- --------------------------------- Franklin C. Miller, President ATTEST: FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF INDEPENDENCE Gary Overfield /s/ Lary G. Spencer - --------------------- ---------------------------------- Larry G. Spencer, President and Chief Executive Officer ATTEST: FIRST INDEPENDENCE CORPORATION Gary Overfield /s/ Larry G. Spencer - ---------------------- ---------------------------------- Larry G. Spencer, President and Chief Executive Officer 33 EX-5 5 EXHIBIT 5 Exhibit 5 EXHIBIT 5 OPINION OF SILVER, FREEDMAN & TAFF, L.L.P. WITH RESPECT TO LEGALITY OF STOCK [Silver, Freedman & Taff, L.L.P. (Letterhead)] July 1, 1998 The Board of Directors First Independence Corporation Myrtle & Sixth Streets Post Office Drawer 947 Independence, Kansas 67301 Re: Registration Statement Under the Securities Act of 1933 Gentlemen: This opinion is rendered in connection with the Registration Statement to be filed on Form SB-2 with the Securities and Exchange Commission under the Securities Act of 1933 relating to the 174,752 shares of Common Stock of First Independence Corporation (the "Company"), par value $.01 per share, to be issued. As counsel, we have reviewed the Certificate of Incorporation of the Company and such other documents as we have deemed appropriate for the purpose of this opinion. We are rendering this opinion as of the time the Registration Statement referred to above becomes effective. Based on the foregoing, we are of the opinion that the shares of Common Stock of the Company covered by the aforesaid Registration Statement will, when sold, be validly issued, fully paid and non-assessable shares of Common Stock of the Company. Very truly yours, /s/Silver, Freedman & Taff, L.L.P. ---------------------------------- SILVER FREEDMAN & TAFF, L.L.P. EX-8 6 EXHIBIT 8.1 Exhibit 8.1 EXHIBIT 8.1 FORM OF OPINION OF SILVER, FREEDMAN & TAFF, L.L.P. WITH RESPECT TO FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER CONVERSION July 1, 1998 Board of Directors First Independence Corporation Myrtle & Sixth Independence, Kansas 67301 Re: Merger Conversion of Neodesha Savings and Loan Association, FSA into First Federal Savings and Loan Association of Independence, a subsidiary of First Independence Corporation Gentlemen: You have requested this firm's opinion regarding certain federal income tax consequences arising from the following two integrated transactions: (i) the conversion of Neodesha Savings and Loan Association, FSA, a federally chartered mutual savings and loan association ("Neodesha"), into a federally chartered stock savings and loan association (the "Conversion") in accordance with the applicable provisions of the regulations of the Office of Thrift Supervision (the "OTS") governing all savings associations (the "Regulations"); and (ii) simultaneously therewith, the merger in accordance with the Regulations (the "Merger") of Neodesha into First Federal Savings and Loan Association of Independence ("First Federal"), with First Federal to be the resulting institution (the "Resulting Institution"). The Conversion and Merger are hereinafter collectively referred to as the "Merger Conversion." Shares of common stock, par value $0.01 per share ("First Independence Common Stock"), of First Independence Corporation ("First Independence"), the holding company of First Federal, will be offered for sale and issued in connection with the Merger Conversion. The Merger Conversion will be consummated pursuant to the Agreement and Plan of Merger and Reorganization (the "Agreement") entered into as of February 18, 1998, between Neodesha and First Independence and the Plan of Merger Conversion (the "Plan") attached as an exhibit thereto and unanimously approved by the Boards of Directors of Neodesha and First Independence. We have examined the Agreement and the Plan and have made such other investigations as we have deemed relevant or necessary for the purposes of this opinion. In our examination of these documents, we have assumed the authenticity of those documents submitted to us as originals and the conformity to authentic original documents of any documents submitted to us as certified, conformed or reproduced copies. Board of Directors July 1, 1998 Page 2 As to matters of fact which are material to this opinion, we have relied on, and have assumed the accuracy of (i) the representations and warranties made by Neodesha, First Independence and First Federal in the Agreement and the Plan and (ii) the accuracy and completeness of the facts, information and representations contained in the registration statement (the "Prospectus") to be filed with the Securities and Exchange Commission ("SEC") to register the shares of First Independence Common Stock (the "Conversion Stock") that will be issued upon consummation of the Merger Conversion. As to other matters of fact which are material to this opinion, we have relied upon certificates of officers of First Independence, First Federal and Neodesha (the "Facts Certificates"). We have also relied upon an opinion of Ferguson & Company, to the effect that the subscription rights to purchase shares of the Conversion Stock have no ascertainable value. The Proposed Transaction As indicated above, the Agreement and Plan provide that, subject to the receipt of all required regulatory approvals, Neodesha shall convert from the federal mutual to the federal stock form of organization and simultaneously merge with and into First Federal, with First Federal to be the resulting institution in accordance with the applicable provisions of the Regulations. Shares of the Conversion Stock will be offered for sale and issued in connection with the Merger Conversion. The aggregate price, per share price and number of shares of the Conversion Stock to be issued in the Merger Conversion shall be determined in accordance with the Plan. Members of Neodesha and other persons shall receive the right to subscribe for shares of the Conversion Stock to be issued by First Independence in connection with the Merger Conversion in accordance with the Plan and the Regulations. Upon consummation of the Merger Conversion, the corporate existence of First Federal shall be continued, and the separate corporate existence of Neodesha shall cease. The Merger Conversion shall be accomplished in accordance with applicable statutes and regulations and the provisions of the Plan. First Independence, First Federal and Neodesha shall cause to be prepared and filed all applications with government agencies which are necessary for consummation of the Merger Conversion, including, without limitation: (i) an Application for Merger Conversion on Form AC to be filed by Neodesha with the OTS, (ii) an Application on Form H-(e)3 to be filed by First Independence with the OTS, which shall include as an exhibit thereto a Merger Application, (iii) a registration statement (the "Registration Statement") with respect to the shares of the Conversion Stock to be issued in the Merger Conversion to be filed by First Independence with the SEC, and (iv) appropriate filings under the securities/blue sky laws of the various states. Upon approval of the Application for Merger Conversion by the OTS and the declaration of effectiveness of First Independence's Registration Statement by the SEC, the Agreement and the Plan shall be submitted to the members of Neodesha for their approval. First Independence has approved the Agreement and the Plan in its capacities as the sole stockholder of First Federal and the issuer of the Conversion Stock. Board of Directors July 1, 1998 Page 3 Upon consummation of the Merger Conversion, all of the assets and property of every kind and character then owned by Neodesha, or which would inure to Neodesha, shall immediately by operation of law be vested in and become the property of First Federal, which shall have, hold and enjoy the same in its own right as fully and to the same extent as the same were possessed, held and enjoyed by Neodesha immediately prior to the consummation of the Merger Conversion. Upon consummation of the Merger Conversion, First Federal shall be deemed to be and shall be a continuation of the entity of Neodesha and shall assume and succeed to all of such rights, obligations, duties and liabilities of Neodesha. Upon consummation of the Merger Conversion, First Federal shall establish on its books a liquidation account in accordance with the Plan and Section 563b.3(f) of the Regulations for the benefit of certain deposit account holders of Neodesha who retain their deposit accounts in First Federal. The function of this liquidation account is to establish a priority on liquidation of First Federal, which priority shall be equal to that of all other liquidation accounts established by First Federal pursuant to the Regulations; the existence of any liquidation account shall not operate to restrict the use or application of any of the capital accounts of First Federal except as provided in the Plan and Section 563b.3(f) of the Regulations. In addition to the foregoing description of the proposed transaction, we have made the following factual assumptions in rendering the opinions hereinafter set forth: (a) The management of First Independence, First Federal and Neodesha have no knowledge of any plan or intention on the part of Neodesha deposit account holders to withdraw from their deposit accounts subsequent to the proposed Merger Conversion an amount which would reduce their interest in the liquidation account established pursuant to the Plan to an amount which would have, in the aggregate, a value at the time of the proposed Merger Conversion of less than 50 percent of the aggregate interest which the members of Neodesha had prior to the proposed transaction. (b) Neither First Independence nor First Federal has any plan or intention to sell or otherwise dispose of any of the assets of Neodesha, except in the ordinary course of business. (c) Following the Merger Conversion, First Federal will continue the historic business of Neodesha in a substantially similar nature. (d) The liabilities of Neodesha to be assumed by First Federal and the liabilities to which the transferred assets of Neodesha are subject arose in the ordinary course of business of Neodesha. (e) There is no intercorporate indebtedness existing between First Independence, First Federal and Neodesha, which was issued, acquired or will be settled at a discount. Board of Directors July 1, 1998 Page 4 (f) The adjusted bases and the fair market value of the assets of Neodesha to be transferred to First Federal will equal or exceed the sum of its liabilities assumed by First Federal plus the amount of the liabilities, if any, to which the transferred assets are subject. (g) First Independence has no current plan or intention to redeem or otherwise acquire any of the shares of the Conversion Stock to be issued in the proposed transaction. (h) No shares of the Conversion Stock issued in the proposed transaction will be issued to or purchased by depositor-employees at a discount or as compensation in the proposed transaction. (i) Both Neodesha and First Federal utilize a reserve for bad debts in accordance with Section 593 of the Internal Revenue Code of 1986, as amended (the "Code"). Following the transaction, First Federal will likewise continue to utilize a reserve for bad debts in accordance with Section 593. (j) No Eligible Account Holders or Supplemental Eligible Account Holders, as defined in the Plan, who maintain their deposit accounts after the Merger Conversion will be excluded from participating in the liquidation account. (k) The fair market value of the withdrawable deposit accounts plus interest in the liquidation account of First Federal to be received by Neodesha members under the Plan will be, in each instance, equal to the fair market value of the withdrawable deposit accounts of Neodesha surrendered in exchange therefor. (l) The exercise price of the subscription rights received by Eligible Account Holders and other members to purchase shares of the Conversion Stock will be the fair market value of the Conversion Stock at the time of the completion of the Merger Conversion. (m) The subscription rights received by Eligible Account Holders and other members to purchase shares of the Conversion Stock will have no ascertainable value. (n) No two parties to the transaction are investment companies as defined in sections 368(a)(2)(F)(iii) and (iv) of the Code. (o) Neodesha is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. Board of Directors July 1, 1998 Page 5 (p) First Independence and Neodesha will pay their respective expenses incurred in connection with the transaction, except that First Independence will pay all filing fees and reimburse Neodesha for certain expenses incurred in connection with the Merger Conversion. Analysis Section 368(a) of the Code defines the various types of transactions which are considered to be "reorganizations" that are generally tax-free to the corporations involved. As discussed below, the Merger Conversion involves both an "F" reorganization which is applicable to the conversion of Neodesha to stock form and an "A" reorganization which is applicable to the merger of Neodesha with and into First Federal. It is the practice of the Internal Revenue Service (the "IRS") regarding conversion mergers to ignore the conversion step of the proposed transaction and to consider the two steps of such a transaction to be a valid "A" merger reorganization. These considerations are discussed below in greater detail. Tax Consequences of the Conversion Section 368(a)(1)(F) of the Code provides that a mere change in the identity, form or place of organization of one corporation, however effected, is a reorganization. In Rev. Rul. 80-105, 1980-1 C.B. 78, the Internal Revenue Service considered the federal income tax consequences of the conversion of a federal mutual savings and loan association to a state stock savings and loan association. The ruling concluded that the conversion qualified as a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F). The rationale for this conclusion is not clearly expressed in the ruling, but two factors are stressed. First, the changes at the corporate level other than the place of organization and form of organization were regarded as insubstantial. The converted association continued its business in the same manner; it had the same savings accounts and loans. The converted association continued its membership in the Federal Savings and Loan Insurance Corporation ("FSLIC") and remained subject to the regulations of the Federal Home Loan Bank Board ("FHLBB"). Second, the ruling states that the ownership rights of the depositors in the mutual company are Amore nominal than real.@ Although the ruling does not explain the significance of this statement, subsequent administrative interpretations have indicated that the IRS believes these nominal rights are preserved in the liquidation account that is typically established for the depositors' benefit. This approach enables the IRS to distinguish the tax treatment of conversion transactions from the tax treatment of acquisitive transactions in which mutual companies acquire stock companies. See Paulsen v. Commissioner, 469 U.S. 131 (1985); Rev. Rul. 69-6, 1969-1 C.B. 104. Board of Directors July 1, 1998 Page 6 Tax Consequences of the Merger Section 368(a)(1)(A) of the Code defines the term "reorganization" to include a "statutory merger" of corporations such as the merger of Neodesha with and into First Federal. Section 1.368-2(b)(1) of the Treasury Regulations provides that, in order to qualify as a reorganization under Section 368(a) (1) (A) , a transaction must be a merger or consolidation effected pursuant to the corporation laws of the United States or a state. The Agreement provides that the Merger will be accomplished in accordance with applicable laws, rules and regulations. Treasury Regulations and case law require that, in addition to the existence of statutory authority for a merger, certain other conditions must be satisfied in order to qualify a proposed transaction such as the Merger as a reorganization within the meaning of Section 368(a)(1)(A) of the Code. The "business purpose test," which requires a proposed merger to have a bona fide business purpose, must be satisfied. See 26 C.F.R. Section 1.368-1(c). We believe that the Merger satisfies the business purpose test for the reasons set forth in the Prospectus regarding the Merger Conversion under the caption "The Merger Conversion - Business Purposes." The "continuity of business enterprise test" requires an acquiring corporation either to continue an acquired corporation's historic business or to use a significant portion of its historic business assets in a business. The policy underlying this rule, which is to ensure that reorganizations are limited to readjustments of continuing interests in property under modified corporate form, requires that the determination of compliance with the rule be based upon all of the relevant facts and circumstances. For example, on the issue of business continuity, the fact that First Federal is in the same line of business as Neodesha tends to establish the requisite continuity, but is not alone sufficient. In addition, a corporation=s historic business generally is the business it has conducted most recently. However, a corporation's historic business is not one that it enters into as part of the reorganization. See 26 C.F.R. Section 1.368-1(d). We believe that the continuity of business enterprise test is satisfied because the business conducted by Neodesha immediately prior to the Merger Conversion, including the acceptance of deposits from the public and investment in mortgage loans, will continue to be conducted by First Federal following the proposed transaction. The "continuity of interest doctrine" requires that the continuing common stock interest of the former owners of an acquired corporation, considered in the aggregate, represent a "substantial part" of the value of their former interest, and provide them with a "definite and substantial interest" in the affairs of the acquiring corporation or a corporation in control of the acquiring corporation. Paulsen v. Comm'r, 469 U.S. 131 (1985); Helvering v. Minnesota Tea Co., 296 U.S. 378 (1935); John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935); Southwest Natural Gas Co. v. Comm'r, 189 F.2d 332 (5th Cir. 1951) , cert. denied, 342 U.S. 860 (1951). In the context of a merger conversion transaction, it is the current practice of the IRS to consider the continuity of ownership interest requirement to be satisfied if an acquired savings and loan association's account holders do not intend to withdraw an amount of their deposit accounts subsequent to the transaction which would reduce their interest in the acquiring company's liquidation account to an amount having, in the aggregate, a value of less than 50 percent of the aggregate interest which the members of the acquired company had prior to the proposed transaction. See Private Letter Ruling number 9049003, representation (a). We have expressly set forth above our assumption, based upon the representations of Neodesha, First Independence and First Federal, that this requirement regarding the preservation of the interest of the Neodesha account holders in the liquidation account of First Federal will be satisfied following the Merger Conversion. Board of Directors July 1, 1998 Page 7 There is no direct authority upon which we can rely in stating that a conversion to stock form of a mutual savings and loan association and sale of its stock to an acquiring holding company, followed immediately by the merger of the converted savings and loan association with another subsidiary of the acquiring holding company, qualifies as a valid "A" reorganization. However, the practice of the IRS is to ignore the conversion step in a conversion merger transaction and to consider the two steps of the transaction to constitute a valid "A" reorganization. See Private Letter Rulings numbered 9124024, 9049003, 9042058, 8952051 and 8843042. Private letter rulings do not represent binding legal authority upon which the parties in a proposed transaction may rely in resisting a challenge by the IRS as to the income tax consequences of a proposed transaction. See Section 6110(j)(3) of the Code. However, such rulings are evidence of the IRS= current position regarding the matter in question and reflect its interpretation and analysis, with which we agree and upon which we base our response to your questions relative to the federal income tax consequences of the Merger Conversion. Opinions Based on the foregoing, our opinions are as follows: (1) The conversion of Neodesha from a mutual savings and loan association to a stock savings and loan association will be ignored for federal income tax purposes. Provided that the proposed merger of Neodesha with and into First Federal qualifies as a statutory merger under applicable federal laws and regulations, the Merger will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code. First Federal and Neodesha will each be "a party to a reorganization" within the meaning of Section 368(b) of the Code. (2) No gain or loss will be recognized to Neodesha on the transfer of its assets to First Federal in exchange for deposit accounts and liquidation accounts in First Federal, and subscription rights to purchase shares of the Conversion Stock, and the assumption by First Federal of the liabilities of Neodesha. See Sections 361(a) and 357(a) of the Code. (3) No gain or loss will be recognized by First Federal upon the receipt of the assets of Neodesha in exchange for First Federal deposit accounts and liquidation accounts, subscription rights to purchase shares of the Conversion Stock, and the assumption by First Federal of all of the liabilities of Neodesha. Board of Directors July 1, 1998 Page 8 (4) First Independence will recognize no gain or loss on the sale of shares of the Conversion Stock in a community offering or through the exercise of the subscription rights. See Section 1032(a) of the Code. (5) The basis of the Neodesha assets in the hands of First Federal immediately after the Merger Conversion will be the same as the basis of the assets in the hands of Neodesha immediately prior to the Merger Conversion. See Section 362(b) of the Code. (6) The holding period of the Neodesha assets in the hands of First Federal will include, in each instance, the period during which such assets were held by Neodesha immediately prior to the Merger Conversion. See Section 1223(2) of the Code. (7) First Federal will succeed to and take into account those items of Neodesha described in Section 381(c) of the Code. See Section 381(a) of the Code and Section 1.381(c)(2)-l of the Treasury Regulations. These items will be taken into account by First Federal, subject to the conditions and limitations specified in Sections 381, 382, 383 and 384 of the Code and the regulations thereunder. (8) Pursuant to the provisions of section 381(c)(4) of the Code and Section 1.381(c)(4)-1(a)(1) (ii) of the Treasury Regulations, First Federal will succeed to and take into account, immediately after the Merger, the dollar amounts of those accounts of Neodesha which represent bad debt reserves in respect of which Neodesha has taken a bad debt deduction for taxable years ending on or before the date of the Merger Conversion. Bad debt reserves will have the same character in the hands of First Federal as they would have had in the hands of Neodesha if the Merger Conversion had not occurred. The bad debt reserves will not be required to be restored to gross income of either Neodesha or First Federal for the taxable year of the Merger Conversion, provided that Neodesha meets the requirements of Section 593(a)(2) of the Code at the close of its taxable year ending on the date of the Merger Conversion and First Federal meets the requirements of Section 593(a)(2) of the Code during such taxable year. (9) The creation of the liquidation account on the books of First Federal for the benefit of former account holders of Neodesha will not require bad debt reserves to be restored to gross income, nor will creation of such an account affect deductions for additions to reserve for bad debts under Section 593 of the Code or distributions to shareholders under Section 593(e) of the Code. Board of Directors July 1, 1998 Page 9 (10) Eligible Account Holders and Supplemental Eligible Account Holders will realize gain, if any, upon the exchange of their interests in Neodesha for interests in the liquidation account in First Federal and subscription rights to purchase shares of the Conversion Stock, but such gain shall be limited to the fair market value, if any, of the interests in the liquidation account and the subscription rights received by such persons. (11) The basis of the deposit accounts in First Federal immediately after the Merger Conversion received by the respective account holders of Neodesha will be the same as the basis of their deposit accounts in Neodesha immediately prior to the Merger Conversion. See Section 1012 of the Code. The basis of the interest of each Eligible Account Holder and Supplemental Eligible Account Holder in the liquidation account of First Federal will be equal to the cost of such property, i.e., the fair market value, if any, of the proprietary interest in First Federal received in exchange for the proprietary interest in Neodesha. The basis of the subscription rights in the hands of the Eligible Account Holders and Supplemental Eligible Account Holders is zero, increased by the amount of gain, if any, recognized upon their receipt. (12) Neither Eligible Account Holders, Supplemental Eligible Account Holders, other members, nor eligible officers, directors or employees of Neodesha, will realize any taxable income as a result of the exercise or lapse of subscription rights to purchase shares of the Conversion Stock. See Rev. Rul. 56-572, 1956-2 C.B. 182. (13) A purchaser of shares of the Conversion Stock will have an initial basis in such stock equal to the purchase price of such stock, increased (in the case of stock acquired pursuant to the exercise of subscription rights) by the basis, if any, of the subscription rights exercised. See Section 1012 of the Code. (14) A purchaser of shares of the Conversion Stock will have a holding period for stock acquired through the exercise of subscription rights which will commence on the date on which the rights were exercised. See Section 1223(6) of the Code. The holding period of the Conversion Stock that will be purchased pursuant to the community offering will commence on the date following the date on which the stock is purchased. See Rev. Rul. 70-598, 1970-2 C.B. 168, and Rev. Rul. 66-97, 1966-1 C.B. 190. Board of Directors July 1, 1998 Page 10 The opinions expressed above are limited to the income tax consequences of the Merger Conversion under the laws of the United States. Furthermore, our opinions are based on research of the Code, applicable Treasury Regulations, current published administrative decisions of the IRS, and existing judicial decisions as of the date hereof. No assurance can be given that legislative, administrative or judicial decisions or interpretations may not be forthcoming that will significantly change the opinions set forth herein. We express no opinions other than those stated immediately above as our opinions. We hereby consent to the filing of this opinion as an exhibit to Neodesha=s Application for Conversion, to First Independence's Application on Form H-(e)3 to the OTS, and to First Independence's Registration Statement. Very truly yours, ---------------------------- EX-8 7 EXHIBIT 8.2 Exhibit 8.2 EXHIBIT 8.2 FORM OF OPINION OF GRANT, THORNTON WITH RESPECT TO KANSAS INCOME TAX CONSEQUENCES OF THE MERGER CONVERSION [GRANT THORNTON (Letterhead)] Board of Directors First Independence Corporation P.O. Drawer 947 Independence, Kansas 67301 Re: Merger Conversion of The Neodesha Savings and Loan Association, FSA into First Federal Savings and Loan Association of Independence, a subsidiary of First Independence Corporation Gentlemen: It is our understanding that The Neodesha Savings and Loan Association, FSA (Neodesha) will convert from a federally chartered mutual savings and loan association to a federally chartered stock savings institution, and simultaneously merge with First Federal Savings & Loan Association of Independence, with First Federal being the surviving company. The Washington D.C. law firm of Silver, Freedman & Taff, LLP has issued their tax opinion that the conversion, by Neodesha, from a mutual savings and loan association to a federally chartered stock savings institution will be considered a tax free reorganization under section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, (subject to the caveats and representation as indicated in their opinion letter dated ______, 1998). Further, the tax opinion provides that the merger of Neodesha into First Federal be considered tax free under section 368(a)(1)(A) of the Code, (subject to the caveats and representations as indicated in their opinion letter). You have asked our opinion as to whether the Kansas income tax consequences would differ from the federal tax consequences, based on the federal income tax consequences as indicated in the Silver, Freedman & Taff, LLP opinion letter. Kansas is a conformity state that derives its income tax statute from the federal statute (with certain modifications not pertinent to this issue). Accordingly, the Kansas income tax consequences of the transactions described above will coincide with the federal income tax consequences of the transactions. Please note that our opinion relates solely to the Kansas income tax consequences of the transaction. Any parties to the transaction residing outside of the state of Kansas should consult with their own advisors regarding the state income tax consequences in their state of residency. Our opinion is based solely on the facts and assumptions provided to us as described above. Please note that should these facts differ from this description in any material respect, our opinion may be inapplicable. Very truly yours, GRANT THORNTON LLP EX-10 8 EXHIBIT 10.4 Exhibit 10.4 EXHIBIT 10.4 EMPLOYMENT AGREEMENT WITH FRANK MILLER EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this ____ day of ___________________, 1998, by and between FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF INDEPENDENCE, Independence, Kansas (the "Association") and Franklin C. Miller (the "Employee"). WHEREAS, the services of the Employee are of a special, unique and unusual character which gives them distinctive value and the Association desires that the Employee continue after the merger of Neodesha Savings and Loan Association, FSA ("Neodesha") into the Association to render services to the Association, in accordance with the terms and conditions set forth herein; and WHEREAS, the Employee desires to be employed by the Association pursuant to the terms of this Agreement; WHEREAS, the Board of Directors recognizes that, as is the case with publicly held corporations generally, the possibility of a change in control of the Association or its parent, First Independence Corporation (the "Holding Company") may exist, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Association, the Holding Company and its stockholders; and WHEREAS, the Board of Directors believes it is in the best interests of the Association to enter into this Agreement with the Employee in order to assure continuity of management of the Association and to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties; and WHEREAS, the Board of Directors has approved and authorized the execution of this Agreement with the Employee to take effect as stated in Section 4 hereof; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, it is AGREED as follows: 1. Employment. The Employee will be employed as a Vice President of the Association. As a Vice President, the Employee shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, and shall have other powers and duties as may from time to time be prescribed by the Board, provided that such duties are consistent with the Employee's position as a Vice President. The Employee shall continue to devote his best efforts and substantially all his business time and attention to the business and affairs of the Association and its Holding Company and affiliated companies. 1 2. Compensation. (a) Salary. The Association agrees to pay the Employee during the term of this Agreement a salary established by the Board of Directors. The salary hereunder as of the Commencement Date (as defined in Section 4 hereof) shall be at least the Employee's current salary of $______ per annum. The salary provided for herein shall be payable not less frequently than monthly in accordance with the practices of the Association, provided, however, that no such salary is required to be paid by the terms of this Agreement in respect of any month or portion thereof subsequent to the termination of this Agreement and provided further, that the amount of such salary shall be reviewed by the Association not less often than annually and may be increased (but not decreased) from time to time in such amounts as the Association in its discretion may decide, subject to the customary withholding tax and other employee taxes as required with respect to compensation paid by a corporation to an employee. (b) Discretionary Bonuses. The Employee shall be entitled to participate in an equitable manner with all other officers of the Association in discretionary bonuses as authorized and declared by the Board of Directors of the Association for its employees. No other compensation provided for in this Agreement shall be deemed a substitute for the Employee's right to participate in such bonuses when and as declared by the Board of Directors. (c) Expenses. During the term of his employment hereunder, the Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him in accordance with policies and procedures at least as favorable to the Employee as those presently applicable to the officers of the Association, provided that the Employee properly accounts therefor in accordance with Association policy. 3. Benefits. (a) Participation in Retirement and Employee Benefit Plans. The Employee shall be entitled while employed hereunder to participate in, and receive benefits under, all plans relating to stock options, stock purchases, pension, thrift, profit-sharing, group life insurance, medical coverage, education, cash or stock bonuses, and other retirement or employee benefits or combinations thereof, that are now or hereafter maintained for the benefit of the Association's employees generally. (b) Fringe Benefits. The Employee shall be eligible while employed hereunder to participate in, and receive benefits under, any other fringe benefits which are or may become applicable to the Association's employees generally. The Employee will also be entitled while employed hereunder to the exclusive use of car (of a type and class and in a manner similar to that made available to the Employee by Neodesha immediately prior to the Commencement Date (as defined in Section 4 hereof)). While the Employee is employed hereunder, the Association further agrees to maintain that certain key man life insurance policy on the life of the Employee maintained by Neodesha immediately prior to the Commencement Date (as defined in Section 4 hereof) (or a similar such policy as mutually agreed to by the Board of Directors of the Association and the Employee). 2 4. Term. The term of employment under this Agreement shall be a period of three (3) years commencing on the date of consummation of the merger with Neodesha (the "Commencement Date"), subject to earlier termination as provided herein. 5. Vacations. The Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, all such voluntary absences to count as vacation time, provided that: (a) The Employee shall be entitled to an annual vacation of not less than three (3) weeks per year; (b) The timing of vacations shall be scheduled in a reasonable manner by the Employee; and (c) Management shall, solely at the Employee's request, be entitled to grant to the Employee a leave or leaves of absence with or without pay at such time or times and upon such terms and conditions as management, in its discretion, may determine. 6. Termination of Employment; Death. (a) The Board of Directors may terminate the Employee's employment at any time, but any termination by the Association's Board of Directors, other than termination for cause, shall not prejudice the Employee's right to compensation or other benefits under the Agreement. If the employment of the Employee is involuntarily terminated, other than for "cause" as provided in this Section 6(a) or pursuant to any of Sections 6(d) through 6(g), or by reason of death or disability as provided in Sections 6(c) or 7, the Employee shall be entitled to receive, for the period that, but for the termination of employment, would have constituted the remaining term of the Agreement, (i) his salary at the rate then applicable, payable in such manner and at such times as such salary would have been payable to the Employee under Section 2 had he remained in the employ of the Association, and (ii) health insurance benefits as maintained by the Association for the benefit of its employees generally. The terms "termination" or "involuntarily terminated" in this Agreement shall refer to the termination of the employment of Employee without his express written consent. The Employee shall be considered to be involuntarily terminated (1) if the employment of the Employee is involuntarily terminated for any reason other than for "cause" as provided in this Section 6(a), pursuant to any of Sections 6(d) through 6(g) or by reason of death or disability as provided in Sections 6(c) and 7; or (2) there occurs a material diminution of or interference with the Employee's duties, responsibilities and benefits as a Vice President of the Association. By way of example and not by way of limitation, any of the following actions, if unreasonable or materially adverse to the Employee, shall constitute such diminution or interference unless consented to in writing by the Employee: (i) a change in the principal workplace of the Employee to a location more than twenty-five (25) miles from the Association's Neodesha branch office; (ii) a material demotion of the Employee, a reduction in the number or seniority of other Association personnel reporting to the Employee, or a reduction in the frequency with which, or in the nature of the matters with respect 3 to which, such personnel are to report to the Employee, other than as part of an Association-wide reduction in staff; or (iii) a reduction or adverse change in the salary, perquisites, benefits, contingent benefits or vacation time which had theretofore been provided to the Employee, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Association. In case of termination of the Employee's employment for cause, the Association shall pay the Employee his salary through the date of termination, and the Association shall have no further obligation to the Employee under this Agreement. The Employee shall have no right to receive compensation or other benefits for any period after termination for cause. For purposes of this Agreement, termination for "cause" shall include termination because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the disinterested members of the Board of Directors of the Association at a meeting of the Board called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with the Employee's counsel, to be heard before the Board), stating that in the good faith opinion of the Board the Employee was guilty of conduct constituting "cause" as set forth above and specifying the particulars thereof in detail. (b) The Employee's employment may be voluntarily terminated by the Employee at any time upon 90 days written notice to the Association or upon such shorter period as may be agreed upon between the Employee and the Board of Directors of the Association. In the event of such voluntary termination, the Association shall be obligated to continue to pay the Employee his salary only through the date of termination, at the time such payments are due, and the Association shall have no further obligation to the Employee under this Agreement. (c) In the event of the death of the Employee during the term of employment under this Agreement and prior to any termination hereunder, the Employee's estate, or such person as the Employee may have previously designated in writing, shall be entitled to receive from the Association the salary of the Employee through the last day of the calendar month in which his death shall have occurred. (d) If the Employee is suspended from office and/or temporarily prohibited from participating in the conduct of the Association's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"), 12 U.S.C. ss. 1818(e)(3); (g)(1), the Association's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Association may in its discretion (i) pay the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate in whole or in part any of the obligations which were suspended. 4 (e) If the Employee is removed from office and/or permanently prohibited from participating in the conduct of the Association's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4); (g)(1), all obligations of the Association under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (f) If the Association becomes in default (as defined in Section 3(x)(1) of the FDIA, 12 U.S.C. ss. 1813(x)(1)), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of the parties. (g) All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Association: (i) by the Director of the Office of Thrift Supervision ("OTS") or his or her designee at the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the Association under the authority contained in Section 13(c) of the FDIA, 12 U.S.C. ss. 1823(c); or (ii) by the Director of the OTS or his or her designee at the time the Director of the OTS or his or her designee approves a supervisory merger to resolve problems related to operation of the Association or when the Association is determined by the Director of the OTS to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by any such action. (h) In the event the Association purports to terminate the Employee for cause, but it is determined by a court of competent jurisdiction or by an arbitrator pursuant to Section 16 that cause did not exist for such termination, or if in any event it is determined by any such court or arbitrator that the Association has failed to make timely payment of any amounts owed to the Employee under this Agreement, the Employee shall be entitled to reimbursement for all reasonable costs, including attorneys' fees, incurred in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights to which the Employee is otherwise entitled under this Agreement. 7. Disability. If during the term of employment hereunder the Employee shall become disabled or incapacitated to the extent that he is unable to perform the duties of the Vice President, he shall be entitled to receive disability benefits of the type provided for other employees of the Association. While he receives such benefits, the rights of the Employee to receive the salary stated in Section 2 hereof shall be suspended. 8. Change in Control. (a) Involuntary Termination. If the Employee's employment is involuntarily terminated (other than for cause or pursuant to any of Sections 6(c) through 6(g) or Section 7 of this Agreement) in connection with or within 18 months after a change in control of the Association or the Holding Company which occurs at any time during the term of employment under this Agreement, the Association shall pay to the Employee in a lump sum in cash within 25 business 5 days after the Date of Termination (as hereinafter defined) of employment an amount equal to 299 percent of the Employee's "base amount" of compensation, as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended ("Code"). (b) Definitions. The term "Date of Termination" means the earlier of (i) the date upon which the Association gives notice to the Employee of the termination of his employment with the Association, or (ii) the date upon which the Employee ceases to serve as an Employee of the Association. The term "change in control" is defined solely as any acquisition of control of the Association or the Holding Company (other than by a trustee or other fiduciary holding securities under an employee benefit plan of the Association or the Holding Company), as defined in 12 C.F.R. ss. 574.4, or any successor regulation, which would require the filing of an application for acquisition of control or notice of change in control as set forth in 12 C.F.R. ss. 574.3, or any successor regulation. 9. Certain Reduction of Payments by the Association. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Association to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible (in whole or part) by the Association for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement ("Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount, not less than zero, expressed in present value, which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Association because of Section 280G of the Code. For purposes of this Section 9, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this Section 9 shall be made by the Association's independent auditors, or at the election of such auditors by such other firm or individuals of recognized expertise as such auditors may select (such auditors or, if applicable, such other firm or individual, are hereinafter referred to as the "Advisory Firm"). The Advisory Firm shall within ten business days of the Date of Termination, or at such earlier time as is requested by the Association, provide to both the Association and the Employee an opinion (and detailed supporting calculations) that the Association has substantial authority to deduct for federal income tax purposes the full amount of the Agreement Payments and that the Employee has substantial authority not to report on his federal income tax return any excise tax imposed by Section 4999 of the Code with respect to the Agreement Payments. Any such determination and opinion by the Advisory Firm shall be binding upon the Association and the Employee. The Employee shall determine which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 9, provided that, if the Employee does not make such determination within ten business days of the receipt of the calculations made by the Advisory Firm, the Association shall elect which and how much, if any, of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 9 and shall notify the Employee promptly of such election. Within five business days of the earlier of (i) the Association's 6 receipt of the Employee's determination pursuant to the immediately preceding sentence of this Agreement, or (ii) the Association's election in lieu of such determination, the Association shall pay to or distribute to or for the benefit of the Employee such amounts as are then due the Employee under this Agreement. The Association and the Employee shall cooperate fully with the Advisory Firm, including without limitation providing to the Advisory Firm all information and materials reasonably requested by it, in connection with the making of the determinations required under this Section 9. (c) As a result of uncertainty in application of Section 280G of the Code at the time of the initial determination by the Advisory Firm hereunder, it is possible that Agreement Payments will have been made by the Association which should not have been made ("Overpayment") or that additional Agreement Payments will not have been made by the Association which should have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Advisory Firm, based upon the assertion by the Internal Revenue Service against the Employee of a deficiency which the Advisory Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Association to or for the benefit of Employee shall be treated for all purposes as a loan ab initio which the Employee shall repay to the Association together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Association if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Advisory Firm, based upon controlling preceding or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Association to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. (d) The total of payments to the Employee in the event of involuntary termination of employment under Section 6(a) and Section 8(a) shall not exceed three times his average annual compensation from the Association over the most recent five taxable years (or, if employed by the Association for a shorter period, over the period of his employment by the Association). (e) Any payments made to the Employee pursuant to this Agreement, or are subject to and conditioned upon their compliance with 12 U.S.C. ss. 1828(k) and any regulations promulgated thereunder. Notwithstanding anything in this Agreement to the contrary, no payments may be made pursuant to this Agreement without the prior approval of the OTS if the Association is not in compliance with its regulatory capital requirements, or if such payment would cause the Association to fail its regulatory capital requirements. 10. No Assignments. (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Association will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Association, by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this 7 Agreement in the same manner and to the same extent that the Association would be required to perform it if no such succession or assignment had taken place. Failure of the Association to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation from the Association in the same amount and on the same terms as the compensation pursuant to Section 8(a) hereof. For purposes of implementing the provisions of this Section 10(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee hereunder if the Employee had continued t live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's devisee, legatee or other designee or if there is no such designee, to the Employee's estate. 11. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed (i) to the Association at its home office to the attention of the Board of Directors of the Association, with a copy to the Secretary of the Association, and (ii) to the Employee at the home address he has most recently provided to the Association, or to such other address as either party may have furnished to the other in writing in accordance herewith. 12. Amendments. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 13. Paragraph Headings. The paragraph headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 14. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 15. Governing Law. This Agreement shall be governed by the laws of the United States to the extent applicable and otherwise by the laws of the State of Kansas. 16. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. 8 THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF INDEPENDENCE By:_________________________________ Donald E. Aitken Chairman of the Board EMPLOYEE By:_________________________________ Franklin C. Miller 9 EX-23 9 EXHIBIT 23.1 Exhibit 23.1 EXHIBIT 23.1 CONSENT OF SILVER, FREEDMAN & TAFF, L.L.P. CONSENT OF COUNSEL We consent to the use of our opinions, to the incorporation by reference of such opinions as an exhibits to the Form SB-2 and to the reference to our firm under the headings "The Merger Conversion - Tax Consequences of Merger Conversion" and "Legal Opinions" in the Prospectus included in this Form SB-2. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. /s/Silver, Freedman, & Taff, L.L.P. ------------------------------------- SILVER, FREEDMAN & TAFF, L.L.P. Washington, D.C. July 1, 1998 EX-23 10 EXHIBIT 23.2 Exhibit 23.2 EXHIBIT 23.2 CONSENT OF GRANT THORNTON ACCOUNTANTS' CONSENT We have issued our report dated October 24, 1997, accompanying the consolidated financial statements of First Independence Corporation and Subsidiary and our report dated April 3, 1998 accompanying the financial statements of The Neodesha Savings and Loan Association, FSA as well as our opinion with respect to Kansas income tax consequences contained in First Independence Corporation's Registration Statement on Forms AC and OC to be filed on or about July 1, 1998, with the Office of Thrift Supervision. We consent to the use of the aforementioned reports in the Registration Statement and Prospectus and to the use of our name as it appears under the caption "Experts." /s/Grant Thornton LLP Wichita, Kansas June 30, 1998 EX-23 11 EXHIBIT 23.3 Exhibit 23.3 EXHIBIT 23.3 CONSENT OF FERGUSON & COMPANY FINANCIAL Ferguson INSTITUTION & Company CONSULTING Suite 305 860 W. Airport Frwy Hurst, Texas 76054 (817) 577-9558 (817) 577-3054 Fax July 2, 1998 Boards of Directors Neodesha Savings and Loan Association, FSA, and First Independence Corporation Myrtle & Sixth Streets Independence, Kansas 67301 Directors: We hereby consent to the use of our firm's name in the Application for Approval of Merger Conversion, to be filed with the Office of Thrift Supervision, of Neodesha Savings and Loan Association, FSA, and any amendments thereto, in the SEC Registration Statement of First Independence Corporation, and any amendments thereto. We also hereby consent to the inclusion of, summary of, and references to our Appraisal Report and our opinion concerning subscription rights in such filings including the Prospectus of First Independence Corporation. Sincerely /s/ Charles M. Hebert Charles M. Hebert Principal EX-27 12 FDS -- EXHIBIT 27
9 The schedule contains summary financial information extracted from the quarterly report on Form 10-QSB for the fiscal quarter ended March 31, 1998 and is qualified in its entirety by reference to such financial statements. 6-MOS SEP-30-1998 MAR-31-1998 869,625 207,117 5,300,000 0 3,346,443 25,902,199 26,054,611 85,919,601 655,745 124,493,983 84,171,855 6,400,000 1,468,421 20,900,000 0 0 14,984 11,538,723 124,493,983 3,332,484 928,819 115,505 4,376,808 1,944,157 2,679,605 1,697,203 0 0 1,146,898 663,327 375,236 0 0 375,236 .41 .38 7.71 573,000 0 49,000 0 668,185 12,440 0 655,745 0 0 655,745
EX-27 13 FDS -- EXHIBIT 27.1
9 The schedule contains summary financial information extracted from the quarterly report on Form 10-QSB for the fiscal quarter ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 3-MOS SEP-30-1997 DEC-31-1997 831,502 196,493 100,000 0 5,866,279 28,756,691 28,755,870 70,428,556 690,009 108,913,840 70,138,277 14,700,000 1,395,418 10,700,000 0 0 14,984 11,965,161 108,913,840 1,382,714 569,538 33,354 1,985,606 891,844 1,247,375 738,231 0 0 510,416 281,655 166,694 0 0 166,694 .16 .15 7.51 304,000 149,000 52,000 0 690,009 0 0 690,009 0 0 690,009
EX-27 14 FDS -- EXHIBIT 27.2
9 The schedule contains summary financial information extracted from the quarterly report on Form 10-QSB for the fiscal quarter ended March 31, 1997 and is qualified in its entirety by reference to such financial statements. 6-MOS SEP-30-1997 MAR-31-1997 709,410 265,530 800,000 0 4,795,589 28,900,681 28,733,731 70,961,880 690,009 109,229,614 74,140,900 9,800,000 1,114,780 12,700,000 0 0 14,984 11,458,950 109,229,614 2,778,864 1,118,892 72,161 3,969,917 1,781,023 2,487,963 1,481,954 0 0 1,050,143 537,689 332,274 0 0 332,274 .33 .31 7.49 440,000 487,000 52,000 0 690,009 0 0 690,009 0 0 690,009
EX-99 15 EXHIBIT 99.4 Exhibit 99.4 EXHIBIT 99.4 QUESTION AND ANSWER BROCHURE II. Question and Answer Brochure A. Explanation The Question and Answer brochure is important to any Merger Conversion. It serves to answer some of the most commonly asked questions in "plain, everyday language." Most of the answers are taken verbatim from the Prospectus and it saves the individual from searching for the answer to a simple question. B. Method of Distribution There are four primary methods of distribution of the Question and Answer brochure, however, regardless of the method they are always accompanied by a Prospectus. 1. A Question and Answer brochure is sent out in the initial mailing to all members of Neodesha. 2. Question and Answer brochures are available in the stock information center of Neodesha. 3. Question and Answer brochures are distributed in information packets at Community meetings. 4. Question and Answer brochures are sent out in a standard information packet to all interested investors who phone the Stock Information Center requesting information. QUESTIONS AND ANSWERS - ----------------------------------------------------------------- - ----------------------------------------------------------------- (ART) - ----------------------------------------------------------------- - ----------------------------------------------------------------- THIS BROCHURE ONLY HIGHLIGHTS CERTAIN INFORMATION IN THE ACCOMPANYING PROSPECTUS. MEMBERS ARE URGED TO READ THE ACCOMPANYING PROSPECTUS FOR MORE COMPLETE INFORMATION ON THE MERGER CONVERSION. QUESTIONS AND ANSWERS REGARDING THE MERGER CONVERSION On February 18, 1998, the Board of Directors of Neodesha Savings and Loan Association, F.S.A ("Neodesha") unanimously adopted a Plan of Conversion, which was subsequently amended on ____________, pursuant to which Neodesha will convert from a federally-chartered mutual savings bank to a federally-chartered stock savings bank ("Conversion"). In conjunction with the Conversion, Neodesha simultaneously will be acquired ("Acquisition") by First Independence Corporation ("First Independence"), a savings institution holding company based in Independence, Kansas. It is anticipated that after the Acquisition, Neodesha will be merged or otherwise combined with ("Merger") First Independence's wholly owned subsidiary, First Federal Savings and Loan Association of Independence ("First Federal"). The Conversion, Acquisition and the Merger are referred to collectively as the "Merger Conversion." The Merger Conversion is subject to various conditions, including approval by Neodesha's "Voting Members." Voting Members are all persons who held deposit accounts or borrowings at Neodesha and those who are obligated on a loan from Neodesha on the Voting Record Date (which is _____________) and continue to hold such deposit accounts or borrowings or be obligated on such loan on the date of the Special Meeting scheduled to be held on _________. As part of the Merger Conversion, certain deposit account holders, an employee stock ownership plan ("Neodesha ESOP") established for the benefit of Neodesha's employees, loan customers and directors, officers and employees of Neodesha are being offered the opportunity to purchase shares of First Independence Common Stock in a Subscription Offering at the "95% Price" (i.e., 95% of the First Independence Market Price as defined in Question 14). This brochure is provided to answer basic questions you might have regarding the Merger Conversion. Following the Conversion and the Acquisition, First Independence will operate Neodesha as a separate savings bank subsidiary and, sometime after the Acquisition, First Independence will merge or otherwise combine Neodesha with First Federal. Following the Merger, First Federal will continue to provide financial services to Neodesha depositors, borrowers and other customers. The Merger Conversion will not affect the balances or withdrawability of existing Neodesha's deposit accounts and/or the terms of any loans to existing borrowers. Deposits will continue to be insured up to the maximum amount permitted by law. See Question 11 for further information. More complete information on the Merger Conversion is contained in the accompanying Prospectus, and all information contained or referred to herein is qualified in its entirety by the Prospectus and the information contained or referred to therein. You are urged to carefully read the Prospectus. ABOUT THE MERGER CONVERSION 1. Q. What is a stock "Conversion"? A. A conversion is a change in the legal form of organization from a mutual to a stock company. Neodesha presently operates as a federally-chartered mutual savings bank and has no stockholders. Through its Conversion, Neodesha will become a federally-chartered stock savings bank. 2. Q. What is the "Acquisition"? A. Concurrent with Neodesha's Conversion, First Independence will acquire all the stock of Neodesha issued in the Conversion, making Neodesha a wholly-owned federally-chartered savings bank subsidiary of First Independence. 3. Q. What is the "Merger"? A. After the Conversion and the Acquisition, Neodesha will be merged or otherwise combined with First Federal, First Independence's wholly-owned subsidiary. After the Merger, First Independence will operate Neodesha as a branch of First Federal. First Independence and Neodesha believe that the Merger will provide Neodesha's customers greater convenience and a broader range of services. 4. Q. What is First Independence Corporation? A. First Independence is a savings bank holding company headquartered in Independence, Kansas. At March 31, 1998, First Independence had assets totaling $124.5 million. Presently, First Independence operates one savings bank subsidiary, First Federal Savings and Loan Association of Independence "First Federal." First Federal currently operates 2 offices in Kansas. First Independence is a publicly-traded company whose stock is quoted on the Nasdaq (National Association of Security Dealers Automated Quotation) SmallCap Market under the symbol "FFSL." 5. Q. What approvals must be received before the Merger Conversion becomes effective? A. First, the Merger Conversion is subject to approvals (which have been received) from the Boards of Directors of Neodesha and First Independence. Second, approval must be received from the Securities and Exchange Commission (SEC) and the Office of Thrift Supervision (OTS). Third, the Plan of Conversion must be approved by the Neodesha Voting Members and the offering of shares of First Independence Common Stock must be completed. A special meeting of Voting Members ("Special Meeting") will be held on __________, 1998 to consider and vote upon the Plan of Conversion. Additional approvals required for the Merger will not be sought until after the Conversion and Acquisition are completed. 6. Q. How did the Board of Directors of Neodesha come to the conclusion that now is the time to convert? A. After considering the increased competition from other financial institutions, the need to offer new services to attract younger customers, new legislative and regulatory requirements imposed upon banking institutions, the growth restrictions imposed by federal and state regulators, management succession, and the alternatives to the Merger Conversion, the Board of Directors determined that becoming part of First Independence would, among other things, assist Neodesha in more effectively meeting increasingly competitive conditions in the financial services industry, provide for expansion of services to the public, enable Neodesha to better meet the needs of its local communities and its customers and enhance its opportunity to attract and retain qualified personnel. For these and other reasons, the Board of Directors believes that the Merger Conversion is in the best interests of Neodesha , its depositors and customers and the communities it serves. 7. Q. Why did the Board of Directors and management choose the Merger Conversion rather than a standard mutual to stock conversion? A. Recognizing that Neodesha would benefit most from greater resources in management and technological resources, the Board of Directors reviewed the opportunities available to Neodesha to (i) convert to a stock savings bank or a stock savings and loan association on a stand-alone basis, (ii) combine with another financial institution, or (iii) remain as a mutual savings bank primarily engaged in making home loans and seeking consumer savings. The Board of Directors decided that the most desirable alternative for Neodesha was to identify and pursue a combination with a strongly capitalized, conservatively managed savings institution that shared Neodesha's operating philosophy and community commitment. The Board of Directors determined that a stand-alone conversion, given the current market and demand for thrift institution stocks, could present substantial risk and liquidity problems in a limited market to local investors. The Board also determined that a stand alone conversion would not solve several of the long-term concerns facing Neodesha. The Board of Directors also believes that the provisions of the Plan of Conversion and the related Agreement and Plan of Reorganization, allowing Neodesha's depositors and loan customers to acquire First Independence Common Stock at a 5% discount, are beneficial to its customers. Finally, all of Neodesha's officers and employees have been offered comparable positions with First Federal, which will allow Neodesha to provide its members, and the communities it serves, with a continuity of personal service of the same high quality provided in the past. 8. Q. Will Neodesha retain its name after the Merger Conversion? A. Neodesha will retain its current name after the Conversion and Acquisition. After the Merger is completed, Neodesha operations will be conducted as part of First Independence under the name "First Federal Savings and Loan Association of Independence." 9. Q. Will I continue banking with the same people at Neodesha ? A. All Neodesha officers and employees have been offered positions with First Federal, so it is expected that the banking professionals at Neodesha whom you know and trust will continue to serve you. 10. Q. What effect will the Conversion and the Acquisition have on my accounts? A. The Conversion and the Acquisition will have no effect on the balance, maturity or withdrawability of your existing deposits at Neodesha or your obligations as a borrower from Neodesha. Your deposits will continue to be insured by the FDIC to the maximum limits available under federal law. 11. Q. How will the insurance of my deposit accounts be affected if I also have an account with First Federal? A. As noted, there will be no effect on the insurance coverage of your deposit account as a result of the Conversion and the Acquisition. Upon consummation of the Merger, depositors who had accounts at both Neodesha and First Federal prior to the Merger will retain separate insurance coverage in those accounts for a period of six months from the date of the Merger or the date when Neodesha's certificates of deposit first mature, if later. Thereafter, for purposes of FDIC insurance, Neodesha accounts held by any person will be aggregated with other First Federal accounts held by such person. ABOUT BECOMING A STOCKHOLDER IN FIRST INDEPENDENCE 12. Q. What is the Subscription Offering? A. Pursuant to the Plan of Conversion adopted by Neodesha's Board of Directors, First Independence is offering shares of its Common Stock in the Subscription Offering, first to "Eligible Account Holders" (certain account holders of record at Neodesha on December 31, 1996, second to the Neodesha ESOP, third to "Supplemental Eligible Account Holders" (certain account holders of record at Neodesha on June 30, 1998), fourth to "Other Members" of Neodesha (depositors and borrowers of record and those obligated on a loan from Neodesha on __________ who continue to hold such accounts and/or borrowings or continue to be obligated on such loan as of he "Voter Record Date", ________ __, 1998) and finally to employees, officers and directors of Neodesha who do not qualify under any of the previous categories, each of whom will receive non-transferable subscription rights to subscribe for shares in the Subscription Offering. Shares not subscribed for in the Subscription Offering will be concurrently offered in the Community Offering to natural persons residing in the local community. 13. Q. At what price will the stock be offered in the Subscription Offering? A. The exact price per share cannot be determined until after the expiration of the Subscription Offering. Subject to certain purchase limitations, customers meeting the above criteria may elect to purchase First Independence Common Stock at a price equal to 95% of the average of the bid and ask price of First Independence Common Stock on the closing of each of the ten days prior to the close of the Subscription Offering. By way of example, if the average of the closing bid and ask quotations for the Common Stock of First Independence for the 10 trading days prior to the expiration of the offering was $13.81 per share, then shares will be offered in this offering at $13.12 per share. For a number of reasons set forth in the accompanying Prospectus, those who purchase shares of First Independence Common Stock in the Subscription Offering should recognize that they may not be able to sell their shares at a price equal to or greater than the 95% Price or the First Federal Market Price. 14. Q. At what price will the stock be offered in the Community Offering? A. The price per share of stock offered in the Community Offering will be the "95% Price," which will be equal to 95% of the average of the bid and ask price of First Independence Common Stock on the closing of each of the ten days prior to the close of the Subscription Offering. For a number of reasons set forth in the accompanying Prospectus, those who purchase shares of First Independence Common Stock in the Community Offering should recognize that they may not be able to sell their shares at a price equal to or greater than the 95% Price. 15. Q. Must I pay a commission to buy First Independence Common Stock in conjunction with the Subscription or Community Offerings? A. No. Unlike shares of First Independence Common Stock which may be purchased in the open market, you will not pay a commission to buy the stock if it is purchased in the Subscription Offering. 16. Q. When may I sell the stock? A. There will not be any sale restrictions applied to shares purchased in the Subscription Offering at the 95% Price. 17. Q. How many shares of First Independence Common Stock will be offered through the Neodesha Merger Conversion? A. The number of shares of First Independence Common Stock to be offered will be determined by dividing the appraised value of Neodesha, as independently determined by Ferguson & Company ("Ferguson") following the closing of the Offerings, by the First Federal Market Price. The actual number of shares to be offered may increase or decrease depending upon changes in the appraised value and the actual market price for the First Independence Common Stock. The Plan of Conversion does not require that a minimum number of shares be sold in the offerings in order to consummate the Merger Conversion. Thus, the number of shares actually issued may be less than the number offered. 18. Q. Are the subscription rights transferable? A. No. Subscription rights granted to Neodesha's Eligible Account Holders, Supplemental Eligible Account Holders, Voting Members in the Merger Conversion are nontransferable. Under OTS regulations, no person may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of rights to subscribe for shares purchased in the Subscription Offering, or the actual underlying shares, to the account of any other person prior to the completion of the Conversion. Thus, only members of Neodesha will have the ability to exercise such rights in the Subscription Offering. 19. Q. If I choose to subscribe for stock, what is the minimum investment that I can make in the Subscription Offering and the Community Offering? A. The minimum investment that can be made in either the Subscription Offering is $250.00 Stock Order Forms must specify a minimum dollar subscription of $250.00 to assure that the subscriber will meet the minimum subscription. The pricing of the shares of First Independence Common Stock on a per share basis will be determined shortly after the expiration of the Subscription Offering, thus fixing the exact number of shares you will receive. Subscribers may not purchase partial or fractional shares. See Questions 13, 14 and 17 above. 20. Q. If I choose to subscribe for stock, what is the maximum investment that I can make in the Subscription Offering? A. The maximum number of shares that may be purchased in the Subscription Offering is that amount having an aggregate purchase price that does not exceed $100,000. 21. Q. Who is entitled to subscribe First Independence common stock? A. Rights to subscribe for common stock, subject to the purchase limitations set forth in the Plan of Conversion, will be given in order of priority to (i) depositors of Neodesha with a $50.00 minimum deposit as of December 31, 1996 (the "Eligible Account Holders"); (ii) Neodesha's employee stock ownership plan (the "ESOP"), a tax qualified employee stock benefit plan; (iii) depositors of Neodesha, who are not Eligible Account Holders, with $50.00 or more on deposit as of June 30, 1998 (the "Supplemental Eligible Account Holders"); (iv) depositors of Neodesha as of _______, 1998 ("Voting Record Date") and borrowers of Neodesha who had loans outstanding as of _______, 1998, which continue to be outstanding as of ________, 1998. ("Other Members"), and (v) directors, officers and employees of Neodesha who do not qualify under any of the above categories.. It is the responsibility of each subscriber qualifying as an Eligible Account Holder, Supplemental Eligible Account Holder or Other Member to list completely all account numbers for qualifying savings accounts as of the qualifying date on the stock order form. Shares that are not subscribed for during the Subscription Offering, if any, may be offered to the general public through a Community Offering with preference given to natural persons and trusts of natural persons who are permanent residents of Wilson and Montgomery Counties, Kansas (the "Local Community"). It is anticipated that any shares not subscribed for in the Subscription and Community Offerings will be offered to certain members of the general public through a syndicate of registered broker dealers pursuant to selected dealers agreements in a Syndicated Community Offering. 22. Q. How do I subscribe for shares of stock? A. Subscribers wishing to exercise their subscription rights must return the enclosed Stock Order Form to Neodesha's Stock Information Center. The Stock Order Form must be completed and returned along with full payment or appropriate instructions authorizing a withdrawal from a deposit account at Neodesha on or prior to the close of the Subscription Offering which will be 12:00 noon, Central time, on ___________, 1998, unless extended. 23. Q. Are the management and the Board of Directors of Neodesha subscribing for a significant amount of Common Stock in First Independence Corporation? A. Directors and Executive Officers of Neodesha currently intend to subscribe for approximately $_______ of First Independence Common Stock in the Subscription Offering. 24. Q. May I use funds currently held in a retirement account to subscribe for stock? A. Yes. If you wish to use funds held in a retirement account to subscribe for stock in the Subscription Offering, and such account is at Neodesha or at First Federal, you first must transfer those funds to a self-directed retirement account with an independent trustee that permits the account to hold stock. The Stock Information Center can assist you in this process and in directing the trustee to purchase First Independence Common Stock. Properly done, this process should not cause any adverse tax consequence to your retirement account. In addition, if your retirement account at Neodesha is invested in one or more certificates of deposit, such purchase may be done without an early withdrawal penalty. Because it takes several days to process the necessary IRA forms, a response must be received by _______, 1998 to accommodate your interest. For additional information regarding the procedures by which funds currently held in a retirement account may be used to purchase stock, please review the accompanying Prospectus or call the Stock Information Center at (316) ___-____. 25. Q. Where should Stock Order Forms be delivered? A. Subscribers in the Subscription Offering should mail or deliver a completed and signed original Stock Order Form with full payment, or instructions for an Authorized Withdrawal from eligible deposit accounts with Neodesha, to the Stock Information Center, ____________ or deliver in person to a customer service representative at the Neodesha office. 26. Q. Will I receive interest on funds I submit for my stock purchase in the Subscription Offering? A. Yes. Neodesha will pay interest at its passbook rate (currently ___%) from the date the funds are received until completion or termination of the Offering, except for subscriptions funded by Authorized Withdrawals. Funds subject to Authorized Withdrawals will remain subject to Neodesha's applicable deposit terms and will continue to earn interest at the contractual rates until completion or termination of the Subscription Offering. 27. Q. May I obtain a loan from Neodesha, First Federal or their affiliates to pay for shares of First Independence Common Stock purchased in the Merger Conversion? A. No. Federal regulations do not allow either institution or their affiliates to make loans for this purpose, but another financial institution may make a loan for this purpose. 28. Q. If I subscribe for First Independence Common Stock in the Merger Conversion, how would I go about buying additional shares, or selling shares in the aftermarket? A. First Independence Common Stock is quoted on the Nasdaq SmallCap Market under the symbol is "FFSL." Trident Securities, Inc. is a market maker in the stock and can assist you in purchasing additional shares or selling shares of First Independence Common Stock, as can any other stockbroker. 29. Q. What has been First Independence's dividend history? A. Since 1994, First Independence has paid regular cash dividends, and the last regular quarterly dividend was $0.075 per common share (or $0.30 per share when annualized). Although First Independence currently intends to continue to pay quarterly cash dividends on First Independence Common Stock, the declaration and payment of dividends, as always, will depend upon business conditions, operating results, capital and other requirements in the judgment of First Independence's Board of Directors. 30. Q. Will the FDIC insure the shares of First Independence Common Stock? A. NO. THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY. 31. Q. If I subscribe for shares and later change my mind, will I be able to get a refund? A. No. A Stock Order Form cannot be canceled, withdrawn or modified without the consent of management once it has been received by Neodesha. 32. Q. If I decide to purchase stock, when will I receive the stock certificate(s)? A. It is expected that stock certificates will be mailed within a few weeks after the conclusion of the Subscription Offering. ABOUT VOTING ON THE CONVERSION 33. Q. Has the Board of Directors of Neodesha unanimously approved the transaction? A. Yes. Neodesha's Board of Directors has unanimously approved the Plan of Conversion and urges that all members vote "For" approval. It is important that all Voting Members of Neodesha sign, date and return their proxy card(s), in the postage-paid return envelope enclosed with the Prospectus prior to the Special Meeting, currently scheduled for ________, 1998, whether or not such members expect to attend the Special Meeting. Failure to return your signed proxy card or to vote in person will have the same effect as a vote against the Plan of Conversion. 34. Q. Am I eligible to vote at the Special Meeting to be held to consider the Plan of Conversion? A. You are eligible to vote at Neodesha's Special Meeting, currently scheduled to be held on ______, 1998, if you are a "Voting Member," who are all persons who held deposit accounts or borrowings at Neodesha , or were obligated on a loan from Neodesha on, ________, 1998 and who continue to hold such account or borrowings or continue to be obligated on such loan through the Special Meeting. If you are a Voting Member, you should have received a Prospectus explaining the Merger Conversion and related matters, and a proxy card with which to vote. 35. Q. How many votes do I have as a Voting Member? A. Each account holder is entitled to one vote for each $100 or fraction thereof on deposit in the Voting Member's account on the Voting Record Date. Each borrower who holds eligible borrowings and each person who is obligated on a loan is entitled to cast one (1) vote in addition to the number of votes, if any, he or she is entitled to vote as an account holder. No Voting Member may cast more than 1,000 votes. 36. Q. If I vote "Against" the Plan of Conversion and it is approved, will I be prohibited from buying First Independence Common Stock in the Subscription Offering? A. No. Voting against the Plan of Conversion in no way restricts you from purchasing First Independence Common Stock in the Subscription Offering. 37. Q. What happens if Neodesha does not obtain enough votes to approve the Plan of Conversion? A. Neodesha's Conversion would not take place, First Independence would not acquire Neodesha and Neodesha would not merge with First Federal. Rather, Neodesha would remain an independent mutual institution operated by its Board of Directors. Neodesha customers would not have the opportunity to purchase shares of First Independence Common Stock at the 95% Price. 38. Q. As a qualifying depositor or borrower of Neodesha , am I required to vote? A. No. However, you are encouraged to vote to assure that the Merger Conversion is consummated on a timely basis. Failure to return your proxy card or to vote in person will have the same effect as a vote against the Plan of Conversion. 39. Q. What is a proxy card? A. A proxy card gives you the ability to vote without attending the Special Meeting in person. You may attend the meeting and vote at the meeting, even if you have returned your proxy, if you choose to do so. However, if you are unable to attend, but you have returned your proxy, you still will be represented by proxy. Your proxy is revocable if you decide to vote in person at the Special Meeting and under other circumstances described in the Prospectus. 40. Q. How does the Merger Conversion benefit Neodesha's members? A. The Merger Conversion will allow Neodesha to offer its members a wider range of financial services and a greater number of locations at which to bank. Also, members of Neodesha are being offered the opportunity to purchase shares of First Independence Common Stock at a discount to its market price. Additional benefits are described in the Prospectus/ Proxy Statement. 41. Q. How can I get further information concerning the stock offerings? A. You may call the Neodesha Stock Information Center, collect at (316) _______ to receive further information and/or a copy of the Prospectus, Stock Order Form and Proxy Card. This does not constitute an offer to sell or the solicitation of an offer to buy any shares of First Independence Common Stock offered in connection with the Merger Conversion, nor does it constitute the solicitation of a proxy in connection with the Merger Conversion. Offers to sell and solicitations of offers to buy are made only by means of the Prospectus and solicitations of proxies are made only by means of the Prospectus and Annexes thereto. There shall be no sale of First Independence Common Stock in any state in which any offer, solicitation of an offer or sale of First Independence Common Stock would be unlawful prior to the registration or qualification of such shares under the securities laws of any such state. A Prospectus can be obtained by calling the Neodesha Stock Information Center at (316)_______. THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. For Your Convenience In order to assist you during the stock offering period, we have established a Stock Information Center to answer your questions. Please call (collect): (316) ___-____ EX-99 16 EXHIBIT 99.5 Exhibit 99.5 EXHIBIT 99.5 ADVERTISING, TRAINING AND COMMUNITY INFORMATION MEETING MATERIALS First Independence Corporation/Neodesha Savings and Loan Association, F.S.A Merger Conversion Proposed Marketing Materials Marketing Materials for First Independence Corporation/Neodesha Table of Contents ----------------- I. Press Release A. Explanation B. Schedule C. Distribution List II. Question and Answer Brochure A. Explanation B. Method of Distribution C. Example III. IRA Mailing A. Explanation B. Method of Distribution C. Example IV. Counter Cards and Lobby Posters A. Explanation B. Quantity C. Examples V. Invitations A. Explanation B. Quantity - Method of Distribution C. Examples VI. Proxygram A. Explanation B. Example X. Letters to accompany initial mailing and other marketing materials A. Dear Voting Member letter B. Dear Friend letter C. To Community Members (Interested Investor) D. Eligible Members where shares must be offered through Broker/Dealer (Trident Letter) I. Press Releases A. Explanation In an effort to ensure that all customers, community members and other interested investors receive prompt accurate information in a simultaneous manner, Trident advises Neodesha and First Federal to forward press releases to area newspapers, radio stations, etc. at various points during the Merger Conversion process. Only press releases approved by Conversion Counsel and counsel for the Sales Agent will be forwarded for publication in any manner. B. Schedule 1. OTS Approval of Merger Conversion and SEC Effectiveness 2. Close of both the Subscription and Community Offerings C. National and Local Distribution List --------------------------------------- First Federal should provide a supplemental distribution list which includes all local newspapers that it considers to be within its market area. American Banker - --------------- One State Street Plaza New York, New York 10004 Michael Weinstein Business Wire - ------------- 212 South Tryon Suite 1460 Charlotte, federally 28281 Wall Street Journal - ------------------- World Financial Center 200 Liberty New York, New York 10004 SNL Securities - -------------- Post Office Box 2124 Charlottesville, Virginia 22902 Barrons - ------- Dow Jones & Company Barron's Statistical Information 200 Burnett Road Chicopee, Massachusetts 01020 Investors Business Daily - ------------------------ 12655 Beatrice Street Post Office Box 661750 Los Angeles, California 90066 Local Media List - ---------------- FOR IMMEDIATE RELEASE Contact: Franklin C. Miller Telephone: (316) ___-____ FIRST INDEPENDENCE CORPORATION AND NEODESHA SAVINGS AND LOAN ASSOCIATION, F.S.A ANNOUNCE APPROVAL OF MERGER CONVERSION Frank Miller, President and Chief Executive Officer of Neodesha Savings and Loan Association, F.S.A ("Neodesha") in Neodesha, Kansas, announced today that Neodesha is mailing solicitation materials in connection with its proposed conversion from a federally-chartered mutual savings bank to a federally-chartered stock savings bank at which time it would become a wholly owned subsidiary of First Independence Corporation ("First Independence"). After the acquisition, Neodesha will be merged or otherwise consolidated with First Federal Savings and Loan Association of Independence, a subsidiary of First Independence Corporation. Under the Plan of Conversion, First Independence will offer up to approximately $1,620,000 of First Independence Common Stock to certain members of Neodesha in a Subscription Offering. On August __, 1998, Neodesha received approval for the Conversion and the Acquisition from Office of Thrift Supervision (OTS). Mr. Miller stated, "Our normal day to day operations at Neodesha will continue without interruption. The Merger Conversion will not affect the terms of any existing loans or the amount or withdrawability of any depositors' savings accounts or other deposits. Depositors will continue to have their accounts insured by the FDIC as provided by law." Mr. Miller also stated, "Information relating to the proposed transaction is available in the Prospectus that has been sent to certain members of Neodesha." Neodesha's eligible account holders and borrowers will have the opportunity to purchase First Independence Common Stock through a Subscription Offering that currently is expected to close on September __, 1998. Subject to certain restrictions, eligible members in the Subscription Offering will generally be allowed to subscribe for shares of First Independence Common Stock at 95% of the average market price of First Independence Common Stock for the last ten trading days prior to the close of the Subscription Offering. The Subscription Offering is being managed by Trident Securities, Inc., of Raleigh, North Carolina. Additional questions should be directed to the Stock Information Center in Neodesha at (316) ___-____. First Independence, a Delaware corporation headquartered in Independence, Kansas, is a savings institution holding company under Kansas and federal law. First Independence Common Stock is traded on the Nasdaq SmallCap Market under the symbol "FFSL." [Close of Offering] FOR IMMEDIATE RELEASE Contact: Larry G. Spencer Telephone: (316) 331-1660 NEODESHA SAVINGS AND LOAN ASSOCIATION, F.S.A COMPLETES STOCK CONVERSION Neodesha Savings and Loan Association, F.S.A ("Neodesha") announced today the successful completion of its conversion from a federally-chartered mutual savings bank to a federally-chartered stock savings bank. Simultaneous with its conversion, Neodesha became a wholly owned subsidiary of First Independence Corporation ("First Independence"), Independence, Kansas, and in the future will be merged or otherwise consolidated with First Independence's subsidiary, First Federal Savings and Loan Association of Independence. Frank Miller, President and CEO of Neodesha, stated "We are very excited about the Merger Conversion and our affiliation with First Independence. This transaction will benefit our customers, employees and the communities we serve and has given our members the opportunity to participate in First Independence's future." Larry G. Spencer, President and Chief Executive Officer of First Independence stated, "We are really excited about further expanding our presence in the Neodesha area and in Wilson County and we look forward to assisting the customers of Neodesha in responding to their growing financial needs." First Independence Common Stock is traded on the Nasdaq (National Association of Securities Dealers Automated Quotation) SmallCap Market under the symbol "FFSL." In connection with the Merger Conversion, First Independence sold ______ shares of its Common Stock at the discounted prices of $_______ per share. The total number of outstanding shares of First Independence Common Stock is approximately _________ shares (excluding the shares to be issued in the Merger Conversion). Trident Securities, Inc. of Raleigh, North Carolina managed the sale of First Independence Common Stock in the Subscription Offering. III. Officer and Director Support Brochure A. Explanation An Officer and Director Brochure merely highlights in brochure form the stock commitments shown in the Prospectus . B. Method of Distribution There are four primary methods of distribution of Officer & Director brochures, however, regardless of the method, they are always accompanied by a Prospectus . 1. An Officer and Director brochure is sent out in the initial mailing to all members of Neodesha . 2. Officer and Director brochures are available in all branch offices of Neodesha . 3. Officer and Director brochures are distributed in information packets at community meetings. 4. Officer and Director brochures are sent out in a standard information packet to all interested investors who phone the Stock Information Center requesting information. ANTICIPATED BOARD OF DIRECTORS' AND EXECUTIVE OFFICERS' COMMITMENTS - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (ART) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Anticipated Director and Executive Officer Subscriptions for First Independence Common Stock Anticipated Aggregate Subscription Title Amount ------------------------ ------------ JoVonnah Boecker Chairman of the Board Doug Buckles Director Frank Miller President Loren Peck Director Patrick Porter Director Richard Stewart Director Jerry Webster Director ------------ All Directors and Executive Officers as a group (_ persons) $ ============ The table above sets forth certain information as to the intended subscriptions as of the date shown for First Independence Common Stock by Neodesha's Directors and Executive Officers, including their associates, and by all Executive Officers and Directors as a group. The table assumes that sufficient shares will be available to satisfy the Directors' and Officers' anticipated subscriptions. This does not constitute an offer to sell or the solicitation of an offer to buy any shares of First Independence Common Stock offered in connection with the Merger Conversion, nor does it constitute the solicitation of a proxy in connection with the Merger Conversion. Offers to sell and solicitations of offers to buy are made only by means of the Prospectus and solicitations of proxies are made only by means of the Prospectus and Annexes thereto. There shall be no sale of First Independence Common Stock in any state in which any offer, solicitation of an offer or sale of First Independence Common Stock would be unlawful prior to the registration or qualification of such shares under the securities laws of any such state. A Prospectus can be obtained by calling the Neodesha Stock Information Center at (316) _________. THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. FOR YOUR CONVENIENCE In order to assist you during the stock offering period, we have established a Stock Information Center to answer your questions, please call (collect): (316) ___-____ IV. IRA Mailing A. Explanation A special IRA mailing is proposed to be sent to all IRA customers of Neodesha following the mailing of the Prospectus to alert the customers that funds held in an IRA can be used to purchase stock. Since this transaction is not as simple as designating funds from a certificate of deposit like a normal stock purchase, this letter informs the customer that this process is slightly more detailed and involves a personal visit to Neodesha . B. Quantity One IRA letter is proposed to be mailed to each IRA customer of Neodesha . These letters would be mailed following approval by the Administrator of the Merger Conversion and after each customer has received the initial mailing containing a Prospectus. [Neodesha Letterhead] Date Dear Neodesha Retirement Account Customer: Neodesha is in the process of converting from a federally-chartered mutual savings bank to a federally-chartered stock savings bank and of being acquired by First Independence Corporation ("First Independence"). Thereafter, Neodesha will merge or otherwise consolidate with and become part of First Federal Savings and Loan Association of Independence, First Independence's wholly-owned subsidiary. Neodesha is offering eligible depositors and borrowers an opportunity to subscribe for stock of First Independence Corporation through the Subscription Offering. Your Neodesha Retirement Account has an opportunity to subscribe for First Independence Common Stock in the Subscription Offering. You should, however, consider whether common stock would be a proper asset for your Retirement Account. If you desire to purchase shares of common stock of First Independence through your IRA, Neodesha can assist you in self-directing those funds. This process can be done without an early withdrawal penalty and generally without a negative tax consequence to your IRA. If you are interested in receiving more information on self-directing your IRA, please contact our Stock Information Center at (316) _______. Because it takes several days to process the necessary IRA forms, a response must be received by _______, 1998 to accommodate your interest. Sincerely, /s/ Frank C. Miller ----------------------------------- Frank C. Miller President & Chief Executive Officer This does not constitute an offer to sell or the solicitation of an offer to buy any shares of First Independence Common Stock offered in connection with the Merger Conversion, nor does it constitute the solicitation of a proxy in connection with the Merger Conversion. Offers to sell and solicitations of offers to buy are made only by means of the Prospectus and solicitations of proxies are made only by means of the Prospectus. There shall be no sale of First Independence Common Stock in any state in which any offer, solicitation of an offer or sale of First Independence Common Stock would be unlawful prior to the registration or qualification of such shares under the securities laws of any such state. A Prospectus can be obtained by calling the Neodesha Stock Information Center at (316) _________. THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. V. Counter Cards and Lobby Posters A. Explanation Counter cards and lobby posters serve two purposes: (1) As a notice to Neodesha's customers, First Federal's customers and members of the local community that the stock offering is underway and (2) to remind the customers of the end of the Subscription Offering. Trident has learned in the past that many people forget the deadline for subscribing and therefore we suggest the use of these simple reminders. Counter cards are only used where Prospectuses/Proxy Statement may be picked up by customers to take with them. B. Quantity Approximately 3 - 4 Counter cards will be used at each office of Neodesha and at First Federal branch offices. They will be used on customer service representatives' desks. Approximately 1 - 2 Lobby posters will be used at each office of Neodesha and at First Federal branch offices. Joining Hands For A Sound Future Stock Offering Materials Available Here. First Federal Logo Neodesha Logo VI. Statement Stuffers A. Explanation The statement stuffers will be mailed with Neodesha's regular monthly statements to its customers, using the statement cycle that occurs after the Registration Statement is declared effective and the Conversion approved by the applicable regulatory authorities. They are another avenue to increase the awareness of the Merger Conversion to Neodesha's customers. Dear Customer: Neodesha Savings and Loan is in the process of converting from a federally-chartered mutual savings bank to a federally-chartered stock savings bank. In conjunction with the conversion, if the Plan of Conversion is approved by Neodesha's voting members (at a meeting scheduled for _________, 1998), Neodesha will be acquired by First Independence Corporation ("First Independence") and thereafter will be merged or otherwise consolidated with and into First Federal Savings and Loan Association of Independence (First Federal), First Independence's subsidiary. We at Neodesha are very excited about the transaction and truly believe we will be able to provide better services for our customers as a result of the combined companies' resources. As part of the transaction, current depositors, certain former depositors and borrowers of Neodesha will have the opportunity to subscribe for First Independence Corporation Common Stock. If you are a customer as defined by the Plan of Conversion and Prospectus, you are entitled to purchase, without paying a sales commission, shares of First Independence Common Stock, within certain purchase limitations, at a 5% discount to the "First Federal Market Price" (a price equal to 95% of the average price of First Independence Common Stock on the ten days prior to the close of the Subscription Offering). For various reasons set forth in the Prospectus that has been mailed to Neodesha's members, subscribers who purchase in the Community Offering at a discount should recognize that they may not be able to sell their shares at a price equal to or greater than the price paid for their shares. All officers and employees of Neodesha have been offered positions with First Federal, so it is expected that the banking professionals at Neodesha whom you know and trust will continue to serve you. The conversion and the acquisition will have no effect on the balance, maturity, or withdrawability of your existing deposits at Neodesha or your obligations as a borrower from Neodesha . A Prospectus relating to these securities is available at each of our offices or by calling our Stock Information Center at (316) _______. Sincerely, /s/ Frank C. Miller ---------------------------------------- Frank C. Miller President & Chief Executive Officer This does not constitute an offer to sell or the solicitation of an offer to buy any shares of First Independence Common Stock offered in connection with the Merger Conversion, nor does it constitute the solicitation of a proxy in connection with the Merger Conversion. Offers to sell and solicitations of offers to buy are made only by means of the Prospectus and solicitations of proxies are made only by means of the Prospectus. There shall be no sale of First Independence Common Stock in any state in which any offer, solicitation of an offer or sale of First Independence Common Stock would be unlawful prior to the registration or qualification of such shares under the securities laws of any such state. A Prospectus can be obtained by calling the Neodesha Stock Information Center at (316) _______. THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. VII. Lapel Button A. Explanation and Method of Distribution The lapel button will be worn by the employees once the information packets (including the effective Prospectus) have been mailed to customers to remind customers of the Subscription Offering and the Community Offering. "Employees" include employees of Neodesha and First Federal employees in Iredell County. Lapel buttons should be co-ordinated to be consistent with the central theme of the offering. VIII. Invitations A. Explanation In order to educate the public about the stock offering, Trident suggests holding several community meetings in various locations. In an effort to target a group of interested investors Trident requests that Directors, Officers and Employees of Neodesha and First Federal advisory directors in Iredell County submit a list of friends, customers and others who may have an interest and whom they would like to invite to a Community meeting. B. Method of Distribution Each affiliate submits his list of prospects. Invitations are sent to each affiliate's prospects through the mail. All invitations are preceded by a Prospectus, and Prospectus will be available at the community meetings. The Officers, Directors and Employees of Neodesha Savings and Loan Association, F.S.A cordially invite you to a presentation by First Independence Corporation regarding Neodesha's affiliation with First Federal and the related stock offering Please join us at the -------------------------- ___________, 1998 at 5:30 p.m. for cocktails and hors d'oeuvres R.S.V.P. (316) ________ IX. Proxygram A. Explanation A proxygram is used when the majority of votes needed to adopt the Plan of Conversion have not been obtained. The proxygram is mailed to those "target" voting members who have not previously returned their signed proxy. The targeted voting members are determined by the conversion agent. P R O X Y G R A M YOUR VOTE ON OUR MERGER CONVERSION PLAN HAS NOT BEEN RECEIVED. YOUR VOTE IS VERY IMPORTANT, PARTICULARLY BECAUSE FAILURE TO VOTE IS EQUIVALENT TO VOTING "AGAINST" THE PLAN. REMEMBER, VOTING FOR THE CONVERSION DOES NOT OBLIGATE YOU TO BUY ANY STOCK. THE BALANCE, MATURITY AND WITHDRAWABILITY OF DEPOSITS WITH NEODESHA WILL NOT CHANGE. DEPOSITS WILL REMAIN INSURED BY THE FDIC TO THE MAXIMUM EXTENT PROVIDED BY LAW. PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL OR DELIVER IT TO EITHER NEODESHA OFFICE. WE RECOMMEND UNANIMOUSLY THAT YOU VOTE "FOR" THE PLAN OF MERGER CONVERSION. THANK YOU! THE BOARD OF DIRECTORS OF NEODESHA SAVINGS AND LOAN ASSOCIATION, F.S.A X. Letters to Accompany Initial Mailing A. Explanation The appropriate letter is mailed in each of the initial mailing packets (which includes a Prospectus, if applicable) to customers and prospects. B. Quantity [Mailed to all Voting Members] _______ __, 1998 Dear Voting Member of Neodesha : Neodesha Savings and Loan Association, F.S.A (Neodesha) is in the process of converting from a federally-chartered mutual savings bank to a federally-chartered stock savings bank pursuant to a Plan of Conversion unanimously adopted by the Board of Directors of Neodesha. In conjunction with the conversion, if the Plan of Conversion is approved by Voting Members, Neodesha will become a wholly owned subsidiary of First Independence Corporation, and thereafter will be merged or otherwise consolidated with and into First Independence's subsidiary, First Federal Savings and Loan Association of Independence (First Federal). These transactions are referred to as the "Merger Conversion." Neodesha has received regulatory approval for the conversion and the acquisition from the Office of Thrift Supervision The favorable vote of the Voting Members of Neodesha at a Special Meeting to be held ___________, 1998 is required to complete the conversion. The enclosed Prospectus contains important information to assist you in voting. Also enclosed is a Proxy Card for you to submit your vote. The Neodesha Board of Directors urges you to vote FOR the Plan of Conversion. Neodesha has successfully operated as an independent mutual savings institution since 1887. Today we believe it is best for Neodesha, its customers and the communities it serves to join with First Independence. Indeed, we expect the conversion and the merger to enhance our ability to meet a wider range of your financial needs and offer you greater convenience. Let us assure you that this transaction will not affect the balance or withdrawability of any of your existing deposits or change the terms of any existing loan accounts. Depositors will continue to have their accounts insured by the FDIC to the maximum extent permitted by federal law. As a Voting Member of Neodesha (i.e., an account holder, borrower or a person obligated on a loan from Neodesha as of _________, 1998 and at the date of the Special Meeting, currently scheduled for __________, 1998), you are entitled to purchase First Independence Common Stock to be offered in the conversion on a priority basis, without paying a sales commission, at a price equal to 95% of the average price of First Independence Common Stock on the ten days prior to the close of the Subscription Offering (called the "First Federal Market Price"). For various reasons set forth in the accompanying Prospectus, subscribers who purchase at a discount should recognize that they may be unable to sell their shares at a price equal to or greater than the price they paid. Voting Members are not required to purchase shares in order to be eligible to vote. In order to assist you in deciding whether to subscribe for shares of First Independence Common Stock, please see the enclosed Prospectus, For your convenience, we have established a Stock Information Center. If you have any questions, please call us collect at (316) ________. To submit your vote on the Plan of Conversion, please complete, date, sign and return the enclosed Proxy Card. If you decide to purchase shares, you must return the enclosed Stock Order Form properly completed with full payment to the Stock Information Center or to our branch office not later than 12:00 p.m, Kansas time on __________, 1998 (unless the deadline is extended). Very truly yours, /s/ Frank C. Miller ------------------------------------- Frank C. Miller President and Chief Executive Officer This does not constitute an offer to sell or the solicitation of an offer to buy any shares of First Independence Common Stock offered in connection with the Merger Conversion, nor does it constitute the solicitation of a proxy in connection with the Merger Conversion. Offers to sell and solicitations of offers to buy are made only by means of the Prospectus and solicitations of proxies are made only by means of the Prospectus and Annexes thereto. There shall be no sale of First Independence Common Stock in any state in which any offer, solicitation of an offer or sale of First Independence Common Stock would be unlawful prior to the registration or qualification of such shares under the securities laws of any such state. A Prospectus and its Annexes can be obtained by calling the Neodesha Stock Information Center at (316) _________. THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY. [Mailed to Eligible Account Holders who are not Voting Members] _____________, 1998 Dear Friend: Neodesha Savings and Loan Association, F.S.A is in the process of converting from a federally-chartered mutual savings bank to a federally-chartered stock savings bank. In conjunction with the conversion, Neodesha will become a wholly-owned subsidiary of First Independence Corporation, and thereafter will be merged or otherwise consolidated with and into First Independence's subsidiary, First Federal Savings and Loan Association of Independence. These transactions are collectively referred to herein and in the Prospectus as the "Merger Conversion." Neodesha has received regulatory approval for the conversion and the acquisition from the Office of Thrift Supervision. Neodesha has successfully operated as an independent mutual savings institution since 1887. Today we believe it is best for Neodesha, its customers and the communities it serves to join with First Independence. Indeed, we expect the Merger Conversion to enhance our ability to meet a wider range of your financial needs and offer you greater convenience. Let us assure you that if you still have an account with Neodesha , this transaction will not affect the balance or withdrawability of any of your existing deposits or change the terms of any existing loan accounts. Depositors will continue to have their accounts insured by the FDIC to the maximum extent permitted by federal law. Since you have been one of our valued members, you have the opportunity to invest in the future by subscribing to purchase First Independence Common Stock without paying a sales commission. Subject to certain purchase limitations, certain Neodesha account holders on) are entitled to purchase, without paying a sales commission, shares of First Independence Common Stock at a 5% discount equal to 95% of the average price of First Independence Common Stock on the ten days prior to the close of the Subscription Offering. For various reasons set forth in the accompanying Prospectus, subscribers who purchase at a discount should recognize that they may be unable to sell their shares at a price equal to or greater than the price they paid. Enclosed is a Prospectus that describes First Independence and the shares of First Independence Common Stock offered in the Merger Conversion. Please review it carefully so you can make an informed decision. For your convenience, we have established a Stock Information Center. If you have any questions, please call us collect at (316) _________. If you decide to purchase shares, you must return the enclosed Stock Order Form properly completed with full payment to the Stock Information Center or to our branch office not later that 12:00 p.m. Kansas time on __________, 1998 (unless the deadline is extended). Sincerely, /s/ Frank C. Miller ------------------------------------- Frank C. Miller President and Chief Executive Officer This does not constitute an offer to sell or the solicitation of an offer to buy any shares of First Independence Common Stock offered in connection with the Merger Conversion, nor does it constitute the solicitation of a proxy in connection with the Merger Conversion. Offers to sell and solicitations of offers to buy are made only by means of the Prospectus and solicitations of proxies are made only by means of the Prospectus and Annexes thereto. There shall be no sale of First Independence Common Stock in any state in which any offer, solicitation of an offer or sale of First Independence Common Stock would be unlawful prior to the registration or qualification of such shares under the securities laws of any such state. A Prospectus can be obtained by calling the Neodesha Stock Information Center at (316) _________. THE SHARES OF FIRST INDEPENDENCE COMMON STOCK OFFERED IN THE MERGER CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. November __, 1993 Dear Interested Investor: Neodesha Savings and Loan Association, F.S.A. is pleased to announce that we have received regulatory approval to proceed with our plan to convert from a federally-chartered mutual savings bank to a federally-chartered stock savings bank pursuant to a Plan of Conversion adopted by the Board of Directors of Neodesha. In conjunction with the conversion, Neodesha will become a wholly-owned subsidiary of First Independence Corporation, and thereafter will merge or otherwise consolidate with First Independence's subsidiary, First Federal Savings and Loan Association of Independence. Enclosed is a Prospectus which fully describes First Independence, its management, board and financial condition. Please review it carefully before you make an investment decision. For your convenience we have established a Stock Information Center. If you have any questions, please call the Stock Information Center at (316) ________. Very truly yours, /s/ Frank C. Miller ------------------------------------- Frank C. Miller President and Chief Executive Officer This does not constitute an offer to sell or the solicitation of an offer to buy any shares of First Independence Common Stock offered in connection with the Merger Conversion, nor does it constitute the solicitation of a proxy in connection with the Merger Conversion. Offers to sell and solicitations of offers to buy are made only by means of the Prospectus and solicitations of proxies are made only by means of the Prospectus and Annexes thereto. There shall be no sale of First Independence Common Stock in any state in which any offer, solicitation of an offer or sale of First Independence Common Stock would be unlawful prior to registration or qualification of such shares under the securities laws of any such state. A Prospectus can be obtained by calling the Neodesha Stock Information Center at (316) _________. THE SHARES OF FIRST INDEPENDENCE COMMON STOCK BEING OFFERED ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. (Trident Letterhead) ___________, 1998 To Members and Friends of Neodesha Savings and Loan Association: Trident Securities, Inc., a member of the National Association of Securities Dealers, Inc., is assisting Neodesha Savings and Loan Association (Neodesha) in its conversion to a federally-chartered stock savings bank. In conjunction with the conversion, Neodesha will then become a wholly owned subsidiary of First Independence Corporation, and thereafter will be merged or otherwise consolidated with and into First Independence's subsidiary, First Federal Savings and Loan Association of Independence. These transactions are collectively referred to herein and in the Prospectus as the "Merger Conversion." At the request of Neodesha, we are enclosing materials explaining the conversion process and your right to subscribe for common shares of First Independence Corporation. Please read the enclosed offering materials carefully before subscribing for stock. If you have any questions, please call the Stock Information Center at (316) _________. Sincerely, TRIDENT SECURITIES, INC. Enclosures The shares of common stock offered in the conversion are not savings accounts or deposits and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. This is not an offer to sell or a solicitation of an offer to buy stock. The offer is made only by the Prospectus. There shall be no sale of stock in any state in which any offer, solicitation of an offer or sale of stock would be unlawful. EX-99 17 EXHIBIT 99.6 Exhibit 99.6 EXHIBIT 99.6 LETTER OF APPRAISER WITH RESPECT TO SUBSCRIPTION RIGHTS July 1, 1998 Boards of Directors Neodesha Savings and Loan Association, FSA, and First Independence Corporation Myrtle & Sixth Streets Independence, Kansas 67301 Merger Conversion, Subscription Rights -------------------------------------- Dear Directors: Terms used in this letter not otherwise defined herein have the same meanings for such terms in the plan by which Neodesha Savings and Loan Association, FSA ("Neodesha") is combining with First Federal Savings and Loan Association of Independence ("First Federal" or the "Association") through the conversion of Neodesha from the mutual to the stock form of organization and the simultaneous merger of Neodesha with and into the Association (the "Merger Conversion"). Simultaneously, First Independence Corporation (the "Company") will issue shares of common stock. We understand that in accordance with the Plan of Merger Conversion, the Non-transferable Subscription Rights to purchase shares of Common Stock in the Company ("Subscription Rights") are to be issued, in order of priority, to: (1) Eligible Account Holders, (2) Tax-Qualified Employee Plans, (3) Supplemental Eligible Account Holders, (4) Other Members, and (5) Officers, directors and employees of Neodesha. Concurrently, and subject to the prior rights of holders of Subscription Rights, the Company is offering its common stock for sale in a community offering to members of the general public (the "Community Offering"). It is anticipated that shares not subscribed for in the Subscription and Community Offering will be offered to certain members of the general public on a best efforts basis through a selected dealers arrangement (the "Syndicated Community Offering"). The actual purchase price per share can not currently be determined because it will be equal to 95% of the average market price of First Independence Corporation common stock (based on the average of closing bid and ask quotations on the Nasdaq SmallCap Market) for the ten trading days ending on the expiration date of the offering. Based solely upon our observation that the Subscription Rights will be available to all such parties without cost, will be legally non-transferable and of short duration, and will afford such parties the right only to purchase shares of Common Stock at the same price to be paid by members of the general public in the Community Offering and through selected dealers in the Syndicated Community Offering, but without undertaking any independent investigation of state or federal laws or the position of the Internal Revenue Service with respect to such issue, it is our opinion: 1. the Subscription Rights will have no ascertainable market value; and 2. the price at which the Subscription Rights are exercisable will not be more or less than the pro forma market value of the shares upon issuance. Boards of Directors July 1, 1998 Page 2 Changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates and other external forces (e.g., natural disasters or significant global events) occur from time to time and may materially affect the value of thrift stocks as a whole or the Holding Company's value. Accordingly, no assurance can be given that persons who subscribe for shares of Common Stock issued in the Merger Conversion will thereafter be able to sell such shares at the same price paid in the Subscription Offering, the Community Offering or the Syndicated Community Offering. Sincerely, /s/ Charles M. Hebert Charles M. Hebert Principal -----END PRIVACY-ENHANCED MESSAGE-----