As filed with the Securities and Exchange Commission on December 16, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST FEDERAL OF OLATHE BANCORP, INC.
(Name of Small Business Issuer in Its Charter )
Kansas 6712 (To be applied for)
(State or Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Code Identification No.)
Organization) Number)
100 East Park Street
Olathe, Kansas 66061
(913) 782-0026
(Address and Telephone Number of Principal Executive Offices)
100 East Park Street
Olathe, Kansas 66061
(Address of Principal Place of Business or Intended Principal Place of Business)
Mitch Ashlock
100 East Park Street
Olathe, Kansas
(913) 782-0026
(Name, Address and Telephone Number of Agent for Service)
Copies to:
Robert I. Lipsher, Esq.
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Approximate date of proposed sale to the public: As soon as practicable after
this registration statement becomes effective.
If this Form is filed to register additional shares 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 the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount to be maximum maximum
Title of each class of registered offering price aggregate Amount of
securities to be registered per share offering price registration fee
(1)
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value per share 859,625 shares $10.00 $8,596,250 $2,390
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(1) Estimated solely for the purpose of calculating the registration fee.
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 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 Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
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PROSPECTUS
First Federal Of Olathe Bancorp, Inc.
(Proposed holding company for First Federal Savings
and Loan Association of Olathe)
Up to 747,500 Shares of Common Stock
First Federal Savings and Loan Association of Olathe is converting from
the mutual to the stock form of organization. As part of this conversion, First
Federal of Olathe Bancorp, Inc. is offering its shares of common stock. First
Federal will become a subsidiary of First Federal of Olathe Bancorp, Inc., a
Kansas corporation we recently formed.
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TERMS OF THE OFFERING
We are offering a minimum of 552,500 shares and a maximum of 747,500
shares. The maximum can be increased by up to 15% to 859,625 shares with
regulatory approval.
Per Share Total
--------- -----
o Purchase price:
minimum to maximum,
as adjusted.................. $10.00 $5,525,000 to $8,596,250
o Estimated offering expenses,
including underwriting
discounts and commissions:
minimum to maximum,
as adjusted.................. $0.91 to $0.58 $500,000
o Estimated net proceeds:
minimum to maximum,
as adjusted.................. $9.09 to $9.42 $5,025,000 to $8,096,250
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Please refer to "Risk Factors" beginning on page __ of this document.
An investment in the common stock is subject to various risks, including
possible loss of principal.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities commission has approved or disapproved of
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The shares of common stock offered hereby are not savings accounts or
deposits and are not insured by the Federal Deposit Insurance Corporation or any
other government agency.
We have applied to quote the common stock on the Over-the-Counter
Electronic Bulletin Board under the symbol "_____." The underwriter, Trident
Securities, Inc., will use its best efforts to assist First Federal of Olathe
Bancorp in selling at least the minimum number of shares but does not guarantee
that this number will be sold. Trident Securities is not obligated to purchase
any shares of common stock in the offering. Trident Securities intends to make a
market in the common stock.
We have granted depositors and borrowers of First Federal as of certain
dates the right to purchase our stock before we sell any shares to the general
public. If you wish to exercise this right, we must receive your order no later
than 12:00 noon, central time, on March __, 2000. We will offer any remaining
shares in a community offering to persons who do not have these priority rights.
We may terminate the community offering at any time without notice. We will
place funds we receive for stock purchases in a separate savings account at
First Federal, and we will pay interest at our passbook rate on those funds for
the period the funds are held until we complete or terminate the offering.
For assistance, please contact the stock information center at____________.
Trident Securities, Inc.
The date of this Prospectus is February ___, 2000
TABLE OF CONTENTS
Questions and Answers about the Stock Offering............................ 1
Summary ................................................................. 3
Risk Factors.............................................................. 6
Selected Financial Data................................................... 10
Proposed Management Purchases............................................. 12
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 13
Market for Common Stock................................................... 14
Historical and Pro Forma Regulatory Capital Compliance.................... 14
Capitalization............................................................ 16
Pro Forma Data............................................................ 17
First Federal Savings and Loan Association of Olathe
Statements of Income and Comprehensive Income.................... 22
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 23
Business of First Federal of Olathe Bancorp, Inc.......................... 33
Business of First Federal................................................. 33
Regulation................................................................ 47
Taxation ................................................................. 52
Management................................................................ 53
The Conversion............................................................ 60
Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions............................ 72
Description of Capital Stock.............................................. 76
Legal and Tax Matters..................................................... 78
Experts ................................................................. 78
Where Can You Find More Information....................................... 78
Index to Financial Statements.............................................F-1
ii
[Insert Map]
iii
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
The following are frequently asked questions. You should read this
entire prospectus, including the "Risk Factors" beginning on page __ and "The
Conversion" beginning on page __, for more information.
Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A. We are offering for sale up to 747,500 shares of common stock at a
subscription price of $10.00 per share. We must sell at least 552,500
shares. If the appraised market value of the common stock changes due to
market or financial conditions, then, without notice to you, we may be
required to sell up to 859,625 shares.
Q. WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER TO PURCHASE
THE STOCK?
A. There are many important factors for you to consider before making an
investment decision. Therefore, you should read this entire prospectus
before making your investment decision.
Q. WILL DIVIDENDS BE PAID ON THE STOCK?
A. We intend to pay semi-annual cash dividends on the common stock at an
initial rate of $.40 per share per annum. We expect to begin paying
dividends at the end of fiscal 2000. However, there can be no assurance
that dividends will be paid or continue in the future.
Q. WILL I BE ABLE TO SELL MY STOCK AFTER I PURCHASE IT?
A. We anticipate having our stock quoted on the Over-the-Counter Electronic
Bulletin Board under the symbol "______." However, we expect the market for
our stock will be limited. There can be no assurance that someone will want
to buy your shares or that you will be able to sell them for more money
than you originally paid. There may also be a wide spread between the bid
and asked price for our stock.
Q. WILL MY STOCK BE COVERED BY DEPOSIT INSURANCE OR GUARANTEED BY ANY
GOVERNMENT AGENCY?
A. No. Unlike insured deposit accounts at First Federal, our stock will not be
insured or guaranteed by the Federal Deposit Insurance Corporation, or
FDIC, or any other government agency.
Q. WHEN IS THE DEADLINE TO SUBSCRIBE FOR STOCK?
A. We must receive a properly signed order form with the required payment on
or before 12:00 noon, central time, on March __, 2000, the subscription
offering expiration date.
Q. CAN THE OFFERING BE EXTENDED?
A. If we do not receive sufficient orders, we can extend the offering beyond
March ___, 2000. We must complete any offering to general members of the
public within 45 days after the close of the subscription offering, unless
we receive regulatory approval to further extend the offering. No single
extension can exceed 45 days, and the extensions may not go beyond March
__, 2002.
Q. HOW DO I PURCHASE THE STOCK?
A. First, you should read this prospectus carefully. Then, complete and return
the enclosed stock order and certification form, together with your
payment. Subscription orders may be delivered in person to our office
during regular banking hours, or by mail in the enclosed envelope marked
STOCK ORDER RETURN. Subscription orders received after the subscription
offering expiration date may be held for participation in any community
offering. If the stock offering is not completed by May __, 2000 and is not
extended, then all funds will be returned promptly with interest, and all
withdrawal authorizations will be cancelled.
Q. CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO SUBSCRIBE FOR STOCK?
A. No. After we receive your order form and payment, you may not cancel or
modify your order. However, if we extend the offering beyond May __, 2000,
you will be able to change or cancel your order. If you cancel your order,
you will receive a prompt refund plus interest.
Q. HOW CAN I PAY FOR THE STOCK?
A. You have three options: (1) pay cash if it is delivered to us in person;
(2) send us a check or money order; or (3) authorize a withdrawal from your
deposit account at First Federal including a certificate of deposit,
without any penalty for early withdrawal. No wire transfers will be
accepted. Please do not send cash in the mail.
Q. WILL I RECEIVE INTEREST ON MY SUBSCRIPTION PAYMENT?
A. Subscriptions payments will be placed in an interest-bearing deposit
account at First Federal, and will earn interest at our passbook rate.
Depositors who elect to pay by withdrawal will continue to receive interest
on their accounts until the funds are withdrawn.
Q. WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES OF STOCK TO FILL ALL ORDERS?
A. If there is an oversubscription, then you may not receive any or all of the
shares you want to purchase.
Q. WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE STOCK
OFFERING?
A. For answers to other questions we encourage you to read this prospectus in
its entirety. Questions may also be directed to our Stock Information
Center at ______________ Monday through Friday, between the hours of _____
a.m. and ______ p.m.
To ensure that each person receives a prospectus at least 48 hours
prior to the expiration date of March __, 2000 in accordance with federal law,
no prospectus will be mailed any later than five days prior to March __, 2000 or
hand delivered any later than two days prior to March __, 2000.
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to financial statements of First Federal.
First Federal of Olathe Bancorp, Inc.
We formed First Federal of Olathe Bancorp in December 1999 as a Kansas
corporation. First Federal of Olathe Bancorp will be the holding company for
First Federal following the conversion. First Federal of Olathe Bancorp is not
an operating company and has not engaged in any significant business to date.
Our executive office is located at 100 East Park Street, Olathe, Kansas 66061,
and our telephone number is (913) 782-0026.
First Federal Savings and Loan Association of Olathe
Founded in 1923, we are a community and customer oriented federally
chartered savings association located in Olathe, Kansas. We emphasize personal
service for our customers, and believe that our ability to make prompt responses
to customer needs and inquiries is an important element in attracting business.
Our business consists principally of attracting deposits from the
general public and using those funds to originate fixed-rate, one- to
four-family residential mortgage loans with terms of 15 years or less. We also
invest in various investment securities. Our profitability depends primarily on
our net interest income, which is the difference between the income we receive
on our loans and other assets and our cost of funds, which consists of the
interest we pay on deposits and borrowings. At September 30, 1999, we had total
assets of $46.2 million, deposits of $35.2 million and total equity of $9.0
million.
Going forward, we intend to expand and diversify our lending programs
to include longer-term fixed-rate residential mortgage loans with terms of up to
25 years, and commercial real estate loans. Additionally, we may implement a
program to purchase adjustable rate loans, on a limited basis, and we may hire
additional staff to expand our lending efforts.
Our Conversion to Stock Form
The conversion is a series of transactions by which we will convert
from our current status as a mutual savings association to a stock savings
association. Following the conversion, we will retain our current name "First
Federal Savings and Loan Association of Olathe," but we will be a subsidiary of
First Federal of Olathe Bancorp. As a stock savings association, we intend to
continue to follow our same business strategies, and we will be subject to the
regulation and supervision of the Office of Thrift Supervision, the Federal
Deposit Insurance Corporation and the Securities and Exchange Commission.
As part of the conversion, we are offering between $5,525,000 and
$7,475,000 of First Federal of Olathe Bancorp common stock. The purchase price
will be $10.00 per share. All investors will pay the same price per share in the
offering. Subject to regulatory approval, we may increase the amount of stock to
be sold to $8,596,250 without any further notice to you if market or financial
conditions change before we complete the conversion.
With the holding company structure, we will be able to plan and develop
long-term growth opportunities and to access the capital markets more easily in
the future. The offering will increase our capital and the amount of funds
available to us for lending and investment. This will give us greater
flexibility to diversify operations and expand the products and services we
offer, if we choose to do so. In addition, we will be able to compensate our
directors, officers and employees in the form of stock.
How We Determined the Offering Range
The offering range is based on an independent appraisal of our pro
forma market value following the conversion by RP Financial, LC., a firm
experienced in appraisals of savings institutions. The pro forma market value is
our estimated market value assuming the sale of shares in this offering. RP
Financial has estimated that in its opinion as of December 10, 1999, the value
was between $5,525,000 and $7,475,000, with a midpoint of $6,500,000. The
appraisal was based in part upon our financial condition and operations and the
effect of the additional capital we will raise from the sale of common stock in
this offering.
3
Subject to regulatory approval, we may increase the amount of common
stock offered by up to 15%. Accordingly, at the minimum of the offering range,
we are offering 552,500 shares, and at the maximum, as adjusted, of the offering
range we are offering 859,625 shares. The appraisal will be updated before we
complete the conversion. If the pro forma market value of the common stock at
that time is either below $5,525,000 or above $8,596,250, we will notify you,
and you will have the opportunity to modify or cancel your order. See "The
Conversion--Stock Pricing and Number of Shares to be Issued" for a description
of the factors and assumptions used in determining the stock price and offering
range.
Two measures investors use to analyze a financial institution stock are
the ratio of the offering price to the issuer's book value and the ratio of the
offering price to the issuer's annual net income. RP Financial considered these
ratios, among other factors, in preparing its appraisal. Book value is the same
as total equity, and represents the difference between the issuer's assets and
liabilities. The ratio of the offering price to First Federal of Olathe
Bancorp's pro forma book value ranges from 41.31% to 53.48%, and the offering
price represents between 5.7 and 8.2 times First Federal of Olathe Bancorp's pro
forma annualized earnings for the nine months ended September 30, 1999. The
ratio of the offering price to First Federal of Olathe Bancorp's pro forma book
value ranges from 42.81% to 55.07%, and the offering price represents between
5.8 and 8.5 times First Federal of Olathe Bancorp's pro forma earnings for the
year ended December 31, 1998. See "Pro Forma Data" for a description of the
assumptions we used in making these calculations.
The peer group selected by RP Financial had a price to book ratio of
83.91% and traded at 12.91 times the last 12 months earnings, which are higher
than our ratios on a pro forma basis. Our independent appraiser determined that
our value should be lower than the ratios for the peer group would suggest. RP
Financial reached this conclusion based on several factors, including our
smaller asset size and pro forma market capitalization relative to the peer
group, the probability that our operating expenses will increase as a public
company, the anticipated absence of an active market for our stock and because
several other recently converted institutions are still trading below their
initial offering prices.
The independent appraisal does not indicate market value. Do not assume
or expect that First Federal's discounted valuation as indicated above means
that the common stock will trade at or above the $10.00 purchase price after the
conversion.
Use of Proceeds from the Sale of Our Common Stock
First Federal of Olathe Bancorp will use 50% of the net offering
proceeds to buy all of the common stock of First Federal and will retain the
remaining net proceeds for general business purposes. These purposes may include
investment in securities, paying cash dividends or repurchasing shares of its
common stock. First Federal will use the funds it receives for general business
purposes, including originating loans and purchasing securities.
First Federal of Olathe Bancorp will also loan an amount equal to 8% of
the total dollar value of the stock to be issued in the conversion to the
employee stock ownership plan to fund its purchase of common stock in the
conversion.
First Federal of Olathe Bancorp and First Federal may also use the
proceeds of the offering to expand and diversify their businesses, although they
do not have any specific contracts, understandings or arrangements for the
acquisition of other financial service companies or their assets.
The Amount of Stock You May Purchase
The minimum purchase is 25 shares. No individual, or individuals
through a single account, may purchase more than $100,000 of stock. If any of
the following persons purchase stock, then their purchases when combined with
your purchases cannot exceed $200,000:
o relatives living in your house
o companies, trusts or other entities in which you have an interest
or hold a position
o other persons who may be acting together with you
We may decrease or increase the maximum purchase limitation without notifying
you.
4
How We Will Prioritize Orders If We Receive Orders for More Shares Than Are
Available for Sale
You might not receive any or all of the shares you order. If we receive
orders for more shares than are available, we will allocate stock to the
following persons or groups in order of priority:
o ELIGIBLE ACCOUNT HOLDERS - Our depositors with a balance of at
least $50 at the close of business on June 30, 1998. Any
remaining shares will be offered to:
o OUR TAX QUALIFIED EMPLOYEE PLANS. Any remaining shares will be
offered to:
o SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS - Our depositors with a
balance of at least $50 at the close of business on December 31,
1999. Any remaining shares will be offered to:
o OTHER MEMBERS - Our depositors at the close of business on
January __, 2000 and our borrowers as of January __, 2000 who
continue to be borrowers as of January __, 2000. Any remaining
shares will be offered to:
o OUR DIRECTORS, OFFICERS AND EMPLOYEES - These individuals may
also be entitled to purchase stock in the above categories.
If the above persons do not subscribe for all of the shares offered, we
will offer the remaining shares to the general public, giving preference to
persons who reside in Johnson County, Kansas.
Your Subscription Rights Are Not Transferable
You may not assign or sell your subscription rights. Any transfer of
subscription rights is prohibited by law. If you exercise subscription rights,
you will be required to certify that you are purchasing shares solely for your
own account and that you have no agreement or understanding regarding the sale
or transfer of shares. We intend to pursue any and all legal and equitable
remedies if we learn of the transfer of any subscription rights. We will reject
orders that we determine to involve the transfer of subscription rights.
Benefits to Management from the Offering
Our full-time employees will benefit from the offering through our
employee stock ownership plan. This plan will buy shares of stock with a portion
of the proceeds of the offering and then allocate the stock to employees over a
period of time, at no cost to the employees. You can find more information about
our employee stock ownership plan by reading the section of this document
entitled "Management - Benefit Plans - Employee Stock Ownership Plan and Trust."
Following the conversion, we also intend to implement a recognition and
retention plan and a stock option plan, which will benefit our officers and
directors. These two plans will not be implemented unless we receive stockholder
approval of the plans at least six months after the conversion. If our
recognition and retention plan is approved by stockholders, our officers and
directors will be awarded shares of common stock at no cost to them. If our
stock option plan is approved by stockholders, stock options will be granted at
no cost to directors and officers, but such persons will be required to pay the
applicable exercise price at the time of exercise in order to receive the shares
of common stock.
The following table summarizes the benefits that directors, officers
and employees may receive from the conversion at the midpoint of the offering
range:
Value of Shares
Individuals Eligible % of Based on Midpoint
Plan to Receive Awards Shares Sold of Offering Range
---- ----------------- ----------- -----------------
Employee stock ownership plan All employees 8% $520,000
Recognition and retention plan Directors and officers 4%(1) $260,000
Stock option plan Directors and officers 10% (2)
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(1) In the event we initially implement the recognition and retention plan more
than 12 months after the conversion, the recognition and retention plan may
authorize the award of up to 5% of the shares issued in the conversion.
(2) Stock options will be granted with a per share exercise price at least
equal to the market price of our common stock on the date of grant. The
value of a stock option will depend upon increases, if any, in the price of
our stock during the life of the stock option.
5
When combined with the proposed stock purchases by our directors and
officers, the above plans may give our directors and officers effective voting
control following the conversion. See "Risk Factors - Our Directors and Officers
May Have Effective Voting Control."
We intend to enter into a three-year employment agreement with Mitch
Ashlock, the President and Chief Executive Officer of First Federal. The
agreement provides that Mr. Ashlock would receive severance payments equal to
three times the annual rate of base salary at termination of employment plus the
highest annual cash bonus paid to him during the prior three years if First
Federal of Olathe Bancorp is acquired and he loses his job in the acquisition or
if he loses his job upon the occurrence of certain other events. If severance
was required to be paid in 2000 after completion of the conversion, Mr. Ashlock
would receive severance payments of approximately $270,000.
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in deciding whether to purchase
our common stock.
Higher Interest Rates Would Hurt Our Profitability
Our ability to earn a profit depends on our net interest income, which
is the difference between the interest income we earn on our interest-earning
assets, such as mortgage loans, and the interest expense we pay on our
interest-bearing liabilities, such as deposits and borrowings. Our profitability
depends on our ability to manage our assets and liabilities during periods of
changing interest rates.
We have sought to maximize our net interest income by emphasizing
investment in higher-yielding fixed-rate mortgage loans. Management believes
that the higher yields available from such investments offset the increased
exposure to interest rate fluctuations associated with investments in such
assets. We have sought to manage our exposure to interest rate volatility by
increasing the maturity of our liabilities as market conditions allow, by
maintaining high capital levels and by emphasizing the origination of fixed-rate
mortgage loans with terms of 15 years or less. Notwithstanding these steps, our
cumulative one-year interest rate sensitivity gap as a percentage of total
assets was a negative 39.19% at September 30, 1999, a relatively high level.
Based on this negative gap, during a period of declining interest rates, our
interest-earning assets could be expected to reprice at a slower rate than our
interest-earning liabilities, which would have a positive effect on net interest
income. Conversely, in a period of rising interest rates, the yields on our
assets could be expected to increase at a slower pace than the cost of our
interest-bearing liabilities, thereby negatively affecting net interest income.
Thus, a sustained increase in market interest rates could adversely
affect our earnings. Because all of our loans have fixed interest rates, our net
interest income could be significantly adversely affected when the rates we pay
on deposits and borrowings are increasing. In addition, the market value of our
fixed-rate assets would decline if interest rates increase.
We Anticipate a Low Return on Our Equity and Increased Non-interest Expenses
Net income divided by equity, known as "return on equity," is a ratio
many investors use to compare the performance of a financial institution to its
peers. We expect our return on equity to decrease as compared to our performance
in recent years until we are able to increase our balance sheet by adding loans,
thereby increasing net interest income. Our return on equity will be reduced by
increased equity from the conversion and increased expenses due to the costs of
being a public company, added expenses associated with our employee stock
ownership plan, and, later on, our recognition and retention plan. Our expenses
will also increase if we hire additional staff following the conversion. We may
hire an additional employee to expand our lending efforts.
We Rely on One Key Officer
Our only executive officer is Mitch Ashlock, the President and Chief
Executive Officer. The loss of Mitch Ashlock would have an adverse effect on us,
especially since we currently only have three employees. We intend to enter into
a three-year employment agreement with Mr. Ashlock, but we do not intend to
obtain a key- man life insurance policy on him.
We May Not Be Successful in Diversifying and Expanding Our Lending Activities
Our business plan adopted in connection with the conversion transaction
contemplates an expansion of our lending activities to include fixed-rate
residential mortgage loans with terms of up to 25 years and commercial real
6
estate loans. We cannot assure you that we will be able to market these
additional loan products successfully and profitably. Additionally, commercial
real estate loans involve a greater risk of loss than loans secured by one- to
four- family residential real estate.
We Intend to Remain Independent
Since we intend to remain an independent financial institution, it is
unlikely that we will be acquired in the foreseeable future. Accordingly, you
should not purchase our common stock with any expectation that a takeover
premium will be paid to you in the near term.
There Is Strong Competition Within Johnson County
We conduct most of our business in Johnson County, Kansas. Competition
in the banking and financial services industry in Johnson County is intense. Our
profitability depends in large part upon our continued ability to successfully
compete. We compete in Johnson County with commercial banks, savings
institutions, credit unions, finance companies, mutual funds, insurance
companies, and brokerage and investment banking firms. Many of these competitors
have substantially greater resources and lending limits than we do and offer
certain services that we do not or cannot provide. This strong competition may
limit First Federal's ability to grow in the future.
Our Stock Value May Suffer from Our Ability to Impede Potential Takeovers
Provisions in our corporate documents and in Kansas corporate law, as
well as certain federal regulations, may make it difficult and expensive to
pursue a tender offer, change in control or attempt a takeover that our board of
directors opposes. As a result, you may not have an opportunity to participate
in such a transaction, and the trading price of our stock may not rise to the
level of other institutions that are more vulnerable to hostile takeovers.
Anti-takeover provisions include:
o restrictions on acquiring more than 10% of our common stock and
limitations on voting rights
o the election of members of the board of directors to three-year
terms
o the absence of cumulative voting by stockholders in the election
of directors
o provisions governing nominations of directors by stockholders
o provisions governing the submission of stockholder proposals
o provisions restricting special meetings of stockholders
o our ability to issue preferred stock and additional shares of
common stock without stockholder approval
o super-majority voting provisions for the approval of certain
business combinations
o super-majority voting provisions to remove directors without
cause or to amend our corporate documents
These provisions also will make it more difficult for an outsider to remove our
current board of directors or management. See "Restrictions on Acquisition of
First Federal of Olathe Bancorp and First Federal" for a description of
anti-takeover provisions in our corporate documents and under Kansas law and
federal regulations.
Our Directors and Officers May Have Effective Voting Control
Our employee stock ownership plan and recognition and retention plan
will give control of 12% of our stock to our directors, officers and employees
at no cost to them, assuming the recognition and retention plan is subsequently
approved by stockholders. In addition, our directors and officers intend to
purchase 41,500 shares in the conversion, or 7.51% at the minimum and 5.55% at
the maximum of the offering.
The above benefit plans and purchases will give our directors and
officers control of approximately 19.51% to 17.55% of our stock. Holders of 20%
of our stock can block the removal of directors without cause, the approval of
certain business combinations, or amendments to our articles of incorporation.
7
If stockholders subsequently approve our proposed stock option plan,
our directors, officers and employees may be granted options to purchase up to
10% of our stock. These options will generally be for 10 years, with a per share
exercise price equal to the market price of our stock on the date of grant.
Directors, officers and employees will benefit if the stock price increases
after the date of grant, and they may be able to exercise their options at
prices that are less than the market price on the date of exercise.
Our Employee Stock Benefit Plans Will Increase Our Costs
We anticipate that our employee stock ownership plan will purchase 8%
of the common stock issued in the conversion, with funds borrowed from First
Federal of Olathe Bancorp. The cost of acquiring the employee stock ownership
plan shares will be between $442,000 at the minimum of the offering range and
$687,700 at the adjusted maximum of the offering range. We will record annual
employee stock ownership plan expenses in an amount equal to the fair value of
shares committed to be released to employees. If shares of common stock
appreciate in value over time, compensation expense relating to the employee
stock ownership plan would increase. We also intend to submit a recognition and
retention plan to our stockholders for approval at least six months after
completion of the conversion. Our officers and directors could be awarded, at no
cost to them, under the recognition and retention plan up to an aggregate of 4%
of the shares issued in the conversion, restricted as to transfer in accordance
with the terms of the plan. In the event we implement the recognition and
retention plan more than 12 months after the conversion, the recognition and
retention plan may authorize the award of up to 5% of the shares issued in the
conversion. Assuming the shares of common stock to be awarded under the plan
cost the same as the purchase price in the conversion, the reduction to
stockholders' equity from the plan would be between $221,000 and $343,850 if 4%
of the shares issued in the conversion were awarded. See "Pro Forma Data " for a
discussion of the increased benefit costs we will incur after the conversion and
how these costs could decrease our return on equity.
Our Employment Agreement May Discourage Takeovers
The employment agreement that we intend to enter into with the
President and Chief Executive Officer of First Federal provides for cash
severance payments if the executive is terminated following a change in control
of First Federal. If a change in control occurs in 2000, the aggregate value of
the cash severance benefits payable to the President and Chief Executive Officer
under the agreement would have been approximately $270,000. This estimate does
not take into account future salary adjustments or bonus payments. This
arrangement could have the effect of increasing the costs of acquiring First
Federal thereby discouraging future attempts to take over First Federal.
Our Employee Stock Benefit Plans May Be Dilutive
If the conversion is completed and stockholders subsequently approve a
recognition and retention plan and a stock option plan, we will issue stock to
our officers and directors through these plans. We currently intend to fund
these plans with shares repurchased in the secondary market. However, if the
shares for the recognition and retention plan are issued from our authorized but
unissued stock, your ownership percentage could be diluted by approximately
3.8%, assuming issuance of an amount equal to 4% of the shares issued in the
conversion, and the trading price of our stock may be reduced. Your ownership
percentage would also decrease by approximately 9.1% if all potential stock
options are exercised. See "Pro Forma Data" for data on the dilutive effect of
the recognition and retention plan and "Management--Benefit Plans" for a
description of the plans. These plans will also involve additional expense.
Possible Increase in the Offering Range Would Be Dilutive
We can increase the maximum of the offering range by up to 15% to
reflect changes in market or financial conditions or to fill the order of our
employee stock ownership plan. An increase in the offering will decrease our net
income per share and our stockholders' equity per share. This would also
increase the purchase price per share as a percentage of pro forma stockholders'
equity per share and net income per share.
Our Valuation Is Not Indicative of the Future Price of Our Common Stock
We cannot assure you that if you purchase common stock in the offering
you will later be able to sell it at or above the purchase price in the
offering. The final aggregate purchase price of the common stock in the
conversion will be based upon an independent appraisal. The appraisal is not
intended, and should not be construed, as a recommendation of any kind as to the
advisability of purchasing shares of common stock. The valuation is based on
estimates and projections of a number of matters, all of which are subject to
change from
8
time to time. See "The Conversion--Stock Pricing and Number of Shares to be
Issued" for the factors considered by RP Financial in determining the appraisal.
Our Stock Price May Decline
The shares of common stock offered by this document are not savings
accounts or deposits, are not insured or guaranteed by the Federal Deposit
Insurance Corporation, the Savings Association Insurance Fund or any other
governmental agency, and involve investment risk, including the possible loss of
principal.
Due to possible continued market volatility and to other factors,
including certain risk factors discussed in this document, we cannot assure you
that, following the conversion, the trading price of our common stock will be at
or above the initial per share offering price. Publicly traded stocks, including
stocks of financial institutions, have recently experienced substantial market
price volatility. These market fluctuations may be unrelated to the operating
performance of particular companies whose shares are traded. In several cases,
common stock issued by recently converted financial institutions has traded at a
price that is below the price at which such shares were sold in the initial
offerings of those companies. The purchase price of our common stock in the
offering is based on the independent appraisal by RP Financial. After our shares
begin trading, the trading price of our common stock will be determined by the
marketplace, and may be influenced by many factors, including prevailing
interest rates, investor perceptions and general industry and economic
conditions.
Limited Market for Our Common Stock
We expect our stock to be quoted on the Over-the-Counter Electronic
Bulletin Board. However, it is unlikely that an active and liquid trading market
for our stock will develop, due to the small size of the offering and the small
number of stockholders we expect to have. There may be a wide spread between the
bid and asked price for our common stock after the conversion. You should
consider the potentially long-term nature of an investment in our common stock.
Exercise of Subscription Rights May Be Taxable
If the Internal Revenue Service determines that your subscription
rights have ascertainable value, you could be taxed as a result of your exercise
of those rights in an amount equal to their value. RP Financial has given us
their opinion that the subscription rights granted to eligible members in the
conversion have no value.
However, this opinion is not binding on the Internal Revenue Service.
Our Operations Are Subject to Regulatory and Legislative Changes
We are subject to extensive government regulation, supervision and
examination. The regulatory authorities have extensive discretion in connection
with their supervisory and enforcement activities. Any change in regulation,
whether by the Office of Thrift Supervision, the FDIC or the U.S. Congress,
could have a significant impact on us and our operations.
The U.S. Congress has enacted and the President has recently signed
legislation intended to modernize the financial services industry. The
legislation provides for greater affiliations by commercial bank holding
companies with financial companies such as securities and insurance companies.
Under the legislation, newly formed unitary savings and loan holding companies
will not have the broad powers formerly available to unitary savings and loan
holding companies. First Federal of Olathe Bancorp will be a unitary savings and
loan holding company after the conversion. Certain unitary savings and loan
holding companies would be grandfathered under the proposed legislation;
however, First Federal of Olathe Bancorp will not qualify for the
grandfathering. Consequently, we will be restricted in terms of activities in
which we may engage to a greater extent than previously existing unitary savings
and loan holding companies. For example, we would not be permitted to engage in
commercial activities whereas a grandfathered unitary holding company would have
such authority.
9
SELECTED FINANCIAL DATA
The following selected financial and other data of First Federal does
not purport to be complete and is qualified in its entirety by reference to the
more detailed financial information contained elsewhere herein. You should read
the Financial Statements and related notes contained at the end of this
prospectus. Set forth below are selected consolidated financial and other data
of First Federal at and for the periods indicated. Financial data as of
September 30, 1999 and for the nine months ended September 30, 1999 and 1998 are
unaudited. In the opinion of management, all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation have been included.
The results of operations and other data for the nine months ended September 30,
1999 are not necessarily indicative of the results of operations that may be
expected for the fiscal year ending December 31, 1999.
At At December 31,
September 30, --------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Selected Financial Condition Data:
Total assets ............................ $46,245 $44,649 $33,048
Loans receivable, net ................... 31,371 28,978 25,742
Investment securities:
Held to maturity ..................... 11,000 9,000 3,910
Available for sale ................... 684 847 552
FHLB stock .............................. 303 289 307
Deposits ................................ 35,221 34,701 25,139
FHLB advances ........................... 1,000 1,000 --
Total equity ............................ 9,009 8,542 7,597
Nine Months Years Ended
Ended September 30, December 31,
-------------------- ------------------
1999 1998 1998 1997
---- ---- ---- ----
(In Thousands)
Selected Operations Data:
Total interest income ............. $ 2,655 $ 2,301 $ 3,091 $ 2,718
Total interest expense ............ 1,461 1,172 1,653 1,337
------- ------- ------- -------
Net interest income ............ 1,194 1,129 1,438 1,381
Provision for loan losses ......... 150 -- -- --
------- ------- ------- -------
Net interest income after
provision for loan losses ........ 1,044 1,129 1,438 1,381
Fees and service charges .......... 16 17 20 7
------- ------- ------- -------
Total non-interest income ......... 16 17 20 7
Total non-interest expense ........ 194 180 248 263
------- ------- ------- -------
Income before income taxes ........ 866 966 1,210 1,125
Income tax provision .............. 300 354 443 398
------- ------- ------- -------
Net income ........................ 566 612 767 727
Unrealized gain(loss) on
investment securities
available for sale, net
of deferred tax expense .......... (99) 61 177 114
------- ------- ------- -------
Comprehensive income .............. $ 467 $ 673 $ 944 $ 841
======= ======= ======= =======
10
Nine Months
Ended September 30, Years Ended December 31,
------------------- ------------------------
1999 1998 1998 1997
---- ---- ---- ----
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income
to average total assets)(1) ........... 1.63% 2.11% 1.91% 2.17%
Return on equity (ratio of net income
to average equity)(1) ................. 8.52 10.22 9.45 10.04
Interest rate spread information:
Average during period ................ 2.66 2.93 2.62 3.09
End of period ........................ 2.43 2.68 2.50 3.13
Net interest margin(2) .................. 3.60 4.01 3.68 4.24
Ratio of operating expense to average
total assets ........................... 0.56 0.62 0.62 0.79
Ratio of average interest-earning
assets to average interest-bearing
liabilities ............................ 121.32 125.94 125.05 127.67
Asset Quality Ratios:
Non-performing assets to total assets
at end of period ....................... 0.29 0.24 0.24 0.28
Allowance for loan losses to
non-performing loans ................... 130.60 23.58 23.58 26.88
Allowance for loan losses to
loans receivable, net .................. 0.56 0.09 0.09 0.10
Capital Ratios
Equity to total assets at
end of period .......................... 19.48 18.62 19.13 22.99
Average equity to average assets ........ 19.18 20.67 20.17 21.65
Other Data:
Number of full-service offices .......... 1 1 1 1
- --------
(1) Ratios for the nine month periods have been annualized.
(2) Net interest income divided by average interest earning assets.
11
PROPOSED MANAGEMENT PURCHASES
The following table sets forth, for each of First Federal of Olathe
Bancorp's directors and executive officers and their associates, and for all of
the directors and executive officers as a group, the proposed purchases of
common stock, assuming sufficient shares are available to satisfy their
subscriptions. The amounts include shares that may be purchased through
individual retirement accounts.
Anticipated Anticipated
Number of Shares Dollar Amount Percent
Name and Title to be Purchased to be Purchased of Shares(1)
-------------- --------------- --------------- ------------
Mitch Ashlock, President............ 10,000 $100,000 1.54%
Chief Executive Officer
and Director
Donald K. Ashlock,.................. 10,000 100,000 1.54
Chairman of the Board
John M. Bowen ...................... 10,000 100,000 1.54
Director
Carl R. Palmer...................... 10,000 100,000 1.54
Director
Marvin Eugene Wollen................ 1,500 15,000 0.23
Director
------ ------- ----
All directors and
executive officers as a group
(5 persons)........................ 41,500 $415,000 6.38%
====== ======== =====
- ---------
(1) Based upon the midpoint of the offering range.
In addition, the ESOP currently intends to purchase 8% of the common
stock issued in the conversion for the benefit of officers and employees. Stock
options and stock grants may also be granted in the future to directors,
officers and employees upon the receipt of stockholder approval of First Federal
of Olathe Bancorp's proposed stock benefit plans. See "Management--Benefit
Plans" for a description of these plans.
USE OF PROCEEDS
Although the actual net proceeds from the sale of our common stock
cannot be determined until the conversion is completed, it is presently
anticipated that the net proceeds from the sale of the common stock will be
between $4.4 million and $6.1 million, or $7.1 million assuming an increase in
the offering range by 15%. See "Pro Forma Data" and "The Conversion--Stock
Pricing and Number of Shares to be Issued" as to the assumptions used to arrive
at such amounts.
First Federal of Olathe Bancorp will purchase all of the capital stock
of First Federal to be issued in the conversion in exchange for 50% of the net
proceeds of the stock offering. Receipt of 50% of the net proceeds will increase
First Federal's capital and will support the expansion of First Federal's
existing business activities. First Federal will use these funds for general
business purposes, including, loan originations and investment in U.S.
government and federal agency securities.
First Federal of Olathe Bancorp intends to loan the employee stock
ownership plan the amount necessary to acquire an amount of shares equal to 8%
of the shares issued in the conversion. The loan to the ESOP will be $442,000
and $598,000 at the minimum and maximum of the offering range. The ESOP will
distribute the shares it purchases to our employees as the loan is repaid over
an estimated 20 years. See "Management--Stock Benefit Plans--Employee Stock
Ownership Plan."
The net proceeds we use to purchase the capital stock of First Federal
will be used by First Federal for general corporate purposes, including
increased lending activities. On a short-term basis, First Federal may purchase
investment and mortgage-backed securities. The net proceeds received by First
Federal will further strengthen First Federal's capital position, which already
exceeds all regulatory requirements. After the conversion, First Federal's
tangible capital ratio will be 21.97%, based upon the midpoint of the offering
range. As a result, First Federal will continue to be a well-capitalized
institution.
We may initially use the remaining net proceeds retained by us to
invest in U.S. Government and federal agency securities of various maturities,
deposits in either the FHLB of Topeka or other financial institutions,
12
mortgage-backed securities issued by U.S. Government agencies and
government-sponsored enterprises, or a combination of these items. The net
proceeds retained by us may ultimately be used to:
o support First Federal's lending activities
o support the future expansion of operations through establishment
of branch offices or other customer facilities, expansion into
other lending markets or diversification into other banking
related businesses, although no such transactions are
specifically being considered at this time
o pay regular or special cash dividends, repurchase the common
stock or pay returns of capital
Applicable conversion regulations require us to sell common stock in
the conversion in an amount equal to our estimated pro forma market value, as
determined by an independent appraisal. See "The Conversion - Stock Pricing and
Number of Shares to be Issued." As a result, we may be required to sell more
shares in the conversion than we may otherwise desire. To the extent we have
excess capital upon completion of the conversion, we intend to consider stock
repurchases, dividends and tax-free returns of capital to the extent permitted
by the Office of Thrift Supervision and deemed appropriate by the board of
directors. A return of capital is similar to a cash dividend, except for tax
purposes it is an adjustment to your tax basis rather than income to you. We
have committed to the OTS that we will not take any action toward paying a
tax-free return of capital during the first year after we complete the
conversion.
Stock repurchases will be considered by our Board of Directors after we
complete the conversion based upon then existing facts and circumstances, as
well as applicable statutory and regulatory requirements. Such facts and
circumstances may include but not be limited to the following:
o market and economic factors such as the price at which the stock
is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the
rate of return and risk involved in the investment, the ability
to increase the book value and/or earnings per share of the
remaining outstanding shares, and an improvement in our return on
equity
o the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to
fund employee stock benefit plans
o any other circumstances in which repurchases would be in the best
interests of First Federal of Olathe Bancorp and our stockholders
No stock will be repurchased by us unless First Federal continues to
exceed all applicable regulatory requirements after the repurchases. The payment
of dividends or repurchase of stock will be prohibited if First Federal's net
worth would be reduced below the amount required for the liquidation account to
be established for the benefit of eligible account holders and supplemental
eligible account holders. As of the date of this prospectus, the initial balance
of the liquidation account would be approximately $9.0 million. See "Dividend
Policy," "The Conversion--Effects of Conversion to Stock Form on Depositors and
Borrowers of First Federal--Liquidation Rights" and "--Restrictions on
Transferability."
We will be a unitary savings and loan holding company which, under
recently adopted legislation, would generally be restricted as to the types of
business activities in which we may engage. See "Regulation--Savings and Loan
Holding Company Regulation" for a description of certain regulations applicable
to us.
Our net proceeds may vary because total expenses of the conversion may
be more or less than those estimated. The net proceeds will also vary if the
number of shares to be issued in the conversion is adjusted to reflect a change
in the estimated pro forma market value of First Federal. Payments for shares
made through withdrawals from existing deposit accounts at First Federal will
not result in the receipt of new funds for investment by First Federal but will
result in a reduction of First Federal's interest expense and liabilities as
funds are transferred from interest-bearing certificates or other deposit
accounts.
DIVIDEND POLICY
After we complete the conversion, our Board of Directors will have the
authority to declare dividends on the common stock, subject to statutory and
regulatory requirements. We intend to pay semi-annual cash dividends on the
common stock at an initial rate of $.40 per share per annum, representing 4% of
the purchase price, commencing at the end of fiscal 2000. However, the rate of
such dividends and the initial or continued payment thereof will depend upon a
number of factors, including the amount of net proceeds retained by us in the
13
conversion, investment opportunities available to us, capital requirements, our
financial condition and results of operations, tax considerations, statutory and
regulatory limitations, and general economic conditions. No assurances can be
given that any dividends will be paid or that, if paid, will not be reduced or
eliminated in future periods. Special cash dividends, stock dividends or
tax-free returns of capital may be paid in addition to, or in lieu of, regular
cash dividends. However, we have committed to the OTS that we will not take any
action toward paying a tax-free return of capital during the first year after we
complete the conversion.
Dividends from us may eventually depend, in part, upon receipt of
dividends from First Federal, because First Federal of Olathe Bancorp initially
will have no source of income other than dividends from First Federal, earnings
from the investment of proceeds from the sale of common stock retained by us,
and interest payments with respect to our loan to the ESOP. An OTS regulation
imposes limitations on "capital distributions" by savings institutions,
including cash dividends to a parent holding company. Under new regulations
effective April 1, 1999, First Federal would have been permitted to make a
capital distribution to First Federal of Olathe Bancorp of up to approximately
$1.7 million as of April 1, 1999.
Any payment of dividends by First Federal to First Federal of Olathe
Bancorp which would be deemed to be drawn out of First Federal's bad debt
reserves would require a payment of taxes at the then-current tax rate by First
Federal on the amount of earnings deemed to be removed from the reserves for
such distribution. First Federal does not intend to make any distribution to
First Federal of Olathe Bancorp that would create such a federal tax liability.
See "Taxation."
Unlike First Federal, we are not subject to the above regulatory
restrictions on the payment of dividends to our stockholders, although the
source of such dividends may eventually depend, in part, upon dividends from
First Federal in addition to the net proceeds retained by us and earnings on
those proceeds. We are, however, subject to the requirements of Kansas law,
which generally permits the payment of dividends out of surplus, or if there is
no surplus, out of a company's net profits for the then current or the preceding
fiscal year.
MARKET FOR COMMON STOCK
Because this is our initial public offering, there is no market for our
common stock at this time. After we complete the offering, we anticipate that
our common stock will be traded and quoted on the Over-the-Counter Electronic
Bulletin Board under the symbol "_____." Trident Securities has indicated its
intention to make a market in our common stock.
Making a market may include the solicitation of potential buyers and
sellers in order to match buy and sell orders. However, Trident Securities will
not be subject to any obligation with respect to such efforts. The development
of a liquid public market depends upon the existence of willing buyers and
sellers, the presence of which is not within our control or of any market maker.
It is unlikely that an active and liquid trading market for the common stock
will develop due to the relatively small size of the offering and the small
number of stockholders expected following the conversion. In addition, there may
be a wide spread between the bid and ask price for our common stock after the
conversion. Under such circumstances, you should not view the common stock as a
short-term investment. Furthermore, there can be no assurance that you will be
able to sell your shares at or above the purchase price.
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
At September 30, 1999, First Federal exceeded all of its regulatory
capital requirements. The table on the following page sets forth First Federal's
historical capital under generally accepted accounting principles ("GAAP") and
regulatory capital at September 30, 1999 and the pro forma capital of First
Federal after giving effect to the conversion, based upon the sale of the number
of shares shown in the table. The pro forma capital amounts reflect the receipt
by First Federal of 50% of the net conversion proceeds, minus the amounts to be
loaned to our employee stock ownership plan and to be contributed to our
proposed recognition and retention plan. The pro forma risk- based capital
amounts assume the investment of the net proceeds received by First Federal in
assets which have a risk-weight of 20% under applicable regulations, as if such
net proceeds had been received and so applied at September 30, 1999.
14
Pro Forma Based Upon Sale of
--------------------------------------------------------------------------
552,500 Shares 650,000 Shares 747,500 Shares
(Minimum of Estimated (Midpoint of Estimated (Maximum of Estimated
Historical Valuation Range) Valuation Range) Valuation Range)
---------------------- --------------------- ------------------------- ------------------------
Amount Percent(1) Amount(2) Percent(1) (Amount(2) Percent(1)(2) Amount(2) Percent(1)(2)
------ ---------- --------- ---------- --------- ------------- --------- -------------
(Dollars in Thousands)
Capital under generally
accepted accounting principles 9,009 19.48% $10,859 22.37% $11,229 22.92% $11,600 23.46%
======== ======= ======= ======== ======= ======== ======= ========
Tangible capital(2)............. $ 8,594 18.49% $10,444 21.41% $10,814 21.97% $11,185 22.52%
Tangible capital requirement.... 697 1.50 732 1.50 738 1.50 745 1.50
-------- ------- ------- ------- ------- -------- ------- --------
Excess.......................... $ 7,897 16.99% $ 9,712 19.91% $10,076 20.47% $10,439 21.02%
======== ======= ======= ======= ======= ======== ======= ========
Core capital(2)................. $ 8,594 18.49% $10,444 21.41% $10,814 21.97% $11,185 22.52%
Core capital requirement(3)..... 1,394 3.00 1,463 3.00 1,477 3.00 1,490 3.00
-------- ------- ------- ------- ------- -------- ------- --------
Excess........................ $ 7,200 15.49% $ 8,980 18.41% 9,337 18.97% $ 9,694 19.52%
======== ======= ======= ======= ======= ======== ======= ========
Risk-based capital(2)(4)........ $ 8,769 46.65% $10,619 55.15% $10,989 56.81% $11,360 58.45%
Risk-based capital
requirement(5)................. 1,503 8.00 1,539 8.00 1,547 8.00 1,554 8.00
-------- ------- ------- ------- ------- -------- ------- --------
Excess........................ $ 7,266 38.66% $ 9,079 47.16% $ 9,442 48.81% $ 9,806 50.46%
======== ======= ======= ======= ======= ======== ======= ========
Pro Forma Based Upon Sale of
----------------------------
859,625 Shares
(15% Above the
Maximum of Estimated
Valuation Range)
-----------------------
Amount(2) Percent(1)
--------- ----------
(Dollars in Thousands)
Capital under generally
accepted accounting principles $ 12,026 24.08%
======== ========
Tangible capital(2)............ $ 11,611 23.14%
Tangible capital requirement... 753 1.50
-------- --------
Excess......................... $ 10,858 21.64%
======== ========
Core capital(2)................ $ 11,611 23.14%
Core capital requirement(3).... 1,506 3.00
-------- --------
Excess....................... $ 10,105 20.14%
======== ========
Risk-based capital(2)(4)....... $ 11,786 60.33%
Risk-based capital
requirement(5)................ 1,562 8.00
-------- --------
Excess....................... $ 10,224 52.33%
======== ========
- ------------
(1) Tangible and core capital levels are shown as a percentage of total
adjusted assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
(2) For purposes of calculating regulatory capital, the valuation allowance
applicable to investment securities in accordance with Statement of
Financial Accounting Standards No. 115 has been excluded from capital. This
amounted to $414,726 at September 30, 1999.
(3) The current Office of Thrift Supervision core capital requirement for
savings associations is 3% of total adjusted assets. The Office of Thrift
Supervision has proposed core capital requirements which would require a
core capital ratio of 3% of total adjusted assets for thrifts that receive
the highest supervisory rating for safety and soundness and a core capital
ratio of 4% to 5% for all other thrifts.
(4) Includes $175,000 of general valuation allowances which qualify as
supplementary capital. See "Regulation--Federal Regulation of Savings
Associations--Capital Requirements."
(5) The OTS utilizes a net market value methodology to measure the interest
rate risk exposure of savings associations. Effective March 31, 1996,
institutions with more than normal interest rate risk, as defined by OTS
regulations, are required to make a deduction from capital equal to 50% of
its interest rate risk exposure multiplied by the present value of its
assets. Based upon this methodology, at September 30, 1999, the latest date
for which such information is available, First Federal's interest rate risk
exposure to a 200 basis point increase in interest rates was considered
"normal" under this regulation. In any event, since First Federal has
assets of less than $300 million and a total risk-based capital ratio in
excess of 12%, it is exempt from this requirement unless the OTS determines
otherwise. See "Regulation--Federal Regulation of Savings
Associations--Capital Requirements."
15
CAPITALIZATION
The following table presents the historical capitalization of First
Federal at September 30, 1999, and our pro forma consolidated capitalization
after giving effect to the conversion, based upon the sale of the number of
shares shown below and the other assumptions set forth under "Pro Forma Data."
First Federal of Olathe Bancorp - Pro Forma
Based Upon Sale at $10.00 Per Share
----------------------------------------------------
552,500 650,000 747,500 859,625
Shares Shares Shares Shares(1)
First Federal (Minimum of (Midpoint of (Maximum of (15% above
- Historical Offering Offering Offering Maximum of
Capitalization Range) Range) Range) Offering Range)
-------------- ------ ------ ------ ---------------
(In Thousands)
Deposits(2) ................................................... $ 35,221 $ 35,221 $ 35,221 $ 35,221 $ 35,221
FHLB Advances ................................................. 1,000 1,000 1,000 1,000 1,000
-------- -------- -------- -------- --------
Total deposits and FHLB advances .............................. $ 36,221 $ 36,221 $ 36,221 $ 36,221 $ 36,221
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none to be issued .............................. $ -- $ -- $ -- $ -- $ --
Common stock, $.01 par value, 4,000,000 shares
authorized; shares to be issued as reflected(3) ............ -- 6 7 7 9
Additional paid-in capital(3) ................................. -- 5,019 5,994 6,986 8,088
Retained earnings(4) .......................................... 8,594 8,594 8,594 8,594 8,594
Net unrealized gain on securities available for sale .......... 415 415 415 415 415
Less:
Common stock acquired by our ESOP(5) ....................... -- (442) (520) (598) (688)
Common stock to be acquired by our
recognition and retention plan(6) .......................... -- (221) (260) (299) (344)
-------- -------- -------- -------- --------
Total equity .................................................. $ 9,009 $ 13,371 $ 14,229 $ 15,087 $ 16,074
======== ======== ======== ======== ========
- -----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% to
reflect changes in market and financial conditions before we complete the
conversion or to fill the order of the ESOP.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) The sum of the par value and additional paid-in capital accounts equals the
net conversion proceeds. No effect has been given to the issuance of
additional shares of common stock pursuant to our proposed stock option
plan. We intend to adopt a stock option plan and to submit such plan to
stockholders at a meeting of stockholders to be held at least six months
following completion of the conversion. If the plan is approved by
stockholders, an amount equal to 10% of the shares of common stock sold in
the conversion will be reserved for issuance under such plan. See "Pro
Forma Data" and "Management - Benefit Plans - Stock Option Plan."
(4) The retained earnings of First Federal will be substantially restricted
after the conversion. See "The Conversion--Effects of Conversion to Stock
Form on Depositors and Borrowers of First Federal--Liquidation Rights."
(5) Assumes that 8% of the common stock will be purchased by our employee stock
ownership plan. The common stock acquired by the ESOP is reflected as a
reduction of stockholders' equity. Assumes the funds used to acquire the
ESOP shares will be borrowed from First Federal of Olathe Bancorp. See Note
1 to the table set forth under "Pro Forma Data" and "Management - Benefit
Plans - Employee Stock Ownership Plan and Trust."
(6) Gives effect to the recognition and retention plan which we expect to adopt
after the conversion and present to stockholders for approval at a meeting
of stockholders to be held at least six months after we complete the
conversion. No shares will be purchased by the recognition and retention
plan in the conversion, and such plan cannot purchase any shares until
stockholder approval has been obtained. If the recognition and retention
plan is approved by our stockholders within 12 months after the conversion,
the plan intends to acquire an amount of common stock equal to 4% of the
shares of common stock issued in the conversion, or 22,100, 26,000, 29,900
and 34,385 shares at the minimum, midpoint, maximum and 15% above the
maximum of the offering range, respectively. The table assumes that
stockholder approval has been obtained and that such shares are purchased
in the open market at $10.00 per share. The common stock so acquired by the
recognition and retention plan is reflected as a reduction in stockholders'
equity. If the shares are purchased at prices higher or lower than the
initial purchase price of $10.00 per share, such purchases would have a
greater or lesser impact, respectively, on stockholders' equity. If the
recognition and retention plan purchases authorized but unissued shares
from First Federal of Olathe Bancorp, such issuance would dilute the voting
interests of existing stockholders by approximately 3.8%. If the
recognition and retention plan is implemented more than 12 months after the
conversion, the plan may authorize the award of up to 5% of the shares
issued in the conversion. See "Pro Forma Data" and "Management--Benefit
Plans--Recognition and Retention Plan."
16
PRO FORMA DATA
We cannot determine the actual net proceeds from the sale of our common
stock until the conversion is completed. However, net proceeds are currently
estimated to be between $5.025 million and $6.975 million (or $8.096 million in
the event the offering range is increased by 15%) based upon the following
assumptions: (1) all shares of common stock will be sold in the subscription
offering; and (2) total expenses, including the marketing fees to be paid to
Trident Securities, will be $500,000. Actual expenses may vary from those
estimated.
We calculated pro forma net income and stockholders' equity for the
nine months ended September 30, 1999 and the year ended December 31, 1998 as if
the common stock to be issued in the offering had been sold at the beginning of
the respective periods. The table assumes that the net proceeds had been
invested at 5.18% for the nine months ended September 30, 1999 and 4.52% for the
year ended December 31, 1998, which represent the yield on the one-year U.S.
Treasury Bill as of the respective dates. The calculations have been based on
the one year Treasury rate, as opposed to the arithmetic average of First
Federal's average yield on all interest-earning assets and average rate paid on
deposits, as contemplated by OTS regulations, because First Federal will
initially invest the proceeds in shorter term assets at a lower yield, although
it will seek to more efficiently invest the proceeds over time. The effect of
withdrawals from deposit accounts for the purchase of common stock has not been
reflected. We assumed a combined effective federal and state income tax rate of
35% for the nine months ended September 30, 1999 and the year ended December 31,
1998, resulting in an after-tax yield of 3.37% for the nine months ended
September 30, 1999 and 2.94% for the year ended December 31, 1998. We calculated
historical and pro forma per share amounts by dividing historical and pro forma
amounts by the indicated number of shares of common stock, as adjusted to give
effect to the shares purchased by the ESOP with respect to the net income per
share calculations. See Notes 2 and 4 to the Pro Forma Data tables. No effect
has been given in the pro forma stockholders' equity calculations for the
assumed earnings on the net proceeds. As discussed under "Use of Proceeds,"
First Federal of Olathe Bancorp intends to retain 50% of the net conversion
proceeds.
The following pro forma information may not be representative of the
financial effects of the conversion at the date on which the conversion actually
occurs and should not be taken as indicative of future results of operations.
Pro forma stockholders' equity represents the difference between the stated
amount of our assets and liabilities computed in accordance with generally
accepted accounting principles. The pro forma stockholders' equity is not
intended to represent the fair market value of the common stock and may be
different than amounts that would be available for distribution to stockholders
in the event of liquidation. We did not reflect in the table the possible
issuance of additional shares equal to 10% of the common stock to be reserved
for future issuance pursuant to our proposed stock option plan, nor does book
value give any effect to the liquidation account to be established for the
benefit of eligible account holders and supplemental eligible account holders or
to First Federal's bad debt reserve. See "Management-- Benefit Plans" and "The
Conversion--Effects of Conversion to Stock Form on Depositors and Borrowers of
First Federal--Liquidation Rights." The table does give effect to the
recognition and retention plan, which we expect to adopt following the
conversion and present together with the stock option plan to stockholders for
approval no earlier than six months following the conversion. If the recognition
and retention plan is approved by stockholders within 12 months after the
conversion, the recognition and retention plan intends to acquire an amount of
common stock equal to 4% of the shares of common stock issued in the conversion,
either through open market purchases, if permissible, or from authorized but
unissued shares of common stock. The table assumes that stockholder approval has
been obtained and that the shares acquired by the recognition and retention plan
are purchased in the open market at $10.00 per share. There can be no assurance
that stockholder approval of the recognition and retention plan will be
obtained, that the shares will be purchased in the open market or that the
purchase price will be $10.00 per share. In addition, if the recognition and
retention plan is implemented more than 12 months after the conversion, the plan
may authorize the award of up to 5% of the shares issued in the conversion.
The tables on the following pages summarize historical consolidated
data of First Federal and pro forma data of First Federal of Olathe Bancorp at
or for the dates and periods indicated based on the assumptions set forth above
and in the table and should not be used as a basis for projection of the market
value of the common stock following the conversion.
17
At and For the Nine Months Ended September 30, 1999
----------------------------------------------------------------------
552,500 650,000 747,500 859,625
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share (15%
(Minimum (Midpoint (Maximum above Maximum
of Range) of Range) of Range) of Range)(8)
--------- --------- --------- ------------
(Dollars in Thousands, Except Per Share Amounts)
Gross proceeds ............................. $ 5,525 $ 6,500 $ 7,475 $ 8,596
Less offering expenses ..................... (500) (500) (500) (500)
--------- --------- --------- ---------
Estimated net conversion proceeds .......... 5,025 6,000 6,975 8,096
Less ESOP adjustment ....................... (442) (520) (598) (688)
Less recognition and retention
plan adjustment ........................... (221) (260) (299) (344)
--------- --------- --------- ---------
Estimated adjusted net proceeds(1) ......... $ 4,362 $ 5,220 $ 6,078 $ 7,065
========= ========= ========= =========
Net income:
Historical .............................. $ 566 $ 566 $ 566 $ 566
Pro forma adjustments:
Income on adjusted net proceeds(1) .... 110 132 154 179
ESOP(2) ............................... (11) (13) (14) (17)
Recognition and retention plan(3) ..... (22) (26) (29) (34)
--------- --------- --------- ---------
Pro forma ............................... $ 644 $ 660 $ 676 $ 694
========= ========= ========= =========
Net income per share(4):
Historical .............................. $ 1.15 $ 0.98 $ 0.85 $ 0.74
Pro forma adjustments:
Income on adjusted net proceeds(1) .... 0.22 0.23 0.23 0.23
ESOP(2) ............................... (0.02) (0.02) (0.02) (0.02)
Recognition and retention plan(3) ..... (0.04) (0.04) (0.04) (0.04)
--------- --------- --------- ---------
Pro forma basic and diluted per share ...... $ 1.31 $ 1.15 $ 1.02 $ 0.91
========= ========= ========= =========
Pro forma basic P/E ratio(4) ............... 5.73x 6.52x 7.35x 8.24x
========= ========= ========= =========
Number of shares used in calculating
net income per share(4):
Basic and diluted EPS ................... 491,173 577,850 664,528 764,207
========= ========= ========= =========
Stockholders' equity:
Historical .............................. $ 9,009 $ 9,009 $ 9,009 $ 9,009
Estimated net conversion proceeds ....... 5,025 6,000 6,975 8,096
Less ESOP adjustment(2) ................. (442) (520) (598) (688)
Less recognition and retention plan
adjustment(3) .......................... (221) (260) (299) (344)
--------- --------- --------- ---------
Pro forma stockholders' equity(5)(6) .... $ 13,371 $ 14,229 $ 15,087 $ 16,074
========= ========= ========= =========
Stockholders' equity per share(7):
Historical .............................. $ 16.31 $ 13.86 $ 12.05 $ 10.48
Estimated net conversion proceeds ....... 9.10 9.23 9.33 9.42
Less ESOP adjustment(2) ................. (0.80) (0.80) (0.80) (0.80)
Less recognition and retention plan
adjustment(3) .......................... (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Pro forma stockholders' equity
per share(3)(5)(6) ........................ $ 24.21 $ 21.89 $ 20.18 $ 18.70
========= ========= ========= =========
Pro forma price to book ratio(7) ........... 41.31% 45.68% 49.55% 53.48%
========= ========= ========= =========
Number of shares used in equity
per share calculations(7) ................. 552,500 650,000 747,500 859,625
========= ========= ========= =========
- ---------
(footnotes begin on next page)
18
At and For the Year Ended December 31, 1998
---------------------------------------------------------------------
552,500 650,000 747,500 859,625
Shares Sold Shares Sold Shares Sold Shares Sold
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share (15%
(Minimum (Midpoint (Maximum above Maximum
of Range) of Range) of Range) of Range)(8)
--------- --------- --------- ------------
(Dollars in Thousands, Except Per Share Amounts)
Gross proceeds ............................. $ 5,525 $ 6,500 $ 7,475 $ 8,596
Less offering expenses ..................... (500) (500) (500) (500)
--------- --------- --------- ---------
Estimated net conversion
proceeds .................................. 5,025 6,000 6,975 8,096
Less ESOP adjustment ....................... (442) (520) (598) (688)
Less recognition and retention
plan adjustment ........................... (221) (260) (299) (344)
--------- --------- --------- ---------
Estimated adjusted net proceeds(1) ......... $ 4,362 $ 5,220 $ 6,078 $ 7,065
========= ========= ========= =========
Net income:
Historical .............................. $ 767 $ 767 $ 767 $ 767
Pro forma adjustments:
Income on adjusted net
proceeds(1) .......................... 128 153 179 208
ESOP(2) ............................... (14) (17) (19) (22)
Recognition and retention
plan(3) .............................. (29) (34) (39) (45)
--------- --------- --------- ---------
Pro forma ............................... $ 852 $ 869 $ 888 $ 908
========= ========= ========= =========
Net income per share(4):
Historical .............................. $ 1.56 $ 1.32 $ 1.15 $ 1.00
Pro forma adjustments:
Income on adjusted net proceeds(1) .... 0.26 0.26 0.27 0.27
ESOP(2) ............................... (0.03) (0.03) (0.03) (0.03)
Recognition and retention plan(3) ..... (0.06) (0.06) (0.06) (0.06)
--------- --------- --------- ---------
Pro forma basic and diluted per share ...... $ 1.73 $ 1.49 $ 1.33 $ 1.18
========= ========= ========= =========
Pro forma basic P/E ratio(4) ............... 5.78x 6.71x 7.52x 8.47x
========= ========= ========= =========
Number of shares used in calculating
net income per share(4):
Basic and diluted EPS ................... 492,830 579,800 666,770 766,786
========= ========= ========= =========
Stockholders' equity:
Historical .............................. $ 8,542 $ 8,542 $ 8,542 $ 8,542
Estimated net conversion proceeds ....... 5,025 6,000 6,975 8,096
Less ESOP adjustment(2) ................. (442) (520) (598) (688)
Less recognition and retention
plan adjustment(3) ..................... (221) (260) (299) (344)
--------- --------- --------- ---------
Pro forma stockholders'
equity(5)(6) ........................... $ 12,904 $ 13,762 $ 14,620 $ 15,607
========= ========= ========= =========
Stockholders' equity per share(7):
Historical .............................. $ 15.46 $ 13.14 $ 11.43 $ 9.94
Estimated net conversion proceeds ....... 9.10 9.23 9.33 9.42
Less ESOP adjustment(2) ................. (0.80) (0.80) (0.80) (0.80)
Less recognition and retention
plan adjustment(3) ..................... (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Pro forma stockholders' equity
per share(3)(5)(6) ........................ $ 23.36 $ 21.17 $ 19.56 $ 18.16
========= ========= ========= =========
Pro forma price to book ratio(7) ........... 42.81% 47.24% 51.12% 55.07%
========= ========= ========= =========
Number of shares used in equity
per share calculations(7) ................. 552,500 650,000 747,500 859,625
========= ========= ========= =========
- -----------
(1) Estimated adjusted net proceeds consist of the estimated net conversion
proceeds, minus (i) the proceeds attributable to the purchase by our ESOP
and (ii) the value of the shares to be purchased by our recognition and
retention plan after the conversion, subject to stockholder approval, at an
assumed purchase price of $10.00 per share.
(2) We assumed that 8% of the shares of common stock issued in the conversion
will be purchased by our ESOP. We also assumed that the funds used to
acquire such shares will be borrowed by the ESOP from First Federal of
Olathe Bancorp. We intend to make quarterly contributions to our ESOP over
approximately a 20-year period in an amount at least equal to the principal
and interest requirement of the debt. The pro forma net income assumes (a)
that the loan to the ESOP is payable over 20 years, with the ESOP shares
having an average fair value of $10.00 per share in accordance with SOP
93-6, entitled "Employers' Accounting for Employee Stock Ownership Plans,"
of the AICPA, (b) that the loan to the ESOP bears a fixed interest rate of
8.50%, (c) that the ESOP expense for the period is equivalent to the
principal payment for the period and was made at the end of the period; (d)
that 2,210, 2,600, 2,990 and 3,439 shares were committed to be released
19
with respect to the year ended December 31, 1998, and that 1,658, 1,950,
2,243 and 2,579 shares were committed to be released with respect to the
nine months ended September 30, 1999, in each case at the minimum,
midpoint, maximum and 15% above the maximum of the offering range,
respectively; (e) in accordance with SOP 93-6 entitled "Employers'
Accounting for Employee Stock Ownership Plans," only the ESOP shares
committed to be released during the period were considered outstanding for
purposes of the net income per share calculations; and (f) the effective
tax rate was 35% for the period. See "Risk Factors--Our Employee Stock
Benefit Plans Will Increase Our Costs" and "Management--Benefit Plans--
Employee Stock Ownership Plan and Trust."
(3) We assumed that the recognition and retention plan purchases 22,100,
26,000, 29,900 and 34,385 shares at the minimum, midpoint, maximum and 15%
above the maximum of the offering range, assuming that: (a) stockholder
approval of the recognition and retention plan is received; (b) the shares
were acquired by the recognition and retention plan at the beginning of the
period presented in open market purchases at $10.00 per share; (c) the
amortized expense for the year ended December 31, 1998 was 20% of the
amount contributed and the amortized expense for the nine months ended
September 30, 1999 was 15% of the amount contributed; and (d) the effective
tax rate applicable to such employee compensation expense was 35% in each
period. Statement of Financial Accounting Standards ("SFAS") No. 128
requires that unvested shares under the recognition and retention plan be
excluded from the basic net income per share calculation and included in
the diluted net income per share calculation only if they are dilutive
under the treasury stock method. We assumed that 20% and 15% of the
recognition and retention plan shares vested at the beginning of the year
ended December 31, 1998 and the nine months ended September 30, 1999,
respectively. If the recognition and retention plan purchases authorized
but unissued shares instead of making open market purchases, then (a) the
voting interests of existing stockholders would be diluted by approximately
3.9%, (b) the pro forma net income per share for the year ended December
31, 1998 would be $1.69, $1.48, $1.32 and $1.19, and pro forma
stockholders' equity per share at December 31, 1998 would be $22.84,
$20.74, $19.19 and $17.84, in each case at the minimum, midpoint, maximum
and 15% above the maximum of the offering range, respectively, and (c) the
pro forma net income per share for the nine months ended September 30, 1999
would be $1.25, $1.10, $.98 and $.88, and pro forma stockholders' equity
per share at September 30, 1999 would be $23.65, $21.43, $19.79 and $18.36,
in each case at the minimum, midpoint, maximum and 15% above the maximum of
the offering range, respectively. See "Management--Benefit
Plans--Recognition and Retention Plan."
(4) Basic net income per share calculations are determined by (a) starting with
the number of shares assumed to be sold in the conversion, (b) in
accordance with SOP 93-6, subtracting the ESOP shares which have not been
committed for release, and (c) in accordance with SFAS No. 128, subtracting
the recognition and retention plan shares which have not vested. The
unvested recognition and retention plan shares were deemed to be for future
services and not dilutive under the treasury stock method.
Set forth below is a reconciliation of the number of shares used in
making the net income per share calculations for the year ended December 31,
1998:
Maximum,
Minimum Midpoint Maximum as Adjusted
------- -------- ------- -----------
Total shares issued....................... 552,500 650,000 747,500 859,625
Less shares sold to ESOP.................. (44,200) (52,000) (59,800) (68,770)
Less recognition and retention
plan shares........................... (22,100) (26,000) (29,900) (34,385)
Subtotal............................... 486,200 572,000 657,800 756,470
Plus ESOP shares assumed committed
to be released......................... 2,210 2,600 2,990 3,439
Plus recognition and retention plan
shares assumed vested.................. 4,420 5,200 5,980 6,877
Number of shares used in calculating
basic and diluted net income
per share.............................. 492,830 579,800 666,770 766,786
20
Set forth below is a reconciliation of the number of shares used in
making the net income per share calculations for the nine months ended September
30, 1999:
Maximum,
Minimum Midpoint Maximum as Adjusted
------- -------- ------- -----------
Total shares issued....................... 552,500 650,000 747,500 859,625
Less shares sold to ESOP.................. (44,200) (52,000) (58,800) (68,770)
Less recognition and retention
plan shares........................... (22,100) (26,000) (29,000) (34,385)
Subtotal............................... 486,200 572,000 657,800 756,470
Plus ESOP shares assumed committed
to be released......................... 1,658 1,950 2,243 2,579
Plus recognition and retention plan
shares assumed vested.................. 3,315 3,900 4,485 5,158
Number of shares used in calculating
basic and diluted net income
per share.............................. 491,173 577,850 664,528 764,207
- ----------
(5) We did not give any effect to the issuance of additional shares of common
stock pursuant to our proposed stock option plan, which we expect to adopt
after the conversion and present to stockholders for approval at a meeting
of stockholders to be held at least six months after we complete the
conversion. If the stock option plan is approved by stockholders, an amount
equal to 10% of the common stock issued in the conversion, or 55,250,
65,000, 74,750 and 85,963 shares at the minimum, midpoint, maximum and 15%
above the maximum of the offering range, respectively, will be reserved for
future issuance upon the exercise of options to be granted under the stock
option plan. The issuance of authorized but previously unissued shares of
common stock pursuant to the exercise of options under such plan would
dilute existing stockholders' interests. Assuming stockholder approval of
the plan, that all the options were exercised at the beginning of the
period at an exercise price of $10.00 per share, and that the shares to
fund the recognition and retention plan are acquired through open market
purchases at $10.00 per share, (a) pro forma net income per share for the
year ended December 31, 1998 would be $1.58, $1.38, $1.23 and $1.09, and
(b) pro forma stockholders' equity per share at December 31, 1998 would be
$22.14, $20.16, $18.69 and $17.41, in each case at the minimum, midpoint,
maximum and 15% above the maximum of the offering range, respectively.
Assuming stockholder approval of the plan, that all the options were
exercised at the beginning of the period at an exercise price of $10.00 per
share, and that the shares to fund the recognition and retention plan are
acquired through open market purchases at $10.00 per share, (a) pro forma
net income per share for the nine months ended September 30, 1999 would be
$1.20, $1.05, $0.94 and $0.84, and (b) pro forma stockholders' equity per
share at September 30, 1999 would be $22.91, $20.81, $19.26 and $17.91, in
each case at the minimum, midpoint, maximum and 15% above the maximum of
the offering range, respectively.
(6) The retained earnings of First Federal will be substantially restricted
after the conversion. See "Dividend Policy" and "The Conversion--Effects of
Conversion to Stock Form on Depositors and Borrowers of First
Federal--Liquidation Rights."
(7) Based on the number of shares sold in the conversion.
(8) Assumes an increase in the number of shares due to a 15% increase in the
maximum of the offering range to reflect changes in market and financial
conditions before we complete the conversion or to fill the order of the
ESOP.
21
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
The following Statements of Income and Comprehensive Income of First
Federal for the fiscal years ended December 31, 1998 and 1997 have been audited
by Taylor, Perky & Parker, L.L.C., independent certified public accountants,
whose report thereon appears elsewhere in this prospectus. The Statements of
Income and Comprehensive Income for the nine months ended September 30, 1999 and
1998 are unaudited and have been prepared in accordance with the requirements
for a presentation of interim financial statements and are in accordance with
generally accepted accounting principles. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, that are necessary for
a fair presentation of the interim periods, have been reflected. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of the results of operations that may be expected for the fiscal year
ending December 31, 1999. These Statements should be read in conjunction with
the Financial Statements of First Federal and Notes thereto included elsewhere
in this prospectus.
Nine Months Ended Years Ended
September 30, December 31,
------------------------ --------------------------
1999 1998 1998 1997
---- ---- ---- ----
(Unaudited)
Interest and Dividend Income:
Loans receivable............................... $1,967,812 $1,775,330 $2,394,515 $2,178,540
Investment securities.......................... 687,139 525,504 696,006 539,557
---------- --------- ---------- ----------
Total Interest and Dividend Income........... 2,654,951 2,300,834 3,090,521 2,718,097
---------- --------- ---------- ----------
Interest Expense:
Deposits....................................... 1,418,024 1,133,967 1,600,362 1,336,689
Federal Home Loan Bank advances................ 42,932 37,900 52,368 --
---------- --------- ---------- ----------
Total Interest Expense....................... 1,460,956 1,171,867 1,652,730 1,336,689
---------- --------- ---------- ----------
Net Interest and Dividend Income
Before Provision for Loan Losses............... 1,193,995 1,128,967 1,437,791 1,381,408
Provision for loan losses.................... 150,000 -- -- --
---------- --------- ---------- ----------
Net Interest and Dividend Income
after Provisions for Loan Losses............ 1,043,995 1,128,967 1,437,791 1,381,408
---------- --------- ---------- ----------
Non-Interest Income:
Service charges and other fees................. 15,808 17,319 19,513 7,331
---------- --------- ---------- ----------
Non-Interest Expense:
Salaries and related payroll expenses.......... 83,461 82,358 100,411 96,790
Federal insurance premiums..................... 19,047 15,135 44,693 41,352
Occupancy of premises.......................... 19,502 15,799 21,229 23,353
Office supplies and related expenses........... 11,741 11,238 17,391 18,828
Other general and administrative............... 60,710 55,059 64,495 83,171
---------- --------- ---------- ----------
Total Non-Interest Expense................... 194,461 179,587 248,219 263,494
---------- --------- ---------- ----------
Income Before Income Taxes........................ 865,342 966,699 1,209,085 1,125,245
Income Tax Provision.............................. 299,828 354,509 442,259 398,561
---------- --------- ---------- ----------
Net Income.................................... 565,514 612,190 766,826 726,684
Other Comprehensive Income (Loss):
Unrealized gain (loss) on investment
securities available for sale, net of
deferred tax expense......................... (98,147) 60,664 177,552 113,929
---------- ---------- ---------- ---------
Comprehensive Income......................... $ 467,367 $ 672,854 $ 944,378 $ 840,613
========== ========= ========== ==========
See accompanying notes to financial statements.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
First Federal of Olathe Bancorp has been formed as part of the
conversion and, accordingly, has no results of operations. First Federal's net
income is primarily dependent on its net interest income, which is the
difference between interest income earned on its mortgage loans and investment
securities and its cost of funds consisting of interest paid on deposits and
borrowings. First Federal's net income also is affected to a lesser extent by
the amount of non-interest income, including income from fees and service
charges, and non-interest expense such as employee compensation and benefits,
deposit insurance premiums, occupancy and administration costs, and income
taxes. Earnings of First Federal also are affected significantly by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities, which are
beyond the control of First Federal. The information contained in this section
should be read in conjunction with the Financial Statements, the accompanying
notes to financial statements and the other sections contained in this
prospectus.
Forward-Looking Statements
This prospectus contains forward-looking statements which are based on
assumptions and describe future plans, strategies and expectations of First
Federal of Olathe Bancorp and First Federal. These forward-looking statements
are generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar words. First Federal's ability
to predict results or the actual effect of future plans or strategies is
uncertain. Factors which could have a material adverse effect on First Federal's
operations include, but are not limited to, changes in interest rates, general
economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in First Federal's market area and accounting principles and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and you should not rely too much on these statements.
Business Strategy
First Federal's current business strategy is to operate as a
well-capitalized, profitable, and independent community-oriented savings and
loan dedicated to providing quality customer service. Generally, First Federal
has sought to implement this strategy by emphasizing deposits as its primary
source of funds and maintaining a substantial part of its assets in
locally-originated residential first mortgage loans and in liquid investment
securities. Specifically, First Federal's business strategy incorporates the
following elements: (1) operating as a community- oriented financial
institution, dedicated to serving the needs of First Federal's customers; (2)
emphasizing investment in one- to four-family residential mortgage loans; (3)
maintaining asset quality; (4) controlling operating expenses; (5) maintaining
capital in excess of regulatory requirements; and (6) maintaining a strong
deposit base.
Highlights of First Federal's business strategy are as follows:
Community-Oriented Institution; Continuity of Management. First Federal
is committed to meeting the financial needs of its customers in Johnson County,
Kansas, the county in which it operates. First Federal concentrates on
originating 15-year mortgage loans and believes it is able to provide such
service on a personalized and efficient basis. Management believes First Federal
can more effectively service its customers than many of its non-locally
headquartered competitors because of its ability to quickly and effectively
provide senior management responses to customer needs and inquiries. First
Federal's ability to provide this service is enhanced by the stability of its
management. Since 1927, First Federal has been served by only three managing
officers, all members of the Ashlock family: Donald M. Ashlock served from 1927
to 1967; his son, Donald K. Ashlock, the current chairman of the board, served
from 1967 to 1995; and Donald K. Ashlock's son, Mitch Ashlock, has served from
1995 to the present.
Emphasizing Traditional One-to-Four Family Residential Real Estate
Lending. Historically, First Federal has emphasized one-to-four family
residential lending within First Federal's primary market area. As of September
30, 1999, 100% of First Federal's total loan portfolio consisted of one- to
four- family residential real estate loans. Although the yields on residential
mortgage loans are often less than the yields on consumer loans and commercial
real estate loans, First Federal intends to continue to emphasize one- to four-
family lending
23
because of its expertise with such lending, and the relatively low delinquency
rates on one- to four- family mortgage loans as compared to other loans.
Asset Quality. Management believes that First Federal's high asset
quality is a result of its conservative underwriting standards. First Federal's
emphasis on traditional residential mortgage loans with 80% loan-to-value
limitations has resulted in minimal problem assets. At September 30, 1999 and
December 31, 1998, First Federal's ratio of nonperforming assets to total assets
was .29% and .24%, respectively.
Controlling Operating Expense. First Federal has managed to control
non-interest expense by limiting the overall number of its employees, and
carefully managing operating expenses. In addition, First Federal maintains a
low occupancy expense by operating out of one building. First Federal's
non-interest expense as a percentage of average total assets was .56% and .62%
for the nine months ended September 30, 1999 and the year ended December 31,
1998, respectively. However, as a result of the conversion, management
anticipates an increase in non-interest expenses associated with First Federal's
status as a public company, resulting from increased administrative expenses,
including various filing fees, and legal, accounting and other professional
expenses, as well as increased compensation expenses associated with the new
stock benefit plans and possible additions to First Federal's staff.
Capital Strength. First Federal's policy has always been to protect the
safety and soundness of First Federal through conservative risk management,
sound operations and a strong capital position. First Federal's total equity at
September 30, 1999 totaled $9.0 million, and its ratio of equity to total assets
was 19.5%.
Strong Retail Deposit Base. Historically, First Federal has experienced
a relatively strong retail deposit base drawn from one office located in
downtown Olathe, Kansas. At September 30, 1999, approximately 15.4% of First
Federal's deposit base of $35.2 million consisted of savings accounts and money
market deposit accounts. At September 30, 1999, 84.6%, or $29.8 million, of
First Federal's deposit base consisted of certificates of deposit ranging in
maturity from 6 months to 60 months. First Federal does not currently accept
brokered deposits. However, in 1998 and early 1999, First Federal supplemented
its local deposits with brokered deposits from outside its market area to raise
funds during a period of strong loan demand.
First Federal does not intend to change its business materially after
the conversion. However, in order to offer more product variety to its customers
and potential customers, First Federal intends to explore offering fixed-rate
residential mortgage loans with terms of up to 25 years, commercial real estate
loans with fixed-rates and, to a lesser extent, loans secured by deposit
accounts. First Federal also intends to explore adjustable rate lending through
the purchase of one- to four- family adjustable rate loans on a limited basis,
provided such loans are secured by local properties and are serviced by the
originator of the loan or a third party. First Federal may hire an additional
employee to support the expanded lending activities of the converted
institution. Implementation of these planned new loan programs will be gradual
so that personnel can be trained adequately and the necessary underwriting and
delivery systems can be implemented.
Financial Condition
Total assets increased $1.6 million, or 3.6%, to $46.2 million at
September 30, 1999, from $44.6 million at December 31, 1998. This increase was
primarily the result of an increase of $2.4 million in mortgage loans and an
increase of $2.0 million in securities held to maturity, offset by a decrease of
$2.8 million in cash and cash equivalents. Total assets increased $11.6 million,
or 35.2%, to $44.6 million at December 31, 1998 from $33.0 million at December
31, 1997. This increase was primarily the result of an increase of $3.2 million
in mortgage loans, an increase of $5.1 million in securities held to maturity
and an increase of $2.9 million in total cash and cash equivalents. These
increases reflected First Federal's decision to pursue opportunities for growth
during recent time periods.
Mortgage loans increased $2.4 million, or 8.3%, to $31.4 million at
September 30, 1999, from $29.0 million at December 31, 1998. Mortgage loans
increased $3.3 million, or 12.8%, to $29.0 million at December 31, 1998 from
$25.7 million at December 31, 1997. The increase during each of these periods
reflect First Federal's controlled growth strategy, including taking advantage
of the strong housing market in First Federal's market area.
Securities held to maturity increased $2.0 million, or 22.2%, to $11.0
million at September 30, 1999 from $9.0 million at December 31, 1998. Securities
held to maturity increased $5.1 million or 130.8%, to $9.0 million at December
31, 1998 from $3.9 million at December 31, 1997, reflecting the purchase of
federal agency debt securities. The increase in securities was primarily
attributable to First Federal's acceptance of brokered deposits in 1998 and
early 1999 which led to an increase in funds which could not immediately be
invested into
24
loans. Over time, a portion of the deposits was invested into loans, however, a
significant portion was invested in securities with maturities of five to 15
years.
Deposits increased $520,000, or 1.5%, to $35.2 million at September 30,
1999 from $34.7 million at December 31, 1998. Deposits increased $9.6 million,
or 38.2%, to $34.7 million at December 31, 1998 from $25.1 million at December
31, 1997. The increases in deposits resulted primarily from First Federal's
practice in 1998 and early 1999 of accepting brokered deposits.
First Federal obtained $1.0 million of FHLB advances during the year
ended December 31, 1998. These advances were used to fund First Federal's growth
during the year.
Total equity increased $467,000, or 5.9%, to $9.0 million at September
30, 1999 from $8.5 million at December 31, 1998, due primarily to First
Federal's net income during the nine months ended September 30, 1999.
Analysis of Net Interest Income
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 volume of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
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 total dollar amount of interest expense on average
interest-bearing liabilities and the resultant rates. No tax-equivalent
adjustments were made. All average balances are monthly average balances. First
Federal's management does not believe the use of monthly balances instead of
daily balances results in a material difference in the information presented.
Nine Months Ended September 30,
----------------------------------------------------------------
At September 30, 1999 1999 1998
-------------------- ----------------------------- --------------------------------
Average Interest Average Interest
Outstanding Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Rate Balance Paid Rate(1) Balance Paid Rate(1)
------- ---- ------- ---- ------- ------- ---- -------
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable............. $ 31,371 8.20% $ 30,423 $ 1,975 8.66% $ 27,454 $ 1,779 8.64%
Investment securities........ 11,000 6.81 9,889 506 6.82 5,542 332 7.99
FHLB stock................... 303 6.60 287 15 6.97 314 18 7.63
Interest-earning deposits.... 2,400 6.76 3,644 159 5.82 4,233 172 5.42
-------- ---- -------- ------- ---- -------- -------- ----
Total interest-earning
assets..................... 45,074 44,243 2,655 8.00 37,544 2,301 8.17
Other non-interest earning
assets........................ 1,171 1,900 1,086
-------- -------- --------
Total assets................ $ 46,245 $ 46,143 $ 38,630
======== ======== ========
Interest-Bearing Liabilities:
Savings deposits............. $ 3,214 3.00 $ 3,285 74 3.00 $ 3,099 69 2.97
Money market accounts........ 2,213 3.00 2,325 52 2.98 2,419 55 3.03
Certificate accounts......... 29,794 5.87 29,857 1,292 5.77 23,403 1,010 5.75
FHLB advances................ 1,000 5.66 1,000 43 5.73 889 38 5.70
-------- ---- -------- -------- ---- -------- -------- ----
Total interest-bearing
liabilities................... 36,221 36,468 1,461 5.34 29,810 1,172 5.24
Non-interest-bearing
liabilities................... 1,015 826 836
Equity......................... 9,009 8,849 7,984
-------- -------- --------
Total liabilities and equity $46,245 $ 46,143 $ 38,630
======== ======== ========
Net interest income............ $ 1,194 $ 1,129
======== ========
Net interest rate spread..... 2.66% 2.93%
==== ====
Net earning assets............. $ 8,853 $ 7,775 $ 7,733
======== ======== ========
Net yield on average interest
-earning assets.............. 3.60% 4.01%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities.................. 124.44% 121.37% 125.94%
====== ====== ======
- -------------
(1) Nine month yield/rates are annualized.
25
Years Ended December 31,
-----------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
Interest-Earning Assets:
Loans receivable.............................. $ 27,784 $ 2,395 8.62% $ 24,967 $ 2,178 8.72%
Investment securities......................... 6,323 11,409 6.47 5,397 415 7.69
FHLB Stock.................................... 311 23 7.41 295 21 7.12
Interest-earning deposits..................... 4,642 261 5.62 1,900 98 5.16
-------- -------- ---- -------- -------- -------
Total interest-earning assets............... 39,059 3,088 7.91 32,559 2,712 8.33
Other non-interest earning assets................ 1,179 890
-------- --------
Total assets.................................. $ 40,238 $ 33,449
======== ========
Interest-Bearing Liabilities:
Savings deposits.............................. $ 3,207 96 2.99 $ 2,241 66 2.94
Money market accounts......................... 2,397 72 3.00 2,673 80 2.99
Certificates accounts......................... 24,715 1,432 5.79 20,588 1,190 5.78
FHLB advances................................. 917 52 5.67 -- -- --
-------- -------- ---- -------- -------- ----
Total interest-bearing liabilities............. 31,236 1,652 5.29 25,502 1,336 5.24
Non-interest-bearing liabilities................. 888 706
Equity........................................... 8,114 7,241
-------- --------
Total liabilities and equity................... $ 40,238 $ 33,449
======== ========
Net interest income............................ $ 1,436 $ 1,376
======== ========
Net interest rate spread...................... 2.62% 3.09%
==== ====
Net earning assets............................ $ 7,823 $ 7,057
======== ========
Net yield on average interest
-earning assets............................. 3.68% 4.23%
==== ====
Average interest-earning assets
to average interest-bearing liabilities..... 125.05% 127.67%
====== ======
The following table 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 changes in volume (i.e.,
changes in volume multiplied by old rate) and 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.
Nine Months Ended September 30, Years Ended December 31,
1999 vs. 1998 1998 vs. 1997
------------------------------- --------------------------------
Increase/(Decrease) Increase/(Decrease)
Due To Total Due To Total
------------------ Increase/ ------------------ Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
Interest-earning assets
Loans receivable....................... $ 192 $ 4 $ 196 $ 246 $ (29) $ 217
FHLB stock............................. (2) (1) (3) 1 1 2
Investment securities.................. 260 (86) 174 71 (77) (6)
Interest-earning deposits.............. (24) 11 (13) 141 22 163
------ ------ ------ ------ ------ ------
Total interest-earning assets........ $ 426 $ (72) $ 354 $ 459 $ (83) $ 376
====== ====== ====== ====== ====== ======
Interest-bearing liabilities:
Savings deposits....................... $ 4 $ 1 $ 5 $ 28 $ 2 $ 30
Money market........................... (2) (1) (3) (8) -- (8)
Certificate accounts................... 278 4 282 239 3 242
FHLB advances.......................... 5 -- 5 52 -- 52
------ ------ ------ ------ ------ ------
Total interest-bearing liabilities... $ 285 $ 4 $ 289 $ 311 $ 5 $ 316
====== ======= ====== ====== ======= ======
Net interest income....................... $ 65 $ 60
====== ======
Comparison of Operating Results for the Nine Months Ended September 30, 1999 and
1998
Performance Summary. Comprehensive income decreased $206,000 from
$673,000 for the nine months ended September 30, 1998, to $467,000 for the nine
months ended September 30, 1999. The decrease was due primarily to a decrease of
$159,000 in unrealized gain on available for sale securities. Net income
decreased $46,000 for the nine months ended September 30, 1999, as compared to
the nine months ended September 30, 1998.
26
Net Income. Net income for the nine months ended September 30, 1999,
decreased by $46,000, or 7.5%, to $566,000 from $612,000 for the nine months
ended September 30, 1998. The decrease reflected the combined effects of a
$65,000 increase in net interest income offset by a $15,000 increase in
non-interest expense and an increase of $150,000 in the provision for loan
losses for the 1999 period compared to the 1998 period. There was a $55,000
decrease in income taxes for the 1999 period compared to the 1998 period. For
the nine months ended September 30, 1999 and 1998, the returns on average assets
were 1.63% and 2.11%, respectively, while the returns on average equity were
8.52% and 10.22%, respectively.
Net Interest Income. For the nine months ended September 30, 1999, net
interest income increased by $65,000, or 5.9%, to $1.2 million from $1.1 million
for the nine months ended September 30, 1999. The increase reflected an increase
of $354,000 in interest income to $2.7 million for the 1999 period from $2.3
million for the 1998 period, which more than offset an increase of $289,000 in
interest expense to $1.5 million for the 1999 period from $1.2 million for the
1998 period. The increase in interest income reflected increased average
balances of loans receivable and investment securities. The increase in interest
expense reflected increased balances of certificate accounts.
For the nine months ended September 30, 1999, the average yield on
interest-earning assets was 8.00% compared to 8.17% for the nine months ended
September 30, 1998. The average cost of interest-bearing liabilities was 5.34%
for the nine months ended September 30, 1999, compared to 5.24% for the nine
months ended September 30, 1998. The average balance of interest-earning assets
increased by $6.7 million to $44.2 million for the nine months ended September
30, 1999, from $37.5 million for the nine months ended September 30, 1998. The
average balance of interest-bearing liabilities increased by $6.7 million to
$36.5 million for the nine months ended September 30, 1999, from $29.8 million
for the same period ended September 30, 1998.
First Federal's average interest rate spread was 2.66% for the nine
months ended September 30, 1999, compared to 2.93% for the nine months ended
September 30, 1998. The average net interest margin was 3.60% for the nine
months ended September 30, 1999, compared to 4.01% for the nine months ended
September 30, 1998.
Provision for Loan Losses. For the nine months ended September 30,
1999, the provision for loan losses increased to $150,000 from none recorded for
the nine months ended September 30, 1998. First Federal's loans receivable has
increased significantly in the last several years. First Federal examined its
market area, the increase in the size of its loan portfolio, the components of
its loan portfolio, including loans on non-owner- occupied properties,
statistical data for the financial institutions industry generally, and
concluded that the allowance for loan losses should be increased. The increase
results in First Federal's allowance for loan losses totaling .56% of total
loans. Management will continue to monitor its allowance for loan losses and
make future additions to the allowance through the provision for loan losses as
economic conditions and First Federal's performance dictate. Although First
Federal maintains its allowance for loan losses at a level which it considers to
be adequate to provide for potential losses, 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.
Non-Interest Income. Non-interest income decreased to $16,000 for the
nine months ended September 30, 1999 from $17,000 for the nine months ended
September 30, 1998.
Non-Interest Expense. Non-interest expense increased by $14,000 to
$194,000 for the nine months ended September 30, 1999, from $180,000 for the
nine months ended September 30, 1998, reflecting small increases in various
components of non-interest expense.
Income Taxes. Income taxes decreased by $55,000 to $300,000 for the
nine months ended September 30, 1999, from $355,000 for the nine months ended
September 30, 1998. The effective tax rates were 34.7% and 36.7%for the nine
months ended September 30, 1999 and 1998, respectively.
Comparison of Operating Results for the Fiscal Years Ended December 31, 1998 and
1997
Performance Summary. Comprehensive income increased by $104,000 from
$840,000 for the year ended December 31, 1997, to $944,000 for the year ended
December 31, 1998. The increase was a result of an increase of $64,000 in
unrealized gain on available for sale securities and an increase of $40,000 in
net income for the year ended December 31, 1998, as compared to the year ended
December 31, 1997.
Net Income. Net income for the year ended December 31, 1998, increased
by $40,000, or 5.5%, to $767,000 from $727,000 for the year ended December 31,
1997. The increase was primarily due to an increase in net interest income of
$56,000, or 4.1% from $1.4 million for the year ended December 31, 1997, to $1.4
million
27
for the year ended December 31, 1998. Non-interest expenses also decreased
$15,000 from $263,000 for the year ended December 31, 1997, to $248,000 for the
year ended December 31, 1998. These improvements were partially offset by an
increase in income tax expense of $43,000 from $399,000 for the year ended
December 31, 1997, to $442,000 for the year ended December 31, 1998.
Net Interest Income. For the year ended December 31, 1998, net interest
income increased by $56,000, or 4.0%, to $1.4 million from $1.4 million for
fiscal 1997. The increase included an increase of $372,000 in interest income to
$3.1 million in fiscal 1999 from $2.7 million in fiscal 1998, which more than
offset an increase of $316,000 in interest expense to $1.7 million in fiscal
1999 from $1.3 million in fiscal 1998. The increase in interest income reflected
an increase in the balance of loans receivable due to favorable economic
conditions and increased demand for single-family homes in Johnson County,
Kansas and an increase in the balance of other interest-earning assets,
comprised of interest carrying deposits with the FHLB of Topeka. Interest
expense increased primarily as a result of increased borrowings to meet loan
demand and an increase in certificate balances and rates. Net interest income
increased primarily as a result of the increase in the average balance of
interest-earning assets in fiscal 1998, as compared to the increase in the
average balance of interest-bearing liabilities.
For the year ended December 31, 1998, the average yield on
interest-earning assets was 7.91% compared to 8.33% for fiscal 1997. The average
cost of interest-bearing liabilities was 5.29% for the year ended December 31,
1998, an increase of 5 basis points from 5.24% for fiscal 1997. The average
balance of interest-earning assets increased by $6.5 million to $39.1 million
for the year ended December 31, 1998, compared to $32.6 million for fiscal 1997.
During this same period, the average balance of interest-bearing liabilities
increased by $5.7 million to $31.2 million for the year ended December 31, 1998,
from $25.5 million for fiscal 1997.
Due to higher funding costs, the average interest rate spread was 2.62%
for the year ended December 31, 1998, compared to 3.09% in fiscal 1997. The
average net interest margin was 3.68% for the year ended December 31, 1998,
compared to 4.23% for the year ended December 31, 1997.
Non-Interest Income. Non-interest income increased to $19,000 in fiscal
1998 from $7,000 in fiscal 1997 due to higher service charges and other fees.
Non-Interest Expense. Non-interest expense decreased by $15,000 to
$248,000 for the year ended December 31, 1998, from $263,000 for the year ended
December 31, 1997. The decrease reflected a decrease in other miscellaneous
expenses.
Income Taxes. Income taxes increased $43,000 to $442,000 for the year
ended December 31, 1998, from $399,000 for the year ended December 31, 1997. The
effective tax rates were 36.6% and 35.4% for the years ended December 31, 1998
and 1997, respectively.
Asset/Liability Management and Market Risk
Savings institutions such as First Federal are subject to interest rate
risk to the extent their interest-bearing liabilities, consisting primarily of
deposit accounts and FHLB advances, mature or reprice more rapidly, or on a
different basis, than their interest-earning assets, consisting predominantly of
15-year fixed rate real estate loans and investments held for investment and
liquidity purposes. Having interest-bearing liabilities that mature or reprice
more frequently on average than assets may be beneficial in times of declining
interest rates, although such an asset/liability structure may result in
declining net interest earnings during periods of rising interest rates.
Conversely, having interest-earning assets that mature or reprice more
frequently on average than liabilities may be beneficial in times of rising
interest rates, although this asset/liability structure may result in declining
net interest earnings during periods of falling interest rates.
28
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at September 30, 1999, which are
expected to reprice or mature in each of the future time periods shown. Except
for deposits, which are classified as repricing in the "within 1 year" category,
the amounts of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual terms of the asset or liability.
Amounts Maturing or Repricing at September 30, 1999
--------------------------------------------------------------
Within Over
1 Year 1-3 Years 3-5 Years 5-15 Years 15 Years Total
--------- --------- --------- ---------- -------- -----
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable............................. $ 10 $ 534 $ 620 $29,656 $ 551(1) $31,371
Investment securities........................ -- -- -- 11,000 -- 11,000
FHLB stock................................... 303 -- -- -- -- 303
Interest-earning deposits.................... 2,400 -- -- -- -- 2,400
------- ------- ------- ------- ------- -------
Total interest-earning assets............... $ 2,713 $ 534 $ 620 $40,656 $ 551 $45,074
======= ======= ======= ======= ======= =======
Interest-Bearing Liabilities:
Savings deposits............................. $ 3,214 $ -- $ -- $ -- $ -- $ 3,214
Money market accounts........................ 2,213 -- -- -- -- 2,213
Certificate accounts......................... 14,602 9,170 5,922 100 -- 29,794
FHLB advances................................ 1,000 -- -- -- -- 1,000
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities.......... $21,029 $ 9,170 $ 5,922 $ 100 $ -- $36,221
======= ======= ======= ======= ======= =======
Interest sensitivity gap....................... $(18,316) $(8,636) $(5,302) $40,556 $ 551 $ 8,853
======== ======= ======= ======= ======= =======
Cumulative interest sensitivity gap............ $(18,316) $(26,952) $(32,254) $ 8,302 $ 8,853 $17,706
======== ======== ======== ======= ======= =======
Ratio of interest-earning assets to
interest-bearing liabilities.................. 12.90% 5.82% 10.47% 40656.28% N.A. 124.44%
Ratio of cumulative gap to total assets........ (39.61)% (58.28)% (69.75)% 17.95% 19.14% 38.29%
- ----------
(1) Includes $473,000 of 15-year loans originated in September 1999 with a
final payment due on October 1, 2014. Also includes one loan with a balance
of $78,000, which, by special approval of First Federal's Board of
Directors, was modified from a 15-year term to a 25- year term upon the
request of a long time customer in view of special circumstances.
Net Portfolio Value. First Federal monitors and evaluates the potential
impact of interest rate changes upon the market value of First Federal's
portfolio equity on a quarterly basis, in an attempt to ensure that interest
rate risk is maintained within limits established by the Board of Directors.
First Federal uses the quarterly reports from the OTS which show the impact of
changing interest rates on First Federal's net portfolio value ("NPV"). NPV is
the difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off- balance sheet contracts. An institution has greater than
"normal" interest rate risk if it would suffer a loss of NPV exceeding 2.0% of
the estimated market value of its assets in the event of a 200 basis point
increase or decrease in interest rates. A resulting change in NPV of more than
2% of the estimated market value of an institution's assets will require the
institution to deduct from its risk-based capital 50% of that excess change, if
and when a rule adopted by the OTS takes effect. Under the rule, an institution
with greater than "normal" interest rate risk will be subject to a deduction of
its interest rate risk component from total capital for purposes of calculating
the risk- based capital requirement. However, the OTS has indicated that no
institutions will be required to deduct capital for interest rate risk until
further notice. Because a 200 basis point increase in interest rates would have
resulted in First Federal's NPV declining by more than 2% of the estimated
market value of First Federal's assets as of September 30, 1999, First Federal
would have been subject to a capital deduction as of September 30, 1999 if the
regulation had been effective as of such date.
29
The following table presents First Federal's NPV as of September 30,
1999, as calculated by the OTS, based on information provided to the OTS by
First Federal.
Net Portfolio Equity
--------------------------------------------
Changes in Amount of Percent NPV as a % of Basis
Interest Rates Estimated Change Change Portfolio Value Point
(basis points) NPV NPV in NPV of Assets Change
-------------- --- --- ------ --------- ------
(Dollars in Thousands)
300 $ 7,710 $ (3,314) (30)% 17.82% (518)bp
200 8,845 (2,179) (20) 19.72 (328)
100 9,984 (1,040) (9) 21.50 (150)
0 11,024 -- -- 23.00 --
-100 11,915 891 8 24.17 117
-200 12,826 1,802 16 25.30 230
-300 13,857 2,833 26 26.53 353
Although the OTS has informed First Federal that it is not subject to
the interest rate risk component discussed above, First Federal is still subject
to interest rate risk and, as can be seen above, rising interest rates will
reduce First Federal's NPV. The OTS has the authority to require otherwise
exempt institutions to comply with the rule concerning interest rate risk.
Certain shortcomings are inherent in the method of analysis presented
in both the computation of NPV and in the analysis presented in the prior table
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. 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, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in the table.
All of First Federal's loan portfolio at September 30, 1999 have fixed
interest rates. First Federal's fixed-rate loans help its profitability if
interest rates are stable or declining, since these loans have yields that
exceed its cost of funds. However, if interest rates increase, First Federal
would have to pay more on its deposits and new borrowings, which would adversely
affect First Federal's interest rate spread.
First Federal's Board of Directors has formulated asset/liability
management policies designed to promote long-term profitability while managing
interest rate risk. These policies are designed to reduce the impact of changes
in interest rates on First Federal's net interest income by achieving a more
favorable match between the maturity or repricing dates of its interest-earning
assets and interest-bearing liabilities. First Federal has sought to maintain a
strong base of less interest-sensitive and lower-costing deposits in the form of
money market accounts and savings accounts, and emphasizing 18-month to 60-month
maturity certificates of deposit.
Liquidity and Capital Resources
First Federal's primary sources of funds are deposits, FHLB advances,
repayments on loans, the maturity of investment securities, and interest income.
Although maturity and scheduled amortization of loans are relatively predictable
sources of funds, deposit flows and prepayments on loans are influenced
significantly by general interest rates, economic conditions, and competition.
The primary investing activity of First Federal is the origination of
loans to be held for investment. For the nine months ended September 30, 1999,
and the fiscal year ended December 31, 1998, First Federal originated loans for
portfolio in the amount of $10.6 million and $11.8 million, respectively. For
the nine months ended September 30, 1999, and the fiscal year ended December 31,
1998, these activities were funded primarily by principal repayments of $7.9
million and $8.4 million, respectively, and a net increase in deposits of
$520,000 and $9.6 million, respectively.
First Federal is required to maintain minimum levels of liquid assets
under the OTS regulations. Savings institutions are required to maintain an
average daily balance of liquid assets (including cash, certain time deposits,
and specified U.S. Government, state, or federal agency obligations) of not less
than 4.0% of its average daily balance of net withdrawal accounts plus
short-term borrowings. It is First Federal's policy to maintain its liquidity
portfolio in excess of regulatory requirements.
30
First Federal's most liquid assets are cash and cash equivalents, which
include overnight deposits at First National Bank of Olathe and the FHLB of
Topeka. The levels of these assets are dependent on First Federal's operating,
financing, lending, and investment activities during any given period. At
September 30, 1999 and at December 31, 1998, cash and cash equivalents were $2.5
million and $5.2 million, respectively. The decrease in cash and cash
equivalents at September 30, 1999, compared to December 31, 1998, resulted
primarily from the use of cash to fund loans. The principal component of cash
provided during the nine months ended September 30, 1999, and the fiscal year
ended December 31, 1998, was the proceeds from loan repayments, deposit
activity, and investment maturities.
Liquidity management for First Federal is both an ongoing and long-term
function of First Federal's asset/liability management strategy. Excess funds
generally are invested in overnight deposits at the FHLB of Topeka and the First
National Bank of Olathe. Should First Federal require funds beyond its ability
to generate them internally, additional sources of funds are available through
FHLB advances. First Federal would pledge its FHLB stock or certain other assets
as collateral for such advances. For the nine months ended September 30, 1999,
First Federal had an average balance of $1.0 million in FHLB advances.
At September 30, 1999, First Federal had outstanding loan commitments
of $477,000 and did not have any undisbursed loans in process. First Federal
anticipates it will have sufficient funds available to meet its current loan
commitments, including loan applications received and in process prior to the
issuance of firm commitments. Certificates of deposit which are scheduled to
mature in one year or less at September 30, 1999, were $14.6 million. Management
believes that a significant portion of such deposits will remain with First
Federal.
Following consummation of the conversion, First Federal of Olathe
Bancorp initially will have no business other than holding the capital stock of
First Federal and the investment of the net proceeds from the conversion.
Management believes the net proceeds will provide sufficient funds for First
Federal of Olathe Bancorp's operations.
Under federal law, First Federal is required to meet certain tangible,
core and risk based capital requirements. For information regarding First
Federal's regulatory capital compliance, see "Pro Forma Regulatory Capital" and
"Regulation--Regulatory Capital Requirements."
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented in this prospectus
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of First Federal's operations. Unlike industrial companies, nearly all of
the assets and liabilities of First Federal are monetary in nature. As a result,
interest rates have a greater impact on First Federal's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Impact of New Accounting Standards
Reporting Comprehensive Income. In June 1997, the Financial Accounting
Standards Board, or FASB, issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). This Statement requires
entities presenting a complete set of financial statements to include details of
comprehensive income that arise in the reporting period. Comprehensive income
consists of net income or loss for the current period and other comprehensive
income consisting of revenue, expenses, gains and losses that bypass the income
statement and are reported directly in a separate component of equity. Other
comprehensive income includes, for example, unrealized gains and losses on
certain investment securities, minimum pension liability adjustments, and
foreign currency items. SFAS No. 130 requires that components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. At September 30, 1999, First Federal's
other comprehensive income consisted of unrealized gains on securities
classified as available for sale. This Statement is effective for fiscal years
beginning after December 15, 1997, and requires restatement of prior period
financial statements presented for comparative purposes.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131"). This Statement changes the current practice for reporting segment
information under SFAS No. 14, "Financial Reporting for Segments of an
Enterprise." Public entities are required to report financial and descriptive
information about their reportable operating segments. An operating segment is a
31
component of an entity for which financial information is developed and
evaluated by the entity's chief operating decision maker to assess performance
and to make decisions about resource allocation. Disclosures about operating
segments should generally be based on the information used internally. This
Statement is effective for financial statements for periods beginning after
December 15, 1997. On adoption, comparative information for earlier years is to
be restated. Based on current operations, First Federal does not believe
adoption of this Statement will have any impact on its public financial
reporting.
Employers' Disclosures about Pensions and Other Postretirement
Benefits. In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which standardizes the disclosure requirements for
pensions and other post-retirement benefits, requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that the FASB
no longer considers as useful as when they were issued. This statement suggests
combined formats for presentation of pension and other post-retirement benefit
disclosures. This statement is effective for fiscal years beginning after
December 15, 1997.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
requires that all derivatives be recognized at fair value as either assets or
liabilities on the balance sheet. If certain conditions are met, a derivative
may be specifically designated as a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, a
hedge of the exposure to variable cash flows of a forecasted transaction, or a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign- currency-denominated forecasted transaction. The accounting for changes
in fair value of a derivative depends on the intended use of the derivative and
the resulting designation. This Statement generally provides for matching the
timing of a gain or loss recognition on the hedging instrument with the
recognition of the changes in the fair value of the hedged asset or liability
that are attributable to the hedged risk or the earnings effect of the hedged
forecasted transaction. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999, with earlier application encouraged.
Retroactive application to prior periods is prohibited. First Federal does not
use derivative instruments and therefore the adoption of the Statement is not
expected to have a material impact on the financial statements of First Federal
of Olathe Bancorp.
32
BUSINESS OF FIRST FEDERAL OF OLATHE BANCORP, INC.
First Federal of Olathe Bancorp is a Kansas corporation organized in
December 1999 by First Federal for the purpose of becoming a unitary savings and
loan holding company of First Federal. We will purchase all of the capital stock
of First Federal to be issued in the conversion in exchange for 50% of the net
conversion proceeds and will retain the remaining 50% of the net proceeds as our
initial capitalization. Immediately following the conversion, our only
significant assets will be the capital stock of First Federal, our loan to the
ESOP, and the remainder of the net conversion proceeds retained by us. The
business and management of First Federal of Olathe Bancorp will initially
primarily consist of the business and management of First Federal.
BUSINESS OF FIRST FEDERAL
General. First Federal was founded in 1923 as a state-chartered mutual
savings association under the name Central Building and Loan Association. In
1934, First Federal converted to a federal mutual savings association charter
and adopted its current name. First Federal is regulated by the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation. First Federal's
deposits have been federally insured since 1934 and are currently insured by the
Federal Deposit Insurance Corporation under the Savings Association Insurance
Fund. First Federal has been a member of the Federal Home Loan Bank System since
1933.
First Federal operates as a traditional savings association,
specializing in one-to four- family residential mortgage lending and savings
deposits. First Federal's business consists primarily of attracting retail
deposits from the general public and using those funds to originate real estate
loans. First Federal holds its loans for long-term investment purposes. First
Federal also invests in various investment securities. See "--Lending
Activities."
Lending Activities
General. At September 30, 1999, First Federal's net loan portfolio
totaled $31.4 million, representing approximately 68.0% of First Federal's $46.2
million of total assets at that date. The principal lending activity of First
Federal is the origination of fixed-rate, one- to four-family residential loans
with terms of up to 15 years. At December 31, 1997 and 1998 and at September 30,
1999 First Federal's loan portfolio consisted exclusively of first mortgage,
one- to four-family residential loans. Although First Federal's lending policies
permit the origination of commercial real estate loans, multi-family loans and
loans secured by deposit accounts, First Federal's loan portfolio has not
included any of such loans in recent years. First Federal also occasionally
originates construction/permanent loans to individuals for the construction and
permanent financing of one- to four-family dwellings, although First Federal has
originated very few construction/permanent loans in recent years. First Federal
retains in its portfolio all loans that it originates.
After the conversion, First Federal plans to implement a program for
offering longer-term, fixed-rate residential mortgage loans with terms of up to
25 years, and fixed-rate commercial real estate loans. First Federal also
intends to explore adjustable rate lending through the purchase of adjustable
rate loans on a limited basis. To a lesser extent, First Federal also intends to
originate loans secured by deposit accounts.
The types of loans that First Federal may originate are subject to
federal and state laws and regulations. Interest rates charged by First Federal
on loans are affected principally by the demand for such loans and the supply of
money available for lending purposes and the rates offered by its competitors.
These factors are, in turn, affected by general and economic conditions, the
monetary policy of the federal government, including the Federal Reserve Board,
legislative and tax policies, and governmental budgetary matters.
Under OTS regulations, a thrift institution's loans-to-one borrower
limit is generally limited to the greater of 15% of unimpaired capital and
surplus or $500,000. See "Regulation--Federal Regulation of Savings
Associations." At September 30, 1999, First Federal's limit on loans-to-one
borrower was $1.3 million. At that date, First Federal's largest amount of loans
to one borrower, including the borrower's related interests, was $1.3 million
and consisted of 23 residential mortgage loans secured by non-owner occupied,
investor-owned homes. These loans were performing according to their original
terms at September 30, 1999.
33
Loan Portfolio Composition. The following table shows the composition
of First Federal's loan portfolio by type of loan at the dates indicated. First
Federal's loan portfolio is composed solely of loans with fixed rates of
interest.
At September 30, At December 31,
--------------------- -----------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family..................... $ 31,867 100.00% $ 29,262(1) 100.00% $ 25,949 100.00%
--------- ------- --------- ------- --------- -------
Total real estate loans................. 31,867 100.00% 29,262 100.00% 25,949 100.00%
--------- ======= --------- ======= --------- =======
Less:
Loans in process........................ -- -- --
Deferred fees and discounts............. 321 259 182
Allowance for losses.................... 175 25 25
--------- --------- ---------
Total loans receivable, net............. $ 31,371 $ 28,978 $ 25,742
========= ========= =========
- -------------
(1) Includes construction/permanent loan in the amount of $31,000.
One- to Four-Family Mortgage Loans. First Federal's primary lending
activity is the origination of first mortgage loans secured by one- to
four-family residential property located in First Federal's market area. A
portion of the one- to four-family mortgage loans originated by First Federal
are secured by investor-owned, nonowner occupied residences. Loans are generated
through First Federal's existing customers and referrals, real estate brokers
and other marketing efforts. First Federal generally has limited its real estate
loan originations to the financing of properties located within its market area
and has not made out-of-state loans. At September 30, 1999, First Federal had
$31.9 million, or 100% of its loan portfolio, invested in mortgage loans secured
by one- to four-family residences.
First Federal's residential mortgage loans have terms of up to 15
years. First Federal has originated only fixed-rate residential loans. First
Federal has no current plans to originate adjustable rate mortgages. However,
following the conversion, First Federal may explore adjustable rate lending
through the purchase of adjustable rate loans on a limited basis. All of the
loans made by First Federal are retained in its portfolio for long-term
investment. First Federal has not sold loans in the secondary mortgage market,
and First Federal's loans generally are not underwritten for resale in the
secondary mortgage market. First Federal's fixed-rate mortgage loans amortize
monthly with principal and interest due each month. Residential real estate
loans often remain outstanding for significantly shorter periods than their
contractual terms because borrowers may refinance or prepay loans at their
option.
Under First Federal's real estate lending policy, a title insurance
policy must be obtained for each real estate loan. First Federal also requires
fire and extended coverage casualty insurance, in order to protect the
properties securing its real estate loans. Borrowers must also obtain flood
insurance policies when the property is in a flood hazard area. First Federal
requires borrowers to advance funds to an escrow account for the payment of real
estate taxes but does not require escrowed funds for hazard insurance premiums
provided other proof of an effective hazard insurance policy is provided to
First Federal. First Federal generally makes loans up to a maximum amount of
$125,000, subject to exceptions by the Board of Directors. In recent years, as a
result of increasing property values, the Board has granted frequent waivers
from this maximum loan amount. Following the conversion, First Federal intends
to increase its maximum loan amount to $175,000, subject to further exceptions
at the discretion of the Board of Directors.
First Federal's residential mortgage loans customarily include
due-on-sale clauses, which are provisions giving First Federal the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are a means of increasing
the interest rate on First Federal's mortgage portfolio during periods of rising
interest rates.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
generally permit a maximum loan-to-value ratio of 95% for residential property
and 90% for all other real estate loans.
34
First Federal's lending policies, however, generally limit the maximum loan to
value ratio to 80% of the lesser of the appraised value or the purchase price of
the property securing the loan.
First Federal originates mortgage loans secured by non-owner-occupied
residential properties. At September 30, 1999, such loans totaled $11.5 million,
or 35.9% of First Federal's loan portfolio. Most of these loans are made to
investors and are secured by one- to four-family rental properties. These loans
are made on the same general terms as loans secured by owner-occupied
properties, including loan-to-value ratios of up to 80% and terms of up to 15
years. However, First Federal generally charges higher interest rates on
investor loans.
When underwriting residential real estate loans, First Federal reviews
and verifies each loan applicant's employment, income and credit history and, if
applicable, First Federal's experience with the borrower. First Federal's policy
is to obtain credit reports and financial statements on all borrowers and
guarantors, and to verify references. Properties securing real estate loans are
appraised by First Federal-approved independent appraisers. Appraisals are
subsequently reviewed by the First Federal's Board. Management believes that
stability of income, past credit history and adequacy of the proposed security
are integral parts in the underwriting process. Written appraisals are always
required on real estate property offered to secure an applicant's loan.
Currently, First Federal does not offer fixed-rate loans with terms
greater than 15 years or adjustable-rate residential mortgage loans. After the
conversion, First Federal plans to implement a program for offering longer term
fixed-rate mortgage loans, with terms of up to 25 years. First Federal also
plans to explore the purchase of adjustable rate loans, provided such loans are
secured by local properties and are serviced by the originator of the loan or a
third party. First Federal does not currently plan to originate adjustable rate
loans, although it may determine to do so in the future.
Residential Construction Loans. On a very limited basis, First Federal
originates residential construction loans to individuals for the construction
and permanent financing of their personal residence. Such loans are generally
made to individuals with whom First Federal has a pre-existing customer
relationship. First Federal's originations of construction/permanent loans have
been minimal during recent years. Construction loans to individuals are made on
the same general terms as First Federal's one- to four-family mortgage loans,
but provide for the payment of interest only during the construction phase,
which is usually six months. At the end of the construction phase, the loan
converts to a permanent mortgage loan.
Prior to making a commitment to fund a construction loan, First Federal
requires an appraisal of the property by an independent appraiser. First Federal
also reviews and inspects each project prior to disbursement of funds during the
term of the construction loan. Loan proceeds are disbursed after inspection of
the project based on percentage of completion.
Multi-Family and Commercial Real Estate Lending. In the past, First
Federal on infrequent occasions has originated loans secured by commercial real
estate. During recent years, however, First Federal's loan portfolio has not
included any such loans. First Federal plans to implement a program for offering
fixed-rate, commercial real estate loans following the conversion.
Historically, any multi-family and commercial real estate loans
originated by First Federal have been made on the same general terms as one- to
four-family loans, including fixed rates of interest, but with terms to maturity
and amortization schedules of up to 10 years, and in amounts up to 50% of the
lesser of the appraised value of the property or the sales price.
Consumer Loans. Historically, First Federal's consumer lending
activities have been limited to deposit account loans. At September 30, 1999, no
consumer loans were outstanding. First Federal does not expect to become an
active consumer lender, although it does expect to place some additional
emphasis on making deposit account loans following the conversion.
First Federal offers loans secured by savings deposits at First
Federal. Generally, these loans are made at an interest rate that is 2% above
the account rate for up to 100% of the account balance and for a term through
the next semi-annual earnings date of June 30 or December 31.
First Federal does not originate second mortgage or home equity loans,
but does make loans to existing borrowers for the purpose of home improvement.
These home improvement loans typically involve a modification to First Federal's
first mortgage. These loans are generally limited to 80% or less of the
appraised value of the property securing the loan based either upon the old
appraisal of the property or, if appropriate, a new appraisal of the property.
These loans are originated as fixed-rate loans and generally have maximum terms
of 15 years. First Federal also makes "additional advance" loans, which are
advances up to the amount of the original first mortgage
35
and which must be repaid prior to the original loan maturity. Because First
Federal's additional advance loans and loans for the purpose of home
improvements are secured by a first mortgage, rather than a second mortgage,
First Federal classifies these loans as one- to four-family residential loans.
Loan Origination and Other Fees. In addition to interest earned on
loans, First Federal receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the mortgage loan
and are charged to the borrower in connection with the origination of the loan.
First Federal generally charges loan origination fees equal to 2% of the loan
amount.
In accordance with Statement of Financial Accounting Standards No. 91,
which deals with the accounting for non-refundable fees and costs associated
with originating or acquiring loans, First Federal's loan origination fees and
certain related direct loan origination costs are offset, and the resulting net
amount is deferred and amortized as interest income over the contractual life of
the related loans as an adjustment to the yield of such loans. At September 30,
1999, First Federal had $321,000 of deferred costs which will be amortized using
the interest method.
Loan Maturity Schedule. The following schedule illustrates the
contractual maturity and weighted average rates of First Federal's total loan
portfolio at December 31, 1998. The schedule does not reflect the effects of
scheduled payments, possible prepayments or enforcement of due-on-sale clauses.
One- to Four-
Family
--------------------
Weighted
Average
Amount Rate
--------- ---------
(Dollars In Thousands)
Due During Years Ending December 31,
- ------------------------------------
1999................................................. $ 3 7.50%
2000................................................. 30 9.26
2001................................................. 159 9.49
2002 and 2003........................................ 748 8.78
2004 to 2008......................................... 4,508 8.29
2009 to 2023......................................... 26,419 8.16
--------- ---------
Total........................................... $ 31,867 8.40%
========= =========
The total amount of loans due after December 31, 1999 which have
predetermined interest rates is $31.9 million, while no loans due after such
date had floating or adjustable interest rates.
Scheduled contractual maturities of loans do not necessarily reflect
the actual expected term of First Federal's portfolio. The average life of
mortgage loans is substantially less than their average contractual terms
because of prepayments. The average life of mortgage loans tends to increase
when current mortgage loans rates are higher than rates on existing mortgage
loans and, conversely, decrease when rates on existing mortgage loans are lower
than current mortgage loan rates, due to refinancing of fixed-rate loans at
lower rates. Under the latter circumstance, the weighted average yield on loans
decreases as higher yielding loans are repaid or refinanced at lower rates.
Origination of Loans. The lending activities of First Federal are
subject to the written underwriting standards and loan origination procedures
established by First Federal's board of directors and management. Loan
originations are obtained through a variety of sources, including referrals from
existing customers and real estate brokers. Written loan applications are taken
by First Federal's staff, and Mitch Ashlock, First Federal's President and Chief
Executive Officer, supervises the procurement of credit reports, appraisals and
other documentation involved with a loan. Property valuations are performed by
independent outside appraisers approved by First Federal's Board of Directors.
First Federal's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. All loans are approved by First
Federal's Board of Directors.
First Federal holds all loans for long-term investment purposes. First
Federal has not purchased any loans but may determine to do so in the future. In
particular, as noted above, First Federal intends to pursue the purchase of
adjustable rate residential loans, provided such loans are secured by local
properties and are serviced by the originator of the loan or a third party.
36
The following table shows total loans originated and repaid during the
periods indicated. No loans were purchased or sold during the periods shown.
Nine Months Ended Years Ended
September 30, December 31,
---------------------- ---------------------
1999 1998 1998 1997
---- ---- ---- ----
(In Thousands)
Originations by Type:
Fixed rate:
Real estate - one- to four-family...... $ 10,565 $ 8,807 $ 11,760 $ 7,138
-------- --------- --------- ---------
Total fixed-rate................ 10,565 8,807 11,760 7,138
-------- --------- --------- ---------
Adjustable Rate.......................... -- -- -- --
Total loans originated.......... 10,565 8,807 11,760 7,138
-------- --------- --------- ---------
Total loans purchased.................... -- -- -- --
Sales and Repayments:
Total loans sold................ -- -- -- --
Principal repayments................... 7,929 5,743 8,443 6,320
-------- --------- --------- ---------
Total reductions................ 7,929 5,743 8,443 6,320
Increase (decrease) in other items,
net (1)................................. (549) (424) (77) (23)
-------- --------- --------- ---------
Net increase (decrease)......... $ 2,087 $ 2,640 $ 3,240 $ 795
======== ========= ========= =========
- ---------------
(1) Other items, net include the effects relating to loans in process, deferred
loan origination fees or costs, escrow funds held and the allowance for
loan losses.
Loan Commitments. First Federal issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Commitments are made in
writing on specified terms and conditions and are honored for up to 180 days
from approval. At September 30, 1999, First Federal had loan commitments
totaling $477,000. See Note N of the Notes to Financial Statements included in
the back of this prospectus.
Asset Quality. All loan payments are due on the first day of each
month. When a borrower fails to make a required loan payment, First Federal
attempts to cure the deficiency by contacting the borrower and seeking the
payment. A late notice is mailed on the 16th day of the month and a second late
notice is mailed on the 23rd day of the month. In most cases, deficiencies are
cured promptly. If a delinquency continues beyond the 27th day of the month,
additional contact is made either through additional notices or other means and
First Federal will attempt to work out a payment schedule. While First Federal
generally prefers to work with borrowers to resolve the problems, First Federal
will institute foreclosure or other proceedings, as necessary, to minimize any
potential loss.
First Federal's Board of Directors is informed monthly of the amounts
of loans delinquent more than 30 days, all loans in foreclosure and all
foreclosed and repossessed property owned by First Federal.
Loans are placed on non-accrual status when the collection of principal
and/or interest becomes doubtful. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is deducted from interest income.
Real estate acquired by First Federal as a result of foreclosure or by
deed-in-lieu of foreclosure and loans deemed to be in-substance foreclosed under
generally accepted accounting principles are classified as real estate owned
until sold. First Federal had no real estate owned at December 31, 1997 or 1998,
or September 30, 1999.
37
Delinquent Loans. The following table sets forth information concerning
delinquent loans at September 30, 1999, in dollar amount and as a percentage of
First Federal's total loan portfolio. The dollar amounts shown equal the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due. At September 30, 1999, First Federal had no
consumer loans, construction loans or land loans which were delinquent 30 or
more days.
Loans Delinquent For:
-------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
-------------------------- -------------------------- --------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------- ------- --------- ------- ------- --------- ------- ------- --------
(Dollars in Thousands)
Real Estate:
One- to four-family ....... 5 $ 168 0.53% 1 $ 134 0.41% 6 $ 302 0.95%
Multi-family .............. -- -- -- -- -- -- -- -- --
Commercial ................ -- -- -- -- -- -- -- -- --
Construction or............ -- -- -- -- -- -- -- -- --
development .............. -- -- -- -- -- -- -- -- --
Consumer .................... -- -- -- -- -- -- -- -- --
---- ------- ---- ----- ------- ---- ----- ------- ----
Total .................. 5 $ 168 0.53% 1 $ 134 0.41% 6 $ 302 0.95%
==== ======= ==== ===== ======= ==== ===== ======= ====
Non-Performing Assets. The following table sets forth information
regarding non-performing loans and real estate owned by First Federal at the
dates indicated. As of the dates indicated, First Federal had no material
restructured loans within the meaning of SFAS No. 15.
At
September 30, At December 31,
------------- ----------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Non-accruing loans: ...................... $ -- $ -- $ --
Accruing loans delinquent
more than 90 days:
One- to four-family .................... 134 106 93
---- ---- ----
Total ............................... 134 106 93
---- ---- ----
Foreclosed assets: ....................... -- -- --
---- ---- ----
Total non-performing assets .............. $134 $106 $ 93
==== ==== ====
Total as a percentage of
total assets ............................ 0.29% 0.24% 0.28%
==== ==== ====
For the year ended December 31, 1998 and for the nine months ended
September 30, 1999, First Federal had no non-accruing loans, and therefor had no
gross interest income which would have been recorded had non-accruing loans been
current in accordance with their original terms. There was no interest income on
such loans for the year ended December 31, 1998, and for the nine months ended
September 30, 1999, respectively.
The $134,000 of accruing loans delinquent more than 90 days at
September 30, 1999, consisted of a single one- to four-family residential loan.
Other Loans of Concern. In addition to the non-performing loans set
forth in the tables above, as of September 30, 1999, there were no loans
classified by First Federal 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 some doubts 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.
Classified Assets. Federal regulations require that each insured
savings institution classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
38
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a higher
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge-off such amount. General loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital. Federal examiners may disagree with an insured
institution's classifications and amounts reserved.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for 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, First Federal reviews
loans in its portfolio monthly to determine whether such assets require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at September 30, 1999, First Federal had no
classified assets.
Allowance for Loan Losses. In originating loans, First Federal
recognizes that losses will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan, general economic conditions and, in the
case of a secured loan, the quality of the security for the loan. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses charged to
operations. The provision for loan losses is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specified impaired
loans, and economic conditions.
At September 30, 1999, First Federal had an allowance for loan losses
of $175,000. Although management believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to the
allowance for loan losses may be necessary and results of operations could be
significantly and adversely affected if circumstances differ substantially from
the assumptions used in making the determinations. Furthermore, while First
Federal believes it has established its existing allowance for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing First Federal's loan portfolio, will not
request First Federal to increase significantly its allowance for loan losses.
In addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that substantial increases will not be necessary
should the quality of any loans deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect First Federal's financial condition and results of operations.
First Federal significantly increased its allowance for loan losses
during the nine months ended September 30, 1999 by incurring a $150,000
provision for loan losses, compared to no provision for 1998 and 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Comparison of Operating Results for the Nine Months Ended September
30, 1999 and 1998 - Provision for Loan Losses" for a discussion of the increase
during the nine months ended September 30, 1999. While management believes that
it determines the size of the allowance based on the best information available
at the time, the allowance will need to be adjusted as circumstances change and
assumptions are updated. Future adjustments to the allowance could significantly
affect net income.
39
The following table sets forth the allocation for loan losses by
category for the periods indicated.
At December 31,
--------------------------------------------------------
At September 30, 1999 1998 1997
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars in Thousands)
--------- -------- -------- --------- -------- -------- --------- -------- --------
One- to four-family......... $ 175 $ 31,371 100.00% $ 25 $ 28,978 100.00% $ 25 $ 25,742 100.00%
Unallocated................. -- -- -- -- -- -- -- -- --
--------- -------- -------- --------- -------- -------- --------- -------- --------
Total.................. $ 175 $ 31,371 100.00% $ 25 $ 28,978 100.00% $ 25 $ 25,742 100.00%
========= ======== ======== ========= ======== ======== ========= ======== ========
The following table sets forth information with respect to First
Federal's allowance for loan losses for the periods indicated.
Nine Months Years Ended
Ended September 30, December 31,
------------------- -------------------
1999 1998 1998 1997
--------- --------- --------- ---------
(Dollars In Thousands)
Balance at beginning of period.................. $ 25 $ 25 $ 25 $ 25
Charge-offs..................................... -- -- -- --
Recoveries...................................... -- -- -- --
Net charge-offs................................. -- -- -- --
Additions charged to operations................. 150 -- -- --
--------- --------- --------- ---------
Balance at end of period........................ $ 175 $ 25 $ 25 $ 25
========= ========= ========= =========
Ratio of net charge-offs during the period to
average loans outstanding during the period... N/A N/A N/A N/A
========= ========= ========= =========
Ratio of net charge-offs during the period to
average non-performing assets.................. N/A N/A N/A N/A
========= ========= ========= =========
Ratio of allowance for loan losses to loans
receivable, net, at end of period.............. .56% .09% .09% .10%
========= ========= ========= =========
Ratio of allowance for loan losses to
non-performing assets at end of period........ 130.60% 23.58% 23.58% 26.88%
========= ========= ========= =========
40
Investment Activities
First Federal is permitted under federal law to invest in various types
of liquid assets, including U.S. Government obligations, securities of various
federal agencies and of state and municipal governments, deposits at the Federal
Home Loan Bank of Topeka, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Within certain
regulatory limits, First Federal may also invest a portion of its assets in
commercial paper and corporate debt securities. Savings institutions like First
Federal are also required to maintain an investment in FHLB stock. First Federal
is required under federal regulations to maintain a minimum amount of liquid
assets. At September 30, 1999, First Federal's liquidity ratio (liquid assets as
a percentage of net withdrawable savings deposits and current borrowings) was
39.5%. See "Regulation" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that investments be
categorized as "held to maturity," "trading securities" or "available for sale,"
based on management's intent as to the ultimate disposition of each security.
Statement of Financial Accounting Standards No. 115 allows debt securities to be
classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings.
First Federal does not currently use or maintain a trading account. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." These securities are
reported at fair value, and unrealized gains and losses on the securities are
excluded from earnings and reported, net of deferred taxes, as a separate
component of equity.
All of First Federal's investment securities carry market risk insofar
as increases in market rates of interest may cause a decrease in their market
value. They also carry prepayment risk insofar as they may be called prior to
maturity in times of low market interest rates, so that First Federal may have
to invest the funds at a lower interest rate. First Federal's investment policy
does not permit engaging directly in hedging activities or purchasing high risk
mortgage derivative products. Investments are made based on certain
considerations, which include the interest rate, yield, settlement date and
maturity of the investment, First Federal's liquidity position, and anticipated
cash needs and sources. The effect that the proposed investment would have on
First Federal's credit and interest rate risk and risk-based capital is also
considered. First Federal purchases investment securities to provide necessary
liquidity for day-to-day operations. First Federal also purchases investment
securities when investable funds exceed loan demand.
Generally, the investment policy of First Federal, as established by
the Board of Directors, is to invest funds among various categories of
investments and maturities based upon First Federal's liquidity needs,
asset/liability management policies, investment quality, marketability and
performance objectives.
Mortgage-backed Securities. First Federal has the legal authority to
invest in mortgage-backed securities to supplement residential loan production,
and First Federal's investment policy as adopted by the Board permits
investments in certain mortgage backed securities. In recent years, however,
First Federal has chosen not to purchase any mortgage backed securities.
Other Investments. At September 30, 1999, First Federal's investment
securities consisted of U.S. government/federal agency securities, FHLB stock,
Freddie Mac stock and other interest-earning assets. All of the U.S.
government/federal agency securities are held to maturity. The Freddie Mac stock
is accounted for as available for sale. The U.S. government/federal agency
securities consisted primarily of U.S. Treasury bonds, Fannie Mae, Freddie Mac
bonds and Federal Home Loan Bank bonds, with fixed rates of interest.
41
The following table sets forth the composition of First Federal's
investment securities, net of premiums and discounts, at the dates indicated.
At September 30, At December 31,
------------------- ------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
--------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Investment securities held to maturity:
U.S. government/federal Agency securities. $ 11,000 76.46% $ 9,000 59.07% $ 3,910 56.10%
Investment securities available for sale:
Freddie Mac stock......................... 684 4.75 847 5.56 552 7.91
FHLB stock.................................. 303 2.10 289 1.89 307 4.41
--------- ------- --------- ------- --------- -------
Total investment securities
and FHLB stock........................ 11,987 83.32 10,136 66.53 4,769 68.43
--------- ------- --------- ------- --------- -------
Average remaining life of
investment securities (1)................. 11yrs 11yrs 10yrs
Other interest-earning assets:
Interest-bearing deposits with banks...... 2,400 16.68 5,100 33.47 2,200 31.57
--------- ------- --------- ------- --------- -------
Total.................................. $ 14,387 100.00% $ 15,236 100.00% $ 6,969 100.00%
========= ======= ========= ======= ========= =======
- ---------
(1) Average remaining life is subject to call provisions on all U.S.
government/federal agency securities and excludes available-for-sale securities.
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for
First Federal's investment securities excluding FHLB stock at September 30,
1999.
At September 30, 1999
-------------------------------------------------------------------
Less
Than 1 1 to 5 5 to 10 Over 10 Total Investment
Year Years Years Years Securities
--------- -------- --------- --------- --------------------
Book Book Book Book Book Market
Value Value Value Value Value Value
--------- -------- --------- --------- --------- ---------
(Dollars in Thousands)
U.S. government/federal agency securities......$ -- $ -- $ 5,500 $ 5,500 $ 11,000 $ 10,561
Freddie Mac stock (1).......................... 684 -- -- -- 684 684
FHLB Stock..................................... 303 -- -- -- 303 303
--------- -------- --------- --------- --------- ---------
Total investment securities ...................$ 987 $ -- $ 5,500 $ 5,500 $ 11,987 $ 11,548
========= ======== ========= ========= ========= =========
Weighted average yield......................... -- -- 6.46% 7.16% 6.81%
- ---------
(1) Consists of available-for-sale securities and FHLB stock excluded from
average yield calculation
Sources of Funds
General. Deposits are the primary source of First Federal's funds for
lending and other investment purposes. In addition to deposits, First Federal
derives funds primarily from principal and interest payments on loans. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions. Borrowings may also be used on a short- term basis to compensate for
reductions in the availability of funds from other sources and may be used on a
longer-term basis for general business purposes.
Deposits. First Federal's deposits are attracted principally from
within its primary market area. Deposit account terms vary, with the principal
differences being the minimum balance required, the time periods the funds must
remain on deposit and the interest rate.
42
First Federal's deposits are obtained primarily from residents of its
primary market area. First Federal is not currently using brokers to obtain
deposits. However, in 1998 and early 1999, First Federal accepted brokered
certificates of deposit from out-of-state sources for the purpose of raising
funds during a period of strong loan demand. At September 30, 1999, First
Federal had approximately $6.1 million of brokered certificates of deposit.
First Federal's deposit products include passbook accounts, money
market accounts and term certificate accounts. Interest rates paid, maturity
terms, service fees and withdrawal penalties are established by First Federal on
a periodic basis. Management determines the rates and terms based on rates paid
by competitors, First Federal's needs for funds or liquidity, growth goals and
federal and state regulations.
Savings Portfolio. The following table sets forth the dollar amount of
savings deposits in the various types of deposit programs offered by First
Federal as of the dates indicated.
At December 31,
At September 30, --------------------------------------
1999 1998 1997
----------------- ----------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ----------
(Dollars in Thousands)
Transactions and Savings Deposits:
Passbook Accounts.................................. $ 3,214 9.13% $ 3,349 9.65% $ 2,546 10.13 %
Money Market Accounts.............................. 2,213 6.28 2,241 6.46 2,517 10.01
-------- ------- -------- ------- -------- --------
Total Non-Certificates............................. 5,427 15.41 5,590 16.11 5,063 20.14
-------- ------- -------- ------- -------- -------
Certificates:
4.00 - 5.99%..................................... 20,009 56.81 18,913 54.50 13,831 55.02
6.00 - 7.99%..................................... 9,785 27.78 10,198 29.39 6,245 24.84
-------- ------- -------- ------- -------- -------
Total Certificates................................. 29,794 84.59 29,111 83.89 20,076 79.86
-------- ------- -------- ------- -------- -------
Total Deposits..................................... $ 35,221 100.00% $ 34,701 100.00% $ 25,139 100.00%
======== ======= ======== ======= ======== =======
Deposit Activity. The following table sets forth the deposit activities
of First Federal for the periods indicated:
Nine Months Ended Years Ended
September 30, December 31,
------------------- -------------------
1999 1998 1998 1997
-------- -------- -------- --------
(Dollars in Thousands)
Opening balance.................. $ 34,701 $ 25,139 $ 25,139 $ 26,935
Deposits......................... 8,733 10,045 13,644 7,045
Withdrawals...................... (8,213) (1,223) (4,082) (8,841)
-------- -------- -------- --------
Ending balance................... $ 35,221 $ 33,961 $ 34,701 $ 25,139
======== ======== ======== ========
Net increase (decrease).......... $ 520 $ 8,822 $ 9,562 $ (1,796)
======== ======== ======== ========
Percent increase (decrease)...... 1.50% 35.09% 38.04% (6.67)%
======== ======== ======== ========
43
Time Deposit Maturity Schedule. The following table shows rate and
maturity information for First Federal's certificates of deposit as of September
30, 1999.
4.00- 6.00- Percent
5.99% 7.99% Total of Total
--------- -------- --------- -------
(Dollars in Thousands)
--------- -------- --------- -------
Certificate accounts maturing in quarter ending:
December 31, 1999................................. $ 3,070 $ 101 $ 3,171 10.64%
March 31, 2000.................................... 3,680 61 3,741 12.56
June 30, 2000..................................... 1,180 434 1,614 5.42
September 30, 2000................................ 1,143 4,932 6,075 20.39
December 31, 2000................................. 1,743 693 2,436 8.18
March 31, 2001.................................... 4,432 -- 4,432 14.88
June 30, 2001..................................... 1,018 -- 1,018 3.42
September 30, 2001................................ 568 -- 568 1.91
December 31, 2001................................. 88 -- 88 0.3
March 31, 2002.................................... 453 -- 453 1.52
June 30, 2002..................................... -- 96 96 0.32
September 30, 2002................................ -- 81 81 0.27
Thereafter ....................................... 2,634 3,387 6,021 20.21
--------- -------- -------- -------
Total ......................................... $ 20,009 $ 9,785 $ 29,794 100.00%
========= ======== ======== =======
Percent of Total............................... 67.16% 32.84 % 100.00 % 0.00%
========= ======== ========= =======
The following table indicates the amount of First Federal's jumbo
certificates of deposit and other certificates of deposit by time remaining
until maturity as of September 30, 1999.
Maturity
------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
---------- -------- --------- --------- --------
(Dollars in Thousands)
Certificates of deposit less than $100,000....... $ 2,162 $ 3,341 $ 5,346 $ 11,412 $ 22,261
Certificates of deposit of $100,000 or more...... 1,010 400 2,343 3,780 7,533
---------- -------- --------- --------- --------
Total certificates of deposit.................... $ 3,172 $ 3,741 $ 7,689 $ 15,192 $ 29,794
========== ======== ========= ========= ========
44
Borrowings. First Federal may obtain advances from the FHLB of Topeka
upon the security of the common stock it owns in that bank and certain of its
residential mortgage loans and mortgage-backed securities, provided certain
standards related to creditworthiness have been met. These advances are made
pursuant to several credit programs, each of which has its own interest rate and
range of maturities. FHLB advances are generally available to meet seasonal and
other withdrawals of deposit accounts and to permit increased lending. See
"Regulation - First Federal - Federal Home Loan Bank System."
As of September 30, 1999, First Federal had available credit lines of
$5.0 million from the FHLB of Topeka. First Federal had $1.0 million of FHLB
advances outstanding at September 30, 1999.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances, for the periods indicated.
Nine Months
Ended Years Ended
September 30, December 31,
--------------- ---------------
1999 1998 1998 1997
------ ------ ------ ------
(In Thousands)
Maximum Balance:
FHLB advances..................... $1,000 $1,000 $1,000 $ --
Average Balance:
FHLB advances..................... 1,000 889 917 --
The following table sets forth certain information as to First
Federal's FHLB advance at the dates indicated.
At
At December 31,
September 30, ---------------
1999 1998 1997
------------- ------ ------
(Dollars In Thousands)
FHLB advances.................................... $ 1,000 $ 1,000 --
Weighted average interest rate of FHLB advances.. 5.74% 5.74% N/A
Employees
At September 30, 1999, First Federal had a total of three full-time and
no part-time employees. First Federal's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
Properties
At September 30, 1999, First Federal conducted its business from its
headquarters and sole office located at 100 East Park, Olathe, Kansas. First
Federal's main office is leased, with the lease term expiring in 2004. The
estimated net book value of First Federal's leasehold improvements, and
furniture and equipment at September 30, 1999 was approximately $21,000.
First Federal believes that its current facilities are adequate to meet
the present needs of First Federal and its holding company. However, if First
Federal determines to expand its staff, First Federal may need to obtain new
facilities or expand its existing facility.
Legal Proceedings
First Federal is involved, from time to time, as plaintiff or defendant
in various legal actions arising in the normal course of their businesses. As of
September 30, 1999, First Federal was not involved in any legal proceedings.
45
Service Corporation Activities
As a federally chartered savings association, First Federal is
permitted by OTS regulations to invest up to 2% of its assets in the stock of,
or loans to, service corporation subsidiaries. First Federal may invest an
additional 1% of its assets in service corporations where such additional funds
are used for inner-city or community development purposes and up to 50% of its
total capital in conforming loans to service corporations in which it owns more
than 10% of the capital stock. In addition to investments in service
corporations, federal associations are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities in which a federal
association may engage. At September 30, 1999, First Federal had no
subsidiaries.
First Federal's Market Area
First Federal considers its primary market area to consist of Johnson
County, Kansas, with a concentration of business activity in the city of Olathe,
which is the county seat, and the immediate surrounding area. Johnson County is
part of the Kansas City metropolitan statistical area. Olathe and the
surrounding areas have experienced increases in population as the Kansas City
outer suburbs have expanded. Since 1990, Johnson County has experienced
significant increases in population. The Johnson County population has increased
from approximately 355,000 in 1990 to approximately 439,000 in 1999,
representing an annual population growth rate of 2.3%.
Estimated per capita annual income for 1999 was over $29,000 for
Johnson County, 57 percent more than the Kansas state average and 44 percent
more than the national average. Median household income levels showed similar
trends, as Johnson County reported income that was 50 and 39 percent above the
state-wide and national averages. Employment in Johnson County is generally
diversified, including employment in services, wholesale and retail trade and
government.
Competition
First Federal faces significant competition both in attracting deposits
and in making loans. Its most direct competition for deposits has come
historically from commercial banks, credit unions and other savings institutions
located in its primary market area, including many large financial institutions
which have greater financial and marketing resources available to them. In
addition, First Federal faces significant competition for investors' funds from
short-term money market securities, mutual funds and other corporate and
government securities. First Federal does not rely upon any individual group or
entity for a material portion of its deposits. First Federal's ability to
attract and retain deposits depends on its ability to generally provide a rate
of return, liquidity and risk comparable to that offered by competing investment
opportunities.
First Federal's competition for real estate loans comes principally
from mortgage banking companies, commercial banks, other savings institutions
and credit unions. First Federal competes for loan originations primarily
through the interest rates and loan fees it charges, and the efficiency and
quality of services it provides borrowers. Factors which affect competition
include general and local economic conditions, current interest rate levels and
volatility in the mortgage markets. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions and the anticipated slowing of refinancing activity.
46
REGULATION
General
First Federal is regulated, examined and supervised by the OTS, as its
chartering agency, and the FDIC, as the insurer of its deposits. The activities
of federal savings institutions are governed by the Home Owners' Loan Act, as
amended and, in certain respects, the Federal Deposit Insurance Act and the
regulations issued by the OTS and the FDIC to implement these statutes. These
laws and regulations delineate the nature and extent of the activities in which
federal savings associations may engage. Lending activities and other
investments must comply with various statutory and regulatory capital
requirements. In addition, First Federal's relationship with its depositors and
borrowers is also regulated to a great extent, especially in matters such as the
ownership of deposit accounts and the form and content of First Federal's
mortgage documents. First Federal must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to review First Federal's compliance with
various regulatory requirements. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in policies, whether by the
OTS, the FDIC or Congress, could have a material adverse impact on First Federal
and its operations.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury. It generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The Federal Home Loan Bank System,
consisting of 12 banks, is under the jurisdiction of the Federal Housing Finance
Board. First Federal, as a member of the Federal Home Loan Bank of Topeka, is
required to acquire and hold shares of capital stock in the Federal Home Loan
Bank of Topeka in an amount equal to the greater of 1.0% of the aggregate
outstanding principal amount of residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or 1/20 of its
borrowings from the Federal Home Loan Bank of Topeka. First Federal is in
compliance with this requirement with an investment in Federal Home Loan Bank of
Topeka stock of $303,000 at September 30, 1999. Among other benefits, the
Federal Home Loan Bank of Topeka provides a central credit facility primarily
for member institutions.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the Bank Insurance Fund and the Savings Association Insurance Fund. As
insurer of First Federal's deposits, the FDIC has examination, supervisory and
enforcement authority over First Federal.
First Federal's accounts are insured by the Savings Association
Insurance Fund to the maximum extent permitted by law. First Federal pays
deposit insurance premiums based on a risk-based assessment system established
by the FDIC. Under applicable regulations, institutions are assigned to one of
three capital groups that are based solely on the level of an institution's
capital -- "well capitalized," "adequately capitalized," and "undercapitalized"
- -- which are defined in the same manner as the regulations establishing the
prompt corrective action system, as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates that until September
30, 1996 ranged from 0.23% for well capitalized, financially sound institutions
with only a few minor weaknesses to 0.31% for undercapitalized institutions that
pose a substantial risk of loss to the Savings Association Insurance Fund unless
effective corrective action is taken.
Under the Deposit Insurance Funds Act, which was enacted on September
30, 1996, the FDIC imposed a special assessment on each depository institution
with Savings Association Insurance Fund-assessable deposits which resulted in
the Savings Association Insurance Fund achieving its designated reserve ratio.
As a result, the FDIC reduced the assessment schedule for Savings Association
Insurance Fund members, effective January 1, 1997, to a range of 0% to 0.27%,
with most institutions, including First Federal, paying 0%. This assessment
schedule is the same as that for the Bank Insurance Fund, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, Savings
Association Insurance Fund members are charged an assessment of
47
.065% of Savings Association Insurance Fund-assessable deposits to pay interest
on the obligations issued by the Financing Corporation in the 1980s to help fund
the thrift industry cleanup. Bank Insurance Fund-assessable deposits will be
charged an assessment to help pay interest on the Financing Corporation bonds at
a rate of approximately .013% until the earlier of December 31, 1999 or the date
upon which the last savings association ceases to exist, after which time the
assessment will be the same for all insured deposits.
The Deposit Insurance Funds Act also contemplates the development of a
common charter for all federally chartered depository institutions and the
abolition of separate charters for national banks and federal savings
associations. It is not known what form the common charter may take and what
effect, if any, the adoption of a new charter would have on the operation of
First Federal.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of First Federal.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets, such as cash,
certain time deposits and savings accounts, bankers' acceptances, and specified
U.S. Government, state or federal agency obligations and certain other
investments, equal to a monthly average of not less than a specified percentage
of its net withdrawable accounts plus short-term borrowings. The current
percentage is 4%. Monetary penalties may be imposed for failure to meet
liquidity requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Prompt Corrective Action. Each federal banking agency is required to
implement a system of prompt corrective action for institutions that it
regulates. The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, an institution shall be deemed to be "well capitalized" if it has a
total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital
ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not required
to meet and maintain a specific capital level for any capital
measure;"adequately capitalized" if it has a total risk-based capital ratio of
8.0% or more, has a Tier I risk-based capital ratio of 4.0% or more, has a
leverage ratio of 4.0% or more, or 3.0% under certain circumstances, and does
not meet the definition of "well capitalized"; "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, has a Tier I risk-based
capital ratio that is less than 4.0% or has a leverage ratio that is less than
4.0%, or 3.0% under certain circumstances; "significantly undercapitalized" if
it has a total risk-based capital ratio that is less than 6.0%, has a Tier I
risk-based capital ratio that is less than 3.0% or has a leverage ratio that is
less than 3.0%; and "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall face various mandatory and discretionary
restrictions on its operations.
At September 30, 1999, First Federal was categorized as "well
capitalized"under the prompt corrective action regulations.
Standards for Safety and Soundness. The federal banking regulatory
agencies have adopted regulatory guidelines for all insured depository
institutions relating to internal controls, information systems and internal
audit systems; loan documentation; credit underwriting; interest rate risk
exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. The guidelines outline the safety and soundness standards that the
federal
48
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that First
Federal fails to meet any standard prescribed by the guidelines, it may require
First Federal to submit to the agency an acceptable plan to achieve compliance
with the standard. OTS regulations establish deadlines for the submission and
review of safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender test to avoid certain restrictions on their
operations. A savings institution that fails to become or remain a qualified
thrift lender shall either convert to a national bank charter or face the
following restrictions on its operations. These restrictions are: the
association may not make any new investment or engage in activities that would
not be permissible for national banks; the association may not establish any new
branch office where a national bank located in the savings institution's home
state would not be able to establish a branch office; the association shall be
ineligible to obtain new advances from any Federal Home Loan Bank; and the
payment of dividends by the association shall be under the rules regarding the
statutory and regulatory dividend restrictions applicable to national banks.
Also, beginning three years after the date on which the savings institution
ceases to be a qualified thrift lender, the savings institution would be
prohibited from retaining any investment or engaging in any activity not
permissible for a national bank and would be required to repay any outstanding
advances to any Federal Home Loan Bank. In addition, within one year of the date
on which a savings association controlled by a company ceases to be a qualified
thrift lender, the company must register as a bank holding company and follow
the rules applicable to bank holding companies. A savings institution may
requalify as a qualified thrift lender if it thereafter complies with the test.
Currently, the qualified thrift lender test requires that either an
institution qualify as a domestic building and loan association under the
Internal Revenue Code or that 65% of an institution's "portfolio assets" consist
of certain housing and consumer-related assets on a monthly average basis in
nine out of every 12 months. Assets that qualify without limit for inclusion as
part of the 65% requirement are loans made to purchase, refinance, construct,
improve or repair domestic residential housing and manufactured housing; home
equity loans; mortgage-backed securities where the mortgages are secured by
domestic residential housing or manufactured housing; Federal Home Loan Bank
stock; direct or indirect obligations of the FDIC; and loans for educational
purposes, loans to small businesses and loans made through credit cards. In
addition, the following assets, among others, may be included in meeting the
test based on an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer loans; and stock issued by Freddie Mac or Fannie
Mae. Portfolio assets consist of total assets minus the sum of goodwill and
other intangible assets, property used by the savings institution to conduct its
business, and liquid assets up to 20% of the institution's total assets. At
September 30, 1999, First Federal was in compliance with the qualified thrift
lender test.
Capital Requirements. Federal regulations require a savings association
must satisfy three minimum capital requirements: core capital, tangible capital
and risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less any intangible assets, except for
certain qualifying intangible assets; certain mortgage servicing rights; and
equity and debt investments in subsidiaries that are not"includable
subsidiaries," which is defined as subsidiaries engaged solely inactivities not
impermissible for a national bank, engaged in activities impermissible for a
national bank but only as an agent for its customers, or engaged solely in
mortgage-banking activities. In calculating adjusted total assets, adjustments
are made to total assets to give effect to the exclusion of certain assets from
capital and to account appropriately for the investments in and assets of both
includable and non-includable subsidiaries. Institutions that fail to meet the
core capital requirement would be required to file with the OTS a capital plan
that details the steps they will take to reach compliance. In addition, the
OTS's prompt corrective action regulation provides that a savings institution
that has a leverage ratio of less than 4%, or 3% in the case of institutions
receiving the highest CAMELS examination rating, will be deemed to be
"undercapitalized" and may face certain restrictions. See "--Federal Regulation
of Savings Associations--Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less
than 1.5% of First Federal's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights. Each savings institution must maintain
total risk-based capital equal to at least 8% of risk-weighted assets. Total
risk-based capital consists of the sum of core and supplementary capital,
provided that supplementary capital cannot exceed core capital, as previously
defined. Supplementary capital includes permanent capital instruments such as
cumulative perpetual preferred stock, perpetual subordinated debt and mandatory
convertible subordinated debt, maturing capital instruments such as subordinated
debt,
49
intermediate-term preferred stock and mandatory convertible subordinated debt,
based on an amortization schedule, and general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans, including multi-family mortgage loans, are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans a
reassigned a 100% risk weight, as are non qualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor from 0% to 100% assigned to that category.
These products are then totaled to arrive at total risk-weighted assets.
Off-balance sheet items are included in risk-weighted assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would face a deduction from total capital
for purposes of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in the net portfolio
value of its assets, or the difference between incoming and outgoing discounted
cash flows from assets, liabilities and off-balance sheet contracts, that would
result from a hypothetical 200 basis point increase or decrease in market
interest rates divided by the estimated economic value of the association's
assets, as calculated in accordance with guidelines of the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate risk component in calculating its total capital under the
risk-based capital rule. The interest rate risk component is an amount equal to
one-half of the difference between the institution's measured interest rate risk
and 2%, multiplied by the estimated economic value of the association's assets.
That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Under the rule,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% is exempt from the interest rate risk
component, unless the OTS determines otherwise. The rule also provides that the
OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the calculated interest rate risk component, as calculated by the OTS,
overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the amount as calculated by the OTS. The OTS has postponed the date that the
component will first be deducted from an institution's total capital.
See "Historical And Pro Forma Regulatory Capital Compliance" for a
table that sets forth in terms of dollars and percentages the tangible, core and
risk-based capital requirements, First Federal's historical amounts and
percentages at September 30, 1999 and pro forma amounts and percentages based
upon the stated assumptions.
Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings institution to make
capital distributions. Under new regulations effective April 1, 1999, a savings
institution must file an application for OTS approval of the capital
distribution if either (1) the total capital distributions for the applicable
calendar year exceed the sum of the institution's net income for that year to
date plus the institution's retained net income for the preceding two years, (2)
the institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is not
eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions which are a subsidiary of a holding
company, as well as certain other institutions, must still file a notice with
the OTS at least 30 days before the board of directors declares a dividend or
approves a capital distribution.
Loans to One Borrower. Savings institutions are generally required to
follow the national bank limit on loans to one borrower. Generally, this limit
is 15% of its unimpaired capital and surplus, plus an additional 10% of
unimpaired capital and surplus, if the loan is secured by readily marketable
collateral, which is defined to include certain financial instruments and
bullion. The OTS by regulation has amended the loans to one borrower rule to
permit savings associations meeting certain requirements, including capital
requirements, to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. See "Business of First Federal--Lending Activities" for further
information.
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Activities of Associations and Their Subsidiaries. A savings
association may establish operating subsidiaries to engage in any activity that
the savings association may conduct directly and may establish service
corporation subsidiaries to engage in certain pre-approved activities or, with
approval of the OTS, other activities reasonably related to the activities of
financial institutions. When a savings association establishes or acquires a
subsidiary or elects to conduct any new activity through a subsidiary that the
association controls, the savings association must notify the FDIC and the OTS
30 days in advance and provide the information each agency may, by regulation,
require. Savings associations also must conduct the activities of subsidiaries
in accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices. Based upon that determination, the
FDIC or the OTS has the authority to order the savings association to divest
itself of control of the subsidiary. The FDIC also may determine by regulation
or order that any specific activity poses a serious threat to the Savings
Association Insurance Fund. If so, it may require that no Savings Association
Insurance Fund member engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the Home
Owners Loan Act. Generally, Sections 23A and 23B limit the extent to which the
insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of the institution's
capital and surplus and place an aggregate limit on all transactions with
affiliates to an amount equal to 20% of capital and surplus, and require that
all transactions be on terms substantially the same, or at least as favorable to
the institution or subsidiary, as those provided to a non-affiliate. The
term"covered transaction" includes the making of loans, the purchase of assets,
the issuance of a guarantee and similar types of transactions.
Any loan or extension of credit by First Federal to an affiliate must
be secured by collateral in accordance with Section 23A.
Three additional rules apply to savings associations. First, a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies. Second, a savings association may not purchase or invest insecurities
issued by an affiliate, other than securities of a subsidiary. Third, the OTS
may, for reasons of safety and soundness, impose more stringent restrictions on
savings associations but may not exempt transactions from or otherwise abridge
Section 23A or 23B. Exemptions from Section 23A or 23B may be granted only by
the Federal Reserve, as is currently the case with respect to all FDIC-insured
banks.
First Federal's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by those persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations require that
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
First Federal may make to those persons based, in part, on First Federal's
capital position, and requires certain board approval procedures to be followed.
The OTS regulations, with certain minor variances, apply Regulation O to savings
institutions.
Community Reinvestment Act. Savings associations are required to follow
the provisions of the Community Reinvestment Act of 1977, which requires the
appropriate federal bank regulatory agency, in connection with its regular
examination of a savings association, to assess the savings association's record
in meeting the credit needs of the community serviced by the savings
associations, including low and moderate income neighborhoods. The regulatory
agency's assessment of the savings association's record is made available to the
public. Further, an assessment is required of any savings associations which has
applied, among other things, to establish a new branch office that will accept
deposits, relocate an existing office or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution. First Federal received a "satisfactory" rating as a result of its
most recent examination.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. Federal law and regulation generally
prohibit a savings and loan holding company, without prior OTS approval, from
acquiring more than 5% of the voting stock of any other savings association or
savings and loan holding company or controlling the assets thereof. They also
prohibit, among other
51
things, any director or officer of a savings and loan holding company, or any
individual who owns or controls more than 25% of the voting shares of First
Federal of Olathe Bancorp, Inc., from acquiring control of any savings
association not a subsidiary of a savings and loan holding company, unless the
acquisition is approved by the OTS.
Holding Company Activities. First Federal of Olathe Bancorp will be a
unitary savings and loan holding company under federal law because First Federal
will be its only insured subsidiary immediately after the conversion. Formerly,
a unitary savings and loan holding company was not restricted as to the types of
business activities in which it could engage, provided that its subsidiary
savings association continued to be a qualified thrift lender. Recent
legislation, however, restricts unitary saving and loan holding companies not
existing or applied for before May 4, 1999 to activities permissible for a
financial holding company as defined under the legislation, including insurance
and securities activities, and those permitted for a multiple savings and loan
holding company as described below. Upon any non-supervisory acquisition by
First Federal of Olathe Bancorp of another savings association as a separate
subsidiary, First Federal of Olathe Bancorp would become a multiple savings and
loan holding company and would have extensive limitations on the types of
business activities in which it could engage. The Home Owner's Loan Act limits
the activities of a multiple savings and loan holding company and its non-
insured institution subsidiaries primarily to activities permissible for the
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act,
provided the prior approval of the Office of Thrift Supervision is obtained, and
to other activities authorized by Office of Thrift Supervision regulation.
Multiple savings and loan holding companies are generally prohibited from
acquiring or retaining more than 5% of a non-subsidiary company engaged in
activities other than those permitted by the Home Owners. Loan Act.
The activities authorized by the Federal Reserve Board as permissible
for bank holding companies also must be approved by the OTS prior to being
engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. Federal law provides that any savings and
loan holding company that controls a savings association that fails the
qualified thrift lender test, as explained under "--Federal Regulation of
Savings Associations--Qualified Thrift Lender Test," must, within one year after
the date on which the association ceases to be a qualified thrift lender,
register as and be deemed a bank holding company under all applicable laws and
regulations.
TAXATION
Federal Taxation
General. First Federal of Olathe Bancorp and First Federal will report
their income using the accrual method of accounting and will be taxed under
federal income tax laws in the same manner as other corporations with some
exceptions, including particularly First Federal's reserve for bad debts
discussed below. First Federal of Olathe Bancorp's and First Federal's tax year
will end on December 31 of each year. The following discussion of tax matters is
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to First Federal or First Federal of
Olathe Bancorp.
Bad Debt Reserve. Historically, savings institutions such as First
Federal which met certain definitional tests primarily related to their assets
and the nature of their business were permitted to establish a reserve for bad
debts and to make annual additions thereto, which may have been deducted in
arriving at their taxable income. First Federal's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interest in real property, were computed using an amount based on First
Federal's actual loss experience, or a percentage equal to 8% of First Federal's
taxable income, computed with certain modifications and reduced by the amount of
any permitted additions to the non-qualifying reserve. Due to First Federal's
loss experience, First Federal generally recognized a bad debt deduction equal
to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also required that all institutions recapture all or a portion
of their bad debt reserves added since the base year, defined as the last
taxable year beginning before January 1, 1988. First Federal has no post-1987
reserves that would be recaptured. For taxable years beginning after December31,
1995, First Federal's bad debt deduction will be determined under the experience
method using a formula based on actual bad debt experience over a period of
years. The unrecaptured base year reserves will not be recaptured as long as the
institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be treated under the
provisions of present law referred to below that require recapture in the case
of certain excess distributions to shareholders.
52
Distributions. To the extent that First Federal makes "nondividend
distributions" to First Federal of Olathe Bancorp, the distributions will be
considered to result in distributions from the balance of its bad debt reserve
as of December 31, 1987, or a lesser amount if First Federal's loan portfolio
decreased since December 31, 1987, and then from the supplemental reserve for
losses on loans. An amount based on the supplemental reserve for loan losses
will be included in First Federal's taxable income. Nondividend distributions
include distributions in excess of First Federal's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividends paid out of First Federal's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from First
Federal's bad debt reserve. The amount of additional taxable income created from
an excess distribution is an amount that, when reduced by the tax attributable
to the income, is equal to the amount of the distribution. Thus, if, after the
conversion, First Federal makes a "nondividend distribution," then approximately
one and one-half times the amount based on the supplemental reserve for loan
losses would be includable in gross income for federal income tax purposes,
assuming a 34% corporate federal income tax rate. See "Regulation" and "Dividend
Policy" for limits on the payment of dividends by First Federal. First Federal
does not intend to pay dividends that would result in a recapture of any portion
of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a
taxon alternative minimum taxable income at a rate of 20%. The excess of the tax
bad debt reserve deduction using the percentage of taxable income method over
the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the alternative minimum
taxable income. In addition, only 90% of alternative minimum taxable income can
be offset by net operating loss carry-overs. Alternative minimum taxable income
is increased by an amount equal to 75% of the amount by which First Federal's
adjusted current earnings exceeds its alternative minimum taxable income
determined without regard to this preference and prior to reduction for net
operating losses. For taxable years beginning after December 31, 1986, and
before January 1, 1996, an environmental tax of 0.12% of the excess of
alternative minimum taxable income (with certain modification) over $2.0 million
is imposed on corporations, including First Federal, whether or not an
alternative minimum tax is paid.
Dividends-Received Deduction. First Federal of Olathe Bancorp may
exclude from its income 100% of dividends received from First Federal as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which First Federal of Olathe Bancorp and
First Federal will not file a consolidated tax return, except that if First
Federal of Olathe Bancorp or First Federal owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The IRS has not audited First Federal's federal income tax
returns for the past five years.
Kansas Taxation
First Federal files Kansas income tax returns. The State of Kansas also
imposes a privilege tax on savings institutions. Savings institutions are
presently taxed at a rate of up to 4.5% of net income, which is calculated based
on federal taxable income, subject to certain adjustments.
First Federal's state tax returns have not been audited by the State of
Kansas during the past five years.
MANAGEMENT
Directors and Executive Officer of First Federal of Olathe Bancorp
The Board of Directors of First Federal of Olathe Bancorp currently
consists of five members, each of whom is also a director of First Federal. See
"--Directors of First Federal." Each Director of First Federal of Olathe Bancorp
has served as such since First Federal of Olathe Bancorp's incorporation in
December 1999. Directors of First Federal of Olathe Bancorp will serve
three-year staggered terms so that approximately one-third of the directors will
be elected at each annual meeting of stockholders. The terms of the current
directors of First Federal of Olathe Bancorp are the same as their terms as
directors of First Federal. First Federal of Olathe Bancorp intends to pay
directors a fee of $4,800 per annum, payable on a monthly basis. See "-Directors
of First Federal."
The executive officer of First Federal of Olathe Bancorp, who held his
present position since December 1999, is elected annually and holds office until
his respective successor has been elected and qualified or until death,
resignation or removal by the Board of Directors. The executive officer of First
Federal of Olathe Bancorp, is set forth below.
53
Name Title
- ---- -----
Mitch Ashlock President, Chief Executive Officer, Chief Financial
Officer and Director
It is not anticipated that the executive officer of First Federal of
Olathe Bancorp will receive any remuneration in his capacity as executive
officer of the holding company. For information regarding compensation of
directors and executive officers of First Federal, see "- Meetings of the Board
of Directors and Committees of First Federal," "-Compensation of the Board of
Directors of First Federal" and "- Executive Compensation."
Committees of First Federal of Olathe Bancorp
First Federal of Olathe Bancorp formed standing Audit, Nominating and
Compensation Committees in connection with its organization in December 1999.
The holding company was not incorporated in fiscal 1998 and therefore the
committees did not meet during that fiscal year.
The Audit Committee will review audit reports and related matters to
ensure effective compliance with regulations and internal policies and
procedures. This committee also will act on the recommendation by management of
an accounting firm to perform the holding company's annual audit and acts as a
liaison between the auditors and the Board. The current members of this
committee are Directors Donald K. Ashlock, Palmer and Wollen.
The Nominating Committee will meet annually in order to nominate
candidates for membership on the Board of Directors. This committee is comprised
of the Board members who are not up for election.
The Compensation Committee will establish the holding company's
compensation policies and review compensation matters. The current members of
this Committee are Directors Donald K. Ashlock, Bowen and Palmer.
Indemnification
The Kansas General Corporation Code describes those circumstances under
which directors, officers, employees and agents may be insured or indemnified
against liability which they may incur in their capacities as such. The Articles
of Incorporation of First Federal of Olathe Bancorp require indemnification of
directors, officers, employees or agents of First Federal of Olathe Bancorp to
the full extent permissible under Kansas law.
In addition, the Articles of Incorporation and Kansas law also provide
that the holding company may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the holding company or
another corporation or entity against any expense, liability or loss, whether or
not the holding company has the power to indemnify such person against such
expense, liability or loss under Kansas law. The holding company intends to
obtain such insurance.
Directors of First Federal
Prior to the conversion, the direction and control of First Federal, as
a mutual savings institution, had been vested in its Board of Directors. Upon
conversion of First Federal to stock form, each of the directors of First
Federal will continue to serve as a director of the converted association. The
Board of Directors of First Federal currently consists of five directors. The
directors are divided into three classes. Approximately one-third of the
directors are elected at each annual meeting of stockholders. Because First
Federal of Olathe Bancorp will own all of the issued and outstanding shares of
capital stock of the converted association after the conversion, directors of
the holding company will elect the directors of First Federal.
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The following table sets forth certain information regarding the
directors of First Federal and the holding company:
Director Term
Name Position(s) Held with First Federal Age(1) Since Expires
- ---- ----------------------------------- ----- ------- -------
Mitch Ashlock(2) President, Chief Executive Officer 42 1995 2001
and Director
Donald K. Ashlock(2) Chairman of the Board 72 1952 2002
John M. Bowen Director 66 1973 2000
Carl R. Palmer Director 63 1982 2000
Marvin Eugene Wollen Director 67 1986 2002
- ---------
(1) At September 30, 1999.
(2) Mitch Ashlock is the son of Donald K. Ashlock.
The business experience of each director is set forth below. All
directors have held their present position for at least the past five years,
except as otherwise indicated.
Mitch Ashlock. Mr. Ashlock has been employed by First Federal since
1992. He served as Vice President form 1992 to 1995, and was appointed President
and Chief Executive Officer in 1995.
Donald K. Ashlock. Mr. Ashlock served as President and Chief Executive
Officer of First Federal from 1982 until his retirement in 1995. He originally
joined First Federal in 1952.
John M. Bowen. Mr. Bowen is the owner and managing officer of John M.
Bowen & Associates, a court reporting company, located in Olathe, Kansas and
Kansas City, Missouri.
Carl R. Palmer. Mr. Palmer is the owner of Carl Palmer Realty, a real
estate sales firm located in Olathe, Kansas.
Marvin Eugene Wollen. Mr. Wollen is an optometrist practicing in
Olathe, Kansas.
Meetings of the Board of Directors and Committees of First Federal
The Board of Directors met 12 times during the year ended December 31,
1998. During fiscal 1998, no director of First Federal 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 First Federal does not have a separate
Nominating Committee. The full Board of Directors acts as the Nominating
Committee, except for directors who are up for election at the upcoming meeting.
The Board of Directors of First Federal has established an Audit
Committee. The Audit Committee reviews First Federal's financial statements,
supervises the internal audit and engages the external auditor. The Audit
Committee consists of directors Donald K. Ashlock, Palmer and Wollen. The Audit
Committee met two times during the year ended December 31, 1998.
Compensation of the Board of Directors of First Federal
During fiscal 1998, all directors of First Federal, other than the
Chairman of the Board, received a fee of $200 per meeting attended. The Chairman
of the Board received a fee of $740 per month plus $200 per meeting attended.
During fiscal 1999, First Federal increased the fees payable to directors to
$250 per meeting attended. For a discussion of additional benefits that may be
received by directors following the conversion, see "--Benefit Plans--Stock
Option Plan" and "--Recognition and Retention Plan."
55
Executive Compensation
The following table sets forth information concerning the compensation
paid or granted to First Federal's Chief Executive Officer. No other executive
officer of First Federal had aggregate compensation in excess of $100,000 in
fiscal 1998.
Annual Compensation(1)
-------------------------------
Other
Annual All Other
Name and Principal Fiscal Compensation Compensation
Position Year(1) Salary($) Bonus($) ($) ($)
- ------------------------ ------ -------- ------- ------------ ------------
Mitch Ashlock, President, 1998 $61,000 $20,000 $ 2,400(2) $--
Chief Executive Officer
and Director
- ---------
(1) In accordance with the revised rules on executive officer and director
compensation disclosure adopted by the SEC, Summary Compensation
information is excluded for the fiscal years ended December 31, 1996
and 1997, as First Federal was not a public company during such
periods.
(2) Consists of director's fees of $2,400. Does not include the aggregate
amount of other personal benefits, which did not exceed 10% of the
total salary and bonus reported.
Benefit Plans
General. First Federal currently provides health care benefits,
including medical, prescription and dental, subject to certain deductibles and
copayments by employees, and group life insurance to its full time employees.
Employment Agreement. First Federal intends to enter into an employment
agreement with Mr. Ashlock which will provide for a term of 36 months. On each
anniversary date, the agreement may be extended for an additional 12 months, so
that the remaining term shall be 36 months. If the agreement is not renewed, the
agreement will expire 36 months following the anniversary date. The current
annual base salary for Mr. Ashlock is $64,000. The base salary may be increased
but not decreased. In addition to the base salary, the agreement provides for,
among other things, participation in other employee and fringe benefits
applicable to executive personnel. The agreement provides for termination by
First Federal for cause at any time. In the event First Federal terminates the
executive's employment for reasons other than for cause, or in the event of the
executive's resignation from First Federal upon (1) failure to re-elect the
executive to his current offices, (2) a material change in the executive's
functions, duties or responsibilities, or relocation of his principal place of
employment by more than 30 miles, (3) liquidation or dissolution of First
Federal, (4) a breach of the agreement by First Federal, or (5) on the effective
date of or following a change in control (as defined in the agreement) during
the term of the agreement, the executive, or in the event of death, his
beneficiary would be entitled to severance pay in an amount equal to three times
the annual rate of base salary at the time of termination, plus the highest
annual cash bonus paid to him during the prior three years. First Federal would
also continue the executive's life, health, dental and disability coverage for
the remaining unexpired term of the agreement. In the event the payments to the
executive would include an "excess parachute payment" as defined in the Internal
Revenue Code, the payments would be reduced in order to avoid having an excess
parachute payment.
The executive's employment may be terminated upon his attainment of age
65. Upon Mr. Ashlock's retirement, he will be entitled to all benefits available
to him under any retirement or other benefit plan maintained by First Federal.
In the event of the executive's disability for a period of six months, First
Federal may terminate the agreement provided that First Federal will be
obligated to pay the executive his base salary for the remaining term of the
agreement or one year, whichever is longer, reduced by any benefits paid to the
executive pursuant to any disability insurance policy or similar arrangement
maintained by First Federal. In the event of the executive's death, First
Federal will pay his base salary to his named beneficiaries for one year
following his death, and will also continue medical, dental, and other benefits
to his family for one year.
56
The employment agreement provides that, following termination of
employment, the executive will not compete with First Federal for a period of
one year, provided, however, that in the event of a termination in connection
with a change in control within the meaning of certain federal laws, the
noncompete provisions will not apply.
Defined Benefit Pension Plan. First Federal maintains the Financial
Institutions Retirement Fund, which is a qualified, tax-exempt defined benefit
plan ("Retirement Plan"). All employees age 21 or older who have worked at First
Federal for a period of one year are eligible for membership in the Plan;
however, only employees that have been credited with 1,000 or more hours of
service with First Federal during the year are eligible to accrue benefits under
the Retirement Plan. First Federal annually contributes an amount to the
Retirement Plan, if necessary, to satisfy the actuarially determined minimum
funding requirements in accordance with the Employee Retirement Income Security
Act.
The regular form of all retirement benefits is guaranteed for the life
of the retiree. An optional form of benefit may be selected. These optional
forms include various joint and survivor annuity form. Benefits payable upon
death may be made in a lump sum, installments, or a lifetime annuity. For a
married participant, the normal form of benefit is a joint and survivor annuity
where, upon the participant's death, the participant's spouse is entitled to
receive a benefit equal to 50% of that paid during the participant's lifetime.
The normal retirement benefit payable at age 65 is an amount equal to
3% of a participant's high 3-year average salary, defined as income reportable
on Form W-2, multiplied by each year of credited service under the Retirement
Plan. A reduced benefit may be payable at or after age 45 and before normal
retirement age after completion of five years of service. If an employee
continues in employment after age 65 or defers commencement of his or her
retirement benefit, his or her retirement benefit will be increased by .8% for
each month of deferment, or 9.6% per year with a maximum increase of 48%. In
addition to the retirement benefit, a retiree will receive an annual retirement
allowance at the end of the calendar year in which he or she attains age 66, and
at the end of each succeeding year equal to 2% times the annual retirement
benefit multiplied by the number of years after retirement. For the plan year
ended June 30, 1999, First Federal was not required to make a contribution to
the Retirement Plan.
The following table indicates the annual retirement benefit that would
be payable under the Retirement Plan upon retirement at age 65 in calendar year
1999, expressed in the form of a single life annuity for the average salary and
benefit service classifications specified below.
Highest Three-Year Years of Service and Benefit Payable at Retirement
Average -------------------------------------------------------------------------------
Compensation 15 20 25 30 35 40
------------ -------- -------- -------- --------- --------- ----------
$ 50,000 $22,500 $30,000 $ 37,500 $ 45,000 $ 50,000 $ 50,000
$ 75,000 33,750 45,000 56,250 67,500 75,000 75,000
$ 100,000 45,000 60,000 75,000 90,000 100,000 100,000
$ 125,000 56,250 75,000 93,750 112,500 125,000 125,000
$ 150,000 67,500 90,000 112,500 130,000(1) 130,000(1) 130,000(1)
- ----------
(1) Benefits are limited by tax laws which limit, in 1999, the maximum
annual benefit payable under a defined benefit pension plan to the
lesser of (i) $130,000, or (ii) 100% of the participant's average
compensation for his high 3 years
As of December 31, 1999, Mr. Mitch Ashlock had 6 years of credited
service under the plan.
Employee Stock Ownership Plan and Trust. First Federal intends to
implement the ESOP in connection with the conversion. Employees with at least
one year of employment with First Federal and who have attained age 21 are
eligible to participate. As part of the conversion, the ESOP intends to borrow
funds from First Federal of Olathe Bancorp and use those funds to purchase a
number of shares equal to up to 8.0% of the common stock to be issued in the
conversion. Collateral for the loan will be the common stock purchased by the
ESOP. The loan will be repaid principally from First Federal's discretionary
contributions to the ESOP over a period of not less than 20 years provided,
however that the loan documents will permit repayment over a period of up to 30
years but provide no penalty for prepayments. It is anticipated that the
interest rate for the loan will be a floating rate equal to the prime rate.
Shares purchased by the ESOP will be held in a suspense account for allocation
among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account
in an amount proportional to the repayment of the ESOP loan will be allocated
among ESOP participants on the basis of compensation in the year of allocation.
Participants in the ESOP will receive credit for up to two years of service
prior to the effective date of the ESOP. A participant vests in his ESOP benefit
at the rate of 20% per year of service so that a participant is 100% vested in
his benefits after five years or upon normal retirement as defined in the ESOP,
early retirement,
57
disability or death of the participant. A participant who terminates employment
for reasons other than death, retirement, or disability prior to five years of
credited service will forfeit his benefits under the ESOP. Benefits will be
payable in the form of common stock and/or cash upon death, retirement, early
retirement, disability or separation from service. First Federal's contributions
to the ESOP are discretionary, subject to the loan terms and tax law limits,
and, therefore, benefits payable under the ESOP cannot be estimated. Pursuant to
SOP 93-6, First Federal is required to record compensation expense in an amount
equal to the fair market value of the shares released from the suspense account.
In connection with the establishment of the ESOP, First Federal will
establish a committee of nonemployee directors to administer the ESOP. First
Federal will appoint an independent financial institution to serve as trustee of
the ESOP. The ESOP trustee, subject to its fiduciary duty, must vote all
allocated shares held in the ESOP in accordance with the instructions of
participating employees. Under the ESOP, nondirected shares, and shares held in
the suspense account, will be voted in a manner calculated to most accurately
reflect the instructions it has received from participants regarding the
allocated stock so long as such vote is in accordance with the provisions of
ERISA.
Stock Option Plan. First Federal of Olathe Bancorp intends to implement
a stock option plan for directors, officers and employees of the holding company
and First Federal after the conversion. Applicable regulations prohibit the
holding company from implementing this plan until six months after the
conversion and, if implemented within the first twelve months after the
conversion, require that approval of the holders of a majority of the
outstanding shares of the holding company be obtained.
First Federal of Olathe Bancorp expects to adopt a stock option plan
that will authorize a committee of non-employee directors or the full board of
the holding company to grant options to purchase up to 10% of the shares issued
in the stock offering over a period of 10 years. The committee will decide which
directors, officers and employees will receive options and what the terms of
those options will be. Generally, no stock option will permit its recipient to
purchase shares at a price that is less than the fair market value of a share on
the date the option is granted, and no option will have a term that is longer
than 10 years. If the holding company implements a stock option plan before the
first anniversary of the conversion, applicable regulations will require that
the holding company:
o Limit the total number of shares that are optioned to outside
directors to 30% of the shares authorized for the plan.
o Limit the number of shares that are optioned to any one
outside director to 5% of the shares authorized for the plan
and the number of shares that are optioned to any officer or
employee to 25% of the shares that are authorized for the
plan.
o Not permit the options to become vested at a more rapid rate
than 20% per year beginning on the first anniversary of
stockholder approval of the plan.
o Not permit accelerated vesting for any reason other than death
or disability.
After the first anniversary of the conversion, the holding company may amend the
plan to change or remove these restrictions. If the holding company adopts a
stock option plan within one year after the conversion, the holding company
expects to amend the plan later to remove these restrictions and to provide for
accelerated vesting in cases of retirement and/or a change of control.
The holding company may obtain the shares needed for this plan by
issuing additional shares or through stock repurchases. The holding company's
ability to engage in stock repurchases may be restricted by Office of Thrift
Supervision regulations that prohibit it from repurchasing its common stock in
the first three years following the conversion, unless the holding company
receives the prior approval of the Office of Thrift Supervision.
The holding company expects the stock option plan will permit the
committee to grant either incentive stock options that qualify for special
federal income tax treatment or non-qualified stock options that do not qualify
for special treatment. Incentive stock options may be granted only to employees
of the holding company and First Federal and will not create federal income tax
consequences when they are granted. If they are exercised during employment or
within three months after termination of employment, the exercise will not
create federal income tax consequences either. When the shares acquired on
exercise of an incentive stock option are resold, the seller must pay federal
income taxes on the amount by which the sales price exceeds the purchase price.
This amount will be taxed at capital gains rates if the sale occurs at least two
years after the option was granted and at least one year after the option was
exercised. Otherwise, it is taxed as ordinary income.
58
Non-qualified stock options may be granted to either employees or
non-employees such as directors, consultants and other service providers. Except
in limited circumstances, incentive stock options that are exercised more than
three months after termination of employment are treated as non-qualified stock
options. Non-qualified stock options will not create federal income tax
consequences when they are granted. When they are exercised, federal income
taxes must be paid on the amount by which the fair market value of the shares
acquired by exercising the option exceeds the exercise price. When the shares
acquired on exercise of a non-qualified stock option are resold, the seller must
pay federal income taxes on the amount by which the sales price exceeds the
purchase price plus the amount included in ordinary income when the option was
exercised. This amount will be taxed at capital gains rates, which will vary
depending upon the time that has elapsed since the exercise of the option.
When a non-qualified stock option is exercised, First Federal of Olathe
Bancorp may be allowed a federal income tax deduction for the same amount that
the option holder includes in his or her ordinary income. This amount may be the
same as the related compensation expense or it may be different. When an
incentive stock option is exercised, there is no tax deduction unless the shares
acquired are resold sooner than two years after the option was granted or one
year after the option was exercised.
Recognition and Retention Plan. First Federal of Olathe Bancorp intends
to implement a recognition and retention plan for the directors, officers and
employees of First Federal and the holding company after the conversion.
Applicable regulations prohibit First Federal of Olathe Bancorp from
implementing this plan until six months after the conversion and, if implemented
within the first twelve months after the conversion, require that the holding
company first obtain the approval of the holders of a majority of its
outstanding shares.
The holding company expects to adopt a recognition and retention plan
that will authorize a committee of non-employee directors or the full board of
the holding company to make restricted stock awards of up to 4% of the shares
issued in the stock offering. In the event the holding company initially
implements the recognition and retention plan more than 12 months after the
conversion, the recognition and retention plan may authorize the committee to
award up to 5% of the shares issued in the stock offering. The committee will
decide which directors, officers and employees will receive restricted stock and
what the terms of those awards will be. The holding company may obtain the
shares needed for this plan by issuing additional shares or through stock
repurchases. If the holding company implements a recognition and retention plan
before the first anniversary of the conversion, applicable regulations will
require that the holding company:
o Limit the total number of shares that are awarded to outside
directors to 30% of the shares authorized for the plan.
o Limit the number of shares that are awarded to any one outside
director to 5% of the shares authorized for the plan and the
number of shares that are awarded to any officer or employee
to 25% of the shares that are authorized for the plan.
o Not permit the awards to become vested at a more rapid rate
than 20% per year beginning on the first anniversary of
stockholder approval of the plan.
o Not permit accelerated vesting for any reason other than death
or disability.
After the first anniversary of the conversion, the holding company may amend the
plan to change or remove these restrictions. If the holding company adopts a
recognition and retention plan within one year after the conversion, the holding
company expects to amend the plan later to remove these restrictions and to
provide for accelerated vesting in cases of retirement and change of control.
Restricted stock awards under this plan may feature employment
restrictions that require continued employment for a period of time for the
award to be vested. Awards are not vested unless the specified employment
restrictions are met. However, pending vesting, the award recipient may have
voting and dividend rights. When an award becomes vested, the recipient must
include the current fair market value of the vested shares in his income for
federal income tax purposes. First Federal and the holding company will be
allowed a federal income tax deduction in the same amount. First Federal and the
holding company will have to recognize a compensation expense for accounting
purposes ratably over the vesting period.
Indebtedness of Management
In the ordinary course of business, First Federal makes loans available
to its directors, officers and employees. Such loans are made in the ordinary
course of business on the same terms, including interest rates and
59
collateral, as comparable loans to other borrowers. It is the belief of
management that these loans neither involve more than the normal risk of
collectibility nor present other unfavorable features. At September 30, 1999,
First Federal had four loans outstanding to directors and executive officers of
First Federal, or members of their immediate families. These loans totaled
approximately $169,000, or 1.9%, of First Federal's total equity at September
30, 1999.
THE CONVERSION
The Board of Directors of First Federal and the OTS have approved the
Plan of Conversion, subject to approval by the members of First Federal entitled
to vote on the matter and the satisfaction of certain other conditions. OTS
approval, however, is not a recommendation or endorsement of the Plan. Certain
terms used in the following summary are defined in the Plan of Conversion, a
copy of which may be obtained by contacting First Federal.
General
On October 13, 1999, the Board of Directors unanimously adopted the
Plan, subject to approval by the OTS and the members of First Federal. Pursuant
to the Plan, First Federal is to be converted from a federal mutual savings
association to a federal stock savings association, with the concurrent
formation of a holding company. The OTS has approved the Plan, subject to its
approval by the affirmative vote of the members of First Federal holding not
less than a majority of the total number of votes eligible to be cast at a
Special Meeting called for that purpose to be held on March __, 2000.
The conversion will be accomplished through amendment of First
Federal's federal mutual charter to authorize the issuance of capital stock, at
which time First Federal will become a wholly owned subsidiary of the holding
company. The conversion will be accounted for as a pooling of interests.
The plan of conversion provides generally that: First Federal will
convert from a federally chartered mutual savings association to a federally
chartered stock savings association; the common stock will be offered by First
Federal of Olathe Bancorp in the subscription offering to persons having
subscription rights; if necessary, shares of common stock not subscribed for in
the subscription offering will be offered in a community offering to certain
members of the general public, with preference given to natural persons and
trusts of natural persons residing in Johnson County, Kansas, and then to
certain members of the general public in a syndicated community offering through
a syndicate of registered broker-dealers under selected dealers agreements; and
First Federal of Olathe Bancorp will purchase all of the capital stock of First
Federal to be issued in the conversion. The conversion will be completed only
upon the sale of at least $5,525,000 of common stock to be issued under the plan
of conversion.
As part of the conversion, First Federal of Olathe Bancorp is making a
subscription offering of its common stock to holders of subscription rights in
the following order of priority. First, depositors of First Federal with $50.00
or more on deposit as of June 30, 1998. Second, First Federal's employee stock
ownership plan. Third, depositors of First Federal with $50.00 or more on
deposit as of December 31, 1999. Fourth, depositors of First Federal as of
January __, 2000 and borrowers of First Federal with loans outstanding as of
January __, 2000 which continue to be outstanding as of January __, 2000.
Finally, officers, directors and employees of First Federal.
Shares of common stock not subscribed for in the subscription offering
may be offered for sale in the community offering. The community offering, if
one is held, is expected to begin immediately after the expiration of the
subscription offering, but may begin at any time during the subscription
offering. Shares of common stock not sold in the subscription and community
offerings may be offered in the syndicated community offering. Regulations
require that the community and syndicated community offerings be completed
within 45 days after completion of the fully extended subscription offering
unless extended by First Federal or First Federal of Olathe Bancorp with the
approval of the regulatory authorities. If the syndicated community offering is
determined not to be feasible, the Board of Directors of First Federal will
consult with the regulatory authorities to determine an appropriate alternative
method for selling the unsubscribed shares of common stock. The plan of
conversion provides that the conversion must be completed within 24 months after
the date of the approval of the plan of conversion by the members of First
Federal.
No sales of common stock may be completed, either in the subscription
offering, direct community offering or syndicated community offering unless the
plan of conversion is approved by the members of First Federal.
60
The completion of the offering, however, depends on market conditions
and other factors beyond First Federal's control. No assurance can be given as
to the length of time after approval of the plan of conversion at the special
meeting that will be required to complete the community or syndicated community
offerings or other sale of the common stock.
Orders for shares of common stock will not be filled until at least
552,500 shares of common stock have been subscribed for or sold and the Office
of Thrift Supervision approves the final valuation and the conversion closes. If
the conversion is not completed within 45 days after the last day of the fully
extended subscription offering and the Office of Thrift Supervision consents to
an extension of time to complete the conversion, subscribers will be given the
right to increase, decrease or rescind their subscriptions. Unless an
affirmative indication is received from subscribers that they wish to continue
to subscribe for shares, the funds will be returned promptly, together with
accrued interest at First Federal's passbook rate from the date payment is
received until the funds are returned to the subscriber. If the period is not
extended, or, in any event, if the conversion is not completed, all withdrawal
authorizations will be terminated and all funds held will be promptly returned
together with accrued interest at First Federal's passbook rate from the date
payment is received until the conversion is terminated.
Purposes of Conversion
The Board of Directors and management believe that the conversion is in
the best interests of First Federal, its members and the communities it serves.
First Federal's Board of Directors has formed First Federal of Olathe Bancorp to
serve as a holding company, with First Federal as its subsidiary, after the
conversion. By converting to the stock form of organization, First Federal of
Olathe Bancorp and First Federal will be structured in the form used by holding
companies of commercial banks, most business entities and by a growing number of
savings institutions. Management of First Federal believes that the conversion
offers a number of advantages which will be important to the future growth and
performance of First Federal. The capital raised in the conversion is intended
to support First Federal's current lending and investment activities and may
also support possible future expansion and diversification of operations,
although there are no current specific plans, arrangements or understandings,
written or oral, regarding any expansion or diversification. The conversion is
also expected to afford First Federal's management, members and others the
opportunity to become stockholders of First Federal of Olathe Bancorp and
participate more directly in, and contribute to, any future growth of First
Federal of Olathe Bancorp and First Federal. The conversion will also enable
First Federal of Olathe Bancorp and First Federal to raise additional capital in
the public equity or debt markets should the need arise, although there are no
current specific plans, arrangements or understandings, written or oral,
regarding any financing activities. First Federal, as a mutual savings and loan
association, does not have the authority to issue capital stock or debt
instruments, other than by accepting deposits.
Effects of Conversion to Stock Form on Depositors and Borrowers of First Federal
Voting Rights. Upon conversion, neither deposit account holders nor
borrowers will have voting rights in First Federal or First Federal of Olathe
Bancorp and will therefore not be able to elect directors of either entity or to
control their affairs. These rights are currently accorded to deposit account
holders and certain borrowers with regard to First Federal. Subsequent to
conversion, voting rights will be vested exclusively in First Federal of Olathe
Bancorp as the sole stockholder of First Federal. Voting rights as to First
Federal of Olathe Bancorp will be held exclusively by its stockholders. Each
purchaser of First Federal of Olathe Bancorp common stock shall be entitled to
vote on any matters to be considered by First Federal of Olathe Bancorp
stockholders. A stockholder will be entitled to one vote for each share of
common stock owned, subject to certain limitations applicable to holders of 10%
or more of the shares of the common stock. See "Restrictions on Acquisitions of
Stock and Related Takeover Defensive Provisions." First Federal of Olathe
Bancorp intends to supply each stockholder with quarterly and annual reports and
proxy statements.
Deposit Accounts and Loans. The terms of First Federal's deposit
accounts, the balances of the individual accounts and the existing FDIC
insurance coverage will not be affected by the conversion. Furthermore, the
conversion will not affect the loan accounts, the balances of these accounts, or
the obligations of the borrowers under their individual contractual arrangements
with First Federal.
Tax Effects. First Federal has received an opinion from Luse Lehman
Gorman Pomerenk & Schick, P.C. with regard to federal income taxation, and an
opinion of Taylor, Perky & Parker, L.L.C., with regard to Kansas taxation, to
the effect that the adoption and implementation of the plan of conversion set
forth herein will not be taxable for federal or Kansas tax purposes to First
Federal or First Federal of Olathe Bancorp. See "- Income Tax Consequences."
61
Liquidation Rights. First Federal has no plan to liquidate either
before or after the conversion. However, if there should ever be a complete
liquidation, either before or after conversion, deposit account holders would
receive the protection of insurance by the FDIC up to applicable limits. Subject
thereto, liquidation rights before and after conversion would be as follows:
Liquidation Rights in Present Mutual Association. In addition to the
protection of FDIC insurance up to applicable limits, in the event of a complete
liquidation each holder of a deposit account in First Federal in its present
mutual form would receive his pro rata share of any assets of First Federal
remaining after payment of claims of all creditors, including the claims of all
depositors in the amount of the withdrawal value of their accounts. Each
depositor's pro rata share of the remaining assets, would be in the same
proportion as the balance in his or her deposit account to the aggregate balance
in all deposit accounts in First Federal at the time of liquidation.
Liquidation Rights in Proposed Converted Association. After 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 First Federal in addition to the protection of FDIC insurance up to
applicable limits. 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 and the holder would have no interest in the value of First
Federal above that amount.
The plan of conversion provides that there shall be established, upon
the completion of the conversion, a special "liquidation account" for the
benefit of eligible account holders and supplemental eligible account holders in
an amount equal to the net worth of First Federal as of the date of its latest
consolidated statement of financial condition contained in the final prospectus
relating to the conversion. Each eligible account holder and supplemental
eligible account holder would have an initial interest in the liquidation
account for each qualifying deposit account held in First Federal on the
qualifying date. An eligible account holder's or supplemental eligible account
holder's interest as to each deposit account would be in the same proportion as
the balance in his or her account on the applicable eligibility date, was to the
aggregate balance in all qualifying deposit accounts on such date. For accounts
in existence on both dates, separate subaccounts shall be determined on the
basis of the qualifying deposits in the accounts on the record dates. However,
if an eligible account holder or supplemental eligible account holder should
reduce the amount in the qualifying deposit account on any annual closing date
of First Federal to a level less than the lowest amount in such account on the
applicable eligibility date, and on any subsequent closing date, then the
account holder's interest in this special liquidation account would be reduced
by an amount proportionate to any such reduction, and the account holder's
interest would cease to exist if such qualifying deposit account were closed.
The interest in the special liquidation account would never be
increased despite any increase in the balance of the account holders' related
accounts after conversion.
Any assets remaining after the above liquidation rights of eligible
account holders and supplemental eligible account holders were satisfied would
be distributed to the holding company as the sole stockholder of First Federal.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether First
Federal, or another federally-insured institution is the surviving institution,
is deemed to be a complete liquidation for purposes of distribution of the
liquidation account. In any such transaction, the liquidation account would be
assumed by the surviving institution. 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 federally-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.
Common Stock. For information as to the characteristics of the common
stock to be issued under the plan of conversion, see "Dividends" and
"Description of Capital Stock." Common stock issued under the plan of conversion
cannot, and will not, be insured by the FDIC or any other government agency.
First Federal will continue, immediately after completion of the
conversion, to provide its services to depositors and borrowers pursuant to its
existing policies and will maintain the existing management and employees of
First Federal. Other than for payment of expenses incident to the conversion, no
assets of First Federal will be distributed in the conversion. First Federal
will continue to be a member of the FHLB System, and its deposit accounts will
continue to be insured by the FDIC. The affairs of First Federal will continue
to be directed by the existing Board of Directors and management.
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Offering of Common Stock
Under the plan of conversion, up to 7,475,000 shares of First Federal
of Olathe Bancorp common stock will be offered for sale, subject to certain
restrictions described below through a subscription and community offering.
Subscription Offering. The subscription offering will expire at 12:00
noon, central time, on March ___, 2000 unless extended by First Federal and
First Federal of Olathe Bancorp. Regulations of the OTS require that all shares
to be offered in the conversion be sold within a period ending not more than 45
days after the expiration date of the subscription offering or such longer
period as may be approved by the OTS or, despite approval of the plan of
conversion by members, the conversion will not be effected. This period expires
on May ___, 2000, unless extended with the approval of the OTS. If the
conversion is not completed by May ___, 2000, all subscribers will have the
right to modify or rescind their subscriptions and to have their subscription
funds returned promptly with interest. In the event of such an extension, all
subscribers will be notified in writing of the time period within which
subscribers must notify First Federal of their intention to maintain, modify or
rescind their subscriptions. If the subscriber rescinds or does not respond in
any manner to First Federal's notice, the funds submitted will be refunded to
the subscriber with interest at 3.0%, First Federal's current passbook rate per
annum, and/or the subscriber's withdrawal authorizations will be terminated. In
the event that the conversion is not effected, all funds submitted and not
previously refunded pursuant to the subscription and community offering will be
promptly refunded to subscribers with interest at 3.0%, and all withdrawal
authorizations will be terminated.
Subscription Rights. Under the plan of conversion, nontransferable
subscription rights to purchase the common stock have been issued to persons and
entities entitled to purchase the common stock in the subscription offering. The
amount of the common stock which these parties may purchase will depend on the
availability of the common stock for purchase under the categories described in
the plan of conversion. Subscription priorities have been established for the
allocation of stock to the extent that the common stock is available. These
priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or
more on deposit at First Federal as of June 30, 1998 will receive
nontransferable subscription rights to subscribe for up to the greater of
$100,000 of common stock, one-tenth of one percent of the total offering of
common stock 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 qualifying deposit of the
eligible account holder and the denominator is the total amount of qualifying
deposits of all eligible account holders. If the exercise of subscription rights
in this category results in an oversubscription, shares of common stock will be
allocated among subscribing eligible account holders so as to permit each one,
to the extent possible, to purchase a number of shares sufficient to make the
person's total allocation equal 100 shares or the number of shares actually
subscribed for, whichever is less. Thereafter, unallocated shares will be
allocated proportionately, based on the amount of their respective qualifying
deposits as compared to total qualifying deposits of all subscribing eligible
account holders. Subscription rights received by officers and directors in this
category based on their increased deposits in First Federal in the one year
period preceding June 30, 1998 are subordinated to the subscription rights of
other eligible account holders.
Category 2: Employee Stock Ownership Plan. The plan of conversion
provides that tax qualified employee plans of First Federal, such as the
employee stock ownership plan, shall receive nontransferable subscription rights
to purchase up to 10% of the shares of common stock issued in the conversion.
The employee stock ownership plan intends to purchase 8% of the shares of common
stock issued in the conversion. In the event the number of shares offered in the
conversion is increased above the maximum of the valuation range, the plan shall
have a priority right to purchase any shares exceeding that amount up to 8% of
the common stock. If the plan's subscription is not filled in its entirety, the
employee stock ownership plan may purchase shares in the open market or may
purchase shares directly from the holding company.
Category 3: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
eligible account holders and the employee stock ownership plan, each depositor
with $50.00 or more on deposit as of December 31, 1999 will receive
nontransferable subscription rights to subscribe for up to the greater of
$100,000 of common stock, one-tenth of one percent of the total offering of
common stock 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 qualifying deposits of the
supplemental eligible account holder and the denominator is the total amount of
qualifying deposits of all supplemental eligible account holders. If the
exercise of subscription rights in this category results in an oversubscription,
shares of common stock will be allocated among subscribing supplemental
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eligible account holders so as to permit each supplemental eligible account
holder, to the extent possible, to purchase a number of shares sufficient to
make his or her total allocation equal 100 shares or the number of shares
actually subscribed for, whichever is less. Thereafter, unallocated shares will
be allocated among subscribing supplemental eligible account holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all subscribing supplemental eligible
account holders.
Category 4: Other Members. Each depositor of First Federal as of
January __, 2000 and each borrower with a loan outstanding on January __, 2000
which continues to be outstanding as of January __, 2000 will receive
nontransferable subscription rights to purchase up to the greater of $100,000 of
common stock or one-tenth of one percent of the total offering of common stock,
in the conversion to the extent shares are available following subscriptions by
eligible account holders, First Federal's employee stock ownership plan and
supplemental eligible account holders. If there is an oversubscription in this
category, the available shares will be allocated proportionately based on the
amount of the other members number of votes as compared to the total number of
votes of all subscribing other members.
Category 5: Officers, Directors and Employees. Each officer, director
and employee of First Federal will receive nontransferable subscription rights,
to purchase up to a maximum of $100,000 of common stock to the extent that
shares are available after satisfying the subscriptions of eligible subscribers
in preference Categories 1, 2, 3 and 4. In the event of an oversubscription, the
available shares will be allocated pro rata among all subscribers in this
category.
Subscription rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for common stock in the subscription
offering or subscribing for common stock on behalf of another person may forfeit
those rights and may face possible further sanctions and penalties imposed by
the Office of Thrift Supervision or another agency of the U.S. Government. Each
person exercising subscription rights will be required to certify that he or she
is purchasing shares solely for his or her own account and that he or she has no
agreement or understanding with any other person for the sale or transfer of the
shares. Once tendered, subscription orders cannot be revoked without the consent
of First Federal and First Federal of Olathe Bancorp.
First Federal and First Federal of Olathe Bancorp 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
conversion reside. However, no shares will be offered or sold under the plan of
conversion to any such person who resides in a foreign country or 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 conversion reside or as to which First
Federal and First Federal of Olathe Bancorp 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 First Federal or
First Federal of Olathe Bancorp 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.
Community Offering. To the extent that shares are available for
purchase, First Federal of Olathe Bancorp and First Federal have determined to
offer shares pursuant to the plan to certain members of the general public to
whom First Federal of Olathe Bancorp delivers a copy of this prospectus and a
stock order form in the community offering, with preference given to natural
persons residing in Johnson County, Kansas. Such persons, together with
associates of and persons acting in concert with such persons, may purchase up
to $100,000 of common stock. The community offering, if any, may begin during
the subscription offering, and may terminate at any time without notice, but may
not terminate later than May ___, 2000, unless extended with the approval of the
OTS. The opportunity to subscribe for shares of common stock in the community
offering category is subject to the right of First Federal of Olathe Bancorp and
First Federal, in their sole discretion, to accept or reject any such orders in
whole or in part either at the time of receipt of an order or as soon as
practicable thereafter.
If there are not sufficient shares available to fill orders in the
community offering, such stock will be allocated first to each natural person
residing in Johnson County whose order is accepted by First Federal, in an
amount equal to the lesser of 1,000 shares or the number of shares subscribed
for by each such subscriber residing in Johnson County, if possible. Thereafter,
unallocated shares will be allocated among the subscribers residing in Johnson
County, whose orders remain unsatisfied in the same proportion that the unfilled
subscription of each bears to the total unfilled subscriptions of all
subscribers residing in Johnson County whose subscription remains unsatisfied.
If there are any shares remaining, shares will be allocated to other members of
the general public who subscribe in the community offering applying the same
allocation described above for subscribers residing in Johnson County.
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Syndicated Community Offering. All shares of common stock not purchased
in the subscription and community offerings, if any, may be offered for sale to
the general public in a syndicated community offering through a syndicate of
registered broker-dealers to be formed and managed by Trident Securities. First
Federal of Olathe Bancorp and First Federal expect to market any shares which
remain unsubscribed after the subscription and community offerings through a
syndicated community offering. First Federal of Olathe Bancorp and First Federal
have the right to reject orders in whole or part in their sole discretion in the
syndicated community offering. Neither Trident Securities nor any registered
broker-dealer shall have any obligation to take or purchase any shares of common
stock in the syndicated community offering; however, Trident Securities has
agreed to use its best efforts in the sale of shares in the syndicated community
offering.
The price at which common stock is sold in the syndicated community
offering will be the same price as in the subscription and community offerings.
Subject to overall purchase limitations, no person will be permitted to
subscribe in the syndicated community offering for more than $100,000 or 10,000
shares of common stock.
Trident Securities may enter into agreements with selected dealers to
assist in the sale of the shares in the syndicated community offering. No orders
may be placed or filled by or for a selected dealer during the subscription
offering. After the close of the subscription offering, Trident Securities will
instruct selected dealers as to the number of shares to be allocated to each
selected dealer. Only after the close of the subscription offering and upon
allocation of shares to selected dealers may selected dealers take orders from
their customers. During the subscription and community offerings, selected
dealers may only solicit indications of interest from their customers to place
orders with First Federal of Olathe Bancorp as of a certain order date for the
purchase of shares of common stock. When and if Trident Securities and First
Federal of Olathe Bancorp believe that enough indications of interest and orders
have not been received in the subscription and community offerings to consummate
the conversion, Trident Securities will request, as of the order date, selected
dealers to submit orders to purchase shares for which they have previously
received indications of interest from their customers. Selected dealers will
send confirmations of the orders to such customers on the next business day
after the order date. Selected dealers will debit the accounts of their
customers on the settlement date which date will be three business days from the
order date. Customers who authorize selected dealers to debit their brokerage
accounts are required to have the funds for payment in their account on but not
before the settlement date. On the settlement date, selected dealers will remit
funds to the account established by First Federal for each selected dealer. Each
customer's funds so forwarded to First Federal, along with all other accounts
held in the same title, will be insured by the FDIC up to $100,000 in accordance
with applicable FDIC regulations. After payment has been received by First
Federal from selected dealers, funds will earn interest at First Federal's
passbook rate until the consummation or termination of the conversion. Funds
will be promptly returned, with interest, in the event the conversion is not
consummated as described above.
The syndicated community offering will terminate no more than 45 days
following the subscription expiration date, unless extended by First Federal of
Olathe Bancorp and First Federal with the approval of the OTS.
Limitations on Purchase of Shares. The plan also provides for certain
additional limitations to be placed upon the purchase of shares in the
conversion. Specifically, no person, other than First Federal's employee stock
ownership plan, by himself or herself or with an associate, and no group of
persons acting in concert, may subscribe for or purchase more than $200,000 of
common stock offered in the conversion. Officers and directors and their
associates may not purchase, in the aggregate, more than 35% of the shares to be
sold in the conversion. For purposes of the plan, the members of the Board of
Directors are not deemed to be acting in concert solely by reason of their Board
membership. Moreover, any shares attributable to the officers and directors and
their associates, but held by a tax-qualified employee plan other than that
portion of a plan which is self-directed, shall not be included in calculating
the number of shares which may be purchased under the limitations in this
paragraph. Shares purchased by employees who are not officers or directors of
First Federal, or their associates, are not subject to this limitation. The term
"associate" is used above to indicate any of the following relationships with a
person:
o any corporation or organization, other than First Federal of
Olathe Bancorp or First Federal or a majority-owned subsidiary
of First Federal of Olathe Bancorp or First Federal, of which
a person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class
of equity security;
o 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
65
o 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 First Federal of Olathe Bancorp or
First Federal or any subsidiary of First Federal of Olathe
Bancorp or First Federal.
The Boards of Directors of First Federal of Olathe Bancorp and First
Federal may, in their sole discretion, decrease the maximum purchase limitation
referred to above or increase the maximum purchase limitation up to 9.99% of the
shares being offered in the conversion, provided that orders for shares
exceeding 5.0% of the shares being offered in the conversion shall not exceed,
in the aggregate, 10% of the shares being offered in the conversion. Requests to
purchase additional shares of First Federal of Olathe Bancorp common stock under
this provision will be allocated by the Boards of Directors on a pro rata basis
giving priority in accordance with the priority rights set forth above.
Depending upon market and financial conditions, and subject to certain
regulatory limitations, the Boards of Directors of First Federal of Olathe
Bancorp and First Federal, with the approval of the OTS and without further
approval of the members, may increase or decrease any of the above purchase
limitations at any time. To the extent that shares are available, each
subscriber must subscribe for a minimum of 25 shares. In computing the number of
shares to be allocated, all numbers will be rounded down to the next whole
number.
Common stock purchased in the conversion will be freely transferable
except for shares purchased by executive officers and directors of First Federal
or First Federal of Olathe Bancorp and except as described below. See "-
Restrictions on Transferability." In addition, under National Association of
Securities Dealers, Inc. ("NASD") guidelines, members of the NASD and their
associates are subject to certain restrictions on transfer of securities
purchased in accordance with subscription rights and to certain reporting
requirements upon purchase of such securities.
Marketing Arrangements
First Federal of Olathe Bancorp and First Federal have engaged Trident
Securities as a financial advisor and marketing agent in connection with the
offering of the common stock, and Trident Securities has agreed to use its best
efforts to solicit subscriptions and purchase orders for shares of common stock
in the offerings. Trident Securities is a member of the NASD and an
SEC-registered broker-dealer. Trident Securities will assist First Federal in
the conversion by acting as marketing advisor with respect to the subscription
offering and will represent First Federal as placement agent on a best efforts
basis in the sale of the common stock in the community offering if one is held;
conduction training sessions with directors, officers and employees of First
Federal regarding the conversion process; and assisting in the establishment and
supervision of First Federal's stock information center and, with management's
input, will train First Federal's staff to record properly and tabulate orders
for the purchase of common stock and to respond appropriately to customer
inquiries.
Based upon negotiations between Trident Securities and First Federal
concerning fee structure, Trident Securities will receive a fee of $97,500. In
the event that a selected dealers agreement is entered into in connection with a
syndicated community offering, First Federal will pay a fee to be determined to
such selected dealers, for shares sold by an NASD member firm pursuant to a
selected dealers agreement. Fees to Trident Securities and to any other
broker-dealer may be deemed to be underwriting fees, and Trident Securities and
such broker-dealers may be deemed to be underwriters. Trident Securities will
also be reimbursed for its reasonable out of pocket expenses in an amount not to
exceed $11,000 and reasonable legal fees not to exceed $26,500 without the prior
approval of First Federal. Trident Securities has been paid $5,000 as an advance
against these expenses. First Federal of Olathe Bancorp and First Federal have
agreed to indemnify Trident Securities for reasonable costs and expenses in
connection with certain claims or liabilities, including certain liabilities
under the Securities Act.
Description of Sales Activities
Directors and executive officers of First Federal of Olathe Bancorp and
First Federal, may to a limited extent and subject to applicable state law,
participate in the solicitation of offers to purchase common stock. Other
employees of First Federal may participate in the subscription and community
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
the prospectus or other offering document. Other questions of prospective
purchasers will be directed to registered representatives of Trident Securities.
Such other employees have been instructed not to solicit offers to purchase
common stock or provide advice regarding the purchase of common stock. Sales of
common stock by directors, executive officers and registered representatives
will be made from the stock information center. First Federal of Olathe Bancorp
will rely on Rule 3a4-1 under the Exchange Act, and sales of common stock will
be conducted within the requirements
66
of Rule 3a4-1, so as to permit officers, directors and employees to participate
in the sale of common stock except in some states where only registered
broker-dealers may sell. No officer, director or employee of First Federal of
Olathe Bancorp or First Federal will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the common stock.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities of a thrift institution sold in connection with its conversion must
be based on an appraised aggregate market value of the institution as converted,
as determined by an independent valuation. RP Financial, which is experienced in
the valuation and appraisal of business entities, including thrift institutions
involved in the conversion process, was retained by First Federal to prepare an
appraisal of the estimated pro forma market value of the common stock.
RP Financial will receive a fee of $20,000 for its appraisal and
assistance in preparation of First Federal's business plan plus reasonable
out-of-pocket expenses. First Federal of Olathe Bancorp has agreed to indemnify
RP Financial, under certain circumstances against liabilities and expenses,
including legal fees, arising out of, related to, or based upon the conversion.
RP Financial has prepared an appraisal of the estimated pro forma
market value of First Federal of Olathe Bancorp and First Federal as converted
taking into account the formation of First Federal of Olathe Bancorp as the
holding company for First Federal. For its analysis, RP Financial undertook
substantial investigations to learn about First Federal's business and
operations. Management supplied financial information, including annual
financial statements, information on the composition of assets and liabilities,
and other financial schedules. In addition to this information, RP Financial
reviewed First Federal's Form AC Application for Approval of Conversion and
First Federal of Olathe Bancorp's Form SB-2 Registration Statement. Furthermore,
RP Financial visited First Federal's facilities and had discussions with First
Federal's management and its special conversion legal counsel, Luse Lehman
Gorman Pomerenk & Schick, P.C. No detailed individual analysis of the separate
components of First Federal of Olathe Bancorp's or First Federal's assets and
liabilities was performed in connection with the evaluation.
In estimating the pro forma market value of First Federal of Olathe
Bancorp and First Federal as converted, as required by applicable regulatory
guidelines, RP Financial's analysis utilized three selected valuation
procedures, the Price/Book method, the Price/Earnings method, and the
Price/Assets method, all of which are described in its report. RP Financial
placed the greatest emphasis on the Price/Earnings and the Price/Book methods in
estimating pro forma market value. In applying these procedures, RP Financial
reviewed, among other factors, the economic make-up of First Federal's primary
market area, First Federal's financial performance and condition in relation to
publicly traded institutions that RP Financial deemed comparable to First
Federal, the specific terms of the offering of First Federal of Olathe Bancorp's
common stock, the pro forma impact of the additional capital raised in the
conversion, conditions of securities markets in general, and the market for
thrift institution common stock in particular. RP Financial's analysis provides
an approximation of the pro forma market value of First Federal of Olathe
Bancorp and First Federal as converted based on the valuation methods applied
and the assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of First Federal of Olathe Bancorp
after the conversion that were utilized in determining the appraised value.
These assumptions included estimated expenses and an assumed after-tax rate of
return on the net conversion proceeds as described under "Pro Forma Data,"
purchases by the employee stock ownership plan of 8% of the common stock issued
in the conversion and purchases in the open market by the recognition and
retention plan of a number of shares equal to 4% of the common stock issued in
the conversion at the $10.00 purchase price. See "Pro Forma Data" for additional
information concerning these assumptions. The use of different assumptions may
yield different results.
On the basis of the foregoing, RP Financial has advised First Federal
of Olathe Bancorp and First Federal that, in its opinion, as of December 10,
1999, the aggregate estimated pro forma market value of First Federal of Olathe
Bancorp and First Federal, as converted was within the valuation range of
$5,525,000 to $7,475,000 with a midpoint of $6,500,000. After reviewing the
methodology and the assumptions used by RP Financial in the preparation of the
appraisal, the Board of Directors established the estimated valuation range
which is equal to the valuation range of $5,525,000 to $7,475,000 with a
midpoint of $6,500,000. Assuming that the shares are sold at $10.00 per share in
the conversion, the estimated number of shares would be between 552,500 and
747,500 with a midpoint of 650,000. The purchase price of $10.00 was determined
by discussion among the Boards of Directors of First Federal and First Federal
of Olathe Bancorp and Trident Securities, taking into account, among other
factors, the requirement under Office of Thrift Supervision regulations that the
common stock be offered in a manner that will achieve the widest distribution of
the stock, and desired liquidity in the common stock subsequent to the
conversion. Since the outcome of the offering relates in large measure to market
conditions at the time of
67
sale, it is not possible to determine the exact number of shares that will be
issued by First Federal of Olathe Bancorp at this time. The estimated valuation
range may be amended, with the approval of the Office of Thrift Supervision, if
necessitated by developments following the date of the appraisal in, among other
things, market conditions, the financial condition or operating results of First
Federal, regulatory guidelines or national or local economic conditions.
RP Financial's appraisal report is filed as an exhibit to the
registration statement that First Federal of Olathe Bancorp has filed with the
Securities and Exchange Commission. See "Where You Can Find More Information."
If, upon completion of the subscription offering, at least the minimum
number of shares are subscribed for, RP Financial, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of First Federal of Olathe Bancorp and
First Federal as converted, as of the close of the subscription offering.
No sale of the shares will take place unless prior thereto RP Financial
confirms to the Office of Thrift Supervision that, to the best of RP Financial's
knowledge and judgment, nothing of a material nature has occurred that would
cause it to conclude that the actual total purchase price on an aggregate basis
was incompatible with its estimate of the total pro forma market value of First
Federal of Olathe Bancorp and First Federal as converted at the time of the
sale. If, however, the facts do not justify that statement, the offering or
other sale may be canceled, a new estimated valuation range and price per share
set and new subscription, direct community and syndicated community offerings
held. Under circumstances, subscribers would have the right to modify or rescind
their subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced.
Depending upon market and financial conditions, the number of shares
issued may be more than 859,625 shares or less than 552,500 shares. If the total
amount of shares issued is less than 552,500 or more than 859,625 (15% above the
maximum of the estimated valuation range), for aggregate gross proceeds of less
than $5,525,000 or more than $8,596,250, subscription funds will be returned
promptly with interest to each subscriber unless he indicates otherwise. If RP
Financial establishes a new valuation range, it must be approved by the Office
of Thrift Supervision.
If purchasers cannot be found for an insignificant residue of
unsubscribed shares from the general public, other purchase arrangements will be
made by the Boards of Directors of First Federal and First Federal of Olathe
Bancorp, if possible. Other purchase arrangements must be approved by the Office
of Thrift Supervision and may provide for purchases for investment purposes by
directors, officers, their associates and other persons in excess of the
limitations provided in the plan of conversion and in excess of the proposed
director purchases discussed earlier, although no purchases are currently
intended. If other purchase arrangements cannot be made, the plan of conversion
will terminate.
In formulating its appraisal, RP Financial relied upon the
truthfulness, accuracy and completeness of all documents First Federal furnished
to it. RP Financial also considered financial and other information from
regulatory agencies, other financial institutions, and other public sources, as
appropriate. While RP Financial believes this information to be reliable, RP
Financial does not guarantee the accuracy or completeness of the information and
did not independently verify the financial statements and other data provided by
First Federal and First Federal of Olathe Bancorp or independently value the
assets or liabilities of First Federal of Olathe Bancorp and First Federal. The
appraisal by RP Financial 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
plan of conversion or of purchasing shares of common stock. Moreover, because
the appraisal is necessarily based on many factors which change from time to
time, there is no assurance that persons who purchase shares in the conversion
will later be able to sell shares thereafter at prices at or above the purchase
price.
Procedure for Purchasing Shares in the Subscription and Community Offerings
To purchase shares in the subscription offering, an executed order form
with the required full payment for each share subscribed for, or with
appropriate authorization indicated on the stock order form for withdrawal of
full payment from the subscriber's deposit account with First Federal, must be
received by First Federal by 12:00 noon, central time, on March ___, 2000. Order
forms that are not received by that time or are executed defectively or are
received without full payment or without appropriate withdrawal instructions
will not be accepted. First Federal of Olathe Bancorp and First Federal have the
right to waive or permit the correction of incomplete or improperly executed
order forms, but do not represent that they will do so. Under the plan of
conversion, the interpretation by First Federal of Olathe Bancorp and First
Federal of the terms and conditions of
68
the plan of conversion and of the order form will be final. In order to purchase
shares in the direct community offering, the order form, accompanied by the
required payment for each share subscribed for, must be received by First
Federal prior to the time the direct community offering terminates, which may be
on or at any time subsequent to the expiration date. Once received, an executed
order form may not be modified, amended or rescinded without the consent of
First Federal unless the conversion has not been completed within 45 days after
the end of the subscription offering, unless extended.
In order to ensure that persons with subscription rights are properly
identified as to their stock purchase priorities, they must list all accounts on
the order form giving all names in each account, the account number and the
approximate account balance as of the appropriate eligibility date. Failure to
list an account could result in fewer shares allocated if there is an
oversubscription than if all accounts had been disclosed.
Full payment for subscriptions may be made in cash if delivered in
person at First Federal's stock information center; by check, bank draft, or
money order; or by authorization of withdrawal from deposit accounts maintained
with First Federal. Appropriate means by which withdrawals may be authorized are
provided on the order form. No wire transfers will be accepted. Interest will be
paid on payments made by cash, check, bank draft or money order at First
Federal's passbook rate from the date payment is received at the stock
information center until the completion or termination of the 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
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 the conversion is completed or
terminated, but a hold will be placed on the funds, making them unavailable to
the depositor until completion or termination of the conversion. When the
conversion is completed, the funds received in the offering will be used to
purchase the shares of common stock ordered. The shares of common stock issued
in the conversion cannot and will not be insured by the Federal Deposit
Insurance Corporation or any other government agency. If the conversion is not
consummated for any reason, all funds submitted will be promptly refunded with
interest as described above.
If a subscriber authorizes First Federal to withdraw the amount of the
aggregate purchase price from his or her deposit account, First Federal will do
so as of the effective date of conversion, though the account must contain the
full amount necessary for payment at the time the subscription order is
received. First Federal will waive any applicable penalties for early withdrawal
from certificate accounts. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time that the
funds actually are transferred under the authorization the certificate will be
canceled at the time of the withdrawal, without penalty, and the remaining
balance will earn interest at First Federal's passbook rate.
The employee stock ownership plan will not be required to pay for the
shares subscribed for at the time it subscribes, but rather may pay for shares
of common stock subscribed for at the $10.00 purchase price after the
conversion, provided that there is in force from the time of its subscription
until that time, a loan commitment from an unrelated financial institution or
First Federal of Olathe Bancorp to lend to the employee stock ownership plan, at
that time, the aggregate purchase price of the shares for which it subscribed.
Individual retirement accounts maintained in First Federal do not
permit investment in the common stock. A depositor interested in using his or
her Individual Retirement Account funds to purchase common stock must do so
through a self-directed individual retirement account. Since First Federal does
not offer those accounts, it will allow a depositor to make a trustee-to-trustee
transfer of the individual retirement account funds to a trustee offering a
self-directed individual retirement account program with the agreement that the
funds will be used to purchase First Federal of Olathe Bancorp's common stock in
the offering. There will be no early withdrawal or Internal Revenue Service
interest penalties for transfers. The new trustee would hold the common stock in
a self- directed account in the same manner as First Federal now holds the
depositor's Individual Retirement Account funds. An annual administrative fee
may be payable to the new trustee. Depositors interested in using funds in an
individual retirement account at First Federal to purchase common stock should
contact the stock information center as soon as possible so that the necessary
forms may be forwarded for execution and returned before the subscription
offering ends. In addition, federal laws and regulations require that officers,
directors and 10% shareholders who use self- directed individual retirement
account funds to purchase shares of common stock in the subscription offering,
make purchases for the exclusive benefit of individual retirement accounts.
Certificates representing shares of common stock purchased, and any
refund due, will be mailed to purchasers at the address as may be specified in
properly completed order forms or to the last address of the persons appearing
on the records of First Federal as soon as practicable following the sale of all
shares of common stock. Any certificates returned as undeliverable will be
disposed of in accordance with applicable law. Purchasers may not be able to
sell the shares of common stock which they purchased until certificates for
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the common stock are available and delivered to them, even though trading of the
common stock may have begun.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the expiration date, on March ___, 2000, in accordance with Rule 15c2-8
under the Securities Exchange Act of 1934, as amended, no prospectus will be
mailed any later than five days prior to that date or hand delivered any later
than two days prior to that 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. First Federal will accept for processing only
orders submitted on original order forms. First Federal is not obligated to
accept orders submitted on photocopied or telecopied order forms. Orders cannot
and will not be accepted without the execution of the certification appearing on
the reverse side of the order form.
Risk of Delayed Offering
In the event that all shares of the common stock are not sold in the
subscription offering and concurrent community offering, First Federal and First
Federal of Olathe Bancorp may extend the community offering for a period of up
to 45 days from the date of the termination of the subscription offering.
Further extensions are subject to OTS approval and may be granted for successive
periods, but not beyond 24 months from the date of the special meeting.
A material delay in the completion of the sale of all unsubscribed
shares in the community offering may result in a significant increase in the
costs in completing the conversion. Significant changes in First Federal's
operations and financial condition, the aggregate market value of the shares to
be issued in the conversion and general market conditions may occur during such
material delay. In the event the conversion is not consummated within 24 months
after the date of the special meeting, First Federal would charge accrued
conversion costs to then current period operations.
Approval, Interpretation, Amendment and Termination
All interpretations of the plan of conversion, as well as the
completeness and validity of order forms, will be made by First Federal and
First Federal of Olathe Bancorp and will be final, subject to the authority of
the OTS and the requirements of applicable law. The plan of conversion provides
that, if deemed necessary or desirable by the Boards of Directors of First
Federal and First Federal of Olathe Bancorp, the plan of conversion may be
substantively amended by the Boards of Directors of First Federal and First
Federal of Olathe Bancorp, as a result of comments from regulatory authorities
or otherwise, at any time but only with the concurrence of the OTS. Moreover, if
the plan of conversion is amended, subscriptions which have been received prior
to such amendment will not be refunded if such amendment is not material to the
transaction or otherwise required by the OTS.
The plan of conversion will terminate if the sale of all shares is not
completed within 24 months after the date of the special meeting. The plan of
conversion may be terminated by the Board of Directors of First Federal with the
concurrence of the OTS at any time. A specific resolution approved by a
two-thirds vote of the Board of Directors would be required to terminate the
plan of conversion prior to the end of such 24-month period.
Restrictions on Repurchase of Stock
Under OTS regulations, OTS-regulated savings associations and their
holding companies may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except if an offer made to all of its stockholders to repurchase the
common stock on a pro rata basis, approved by the OTS or the repurchase of
qualifying shares of a director. Furthermore, repurchases of any common stock
are prohibited if the effect thereof would cause the association's regulatory
capital to be reduced below the amount required for the liquidation account or
the regulatory capital requirements imposed by the OTS. Repurchases are
generally prohibited during the first year following conversion. Upon ten days'
written notice to the OTS, and if the OTS does not object, an institution may
make open market repurchases of its outstanding common stock during years two
and three following the conversion, provided that certain regulatory conditions
are met and that the repurchase would not adversely affect the financial
condition of the institution. Any repurchases of common stock by First Federal
of Olathe Bancorp must meet these regulatory restrictions unless the OTS would
provide otherwise.
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Restrictions on Transferability
The subscription rights described in this prospectus are
non-transferable and shall be awarded to eligible persons without payment. Prior
to the completion of the conversion, federal regulations prohibit any person
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. Persons
violating such prohibition may lose their right to purchase stock in the
conversion and may be subject to sanctions by the OTS. Each person exercising
subscription rights will be required to certify that a purchase of common stock
is solely for the purchaser's own account and that there is no agreement or
understanding regarding the sale or transfer of such shares. First Federal and
First Federal of Olathe Bancorp will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders known by them to involve the transfer of such rights.
Shares of common stock purchased in the offering by directors and
officers of First Federal of Olathe Bancorp may not be sold for a period of one
year following the conversion, except upon the death of the stockholder or in
any exchange of the common stock in connection with a merger or acquisition of
First Federal of Olathe Bancorp. Shares of common stock received by directors or
officers through the employee stock ownership plan or the recognition and
retention plan or upon exercise of options issued under the stock option plan or
purchased subsequent to the conversion are free of this restriction.
Accordingly, shares of common stock issued by First Federal of Olathe Bancorp to
directors and officers shall bear a legend giving appropriate notice of the
restriction and, in addition, First Federal of Olathe Bancorp will give
appropriate instructions to the transfer agent for First Federal of Olathe
Bancorp's common stock with respect to the restriction on transfers. Any shares
issued to directors and officers as a stock dividend, stock split or otherwise
with respect to restricted common stock shall also be restricted.
Purchases of outstanding shares of common stock of First Federal of
Olathe Bancorp by directors, executive officers, or any person who was an
executive officer or director of First Federal after adoption of the plan of
conversion, and their associates during the three-year period following the
conversion may be made only through a broker or dealer registered with the SEC,
except with the prior written approval of the OTS. This restriction does not
apply, however, to negotiated transactions involving more than 1% of First
Federal of Olathe Bancorp's outstanding common stock or to the purchase of stock
under the stock option plan.
First Federal of Olathe Bancorp has filed with the SEC a registration
statement under the Securities Act of 1933, as amended, for the registration of
the common stock to be issued in the conversion. The registration under the
Securities Act of shares of the common stock to be issued in the conversion does
not cover the resale of the shares. Shares of common stock purchased by persons
who are not affiliates of First Federal of Olathe Bancorp may be resold without
registration. Shares purchased by an affiliate of First Federal of Olathe
Bancorp will have resale restrictions under Rule 144 of the Securities Act. If
First Federal of Olathe Bancorp meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of First
Federal of Olathe Bancorp who complies with the other conditions of Rule 144,
including those that require the affiliate's sale to be aggregated with those of
certain other persons, would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of 1% of the outstanding shares of First Federal of Olathe Bancorp or
the average weekly volume of trading in the shares during the preceding four
calendar weeks. Provision may be made in the future by First Federal of Olathe
Bancorp to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates
face certain restrictions on the transfer of securities purchased in accordance
with subscription rights and to certain reporting requirements upon purchase of
the securities.
Income Tax Consequences
Consummation of the conversion is expressly conditioned upon prior
receipt by First Federal of either a ruling from the Internal Revenue Service or
an opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. with respect to federal
taxation, and a ruling of the Kansas taxation authorities or an opinion with
respect to Kansas taxation, to the effect that consummation of the conversion
will not be taxable to the converted association or First Federal of Olathe
Bancorp.
Luse Lehman Gorman Pomerenk & Schick, P.C. has issued an opinion with
respect to the proposed conversion of First Federal to the effect that:
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1. the conversion of First Federal from mutual to stock form will
qualify as a reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code, and no gain or loss will be recognized
by First Federal in either its mutual form or its stock form
by reason of the proposed conversion;
2. no gain or loss will be recognized by First Federal upon the
receipt of money from First Federal of Olathe Bancorp for
stock of First Federal; and no gain or loss will be recognized
by First Federal of Olathe Bancorp upon the receipt of money
for common stock of First Federal of Olathe Bancorp;
3. no gain or loss will be recognized by eligible account holders
and supplemental eligible account holders of First Federal
upon the issuance to them of withdrawable deposit accounts in
First Federal in its stock form plus an interest in the
liquidation account of First Federal in exchange for their
deposit accounts in First Federal in its mutual form;
4. assuming the non-transferable subscription rights to purchase
common stock have no value, the tax basis of an account
holder's deposit accounts in First Federal in its stock form
will be the same as the basis of the account holder's deposit
accounts in First Federal in its mutual form;
5. assuming the non-transferable subscription rights to purchase
common stock have no value, the tax basis of each eligible
account holder's and supplemental eligible account holder's
interest in the liquidation account will be zero;
6. the basis of First Federal of Olathe Bancorp common stock to
its shareholders will be the purchase price thereof and a
shareholder's holding period for First Federal of Olathe
Bancorp common stock acquired through the exercise of
subscription rights shall begin on the date of consummation of
the conversion;
The opinion from Luse Lehman Gorman Pomerenk & Schick, P.C. is based,
among other things, on certain assumptions, including the assumptions that the
exercise price of the subscription rights to purchase First Federal of Olathe
Bancorp common stock will be approximately equal to the fair market value of
that stock at the time of the completion of the proposed conversion. First
Federal of Olathe Bancorp and First Federal have received a letter issued by RP
Financial stating that pursuant to RP Financial's valuation, RP Financial is of
the belief that subscription rights issued in connection with the conversion
will have no value. The letter of RP Financial and the federal and state tax
opinions, respectively, referred to herein are filed as exhibits to the
Registration Statement. See "Where You Can Find More Information."
If it is subsequently established that the subscription rights received
by such persons have an ascertainable fair market value, then, in such event,
the subscription rights will be taxable to the recipient in the amount of their
fair market value. In this regard, the subscription rights may be taxed
partially or entirely at ordinary income tax rates.
With respect to Kansas taxation, First Federal has received an opinion
from Taylor, Perky & Parker, L.L.C. to the effect that, assuming the conversion
does not result in any federal taxable income, gain or loss to First Federal in
its mutual or stock form, First Federal of Olathe Bancorp, the account holders,
borrowers, officers, directors and employees and tax-qualified employee plans of
First Federal, the conversion should not result in any Kansas income tax
liability to such entities or persons.
Unlike a private letter ruling, the opinions of Luse Lehman Gorman
Pomerenk & Schick, P.C. and Taylor, Perky & Parker, L.L.C., as well as the RP
Financial Letter, have no binding effect or official status, and no assurance
can be given that the conclusions reached in any of those opinions would be
sustained by a court if contested by the IRS or the Kansas tax authorities.
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Boards of Directors of First Federal and First Federal of
Olathe Bancorp are not aware of any effort that might be made to obtain control
of First Federal of Olathe Bancorp after conversion, the Boards of Directors, as
discussed below, believe that it is appropriate to include certain provisions as
part of First Federal of Olathe Bancorp's articles of incorporation to protect
the interests of First Federal of Olathe Bancorp and its stockholders from
takeovers which the Board of Directors of First Federal of Olathe Bancorp might
conclude are
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not in the best interests of First Federal, First Federal of Olathe Bancorp or
First Federal of Olathe Bancorp's stockholders.
The following discussion is a general summary of the material
provisions of First Federal of Olathe Bancorp's articles of incorporation and
bylaws and certain other regulatory provisions which may be deemed to have an
"anti-takeover" effect. The following description of certain of these provisions
is necessarily general and, with respect to provisions contained in First
Federal of Olathe Bancorp's articles of incorporation and bylaws and First
Federal's proposed stock charter and bylaws, reference should be made in each
case to the document in question, each of which is part of First Federal's
application to the OTS and First Federal of Olathe Bancorp's Registration
Statement filed with the SEC. See "Where You Can Find Additional Information."
Provisions of First Federal of Olathe Bancorp's Articles of Incorporation and
Bylaws
Directors. Certain provisions of First Federal of Olathe Bancorp's
articles of incorporation and bylaws will impede changes in majority control of
the Board of Directors. First Federal of Olathe Bancorp's articles of
incorporation provides that the Board of Directors of First Federal of Olathe
Bancorp 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 First Federal of Olathe Bancorp's Board. First Federal of
Olathe Bancorp's articles of incorporation provides that the size of the Board
of Directors may be increased or decreased only by a majority vote of the Board.
The bylaws also provide 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 articles and 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 articles of incorporation provide that a director may only be
removed for cause by the affirmative vote of at least 80% of the shares eligible
to vote.
Restrictions on Call of Special Meetings. The articles of incorporation
of First Federal of Olathe Bancorp provide that a special meeting of
stockholders may be called only by a majority of the board of directors, or by a
committee of the board of directors which is authorized to call such meetings.
Stockholders are not authorized to call a special meeting.
Absence of Cumulative Voting. First Federal of Olathe Bancorp's
articles of incorporation provide that there shall be no cumulative voting
rights in the election of directors.
Authorized Shares. The articles of incorporation authorize the issuance
of 4,000,000 shares of common stock and 1,000,000 shares of preferred stock. The
shares of common stock and preferred stock were authorized in an amount greater
than that to be issued in the conversion to provide First Federal of Olathe
Bancorp's board of directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits and the exercise of stock options. However, these additional authorized
shares may also be used by the board of directors consistent with its fiduciary
duty to deter future attempts to gain control of First Federal of Olathe
Bancorp. The board of directors also has sole authority to determine the terms
of any one or more series of preferred stock, including voting rights,
conversion rates, and liquidation preferences. As a result of the ability to fix
voting rights for a series of preferred stock, the board has the power, to the
extent consistent with its fiduciary duty, to issue a series of preferred stock
to persons friendly to management in order to attempt to block a post-tender
offer merger or other transaction by which a third party seeks control, and
thereby assist management to retain its position. The Board of Directors has no
present plans or understandings for the issuance of any preferred stock but it
may issue any preferred stock on terms which the Board deems to be in the best
interests of First Federal of Olathe Bancorp and its stockholders.
Limitations on Voting Rights. The articles of incorporation of First
Federal of Olathe Bancorp provide that after completion of the conversion, in no
event shall any record owner of any outstanding equity security which is
beneficially owned, directly or indirectly, by a person who beneficially owns in
excess of 10% of any class of equity security outstanding (the "Limit"), be
entitled or permitted to any vote in respect of the shares held in excess of the
Limit. In addition, for a period of five years from the completion of the
conversion, no person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of
First Federal of Olathe Bancorp without the approval of the Board of Directors.
The impact of these provisions on the submission of a proxy on behalf
of a beneficial holder of more than 10% of the common stock is to disregard for
voting purposes and require divestiture of the amount of
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stock held in excess of 10%, if within five years of the conversion more than
10% of the common stock is beneficially owned by a person, and limit the vote on
common stock held by the beneficial owner to 10% or possibly reduce the amount
that may be voted below the 10% level, if more than 10% of the common stock is
beneficially owned by a person more than five years after the conversion. Unless
the grantor of a revocable proxy is an affiliate or an associate of such a 10%
holder or there is an arrangement, agreement or understanding with such a 10%
holder, these provisions would not restrict the ability of such a 10% holder of
revocable proxies to exercise revocable proxies for which the 10% holder is
neither a beneficial nor record owner. A person is a beneficial owner of a
security if he has the power to vote or direct the voting of all or part of the
voting rights of the security, or has the power to dispose of or direct the
disposition of the security. The articles of incorporation of First Federal of
Olathe Bancorp further provide that this provision limiting voting rights may
only be amended upon the vote of 80% of the outstanding shares of voting stock.
Evaluation of Offers. The articles of incorporation further provide
that the board of directors of First Federal of Olathe Bancorp, when evaluating
any offer to (1) make a tender or exchange offer for any equity security of
First Federal of Olathe Bancorp, (2) merge or consolidate First Federal of
Olathe Bancorp with another corporation or entity, or (3) purchase or otherwise
acquire all or substantially all of the properties and assets of First Federal
of Olathe Bancorp, may, in connection with the exercise of its judgment in
determining what is in the best interest of First Federal of Olathe Bancorp and
its stockholders, give due consideration to all relevant factors. These factors
include, without limitation, the social and economic effect of acceptance of
such offer on First Federal of Olathe Bancorp's present and future customers and
employees and those of its subsidiaries; on the communities in which First
Federal of Olathe Bancorp and its subsidiaries operate or are located; on the
ability of First Federal of Olathe Bancorp to fulfill its corporate objectives
as a financial institution holding company; and on the ability of its subsidiary
financial institution to fulfill the objectives of a federally insured financial
institution under applicable statutes and regulations. The articles of
incorporation of First Federal of Olathe Bancorp also authorize the Board of
Directors to take certain actions to encourage a person to negotiate for a
change of control of First Federal of Olathe Bancorp or to oppose such a
transaction deemed undesirable by the Board of Directors including the adoption
of so-called shareholder rights plans. By having these standards and provisions
in the certificate of incorporation of First Federal of Olathe Bancorp, the
Board of Directors may be in a stronger position to oppose such a transaction if
the Board concludes that the transaction would not be in the best interest of
First Federal of Olathe Bancorp, even if the price offered is significantly
greater than the then market price of any equity security of First Federal of
Olathe Bancorp.
Procedures for Certain Business Combinations. The articles of
incorporation require that unless certain fair price provisions are met,
business combinations must be approved by the affirmative vote of the holders of
not less than 80% of the outstanding stock of First Federal of Olathe Bancorp.
Exceptions to this requirement may occur if two-thirds of the members of the
board of directors, who are continuing directors, has previously approved the
business transaction. Any amendment to this provision requires the affirmative
vote of at least 80% of the shares of First Federal of Olathe Bancorp entitled
to vote generally in an election of directors.
Amendment to Articles of Incorporation and Bylaws. Amendments to First
Federal of Olathe Bancorp's articles of incorporation must be approved by First
Federal of Olathe Bancorp's Board of Directors and also by a majority of the
outstanding shares of First Federal of Olathe Bancorp's voting stock; provided,
however, that approval by at least 80% of the outstanding voting stock is
generally required for certain provisions, including provisions relating to
number, classification, election and removal of directors, amendment of bylaws,
call of special stockholder meetings, criteria for evaluating certain offers,
offers to acquire and acquisitions of control, director liability, certain
business combinations, power of indemnification, and amendments to provisions
relating to the foregoing in the certificate of incorporation.
The bylaws may be amended by the affirmative vote of the total number
of directors of First Federal of Olathe Bancorp or the affirmative vote of at
least 80% of the outstanding shares of First Federal of Olathe Bancorp entitled
to vote in the election of directors, cast at a meeting called for that purpose.
Purpose and Takeover Defensive Effects of First Federal of Olathe
Bancorp's Articles of Incorporation and Bylaws. The Board of Directors of First
Federal believes that the provisions described above are prudent and will reduce
First Federal of Olathe Bancorp's vulnerability to takeover attempts and certain
other transactions which have not been negotiated with and approved by its Board
of Directors. These provisions will also assist First Federal in the orderly
deployment of the conversion proceeds into productive assets during the initial
period after the conversion. The Board of Directors believes these provisions
are in the best interest of First Federal and of First Federal of Olathe Bancorp
and its stockholders. In the judgment of the Board of Directors, First Federal
of Olathe Bancorp's Board will be in the best position to determine the true
value of First Federal of Olathe Bancorp and to negotiate more effectively for
what may be in the best interests of its stockholders. Accordingly,
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the Board of Directors believes that it is in the best interests of First
Federal of Olathe Bancorp and its stockholders to encourage potential acquirer
to negotiate directly with the Board of Directors of First Federal of Olathe
Bancorp and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at prices reflective of the true value of First
Federal of Olathe Bancorp and which is in the best interests of all
stockholders.
Attempts to take over financial institutions and their holding
companies have 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 First Federal of Olathe
Bancorp and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of First Federal of Olathe Bancorp'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 First
Federal of Olathe Bancorp'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.
Potential Anti-Takeover Effects. Despite the belief of First Federal
and First Federal of Olathe Bancorp as to the benefits to stockholders of these
provisions of First Federal of Olathe Bancorp's articles of incorporation and
bylaws, these provisions may also have the effect of discouraging a future
takeover attempt which would not be approved by First Federal of Olathe
Bancorp'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 First
Federal of Olathe Bancorp's Board of Directors and of management more difficult.
The Boards of Directors of First Federal and First Federal of Olathe Bancorp,
however, have concluded that the potential benefits outweigh the possible
disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the conversion, First Federal of Olathe Bancorp may adopt
additional provisions to its articles of incorporation regarding the acquisition
of its equity securities that would be permitted to a Kansas corporation. First
Federal of Olathe Bancorp and First Federal do not presently intend to propose
the adoption of further restrictions on the acquisition of First Federal of
Olathe Bancorp's equity securities.
Other Restrictions on Acquisitions of Stock
Kansas Anti-Takeover Statute. The State of Kansas has enacted
legislation which provides that subject to certain exceptions a publicly held
Kansas corporation may not engage in any business combination with an
"interested stockholder" for three years after such stockholder became an
interested stockholder, unless, among other things, the interested stockholder
acquired at least 85% of the corporation's voting stock in the transaction that
resulted in the stockholder becoming an interested stockholder. This legislation
generally defines "interested stockholder" as any person or entity that owns 15%
or more of the corporation's voting stock. The term "business combination" is
defined broadly to cover a wide range of corporate transactions, including
mergers, sales of assets, issuances of stock, transactions with subsidiaries and
the receipt of disproportionate financial benefits. Under certain circumstances,
either the board of directors or both the board and two-thirds of the
stockholders other than the acquirer may approve a given business combination
and thereby exempt the corporation from the operation of the statute.
However, these statutory provisions do not apply to Kansas corporations
with fewer 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. First Federal of Olathe Bancorp has applied to have the common
stock quoted and traded on the Over-the-Counter Electronic Bulletin Board.
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Federal Regulation. A federal regulation prohibits any person prior to
the completion of a 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 conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, this regulation prohibits any person, without
the prior approval of the OTS, from acquiring or making an offer, if opposed by
the institution, to acquire more than 10% of the stock of any converted savings
institution if such person is, or after consummation of such acquisition would
be, the beneficial owner of more than 10% of such stock. In the event that any
person, directly or indirectly, violates this regulation, the securities
beneficially owned by such person in excess of 10% shall not be counted as
shares entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matter submitted to a vote of stockholders.
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 and loan
association at any time without the prior approval of the OTS. "Acting in
concert" is defined very broadly. In addition, federal regulations require that,
prior to obtaining control of a savings and loan 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 and loan
association" includes state and federally chartered institutions whose accounts
are insured by the Savings Association Insurance Fund and federally chartered
savings banks whose accounts are insured by the FDIC's Bank Insurance Fund and
holding companies thereof.
Control, as defined under federal law, 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 the savings and
loan association's directors, or a determination by the OTS that the acquirer
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 and loan association's voting stock, if
the acquirer also is subject to any one of eight "control factors," constitutes
a rebuttable determination of control under the regulations. Such control
factors include the acquirer 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 regulations provide that persons or companies which
acquire beneficial ownership exceeding 10% or more of any class of a savings and
loan 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.
DESCRIPTION OF CAPITAL STOCK
Holding Company Capital Stock
The 5,000,000 shares of capital stock authorized by First Federal of
Olathe Bancorp's articles of incorporation are divided into two classes,
consisting of 4,000,000 shares of common stock, $.01 par value, and 1,000,000
shares of serial preferred stock, $.01 par value. First Federal of Olathe
Bancorp currently expects to issue between 552,500 and 747,500 shares of common
stock in the conversion. The aggregate par value of the issued shares will
constitute the capital account of First Federal of Olathe Bancorp on a
consolidated basis. The balance of the purchase price of common stock, less
expenses of conversion, will be reflected as paid-in capital on a consolidated
basis. See "Capitalization." Upon payment of the purchase price for the common
stock, in accordance with the plan, all such stock will be duly authorized,
fully paid, validly issued and nonassessable.
Each share of the common stock will have the same relative rights and
will be identical in all respects with each other share of the common stock. The
common stock of First Federal of Olathe Bancorp will represent non-withdrawable
capital, will not be of an insurable type and will not be insured by the FDIC.
Under Kansas law, the holders of the common stock will possess
exclusive voting power in First Federal of Olathe Bancorp. Each stockholder will
be entitled to one vote for each share held on all matters voted upon by
stockholders, subject to the limitation discussed under "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions - Provisions of
First Federal of Olathe Bancorp's Articles of Incorporation and Bylaws
Limitation on Voting Rights." Stockholders will not be permitted to cumulate
their votes in the election of
76
directors of First Federal of Olathe Bancorp. If First Federal of Olathe Bancorp
issues preferred stock subsequent to the conversion, holders of the preferred
stock may also possess voting powers.
Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of First Federal of Olathe Bancorp, the holders of the common stock
will be entitled to receive, after payment or provision for payment of all debts
and liabilities of First Federal of Olathe Bancorp, including all deposits in
First Federal and accrued interest thereon, and after distribution of the
liquidation account established upon conversion for the benefit of eligible
account holders and supplemental eligible account holders, all assets of First
Federal of Olathe Bancorp available for distribution. See "The Conversion -
Effects of Conversion to Stock Form on Depositors and Borrowers of First
Federal." If preferred stock is issued subsequent to the conversion, the holders
thereof may have a priority over the holders of common stock in the event of
liquidation or dissolution.
No Preemptive Rights. Holders of the common stock will not be entitled
to preemptive rights with respect to any shares which may be issued. The common
stock will not be subject to call for redemption, and, upon receipt by First
Federal of Olathe Bancorp of the full purchase price therefor, each share of the
common stock will be fully paid and nonassessable.
Preferred Stock. After conversion, the Board of Directors of First
Federal of Olathe Bancorp will be 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 will 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 herein, First Federal of Olathe Bancorp 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, under a cash
dividend reinvestment and stock purchase plan, in a future underwritten or other
public offering or under an employee stock ownership plan, stock option or
recognition and retention 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 First Federal of Olathe Bancorp, 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.
Restrictions on Acquisitions. See "Restrictions on Acquisitions of
Stock and Related Takeover Defensive Provisions" for a description of certain
provisions of First Federal of Olathe Bancorp's articles of incorporation and
bylaws which may affect the ability of First Federal of Olathe Bancorp's
stockholders to participate in certain transactions relating to acquisitions of
control of First Federal of Olathe Bancorp.
Dividends. Upon consummation of the formation of First Federal of
Olathe Bancorp, First Federal of Olathe Bancorp's only asset will be First
Federal's common stock. Although it is anticipated that First Federal of Olathe
Bancorp will retain approximately 50% of the net proceeds in the conversion,
dividends from First Federal will be an important source of income for First
Federal of Olathe Bancorp. Should First Federal elect to retain its income, the
ability of First Federal of Olathe Bancorp to pay dividends to its own
shareholders may be adversely affected. Furthermore, if at any time in the
future First Federal of Olathe Bancorp owns less than 80% of the outstanding
stock of First Federal, certain tax benefits under the Code as to inter-company
distributions will not be fully available to First Federal of Olathe Bancorp and
it will be required to pay federal income tax on a portion of the dividends
received from First Federal, thereby reducing the amount of income available for
distribution to the shareholders of First Federal of Olathe Bancorp. For further
information concerning the ability of First Federal to pay dividends to First
Federal of Olathe Bancorp, see "Dividends."
77
LEGAL AND TAX MATTERS
The legality of the common stock and the federal income tax
consequences of the conversion will be passed upon for First Federal and First
Federal of Olathe Bancorp by the firm of Luse Lehman Gorman Pomerenk & Schick,
P.C., Washington, D.C. The Kansas state income tax consequences of the
conversion will be passed upon for First Federal and First Federal of Olathe
Bancorp by Taylor, Perky & Parker, L.L.C., Overland Park, Kansas. Luse Lehman
Gorman Pomerenk & Schick, P.C. and Taylor, Perky & Parker, L.L.C. have consented
to the references herein to their opinions. Certain legal matters regarding the
conversion will be passed upon for Trident Securities by Muldoon Murphy &
Faucette LLP, Washington, D.C.
EXPERTS
The Financial Statements of First Federal as of December 31, 1998 and
1997, and for the fiscal years ended December 31, 1998 and 1997 have been
included in this prospectus in reliance on the report of Taylor, Perky & Parker,
L.L.C., certified public accountants, appearing elsewhere herein, and upon the
authority of that firm as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of
its report to First Federal and First Federal of Olathe Bancorp setting forth
its opinion as to the estimated pro forma market value of the common stock upon
conversion and its letter with respect to subscription rights.
WHERE CAN YOU FIND MORE INFORMATION
First Federal of Olathe Bancorp 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.
Such information can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, NW, Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
The registration statement also is available through the SEC's world wide web
site on the internet at 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 and are not
necessarily complete but do contain all material information regarding such
documents; each such statement is qualified by reference to such contract or
document.
First Federal has filed an Application for Conversion with the OTS with
respect to the 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 and at the Midwest Regional Office of the OTS
located at 122 W. John Carpenter Freeway, Suite 600, Irving, Texas 75039.
In connection with the conversion, First Federal of Olathe Bancorp will
register the common stock with the SEC under Section 12(g) of the Exchange Act;
and, upon such registration, First Federal of Olathe Bancorp and the holders of
its common stock will become subject to the proxy solicitation rules, reporting
requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Exchange Act. Under the plan, First
Federal of Olathe Bancorp has undertaken that it will not terminate such
registration for a period of at least three years following the conversion.
A copy of the articles of incorporation and bylaws of First Federal of
Olathe Bancorp are available without charge from First Federal.
78
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ............................................. F-2
Statements of Financial Condition as of September 30, 1999 (unaudited)
and December 31, 1998 and 1997 ......................................... F-3
Statements of Income and Comprehensive Income for the
nine months ended September 30, 1999 and 1998 (unaudited)
and December 31, 1998 and 1997 ......................................... 22
Statements of Equity for the nine months ended September 30, 1999
(unaudited) and December 31, 1998 and 1997 ............................. F-4
Statements of Cash Flows for the nine months ended September 30, 1999
and 1998 (unaudited) and December 31, 1998 and 1997 .................... F-5
Notes to Financial Statements ............................................ F-7
########
All schedules are omitted because the required information is not
applicable or is included in the Financial Statements and related Notes.
All financial statements of First Federal of Olathe Bancorp have been
omitted because First Federal of Olathe Bancorp has not issued any stock, has no
assets or liabilities, and has not conducted any business other than that of an
organizational nature.
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Federal Savings and Loan
Association of Olathe
Olathe, Kansas
We have audited the accompanying statements of financial condition of First
Federal Savings and Loan Association of Olathe as of December 31, 1998 and 1997,
and the related statements of income and comprehensive income, equity 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 First Federal Savings and
Loan Association of Olathe as of December 31, 1998 and 1997, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As more fully described in "Note B - Revisions to Previously Issued
Financial Statements," subsequent to the issuance of the Association's 1998 and
1997 financial statements and our report thereon dated February 8, 1999, we
became aware of certain restatements that were made to the 1998 and 1997
financial statements. These restatements included a change in the Association's
method of amortizing loan origination fees and disclosures related to "available
for sale" securities in the equity section as prescribed by Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
October 22, 1999
/s/ Taylor, Perky & Parker
- ------------------------------
F-2
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
------------- -------------------------
1999 1998 1997
------------- ----------- -----------
(unaudited)
ASSETS
Cash and cash equivalents:
Cash and non-interest earning deposits ................. $ 55,748 $ 112,508 $ 66,590
Overnight deposits at Federal Home Loan Bank ........... 2,400,000 5,100,000 2,200,000
----------- ----------- -----------
Total Cash and Cash Equivalents .................... 2,455,748 5,212,508 2,266,590
Securities held-to-maturity, at cost ..................... 11,000,000 9,000,000 3,909,622
Available for sale securities ............................ 683,904 847,482 551,562
Federal Home Loan Bank stock, at cost .................... 302,600 288,700 307,400
Loans receivable, net .................................... 31,371,245 28,978,023 25,741,621
Accrued interest receivable .............................. 401,111 301,158 264,316
Equipment, net of accumulated depreciation ............... 21,100 20,695 640
Other assets ............................................. 9,234 -- 6,250
----------- ----------- -----------
Total Assets ....................................... $46,244,942 $44,648,566 $33,048,001
=========== =========== ===========
LIABILITIES AND EQUITY
Deposits ................................................. $35,221,437 $34,701,287 $25,139,748
Advance payments from borrowers for taxes and insurance .. 379,685 20,414 24,280
Interest payable on deposits ............................. 398,591 55,122 38,159
Advances from the Federal Home Loan Bank ................. 1,000,000 1,000,000 --
Accrued expenses ......................................... 131,473 89,613 47,480
Deferred income taxes payable ............................ 59,709 220,180 132,302
Income taxes payable ..................................... 44,830 20,100 68,560
----------- ----------- -----------
Total Liabilities .................................. 37,235,725 36,106,716 25,450,529
Commitments and contingencies ............................ -- -- --
Equity:
Retained earnings ...................................... 8,594,491 8,028,977 7,262,151
Accumulated other comprehensive income ................. 414,726 512,873 335,321
----------- ----------- -----------
Total Equity ....................................... 9,009,217 8,541,850 7,597,472
----------- ----------- -----------
Total Liabilities and Equity ....................... $46,244,942 $44,648,566 $33,048,001
=========== =========== ===========
See accompanying notes to financial statements.
F-3
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
STATEMENTS OF EQUITY
Other Comprehensive
Income (Loss):
Unrealized Gain
on Securities
Retained Available for Sale,
Earnings Net of Income Taxes Total Equity
---------- ------------------- ------------
Balance, December 31, 1996 (Restated) ............. $6,535,467 $221,392 $6,756,859
Net income for the year ended December 31, 1997 ... 726,684 -- 726,684
Other comprehensive income:
Change in unrealized gain on available for sale
securities, net of income taxes ............... -- 113,929 113,929
---------- -------- ----------
Balance, December 31, 1997 ........................ 7,262,151 335,321 7,597,472
Net income for the year ended December 31, 1998 ... 766,826 -- 766,826
Other comprehensive income:
Change in unrealized gain on available for sale
securities, net of income taxes ............... -- 177,552 177,552
---------- -------- ----------
Balance, December 31, 1998 ........................ 8,028,977 512,873 8,541,850
Net income for the nine months ended
September 30, 1999 (unaudited) .................. 565,514 -- 565,514
Other comprehensive (loss):
Change in unrealized gain on available for sale
securities, net of income taxes (unaudited) ... -- (98,147) (98,147)
---------- -------- ----------
Balance, September 30, 1999 (unaudited) ........... $8,594,491 $414,726 $9,009,217
========== ======== ==========
See accompanying notes to financial statements.
F-4
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, Years Ended December 31,
------------------------------- --------------------------
1999 1998 1998 1997
------------- ------------- ----------- -----------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Mortgage loan interest received .......................... $ 1,893,729 $ 1,745,486 $ 2,378,809 $ 2,182,351
Investment interest and dividends received ............... 661,269 501,621 674,870 549,508
Other fees ............................................... 15,808 17,319 19,513 7,331
----------- ----------- ----------- -----------
2,570,806 2,264,426 3,073,192 2,739,190
Interest paid ............................................ 1,117,487 843,754 1,635,767 1,339,741
Salaries and other administrative expenses ............... 158,125 108,718 195,676 266,686
Income taxes paid ........................................ 317,053 390,137 521,209 338,932
----------- ----------- ----------- -----------
1,592,665 1,342,609 2,352,652 1,945,359
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities ....... 978,141 921,817 720,540 793,831
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of U.S. Government and agency securities ........ (3,000,000) (4,400,000) (10,300,000) (5,909,622)
Maturity of U.S. Government and agency securities ........ 1,000,000 2,509,622 5,209,622 7,700,000
Net increase in mortgage loans ........................... (2,237,036) (2,639,914) (3,240,268) (795,438)
(Purchase) redemption of FHLB stock ...................... (13,900) (17,400) 18,700 (21,100)
Purchase of property and equipment ....................... (4,115) (24,215) (24,215) --
----------- ----------- ----------- -----------
Net cash provided (used) by investing activities ....... (4,255,051) (4,571,907) (8,336,161) 973,840
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits ................................... 520,150 8,821,098 9,561,539 (1,795,571)
Proceeds from FHLB advances .............................. -- 1,000,000 1,000,000 --
----------- ----------- ----------- -----------
Net cash provided (used) by financing activities ....... 520,150 9,821,098 10,561,539 (1,795,571)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ... (2,756,760) 6,171,008 2,945,918 (27,900)
Cash and cash equivalents at beginning of period ........... 5,212,508 2,266,590 2,266,590 2,294,490
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ................. $ 2,455,748 $ 8,437,598 $ 5,212,508 $ 2,266,590
=========== =========== =========== ===========
See accompanying notes to financial statements.
F-5
RECONCILIATION OF NET INCOME TO NET CASH
FLOWS FROM OPERATING ACTIVITIES
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ------------------------
1999 1998 1998 1997
------------- ------------- ---------- ----------
(unaudited)
Net income ................................................. $ 565,514 $ 612,190 $ 766,826 $ 726,684
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ........................................... 3,710 2,921 4,160 7,686
Provision for loan losses .............................. 150,000 -- -- --
Deferred income taxes .................................. (41,955) (22,868) (30,490) (8,931)
(Increase) decrease in accrued interest receivable ..... (99,953) (53,727) (36,842) (19,387)
(Increase) decrease in other assets .................... (9,234) 7,886 6,250 26,766
Increase (decrease) in income taxes payable ............ 24,730 (12,760) (48,460) 68,560
Increase (decrease) in accrued interest payable ........ 343,469 328,113 16,963 (3,052)
Increase (decrease) in accrued expenses ................ 41,860 60,062 42,133 (4,495)
---------- ---------- ---------- ----------
Net cash provided by operating activities ............ $ 978,141 $ 921,817 $ 720,540 $ 793,831
========== ========== ========== ==========
F-6
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Nature of Operations
--------------------
The Association was incorporated in December 1923 and provides financial
services to individual and corporate customers through its office in Olathe,
Kansas. The Association's primary source of revenue is one-to-four family
dwelling loans. The Association's lending activity is concentrated within a
small geographic area in Kansas.
2. Unaudited Interim Financial Statements
--------------------------------------
The financial statements and related notes as of September 30, 1999 and for the
nine months ended September 30, 1999 and 1998 are unaudited. All adjustments,
consisting of only normal recurring adjustments, which in the opinion of
management are necessary for fair presentation of the financial information,
have been made.
3. Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. Investment Securities
---------------------
Investment in debt securities that the Association has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost. These securities include U.S. Treasury notes and
securities of the Federal Home Loan Bank, all backed by the full faith and
credit of the United States Government, and securities of the Federal Home Loan
Mortgage Corporation and Federal National Mortgage Association. The securities
are carried at cost unless there is a permanent impairment of value, at which
time the securities are valued at market. Held-to-maturity debt securities are
carried at cost, adjusted for amortization of premium and accretion of discounts
using methods approximating the interest method. 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
holding gains and losses included in earnings. The Association does not hold
these types of securities at this time. Debt and equity securities not
classified as trading securities or as held-to-maturity securities are
classified as available for sale securities and reported at fair value, with
unrealized holding gains or losses, net of applicable deferred income taxes,
reported in a separate component of retained earnings.
F-7
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. Loan Fees
---------
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment net of a prepayment
factor over the contractual term of the related loans using the interest method.
6. Depreciation
------------
Equipment is stated at cost, net of accumulated depreciation. Depreciation is
provided for in amounts sufficient to relate the costs of depreciable assets to
operations over their estimated service lives.
7. Cash Equivalents
----------------
For purposes of the statement of cash flows, cash equivalents include time
deposits and all highly liquid debt instruments with original maturities of less
than three months.
8. Loans Receivable
----------------
Loans receivable consist solely of conventional first mortgage loans for
permanent one-to-four family dwellings. It is the policy of the Association to
limit mortgages to 80 percent of the appraised value of the mortgaged property.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions and other risks inherent in the portfolio.
9. Gains and Losses
----------------
Gains and losses on the sale of investment securities are determined using the
specific identification method.
F-8
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- REVISIONS TO PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Office of Thrift Supervision (OTS) issued a report dated November 1998 that
prescribed that associations defer loan origination fees, net of the related
cost, and adjust the yield on the loans issued using the "interest method."
Although the difference between the "interest method" and the method used by the
Association was not material, the Association decided to come into compliance
with these new regulations and restated the 1998 and 1997 financial statements
to comply with the OTS pronouncement. The cumulative effect of this restatement,
net of taxes, was a $155,202 decrease to retained earnings as of December 31,
1998, and reductions in net income of $45,732 and $13,397 for 1998 and 1997,
respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires that all items that are components of "comprehensive
income" be reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income is defined as the
"change in equity of a business enterprise during a period from transactions and
other events and circumstances from non owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributor or owners." This SFAS requires companies to (a) classify items of
other comprehensive income by their nature in the financial statements and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings in the equity section of a statement of financial position.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and
requires reclassification of prior periods presented. As the requirements of
SFAS No. 130 are disclosure related, its implementation had no impact on the
Association's financial condition or results of operations. The Association has
reclassified the unrealized gain (loss) on available for sale securities, which
are considered "other comprehensive income," to be included in the Statement of
Retained Earnings and in comprehensive income on the Statement of Income and
Comprehensive Income.
NOTE C -- RELATED PARTY TRANSACTIONS
In the normal course of business, the Association has made loans to its
directors, officers, and their related business interests. In the opinion of
management, related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility. The aggregate dollar amount of loans outstanding
to directors, officers and their related business interests totaled
approximately $169,000 at September 30, 1999 and $208,000 and $175,000 at
December 31, 1998 and 1997, respectively.
F-9
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- LOANS RECEIVABLE
Loans at September 30, 1999 and December 31, 1998 and 1997 are summarized as
follows:
December 31,
September 30, -------------------------
1999 1998 1997
------------- ----------- -----------
(unaudited)
Loans receivable:
One-to-four family ................ $31,867,496 $29,261,165 $25,949,070
Less:
Deferred loan fees, net ........... 321,251 258,142 182,449
Allowance for loan losses ......... 175,000 25,000 25,000
----------- ----------- -----------
Total loans receivable, net ..... $31,371,245 $28,978,023 $25,741,621
=========== =========== ===========
NOTE E -- AVAILABLE FOR SALE SECURITIES
The cost and market value of the available for sale securities as reclassified
are summarized as follows:
September 30, 1999 (unaudited)
--------------------------------------------
Gross Unrealized
------------------- Market
Cost Gains Losses Value
------- -------- ------ --------
Common Stock .................... $10,960 $672,944 $ -- $683,904
======= ======== ====== ========
December 31, 1998
--------------------------------------------
Gross Unrealized
------------------- Market
Cost Gains Losses Value
------- -------- ------ --------
Common Stock .................... $10,960 $836,522 $ -- $847,482
======= ======== ====== ========
December 31, 1997
--------------------------------------------
Gross Unrealized
------------------- Market
Cost Gains Losses Value
------- -------- ------ --------
Common Stock .................... $10,960 $540,602 $ -- $551,562
======= ======== ====== ========
F-10
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- HELD-TO-MATURITY SECURITIES
The amortized cost and market value of investments in debt securities are as
follows:
September 30, 1999
(unaudited)
--------------------------------------
Amortized Unrealized Market
Cost (Losses) Value
----------- ---------- -----------
U.S. Government and agency securities .. $11,000,000 $(438,780) $10,561,220
----------- --------- -----------
$11,000,000 $(438,780) $10,561,220
=========== ========= ===========
Due in less than one year .............. $ -- $ -- $ --
After one through five years ........... -- -- --
After five through ten years ........... 5,500,000 (198,780) 5,301,220
After ten years ........................ 5,500,000 (240,000) 5,260,000
----------- --------- -----------
$11,000,000 $(438,780) $10,561,220
=========== ========= ===========
December 31, 1998
--------------------------------------
Amortized Unrealized Market
Cost Gains Value
----------- ---------- -----------
U.S. Government and agency securities .. $ 9,000,000 $ 6,335 $ 9,006,335
----------- --------- -----------
$ 9,000,000 $ 6,335 $ 9,006,335
=========== ========= ===========
Due in less than one year .............. $ -- $ -- $ --
After one through five years ........... -- -- --
After five through ten years ........... 6,500,000 4,230 6,504,230
After ten years ........................ 2,500,000 2,105 2,502,105
----------- --------- -----------
$ 9,000,000 $ 6,335 $ 9,006,335
=========== ========= ===========
December 31, 1997
--------------------------------------
Amortized Unrealized Market
Cost Gains Value
----------- ---------- -----------
U.S. Government and agency securities .. $ 3,909,622 $ 15,678 $ 3,925,300
----------- --------- -----------
$ 3,909,622 $ 15,678 $ 3,925,300
=========== ========= ===========
Due in less than one year .............. $ -- $ -- $ --
After one through five years ........... -- -- --
After five through ten years ........... 3,500,000 17,980 3,517,980
After ten years ........................ 409,622 (2,302) 407,320
----------- --------- -----------
$ 3,909,622 $ 15,678 $ 3,925,300
=========== ========= ===========
F-11
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G -- DEPOSITS
An analysis of deposit account balances, by interest rate, is as follows:
September 30, 1999
(unaudited)
-----------------------------------------------------------------
Interest 18 to 60 Mo. 6 Mo. Money Savings
Rate C.D.'s C.D.'s Market Accounts Total
- ------------- ------------ ---------- ---------- ---------- -----------
3%-3.99% .... $ -- $ -- $2,213,048 $3,214,757 $ 5,427,805
4%-4.99% .... 100,000 1,680,981 -- -- 1,780,981
5%-5.99% .... 17,021,254 1,231,213 -- -- 18,252,567
6%-6.99% .... 9,760,084 -- -- -- 9,760,084
----------- ---------- ---------- ---------- -----------
Totals .... $26,881,438 $2,912,194 $2,213,048 $3,214,757 $35,221,437
=========== ========== ========== ========== ===========
December 31, 1998
-----------------------------------------------------------------
Interest 18 to 60 Mo. 6 Mo. Money Savings
Rate C.D.'s C.D.'s Market Accounts Total
- ------------- ------------ ---------- ---------- ---------- -----------
3%-3.99% .... $ -- $ -- $2,240,937 $3,349,020 $ 5,589,957
4%-4.99% .... -- -- -- -- --
5%-5.99% .... 16,249,700 2,663,230 -- -- 18,912,930
6%-6.99% .... 10,198,400 -- -- -- 10,198,400
----------- ---------- ---------- ---------- -----------
Totals .... $26,448,100 $2,663,230 $2,240,937 $3,349,020 $34,701,287
=========== ========== ========== ========== ===========
December 31, 1997
-----------------------------------------------------------------
Interest 18 to 60 Mo. 6 Mo. Money Savings
Rate C.D.'s C.D.'s Market Accounts Total
- ------------- ------------ ---------- ---------- ---------- -----------
3%-3.99% .... $ -- $ -- $2,517,568 $2,545,897 $ 5,063,465
4%-4.99% .... -- -- -- -- --
5%-5.99% .... 13,654,234 176,295 -- -- 13,830,529
6%-6.99% .... 6,023,336 222,418 -- -- 6,245,754
----------- ---------- ---------- ---------- -----------
Totals .... $19,677,570 $ 398,713 $2,517,568 $2,545,897 $25,139,748
=========== ========== ========== ========== ===========
F-12
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G -- DEPOSITS (CONTINUED)
At September 30, 1999, scheduled maturities of certificates of deposit are as
follows:
1999 ............................ $ 3,171,437
2000 ............................ 13,915,745
2001 ............................ 6,104,965
2002 ............................ 6,601,485
-----------
$29,793,632
===========
The aggregate amount of time deposit accounts exceeding $100,000 at September
30, 1999, December 31, 1998 and 1997 amounted to $7,532,517, $5,771,000 and
$3,036,000, respectively.
NOTE H -- ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB)
The Association is required to purchase stock in the FHLB. Such stock may be
redeemed at par but is not readily marketable. The Association had stock of
$302,600 at September 30, 1999 and $288,700 and $307,400 at December 31, 1998
and 1997, respectively.
The Association had $1,000,000 in outstanding advances at a fixed interest rate
of 5.74% from the FHLB at September 30, 1999 and December 31, 1998,
respectively. The advances have a maturity date of February 2, 2001 and are
collateralized by the FHLB stock. There were no outstanding advances at December
31, 1997.
NOTE I -- LEASE COMMITMENTS
Rent expense under a long-term operating lease for office space amounted to
$10,608 for the nine months ended September 30, 1999, and $13,607 and $14,145
for the years ended December 31, 1998 and 1997, respectively. The Association
renewed this lease on August 1, 1999 and is obligated under the terms of this
lease through July 31, 2004. Future lease obligations under this agreement are
as follows:
Year Obligation
---- ----------
2000 .............................. $14,538
2001 .............................. 14,538
2002 .............................. 14,538
2003 .............................. 14,538
2004 .............................. 8,480
F-13
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE J -- RETIREMENT PLAN
The Association participates in a noncontributory group pension plan for the
savings and loan industry. This defined benefit plan covers all full-time
employees. There was no pension expense for the nine months ended September 30,
1999 and for the years ended December 31, 1998 and 1997, since the plan was
fully funded in accordance with the maximum funding standards of ERISA. Because
this is a multiple-employer pension plan, the actuarial present value of plan
benefits is not determinable. The net assets of the fund available for benefits
at June 30, 1999, the most recent information available, amounted to
$1,850,200,000.
NOTE K -- REGULATORY MATTERS
The Association is subject to various regulatory capital requirements by its
primary federal regulator, the Office of Thrift and Supervision (OTS). Under the
regulatory capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Failure to meet minimum regulatory 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. The Association's capital amounts and classification under the
prompt corrective action guidelines are also subject to qualitative judgments by
regulatory agencies about components, risk weightings, and other factors.
Regulatory quantitative measures to ensure capital adequacy require the
Association to maintain minimum amounts and ratios of: total and risk-based
capital and Tier 1 Capital to risk-weighted assets (as defined in the
regulations), and Tier 1 Capital and Tangible Capital to adjusted total assets
(as defined).
As of the most recent notification from federal regulators, the Association was
categorized as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Association must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as disclosed in the table below. There are no conditions or events since the
notification that management believes would change the Association's category.
F-14
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K -- REGULATORY MATTERS (CONTINUED)
The following table sets forth regulatory capital ratios for the Association.
To Be Well Capitalized
For Capital Under the Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
September 30, 1999: (unaudited)
Total Risk-Based Capital greater than greater than greater than greater than
(to Risk-Weighted Assets) .... $8,769 46.65% or equal to $1,503 or equal to 8.0% or equal to $1,879 or equal to 10.0%
Tier 1 Capital greater than greater than greater than greater than
(to Risk-Weighted Assets) .... $8,594 45.72% or equal to $ 751 or equal to 4.0% or equal to $1,127 or equal to 6.0%
Tier 1 Capital greater than greater than greater than greater than
(to Adjusted Total Assets) ... $8,594 18.49% or equal to $1,858 or equal to 4.0% or equal to $2,322 or equal to 5.0%
Tangible Capital greater than greater than
(to Adjusted Total Assets) ... $8,594 18.49% or equal to $ 697 or equal to 1.5% N/A N/A
December 31, 1998:
Total Risk-Based Capital greater than greater than greater than greater than
(to Risk-Weighted Assets) .... $8,054 44.28% or equal to $1,455 or equal to 8.0% or equal to $1,819 or equal to 10.0%
Tier 1 Capital greater than greater than greater than greater than
(to Risk-Weighted Assets) .... $8,029 44.14% or equal to $ 727 or equal to 4.0% or equal to $1,091 or equal to 6.0%
Tier 1 Capital greater than greater than greater than greater than
(to Adjusted Total Assets) ... $8,029 17.97% or equal to $1,786 or equal to 4.0% or equal to $2,233 or equal to 5.0%
Tangible Capital greater than greater than
(to Adjusted Total Assets) ... $8,029 17.97% or equal to $ 670 or equal to 1.5% N/A N/A
December 31, 1997:
Total Risk-Based Capital greater than greater than greater than greater than
(to Risk-Weighted Assets) .... $7,287 50.85% or equal to $1,146 or equal to 8.0% or equal to $1,432 or equal to 10.0%
Tier 1 Capital greater than greater than greater than greater than
(to Risk-Weighted Assets) .... $7,262 50.68% or equal to $ 429 or equal to 3.0% or equal to $ 859 or equal to 6.0%
Tier 1 Capital greater than greater than greater than greater than
(to Adjusted Total Assets) ... $7,262 21.97% or equal to $ 992 or equal to 3.0% or equal to $1,652 or equal to 5.0%
Tangible Capital greater than greater than
(to Adjusted Total Assets) ... $7,262 21.97% or equal to $ 495 or equal to 1.5% N/A N/A
F-15
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE L -- INCOME TAXES
The differences between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to income before income
taxes were as follows for the following periods:
Nine Months Ended Years Ended
September 30, December 31,
-------------------- --------------------
1999 1998 1998 1997
-------- -------- -------- --------
(unaudited)
Income tax at federal statutory rate ........... $294,216 $328,678 $411,089 $382,583
State income tax, net of federal tax benefit ... 36,500 43,700 54,000 68,706
Other .......................................... (30,888) (17,869) (22,830) (52,728)
-------- -------- -------- --------
Provision for income taxes ..................... $299,828 $354,509 $442,259 $398,561
======== ======== ======== ========
Effective tax rate ............................. 34.65% 36.67% 36.57% 35.41%
===== ===== ===== =====
The tax effects of existing temporary differences that give rise to significant
positions of deferred tax assets and deferred tax liabilities are as follows:
September 30, December 31,
------------- ----------------------
1999 1998 1997
------------- --------- ---------
(unaudited)
Deferred tax assets
- -------------------
Deferred loan origination fees ....... $ 128,509 $ 103,469 $ 72,979
Allowance for loan losses ............ 70,000 -- --
Deferred tax liabilities
- ------------------------
Unrealized gain on available for
sale securities .................... (258,218) (323,649) (205,281)
--------- --------- ---------
Net deferred tax liability ....... $ (59,709) $(220,180) $(132,302)
========= ========= =========
NOTE M -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value amounts have been determined by the Association using
available market information and a selection from a variety of valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented are not necessarily indicative of the amount the Association
could realize in a current market exchange. The use of different market
assumptions and estimation methodologies may have a material effect on the
estimated fair value amounts.
F-16
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE M -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair value of the Association's financial instruments are as
follows:
September 30, December 31,
------------------------- -----------------------------------------------------
1999 (unaudited) 1998 1997
------------------------- ------------------------- -------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value Value Fair Value
----------- ----------- ----------- ----------- ----------- -----------
Assets:
Cash and cash equivalents ................. $ 2,455,748 $ 2,455,748 $ 5,212,508 $ 5,212,508 $ 2,266,590 $ 2,266,590
Investment securities ..................... 11,683,904 11,245,124 9,847,482 9,853,817 4,461,184 4,476,862
Capital Stock of Federal Home Loan Bank ... 302,600 302,600 288,700 288,700 307,400 307,400
Loans receivable .......................... 31,371,245 31,876,674 28,978,023 29,692,496 25,741,621 26,250,426
Liabilities:
Deposits .................................. 35,221,437 35,432,562 34,701,287 35,008,904 25,139,748 25,150,585
Advances from Federal Home Loan Bank ...... 1,000,000 1,000,000 1,000,000 1,000,000 -- --
The following methods and assumptions were used to estimate the fair value of
the financial instruments:
Cash and Cash Equivalents -- The carrying amounts of cash and cash equivalents
are reasonable estimates of their fair value.
Investment Securities -- Estimated fair values of investment securities are
based on quoted market prices where available. If quoted market prices are not
available, fair values are estimated using quoted market prices for similar
instruments.
Capital Stock of Federal Home Loan Bank -- The carrying value of capital stock
of Federal Home Loan Bank approximates its fair value.
Loans Receivable -- Fair values are estimated for portfolios with similar
financial characteristics. Future cash flows of these loans are discounted using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Deposits -- The estimated fair value of demand deposits and savings accounts is
the amount payable on demand at the reporting date. The estimated fair value of
fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of similar remaining
maturities.
Advances from Federal Home Loan Bank -- The estimated fair value of advances
from Federal Home Loan Bank is determined by discounting the future cash flows
of existing advances using rates currently available on advances from Federal
Home Loan Bank having similar characteristics.
F-17
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE N -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Association has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements.
At December 31, 1998 and 1997, the Association had outstanding commitments to
originate fixed rate mortgages of $1,276,000 and $1,325,000, respectively, and
$477,000 at September 30, 1999.
NOTE O -- YEAR 2000 COMPLIANCE REVIEW
Subsequent to December 31, 1998, the Association completed a compliance
examination conducted by the Office of Thrift Supervision for Year 2000
compliance.
NOTE P -- PLAN OF CONVERSION
On October 13, 1999, the Association's Board of Directors approved a plan
("Plan") to convert from a federally-chartered mutual savings association to a
federally-chartered stock savings association, subject to approval by its
members. The Plan, which includes formation of a holding company to own all of
the outstanding stock of the Association, is subject to approval by the Office
of Thrift Supervision (OTS) and includes the filing of a registration statement
with the Securities and Exchange Commission.
The Plan calls for the common stock of the holding company to be offered to
various parties in a subscription offering at a price based on an independent
appraisal of the Association. It is anticipated that any shares not purchased in
the subscription offering will be offered in a community offering. The
Association may not declare or pay a cash dividend if the effect thereof would
cause its net worth to be reduced below either the amount required for the
liquidation account discussed below or the regulatory capital requirements
imposed by the OTS.
At the time of conversion, the Association will establish a liquidation account
in an amount equal to its retained earnings as reflected in the latest statement
of financial condition used in the final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible account holders who
continue to maintain their deposit accounts in the Association after conversion.
In the event of a complete liquidation of the Association, and only in such an
event, eligible depositors who continue to maintain accounts shall be entitled
to receive a distribution from the liquidation account before any liquidation
may be made with respect to common stock.
NOTE Q -- NEW ACCOUNTING STANDARDS
Reporting Comprehensive Income. In June 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS No. 130). This Statement requires
entities presenting a
F-18
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE Q -- NEW ACCOUNTING STANDARDS (CONTINUED)
complete set of financial statements to include details of comprehensive income
that arise in the reporting period. Comprehensive income consists of net income
or loss for the current period, other comprehensive income consists of revenue,
expenses, gains, and losses that bypass the income statement and are reported
directly in a separate component of equity. "Other comprehensive income"
includes, for example, unrealized gains and losses on certain investment
securities, minimum pension liability adjustments, and foreign currency items.
SFAS No. 130 requires that components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. At September 30, 1999, the Savings and Loan's other
comprehensive income consisted of unrealized gains on securities classified as
available for sale. This Statement is effective for fiscal years beginning after
December 15, 1997, and requires restatement of prior period financial statements
presented for comparative purposes.
Disclosures about Segments of an Enterprise and Related Information. In June
1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131). This Statement changes the current practice for reporting segment
information under SFAS No. 14, "Financial Reporting for Segments of an
Enterprise." Public entities are required to report financial and descriptive
information about their reportable operating segments. An operating segment is a
component of an entity for which financial information is developed and
evaluated by the entity's chief operating decision maker to assess performance
and to make decisions about resource allocation. Disclosures about operating
segments should generally be based on the information used internally. This
Statement is effective for financial statements for periods beginning after
December 15, 1997. On adoption, comparative information for earlier years is to
be restated. Based on current operations, the Savings and Loan does not believe
adoption of this Statement will have any impact on its public financial
reporting.
Employers' Disclosures about Pensions and Other Postretirement Benefits. In
February 1998, the FASB issued Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
which standardizes the disclosure requirements for pensions and other
post-retirement benefits, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that the FASB no longer
considers as useful as when they were issued. This statement suggests combined
formats for presentation of pension and other post-retirement benefit
disclosures. This statement is effective for fiscal years beginning after
December 15, 1997.
Accounting for Derivative Instruments and Hedging Activities. In June 1998, the
FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement requires that all
derivatives be recognized
F-19
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF OLATHE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE Q -- NEW ACCOUNTING STANDARDS(CONTINUED)
at fair value as either assets or liabilities on the balance sheet. If certain
conditions are met, a derivative may be specifically designated as (a) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available for sale security or a foreign-currency-denominated
forecasted transaction. The accounting for changes in fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
This Statement generally provides for matching the timing of a gain or loss
recognition on the hedging instrument with the recognition of (a) the changes in
the fair value of the hedged asset or liability that are attributable to the
hedged risk or (b) the earnings effect of the hedged forecasted transaction.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, with earlier application encouraged. Retroactive
application to prior periods is prohibited. The Savings and Loan does not use
derivative instruments and therefore the adoption of the Statement is not
expected to have a material impact on the financial statements of the Savings
and Loan.
F-20
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information that is different.
If the laws of your state or other jurisdiction prohibit us from offering our
common stock to you, then this prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any of our common stock. Neither the
delivery of this prospectus nor any sale hereunder shall imply that there has
been no change in our affairs since any of the dates as of which information is
furnished herein since the dare hereof.
Our Table of Contents
is located on the inside of the
front cover page of this document.
Until _________, 2000 or 90 days after commencement of the syndicated
community offering, if any, whichever is later, all dealers effecting
transactions in our common stock may be required to deliver a prospectus. This
is in addition to the obligation of dealers to deliver a prospectus when acting
as underwriters and with respect to any unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
747,500 Shares
(Anticipated Maximum)
(Subject to Increase to Up to 859,625 Shares)
First Federal of Olathe Bancorp, Inc.
(Proposed Holding Company for
First Federal Savings and Loan
Association of Olathe)
COMMON STOCK
---------------------
PROSPECTUS
---------------------
Trident Securities, Inc.
February ___, 2000
- --------------------------------------------------------------------------------
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers of First Federal Savings
Association of Olathe
Generally, federal regulations define areas for indemnity coverage for federal
savings associations, as follows:
(a) Any person against whom any action is brought by reason of the fact
that such person is or was a director or officer of the savings association
shall be indemnified by the savings association for:
(i) Reasonable costs and expenses, including reasonable attorneys'
fees, actually paid or incurred by such person in connection with
proceedings related to the defense or settlement of such action;
(ii) Any amount for which such person becomes liable by reason of any
judgment in such action;
(iii) Reasonable costs and expenses, including reasonable attorneys'
fees, actually paid or incurred in any action to enforce his rights under
this section, if the person attains a final judgment in favor of such
person in such enforcement action.
(b) Indemnification provided for in subparagraph (a) shall be made to
such officer or director only if the requirements of this subsection are met:
(i) The savings association shall make the indemnification provided by
subparagraph (a) in connection with any such action which results in a
final judgment on the merits in favor of such officer or director.
(ii) The savings association shall make the indemnification provided
by subparagraph (a) in case of settlement of such action, final judgment
against such director or officer or final judgment in favor of such
director or officer other than on the merits except in relation to matters
as to which he shall be adjudged to be liable for negligence or misconduct
in the performance of duty, only if a majority of the directors of the
savings association determines that such a director or officer was acting
in good faith within what he was reasonably entitled to believe under the
circumstances was the scope of his employment or authority and for a
purpose which he was reasonably entitled to believe under the circumstances
was in the best interest of the savings association or its members.
(c) As used in this paragraph:
(i) "Action" means any action, suit or other judicial or
administrative proceeding, or threatened proceeding, whether civil,
criminal, or otherwise, including any appeal or other proceeding for
review;
(ii) "Court" includes, without limitation, any court to which or in
which any appeal or any proceeding for review is brought;
(iii) "Final Judgment" means a judgment, decree, or order which is
appealable and as to which the period for appeal has expired and no appeal
has been taken;
(iv) "Settlement" includes the entry of a judgment by consent or by
confession or upon a plea of guilty or of nolo contendere.
Indemnification of Directors and Officers of First Federal of Olathe Bancorp,
Inc.
Article XVIII of First Federal of Olathe Bancorp, Inc.'s (the
"Corporation") Articles of Incorporation sets forth circumstances under which
directors, officers, employees and agents of the Corporation may be insured or
indemnified against liability which they may incur in their capacities as such.
ARTICLE XVIII
A. Persons. The Corporation shall indemnify, to the extent provided in
Subsection B, D, or F of this Article XVIII:
1. any person who is or was a director, officer, or employee of the
Corporation; and
2. any person who serves or served at the Corporation's request as a
director, officer, employee, partner, or trustee of another corporation,
partnership, joint venture, trust, or other enterprise.
B. Extent -- Derivative Suits. In case of a threatened, pending or
completed action or suit by or in the right of the Corporation against a person
named in Subsection A of this Article XVIII by reason of the person holding a
position named in Subsection A of this Article XVIII, the Corporation shall
indemnify the person if the person satisfies the standard in Subsection C of
this Article XVIII, for expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or settlement
of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending, or
completed action or suit by or in the right of the Corporation, a person named
in Subsection A of this Article XVIII shall be indemnified only if:
1. the person acted in good faith in the transaction which is the
subject of the suit or action; and if
2. the person acted in a manner the person reasonably believed to be
in, or not opposed to, the best interest of the Corporation, including, but
not limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XIV of these Articles) not approved by the board of directors. However, the
person shall not be indemnified in respect of any claim, issue, or matter
as to which the person has been adjudged liable to the Corporation unless
(and only to the extent that) the court in which the suit or action was
brought shall determine, upon application, that despite the adjudication of
liability but in view of all the circumstances, the person is fairly and
reasonably entitled to indemnity for such expenses as the court shall deem
proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending, or
completed suit, action, or proceeding (whether civil, criminal, administrative,
or investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a nonderivative suit, against a person named
in Subsection A of this Article XVIII by reason of the person holding a position
named in Subsection A of this Article XVIII, the Corporation shall indemnify the
person if the person satisfies the standard in Subsection E of this Article
XVIII, for amounts actually and reasonably incurred by the person in connection
with the defense or settlement of the nonderivative suit, including, but not
limited to (i) expenses (including attorneys' fees), (ii) amounts paid in
settlement, (iii) judgments, and (iv) fines.
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
person named in Subsection A of this Article XVIII shall be indemnified only if:
1. the person acted in good faith; and if
2. the person acted in a manner the person reasonably believed to be
in, or not opposed to, the best interests of the Corporation, including,
but not limited to, the taking of any and all actions in connection with
the Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XIV of these Articles) not approved by the board of directors and, with
respect to any criminal action or proceeding, the person had no reasonable
cause to believe the person's conduct was unlawful. The termination of a
nonderivative suit by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent shall not,
in itself, create a presumption that the person failed to satisfy the
standard of this Subsection E.
F. To the extent that a person named in Subsection A of this Article
XVIII has been successful on the merits or otherwise in defense of any action,
suit or proceeding, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses actually and reasonably incurred by
such person in connection therewith, including attorneys fees.
G. Determination That Standard Has Been Met. A determination that the
standard of Subsection C or E of this Article XVIII has been satisfied may be
made by a court, or, except as stated in Subsection C.2 of this Article XVIII
(second sentence), the determination may be made by:
1. the board of directors by a majority vote of directors of the
Corporation who were not parties to the action, suit, or proceeding, even
though less than a quorum; or
2. independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
3. the stockholders of the Corporation.
H. Proration. Anyone making a determination under Subsection G of this
Article XVIII may determine that a person has met the standard as to some
matters but not as to others, and may reasonably prorate amounts to be
indemnified.
I. Advance Payment. The Corporation may pay in advance any expenses of
directors and officers (including attorneys' fees) which may become subject to
indemnification under Subsections A through H of this Article XVIII if the
person receiving the payment undertakes in writing to repay the same if it is
ultimately determined that the person is not entitled to indemnification by the
Corporation under Subsections A through H of this Article XVIII. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
J. Nonexclusive. The indemnification and advancement of expenses
provided by Subsections A through I of this Article XVIII or otherwise granted
pursuant to Kansas law shall not be exclusive of any other rights to which a
person may be entitled by law, bylaw, agreement, vote of stockholders, or
disinterested directors, or otherwise.
K. Continuation. The indemnification and advance payment provided by
Subsections A through I of this Article XVIII shall continue as to a person who
has ceased to hold a position named in Subsection A of this Article XVIII and
shall inure to the person's heirs, executors, and administrators.
L. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who holds or who has held any position named in Subsection
A of this Article XVIII, against any liability asserted against the person and
incurred by the person in any such position, or arising out of the person's
status as such, whether or not the Corporation would have power to indemnify the
person against such liability under Subsections A through I of this Article
XVIII.
M. Security Fund; Indemnity Agreements. By action of the board of
directors (notwithstanding their interest in the transaction), the Corporation
may create and fund a trust fund or fund of any nature, and may enter into
agreements with its officers, directors, employees and agents for the purpose of
securing or insuring in any manner its obligation to indemnify or advance
expenses provided for in this Article XVIII.
N. Modification. The duties of the Corporation to indemnify and to
advance expenses to any person as provided in this Article XVIII shall be in the
nature of a contract between the Corporation and each such person, and no
amendment or repeal of any provision of this Article XVIII, and no amendment or
termination of any trust or other fund created pursuant to Article XVIII M
hereof, shall alter to the detriment of such person the right of such person
to the advancement of expenses or indemnification related to a claim based on an
act or failure to act which took place prior to such amendment, repeal or
termination.
O. Proceedings Initiated by Indemnified Persons. Notwithstanding any
other provision in this Article XVIII, the Corporation shall not indemnify a
director, officer, employee or agent for any liability incurred in an action,
suit or proceeding initiated by (which shall not be deemed to include
counter-claims or affirmative defenses) or participated in as an intervenor or
amicus curiae by the person seeking indemnification unless such initiation of or
participation in the action, suit or proceeding is authorized, either before or
after its commencement, by the affirmative vote of a majority of the directors
then in office.
P. Savings Clause. If this Article XVIII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article XVIII that shall
not have been invalidated and to the full extent permitted by applicable law.
If Kansas law is amended to permit further indemnification of the
directors, officers, employees, and agents of the Corporation, then the
Corporation shall indemnify such persons to the fullest extent permitted by
Kansas law, as so amended. Any repeal or modification of this Article XVIII by
the stockholders of the Corporation shall not adversely affect any right or
protection of a director, officer, employee or agent existing at the time of
such repeal or modification.
Item 25. Other Expenses of Issuance and Distribution
Amount
------
* Legal Fees and Expenses...................................... $105,000
* EDGAR expenses............................................... 20,000
* Printing, Postage and Mailing................................ 50,000
* Appraisal and Business Plan Fees and Expenses................ 27,500
* Accounting Fees and Expenses................................. 95,000
* Blue Sky Filing Fees and Expenses
(including counsel fees)................................... 10,000
Conversion Agent and Proxy Solicitation Fees................. 7,500
** Marketing Agent Fees and Expenses............................ 108,500
* Marketing Agent Counsel Fees................................. 26,500
* Filing Fees (OTS and SEC).................................... 13,000
* Other Expenses............................................... 37,000
--------
* Total ....................................................... $500,000
========
- -----------
* Estimated
** First Federal of Olathe Bancorp, Inc. has retained Trident Securities, Inc.
("Trident Securities") to assist in the sale of common stock on a best
efforts basis in the Offerings. Trident Securities will receive fees of
$97,500, exclusive of estimated expenses of $11,000.
Item 26. Recent Sales of Unregistered Securities
Not Applicable.
Item 27. Exhibits:
The exhibits filed as part of this registration statement are as
follows:
(a) List of Exhibits
1.1 Engagement Letter between First Federal Savings and Loan Association of
Olathe and Trident Securities, Inc.
1.2 Form of Agency Agreement among First Federal of Olathe Bancorp, Inc., First
Federal Savings and Loan Association of Olathe and Trident Securities, Inc.
*
2 Plan of Conversion
3.1 Articles of Incorporation of First Federal of Olathe Bancorp, Inc.
3.2 Bylaws of First Federal of Olathe Bancorp, Inc.
3.3 Federal Stock Charter of First Federal Savings and Loan Association of
Olathe
3.4 Bylaws of First Federal Savings and Loan Association of Olathe
4 Form of Common Stock Certificate of First Federal of Olathe Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick regarding legality of
securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick
8.2 State Tax Opinion of Taylor, Perky & Parker, L.L.C.
8.3 Opinion of RP Financial LC. with respect to Subscription Rights
10.1 Form of Employment Agreement for Mitch Ashlock
10.2 Form of Employee Stock Ownership Plan
21 Subsidiaries of Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick (contained in Opinions
included on Exhibits 5 and 8.1)
23.2 Consent of Taylor, Perky & Parker, L.L.C.
23.3 Consent of RP Financial, LC
24 Power of Attorney (set forth on signature page)
27.1 EDGAR Financial Data Schedule
99.1 Appraisal Agreements between First Federal Savings and Loan Association of
Olathe and RP Financial, LC
99.2 Appraisal Report of RP Financial, LC (Filed under separate cover)**
99.3 Marketing Materials
99.4 Order and Acknowledgment Form*
- -----------
* To be filed supplementally or by amendment.
** Filed pursuant to Rule 202 of Regulation S-T.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) 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. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
duration from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the
closing specified in the Underwriting Agreement certificates in such
documentation and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer 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 small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer 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 small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
questions whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
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 for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of Olathe,
State of Kansas on December 15, 1999.
FIRST FEDERAL OF OLATHE BANCORP, INC.
By: /s/ Mitch Ashlock
----------------------------------------
Mitch Ashlock
President, Chief Executive Officer
and Director
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of First Federal of Olathe
Bancorp, Inc. (the "Company") hereby severally constitute and appoint Mitch
Ashlock as our true and lawful attorney and agent, to do any and all things in
our names in the capacities indicated below which said Mitch Ashlock may deem
necessary or advisable to enable the Company to comply with the Securities Act
of 1933, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the registration statement on Form SB-2
relating to the offering of the Company's Common Stock, including specifically,
but not limited to, power and authority to sign for us in our names in the
capacities indicated below the registration statement and any and all amendments
(including post-effective amendments) thereto; and we hereby approve, ratify and
confirm all that said Mitch Ashlock shall do or cause to be done by virtue
thereof.
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 stated.
Signatures Title Date
---------- ----- ----
/s/ Mitch Ashlock President, Chief Executive December 15, 1999
- ---------------------- Officer and Director (Principal
Mitch Ashlock Executive, Accounting and
Financial Officer)
/s/ Donald K. Ashlock Chairman of the Board December 15, 1999
- ---------------------
Donald K. Ashlock
/s/ John M. Bowen Director December 15, 1999
- ---------------------
John M. Bowen
/s/ Carl R. Palmer Director December 15, 1999
- ---------------------
Carl R. Palmer
/s/ Marvin E. Wollen Director December 15, 1999
- ---------------------
Marvin E. Wollen
As filed with the Securities and Exchange Commission on December 16, 1999
Registration No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM SB-2
------------------------------------
First Federal of Olathe Bancorp, Inc.
Olathe, Kansas
EXHIBIT INDEX
1.1 Engagement Letter between First Federal Savings and Loan Association of
Olathe and Trident Securities, Inc.
1.2 Form of Agency Agreement among First Federal of Olathe Bancorp, Inc., First
Federal Savings and Loan Association of Olathe and Trident Securities, Inc.
*
2 Plan of Conversion
3.1 Articles of Incorporation of First Federal of Olathe Bancorp, Inc.
3.2 Bylaws of First Federal of Olathe Bancorp, Inc.
3.3 Federal Stock Charter of First Federal Savings and Loan Association of
Olathe
3.4 Bylaws of First Federal Savings and Loan Association of Olathe
4 Form of Common Stock Certificate of First Federal of Olathe Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick regarding legality of
securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick
8.2 State Tax Opinion of Taylor, Perky & Parker, L.L.C.
8.3 Opinion of RP Financial, LC. with respect to Subscription Rights
10.1 Form of Employment Agreement for Mtich Ashlock
10.2 Form of Employee Stock Ownership Plan
21 Subsidiaries of Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick (contained in Opinions
included on Exhibits 5 and 8.1)
23.2 Consent of Taylor, Perky & Parker, L.L.C.
23.3 Consent of RP Financial, LC.
24 Power of Attorney (set forth on signature page)
27.1 EDGAR Financial Data Schedule
99.1 Appraisal Agreements between First Federal Savings and Loan Association of
Olathe and RP Financial, LC.
99.2 Appraisal Report of RP Financial, LC.(Filed on separate cover)**
99.3 Marketing Materials
99.4 Order and Acknowledgment Form*
- --------------
* To be filed supplementally or by amendment.
** Filed pursuant to Rule 202 of Regulation S-T.