[LOGO] FIRST FEDERAL OF OLATHE BANCORP, INC.
2002 ANNUAL REPORT
March 25, 2003
To Our Shareholders:
The Board of Directors, Officers and Employees of First Federal of Olathe
Bancorp, Inc. and its wholly owned subsidiary, First Federal Savings and Loan
Association of Olathe, are pleased to provide you with our annual report.
Our 2002 fiscal year was a challenging one not only as part of the financial
industry but for our nation as well, as we continue to adjust, cope and live
with the many changes which have occurred since the events of September 2001.
Continued record low interest rates, a depressed stock market, uncertainty
overseas and a "cooled off" local economy have kept financial institutions on
their toes.
First Federal of Olathe Bancorp's assets decreased from $55,436,000 to
$49,729,000, for the fiscal year ended December 31, 2002, primarily due to a
majority of the investment securities being called. Total shareholders' equity
for the parent corporation decreased from $12,241,000 to $11,841,000; mostly due
to the continued repurchase plans. Net earnings for the year increased from
$560,000 to $767,000, generating basic earnings per share of $1.65 for the year
ended December 31, 2002.
The Board and Management are committed to continue to watch expenses, improve
earnings and evaluate business decisions. The Board expects to consider the
benefits of delisting after the Company completes the three-year period as a
public company. In addition, our commitment is to operate a safe and sound,
community-oriented financial institution, to serve our customers and the local
community and obtain returns for you, our shareholders.
Thank you for your support and confidence in our Company.
Sincerely,
/s/ Mitch Ashlock
Mitch Ashlock
President and Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our consolidated financial data as of and for the
three years ended December 31, 2002, and should be read in conjunction with the
consolidated financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," each of which is
included elsewhere in this document. The selected balance sheets and statements
of income data, insofar as they relate to the three years in the three-year
period ended December 31, 2002, have been derived from our audited consolidated
financial statements.
AT DECEMBER 31,
2002 2001 2000
-----------------------------------------
(IN THOUSANDS)
SELECTED CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................................. $ 49,729 $ 55,436 $ 50,421
Loans, net................................................ 39,993 38,415 36,059
Securities:
Held to maturity...................................... 2,014 5,500 12,594
Available for sale.................................... 1,819 1,848 829
FHLB stock................................................ 380 380 330
Deposits.................................................. 35,328 37,671 28,504
FHLB advances............................................. 2,000 5,000 6,600
Total stockholders' equity................................ 11,841 12,241 14,836
YEARS ENDED DECEMBER 31,
2002 2001 2000
-----------------------------------------
(IN THOUSANDS)
SELECTED CONSOLIDATED OPERATIONS DATA:
Total interest income..................................... $ 3,869 $ 4,149 $ 3,907
Total interest expense.................................... 1,965 2,144 1,901
---------- ---------- ----------
Net interest income................................... 1,904 2,005 2,006
Provision for loan losses................................. -- -- --
---------- ---------- ----------
Net interest income after provision for loan losses....... 1,904 2,005 2,006
Fees and service charges.................................. 36 23 13
Gain on sale of other real estate......................... 7 14 --
---------- ---------- ----------
Total non-interest income................................. 43 37 13
Total non-interest expense................................ 718 1,027 399
---------- ---------- ----------
Income before income tax.................................. 1,229 1,015 1,620
Income tax provision...................................... 462 455 614
---------- ---------- ----------
Net income................................................ 767 560 1,006
---------- ---------- ----------
Unrealized gain (loss) on investment securities available
for sale, net of deferred tax expense................. (19) 12 151
---------- ---------- ----------
Comprehensive income...................................... $ 748 $ 572 $ 1,157
========== ========== ==========
Earnings per share, Basic................................. $ 1.65 $ 1.12 $ 1.33
Earnings per share, Diluted............................... $ 1.63 $ 1.11 $ 1.33
2
YEARS ENDED DECEMBER 31,
2002 2001 2000
----------------------------------------------
SELECTED CONSOLIDATED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Return on assets (net income to average total assets)..... 1.41% 1.02% 2.00%
Return on equity (net income to average equity)........... 6.36 3.91 4.71
Interest rate spread information:
Average during period..................................... 2.43 2.16 2.70
End of period............................................. 2.62 2.60 2.99
Net interest margin(1) ....................................... 3.57 3.65 4.12
Ratio of operating expense to average total assets............ 1.32 1.85 0.79
Ratio of average interest-earning assets to average
interest-bearing liabilities.............................. 130.26 138.14 136.40
YEARS ENDED DECEMBER 31,
2002 2001 2000
----------------------------------------------
Asset Quality Ratios:
Non-performing assets to total assets at end of period.... -- .49% 0.59%
Allowance for loan losses to non-performing loans......... -- 63.87 58.53
Allowance for loan losses to loans, net................... .44% .46 0.49
Capital Ratios:
Equity to total assets at end of period................... 23.81 22.08 29.42
Average equity to average assets.......................... 22.13 25.81 28.99
Other Data:
Number of full-service offices............................ 1 1 1
-----------------------------
(1) Net interest income divided by average interest earning assets.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
First Federal of Olathe Bancorp, Inc. ("First Federal of Olathe Bancorp" or
the "Company") was formed in December 1999 to become a holding company for
First Federal Savings and Loan Association of Olathe ("First Federal
Savings" or the "Association"). The Company's principal business is to
provide banking services through the Association. Specifically, First
Federal Savings operates as a traditional savings association, specializing
in one-to-four family residential mortgage lending and savings deposits.
First Federal Savings' business consists primarily of attracting retail
deposits from the general public and using those funds to originate real
estate loans, primarily in Johnson County, Kansas. First Federal Savings
holds its loans for long-term investment purposes. First Federal Savings
also invests in various investment securities. The Association's primary
sources of income are interest on loans and investment securities plus
customer service fees from lending activities. Expenses consist primarily
of interest payments on customer deposits and other borrowings and general
and administrative costs. Earnings of First Federal Savings 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 Savings.
Customer deposit accounts are insured by the Savings Association Insurance
Fund ("SAIF"), a division of the Federal Deposit Insurance Corporation
("FDIC"). The Association is regulated by the Office of Thrift Supervision
("OTS") and the FDIC. The information contained in this section should be
read in conjunction with the consolidated financial statements, the
accompanying notes to consolidated financial statements and the other
sections contained in this document.
The executive office of the Company and the Association is located at 100
East Park Street, Olathe, Kansas 66061 and its telephone number is (913)
782-0026.
FORWARD-LOOKING STATEMENTS
This report includes statements that may constitute forward-looking
statements, usually containing the words "believe," "estimate," "expect,"
"intent" or similar expressions. These statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements inherently involve risks and uncertainties
that could cause actual results to differ materially from those reflected
in the forward-looking statements. Factors that could cause future results
to vary from current expectations include, but are not limited to, the
following: changes in economic conditions (both generally and more
specifically in the markets in which the Company operates); changes in
interest rates, accounting principles, policies or guidelines and in
government legislation and regulation (which change from time to time and
over which the Company has no control); and other risks detailed in this
report and the Company's other Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof.
The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise
after the date hereof.
4
FINANCIAL CONDITION
Total assets decreased by $5.7 million, or 10.3%, to $49.7 million at
December 31, 2002 from $55.4 million at December 31, 2001. Calls on
securities continued into 2002 as issuers were taking advantage of lower
rates. There was very little loan growth during the year as refinancings
continued their fast pace during 2002. In addition, $3.0 million in FHLB
advances were paid off during the year.
Loans increased $1.6 million, or 4.2%, to $40.0 million at December 31,
2002 from $38.4 million at December 31, 2001. The increase reflects the
Association's attempt to move the federal funds sold from the low
interest-bearing deposit with the Federal Home Loan Bank to higher interest
earning assets. In November 2002, the Association purchased $1.8 million in
loans from a local bank that was withdrawing from the Johnson County,
Kansas market. The Association continued to see growth in its market and
strong competition as customers continued to capitalize on the low interest
rates.
Securities held to maturity decreased $3.5 million, or 63.6%, to $2.0
million at December 31, 2002 from $5.5 million at December 31, 2001,
reflecting the maturity or call of various federal agency debt securities.
These funds were primarily used to pay down matured Federal Home Loan Bank
advances. Advances from Federal Home Loan Bank decreased $3.0 million to
$2.0 million at December 31, 2002 from $5.0 million at December 31, 2001.
Deposits decreased $2.4 million, or 6.4%, to $35.3 million at December 31,
2002 from $37.7 million at December 31, 2001. The average yield on
interest-bearing deposits during that period decreased to 4.6% at December
31, 2002 from 5.3% at December 31, 2001. In addition, the Association had a
withdrawal of a significant deposit account during the second quarter of
2002. Thus, even though rates were dropping, consumers continued to leave
their money in more stable interest-earning deposits. Brokered deposits
remained consistent at $7.3 million.
Total stockholders' equity decreased $.4 million, or 3.3%, to $11.8 million
at December 31, 2002 from $12.2 million at December 31, 2001. This was
mainly due to net income being offset by a purchase of treasury shares
during 2002. The Board of Directors authorized the repurchase of 55,632
shares in both May and October 2001 and another 55,632 shares in September
2002, as part of its capital management strategy. The Company repurchased
50,811 shares in open market transactions during 2002 at an average cost of
$23.31 per share, or a total cost of $1.2 million.
5
ANALYSIS OF NET INTEREST INCOME
The Association's net interest income is comprised of the difference
("spread") between interest income on loans and investment securities and
the interest cost of customer deposits and FHLB advances. Management
monitors net interest spreads and, although constrained by certain market,
economic and competition factors, it establishes loan rates and customer
deposit rates that maximize net interest margins.
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.
YEARS ENDED DECEMBER 31,
2002 2001
-------------------------------------- -----------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------- -----------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans (1)......................... $ 38,570 $ 3,350 8.68% $ 38,166 $ 3,297 8.64%
Securities ....................... 6,127 368 6.01 9,874 624 6.32
FHLB stock ....................... 380 17 4.56 379 25 6.77
Interest-earning deposits......... 8,290 134 1.62 6,434 203 3.15
--------- --------- --------- ---------
Total interest-earning assets 53,367 3,869 7.18 54,853 4,149 7.56
--------- ---------
Other non-interest-earning assets .... 1,131 575
--------- ---------
Total assets .............. $ 54,498 $ 55,428
========= =========
Interest-bearing liabilities:
Savings deposits ................. $ 3,925 51 1.31 $ 3,716 99 2.66
Money market accounts ............ 1,723 26 1.52 1,758 48 2.76
Certificate accounts ............. 31,897 1,660 5.21 28,617 1,658 5.79
FHLB advances .................... 3,816 228 5.96 5,621 339 6.03
--------- --------- --------- ---------
Total interest-bearing
liabilities ................. 41,361 1,965 4.75 39,712 2,144 5.40
--------- ---------
Non-interest-bearing liabilities ..... 1,075 1,368
Equity ............................... 12,062 14,348
--------- ---------
Total liabilities and equity ..... $ 54,498 $ 55,428
========= =========
Net interest income .................. $ 1,904 $ 2,005
========= =========
Net interest rate spread ......... 2.43% 2.16%
===== =====
Net earning assets ............... $ 12,006 $ 15,141
========= =========
Net yield on average
interest-earning assets ... 3.57% 3.65%
===== =====
----------------
(1) Calculated net of loan fees, loans in progress and loan loss reserves.
Nonaccruing loans would be included in the average loan amounts,
although First Federal Savings has not had any nonaccruing loans
during recent periods.
6
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 those 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.
YEARS ENDED DECEMBER 31,
2002 VS. 2001
VOLUME RATE TOTAL
-----------------------------------
(IN THOUSANDS)
Interest-earning assets:
Loans........................................ $ 37 $ 16 $ 53
FHLB stock .................................. 0 (8) (8)
Securities .................................. (224) (32) (256)
Interest-earning deposits ................... 47 (116) (69)
------- ------- -------
Total interest-earning assets ........... $ (140) $ (140) $ (280)
======= ======= =======
Interest-bearing liabilities:
Savings deposits ............................ $ 6 $ (53) $ (47)
Money market accounts........................ (1) (21) (22)
Certificate accounts ........................ 178 (176) 2
FHLB advances ............................... (108) (4) (112)
------- ------- -------
Total interest-bearing liabilities ........ $ 75 $ (254) $ (179)
======= ======= =======
Net interest income ......................... $ (101)
=======
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NET INCOME. Net income for the year ended December 31, 2002 increased by
$207,000 or 36.8%, to $767,000 from $560,000 for the year ended December
31, 2001. The increase in net income was due principally to lower
compensation cost under stock benefit plans during 2002, as the 2001
expense reflected the 20% immediate vesting and the additional release of
ESOP shares from the $4.00 special cash distribution received by the ESOP.
Compensation expense related to the Recognition and Retention Plan, which
was approved by the Company's stockholders on April 25, 2001, amounted to
$103,000 and $173,000 for the years ended December 31, 2002 and 2001,
respectively. Compensation cost recognized under the ESOP amounted to
$108,000 and $314,000 for the years ended December 31, 2002 and 2001,
respectively.
Basic earnings per share (EPS) increased 47.3% to $1.65 for the year ended
December 31, 2002 from $1.12 during 2001. The Company's return on average
interest-earning assets for the years ended December 31, 2002 and 2001 was
1.4% and 1.0%, respectively. The return on average stockholders' equity
amounted to 6.4% and 3.9% for the years ended December 31, 2002 and 2001,
respectively. The increase in the return on stockholders' equity was
primarily due to the increase in net income during 2002 (discussed above)
and the decrease in equity during 2002 due to the repurchase of 50,811
treasury shares.
7
NET INTEREST INCOME. For the year ended December 31, 2002, net interest
income decreased by $.1 million to $1.9 million from $2.0 million for the
year ended December 31, 2001. The decrease reflects a decrease of $.2
million, or 4.9%, in interest income to $3.9 million for the year ended
December 31, 2002 from $4.1 million for the year ended December 31, 2001,
and a decrease of $.2 million, or 8.3%, in interest expense, to $2.0
million for the year ended December 31, 2002 from $2.1 million for the year
ended December 31, 2001. The net interest margin decreased to 3.5% in 2002,
as compared to 3.7% in 2001.
Interest income decreased principally as a result of the decrease in the
volume of interest earning assets. The yield on average interest-earning
assets decreased to 7.2% in 2002 from 7.6% in 2001, while average
interest-earning assets decreased to $53.4 million at December 31, 2002 as
compared to $54.9 million at December 31, 2001. The decrease in average
interest-earning assets was attributable principally to a decrease in
investment securities as securities were called to take advantage of lower
interest rates, which proceeds were primarily used to pay matured advances
to FHLB. The average yield on fed funds decreased to 1.6% for the year
ended December 31, 2002 from 3.2% for the year ended December 31, 2001. The
average yield on investments decreased to 6.0% for the year ended December
31, 2002 from 6.3% for the year ended December 31, 2001.
The interest expense decrease is partially attributed to a decrease in
average advances from the FHLB during the year. The interest expense on
Federal Home Loan Bank advances decreased $111,000 to $228,000 for the year
ended December 31, 2002 from $339,000 for 2001, which principally reflected
the decrease in the average outstanding balances of advances from the
Federal Home Loan Bank during 2002.
Interest expense on deposits decreased $.1 million to $1.7 million for the
year ended December 31, 2002 from $1.8 million for 2001, which reflected
the increase in the average outstanding deposit balances to $37.5 million
for 2002 from $34.1 million for 2001 and a decrease on the average yield
paid on deposits to 4.6% during the year ended December 31, 2002 as opposed
to 5.3% for the year ended December 31, 2001.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $0 for the
years ended December 31, 2002 and 2001. Although no additions were made to
the allowance for loan losses during 2002, management continues to closely
assess the loan portfolio for inherent losses and reports all loans greater
than 30 days past due to the Board of Directors. In addition, detail review
and discussion occurs with management and the Board for those loans that
approach the 60 and 90 days past due levels.
At December 31, 2002 and 2001, the allowance for loan losses was $175,000,
which represents .44% and .46%, respectively, of net loans. There were no
non-performing loans or loans in the 90-day past due category at December
31, 2002. There were four non-performing loans and two loans in the over
90-day category at December 31, 2001. The allowance for loan losses at
December 31, 2001 represented 63.9% of non-performing loans.
In assessing the inherent losses in First Federal Savings' portfolio at
December 31, 2002 and 2001, management examined its market area, the
increase in the size of its loan portfolio, its problem assets, the
components of its loan portfolio, including loans on non-owner occupied
properties and statistical data for financial institutions. Generally,
management considered, among other things, the following matters: First
Federal Savings' total loan portfolio increases during these periods, total
non-owner occupied property loan increases from 1998 to 2002 and increases
in the number of loans to borrowers that are not depositors or known on a
personal basis by management. Based upon this analysis, management
concluded that no provision for loan losses was required for the years
ended December 31, 2002 and 2001.
8
Historical net charge-offs are not necessarily indicative of the amount of
net charge-offs that First Federal Savings will realize as it continues to
evolve and grow. First Federal Savings' manage- ment assesses the adequacy
of the allowance for loan losses based on the known inherent losses in the
loan portfolio and management's continuing analysis of the quality of the
loan portfolio. While management believes that, based on the information
currently available, First Federal Savings' allowance for loan losses is
sufficient to cover probable losses inherent in its loan portfolio at this
time, no assurances can be given that First Federal Savings' level of
allowance for loan losses will be sufficient to cover loan losses incurred
by First Federal Savings or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. Management
may increase its level of allowance for loan losses as a percentage of its
total loans and non-performing loans if the level of loans on non-owner
occupied properties, commercial loans, consumer lending or loan purchases
as a percentage of its total loan portfolio increases. In addition, various
regulatory agencies, as an integral part of their examination processes,
periodically review First Federal Savings' allowance for loan losses. These
agencies may require First Federal Savings to provide additions to the
allowance based on judgments different than management.
NON-INTEREST INCOME. Non-interest income increased $6,000 to $43,000 for
the year ended December 31, 2002 from $37,000 for the year ended December
31, 2001. This increase was principally due to an increase in loan fees
caused by increased refinancings as borrowers took advantage of lower
mortgage rates.
NON-INTEREST EXPENSE. Non-interest expense decreased $.3 million to $.7
million for the year ended December 31, 2002 from $1.0 million for the year
ended December 31, 2001. This decrease was principally due to decreases in
compensation cost and professional fees. Compensation expense related to
the Recognition and Retention Plan, amounted to $103,000 and $173,000 (of
which $103,000 represents 20% immediate vesting under the plan) for the
years ended December 31, 2002 and 2001, respectively. The Company also
recognized compensation cost recognized under the ESOP of $108,000 and
$314,000 (includes the special cash dividend of $4 per share received by
the ESOP which released additional ESOP shares during 2001) for the years
ended December 31, 2002 and 2001, respectively. In addition, professional
fees decreased 31.4%, or $64,000, to $140,000 from $204,000 for the years
ended December 31, 2002 and 2001, respectively. The decrease in
professional fees was principally due to higher fees in 2001 related to
preparing documents and accounting for the 2001 Stock Option and
Recognition and Retention Plans.
INCOME TAXES. Income taxes increased by $7,000 to $462,000 for the year
ended December 31, 2002 from $455,000 for the year ended December 31, 2001.
The effective tax rates were 37.6% and 44.8% (higher due to nondeductible
ESOP compensation expense) for the years ended December 31, 2002 and 2001,
respectively. The effective rate represents a blended rate of federal and
state tax rates.
9
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
INTEREST RATE SENSITIVITY. Savings institutions such as First Federal
Savings 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- and
25-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.
NET PORTFOLIO VALUE. First Federal Savings monitors and evaluates the
potential impact of interest rate changes upon the market value of First
Federal Savings' 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 Savings uses the quarterly reports
from the OTS that show the impact of changing interest rates on First
Federal Savings' 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
Savings' NPV declining by more than 2% of the estimated market value of
First Federal Savings' assets as of December 31, 2002, First Federal
Savings would have been subject to a capital deduction at December 31, 2002
if the regulation had been effective as of such date.
10
The following table presents First Federal Savings' NPV at December 31,
2002, as calculated by the OTS, based on information provided to the OTS by
First Federal Savings.
NET PORTFOLIO VALUE
------------------------------------------
CHANGES IN AMOUNT OF PERCENT NPV AS A % OF BASIS
INTEREST RATES ESTIMATED CHANGE IN CHANGE PORTFOLIO VALUE POINT
(BASIS POINTS) NPV NPV IN NPV OF ASSETS CHANGE
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands)
300 13,543 (1,835) (12)% 26.39% (190)
200 14,553 (824) (5)% 27.60% (69)
100 15,238 (140) (1)% 28.32% 3
0 15,378 -- -- 28.29% --
-100 15,362 (16) 0% 18.05% (24)
-200 -- -- -- -- --
-300 -- -- -- -- --
Although the OTS has informed First Federal Savings that it is not subject
to the interest rate risk component discussed above, First Federal Savings
is still subject to interest rate risk and, as can be seen above, rising
interest rates will reduce First Federal Savings' 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
the computation of NPV. 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 Savings' loan portfolio at December 31, 2002 had fixed
interest rates. First Federal Savings' 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 Savings would have to pay more on its deposits and
new borrowings, which would adversely affect First Federal Savings'
interest rate spread.
First Federal Savings' 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 Savings' 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 Savings has sought to maintain a strong deposit
base by increasing customer investments in fixed rate obligations with an
emphasis on 18-month to 60-month maturity certificates of deposit. Customer
deposits are originated from the local customer base as well as brokered
deposits.
LIQUIDITY AND CAPITAL RESOURCES
First Federal Savings' 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.
11
The primary investing activity of First Federal Savings is the origination
of loans to be held for investment. For the years ended December 31, 2002
and 2001, First Federal Savings originated loans for the portfolio in the
amount of $16.0 million and $17.4 million, respectively. For the years
ended December 31, 2002 and 2001, these activities were funded by principal
repayments of $14.5 million and $15 million, respectively, in addition to
the growth in deposits.
First Federal Savings is required to maintain minimum levels of liquid
assets under the OTS regulations. It is First Federal Savings' policy to
maintain its liquidity portfolio in excess of regulatory requirements.
First Federal Savings' 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 the
Association's operating, financing, lending and investing activities during
any given period. At December 31, 2002 and 2001, cash and cash equivalents
were $5.1 million and $8.6 million, respectively. The decrease in cash and
cash equivalents at December 31, 2002, compared to December 31, 2001,
resulted primarily from purchasing $1.8 million in mortgage loans in
November 2002 and funding withdrawal of deposit accounts late in 2002.
Liquidity management for the Association is both an ongoing and long-term
function of the Association'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 the Association require funds
beyond its ability to generate them internally, additional sources of funds
are available through FHLB advances. The Association could pledge its
mortgage loans, FHLB stock or certain other assets as collateral for such
advances. At December 31, 2002, the Association had a balance of $2.0
million in FHLB advances. The Association had a maximum of FHLB advances
available of approximately $18.3 million at December 31, 2002.
At December 31, 2002, First Federal Savings had outstanding loan
commitments of $474,000 and $90,000 of undisbursed loans in process. First
Federal Savings 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
that are scheduled to mature in one year or less at December 31, 2002
amount to $20.6 million. Management believes that a significant portion of
such deposits will remain with First Federal Savings.
Under federal law, First Federal Savings is required to maintain regulatory
capital sufficient to meet tangible, core and risk-based capital ratios of
at least 1.5%, 4.0% and 8.0%, respectively. At December 31, 2002, First
Federal Savings exceeded each of its capital requirements, with tangible,
core and risk-based capital ratios of 23.5%, 23.5% and 51.7%, respectively.
CRITICAL ACCOUNTING POLICIES
The Company has identified the accounting policies below as critical to the
Company's operations and to understanding the Company's consolidated
financial statements. Following is an explanation of the methods and
assumptions underlying their application.
ALLOWANCE FOR LOAN LOSSES. Management records an Allowance for Loan Losses
("ALLL") sufficient to cover current net charge-offs and an estimate of
probable losses based on an analysis of risks that management believes to
be inherent in the loan portfolio. The ALLL recognizes the inherent risks
associated with lending activities but, unlike a specific allowance, has
not been allocated to particular problem assets but to a homogenous pool of
loans. Management analyzes the adequacy of the allowance on a monthly basis
and believes that the Association's ALLL is adequate.
12
While management uses information currently available to determine this
allowance, it can fluctuate based on changes in economic conditions and
changes in the information available to management. Also, regulatory
agencies review the Association's allowance for loan loss as part of their
examination, and they may require the Association to recognize additional
loss provisions based on the information available at the time of their
examinations. Management estimates the required level of ALLL using a
formula based on various subjective and objective factors.
Each quarter, management assesses the risk of the assets in the loan
portfolio using historical loss data and current economic conditions in
order to determine impairment of the loan portfolio and adjusts the level
of ALLL, if necessary. At any given time, the ALLL should be sufficient to
absorb at least all estimated credit losses on outstanding balances over
the next 12 months. When considering the adequacy of ALLL, management's
evaluation of the asset portfolio has two primary components: foreclosure
probability and loss severity. Foreclosure probability is the likelihood of
loans not repaying in accordance with their original terms, which would
result in the foreclosure and subsequent liquidation of the property. Loss
severity is any potential loss resulting from the loan's foreclosure and
subsequent liquidation. Management calculates estimated foreclosure
frequency and loss severity for the loan portfolio based upon historical
data plus an estimate of certain subjective factors including future market
trends and economic conditions.
In addition, management reviews individual loans for impairment each month.
A loan becomes impaired when management believes it will be unable to
collect all principal and interest due according to the contractual terms
of the loan. If a loan is impaired, the Association records a specific
allowance equal to the excess of the loan's carrying value over the present
value of the estimated future cash flows discounted at the loan's effective
rate based on the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent.
CHANGE IN ACCOUNTING PRINCIPLES. The Financial Accounting Standards Board
(FASB) recently issued Interpretation No. 45, GUARANTOR'S ACCOUNTING AND
DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS OF OTHERS, effective for guarantees issued or modified after
December 31, 2002, which is not expected to have a material effect on the
Company's financial statements.
In addition, FASB issued Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, effective for financial statements issued
for fiscal years beginning after December 15, 2001, Statement No. 145,
RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS, ISSUED APRIL 2002, STATEMENT
NO. 147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, AN AMENDMENT OF
FASB STATEMENTS NO. 72 AND 144 AND FASB INTERPRETATION NO. 9, issued
October 2002 and Statement No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION
- TRANSITION AND DISCLOSURE, issued December 2002, which are not expected
to have a material effect on the Company's financial position or results of
operations.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto presented herein
have been prepared in accordance with accounting principles generally
accepted in the United States of America , which require the measurement of
financial position and operating results in terms of historical dollars,
without considering changes in relative purchasing power over time due to
inflation. Unlike industrial companies, nearly all of the Association's
assets and liabilities are monetary in nature. As a result, interest rates
generally have a more significant impact on First Federal Savings'
performance than does the effect of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the
prices of goods and services.
13
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
First Federal of Olathe Bancorp, Inc.
Olathe, Kansas
We have audited the accompanying consolidated balance sheets of First Federal of
Olathe Bancorp, Inc. and its wholly owned subsidiary, First Federal Savings and
Loan Association of Olathe (the "Association") as of December 31, 2002 and 2001,
and the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Federal of
Olathe Bancorp, Inc. and Subsidiary as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ BKD, LLP
BKD, LLP
Kansas City, Missouri
January 24, 2003
14
FIRST FEDERAL OF OLATHE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
------------------------------------
Cash and cash equivalents
Cash and non-interest earning deposits $ 204,821 $ 317,541
Federal funds sold 4,900,000 8,300,000
-------------- --------------
Total cash and cash equivalents 5,104,821 8,617,541
Held-to-maturity securities, at cost 2,014,309 5,500,000
Available-for-sale securities 1,818,984 1,847,909
Federal Home Loan Bank stock, at cost 380,000 380,000
Loans, net of deferred loan fees and allowance for loan losses 39,993,211 38,414,852
Accrued interest and dividends 317,596 331,605
Equipment, net of accumulated depreciation 2,250 8,081
Refundable income taxes 56,919 117,918
Other real estate owned -- 217,882
Prepaid expenses 41,295 --
-------------- --------------
Total assets $ 49,729,385 $ 55,435,788
============== ==============
See Notes to Consolidated Financial Statements 15
LIABILITIES AND STOCKHOLDERS' EQUITY
2002 2001
-------------------------------------
LIABILITIES
Deposits $ 35,327,722 $ 37,670,610
Dividends payable 83,682 93,844
Advances from borrowers for taxes and insurance 3,957 1,190
Interest payable on deposits 49,766 54,044
Advances from the Federal Home Loan Bank 2,000,000 5,000,000
Accrued expenses 86,921 85,530
Deferred income taxes 336,289 289,802
-------------- --------------
Total liabilities 37,888,337 43,195,020
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 4,000,000 shares authorized,
556,328 shares issued in 2002 and 2001 5,563 5,563
Additional paid-in capital 3,401,161 3,336,145
Retained earnings 10,581,921 9,996,392
Unearned ESOP shares (241,770) (291,696)
Deferred compensation (237,580) (340,203)
Accumulated other comprehensive income
Unrealized appreciation on available-for-sale securities,
net of
income taxes of $291,000 in 2002 and $301,000 in 2001 517,136 535,648
-------------- --------------
14,026,431 13,241,849
Treasury stock, at cost, 93,413 and 42,602 shares in 2002 and
2001, respectively (2,185,383) (1,001,081)
-------------- --------------
Total stockholders' equity 11,841,048 12,240,768
-------------- --------------
Total liabilities and stockholders' equity $ 49,729,385 $ 55,435,788
============== ==============
See Notes to Consolidated Financial Statements 16
FIRST FEDERAL OF OLATHE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
-----------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 3,349,734 $ 3,296,639
Investment securities 367,994 623,812
Cash and cash equivalents 134,267 202,979
Equity securities 17,326 25,675
------------ ------------
Total interest and dividend income 3,869,321 4,149,105
------------ ------------
INTEREST EXPENSE
Deposits 1,737,873 1,805,272
Federal Home Loan Bank advances 227,370 338,806
------------ ------------
Total interest expense 1,965,243 2,144,078
------------ ------------
NET INTEREST AND DIVIDEND INCOME 1,904,078 2,005,027
------------ ------------
NON-INTEREST INCOME
Service charges and other fees 36,295 22,677
Gain on sale of other real estate 6,864 14,253
------------ ------------
43,159 36,930
------------ ------------
NON-INTEREST EXPENSE
Salaries and related payroll expenses 317,620 620,801
Federal insurance premiums 26,428 23,961
Directors' fees 56,080 56,480
Occupancy of premises 58,921 53,848
Professional fees 140,247 204,196
Other general and administrative expenses 119,190 67,260
------------ ------------
Total non-interest expense 718,486 1,026,546
------------ ------------
INCOME BEFORE INCOME TAXES 1,228,751 1,015,411
INCOME TAX PROVISION 462,000 455,000
------------ ------------
NET INCOME $ 766,751 $ 560,411
============ ============
EARNINGS PER SHARE - BASIC $ 1.65 $ 1.12
============ ============
EARNINGS PER SHARE - DILUTED $ 1.63 $ 1.11
============ ============
See Notes to Consolidated Financial Statements 17
FIRST FEDERAL OF OLATHE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
COMPRE- ADDITIONAL UNEARNED
HENSIVE COMMON PAID-IN RETAINED ESOP DEFERRED
INCOME STOCK CAPITAL EARNINGS SHARES COMPENSATION
-------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 $ 5,563 $ 5,041,442 $ 9,700,070 $ (434,448) $ --
Net income $ 560,411 -- -- 560,411 -- --
Other comprehensive income
Change in unrealized
appreciation on
available-for-sale
securities, net of income
taxes of $7,000 12,196 -- -- -- -- --
Issuance of 25,030 shares under
recognition plan -- -- -- (70,154) -- (513,115)
Compensation cost on awards
issued under recognition plan -- -- -- -- -- 172,912
Purchase of 67,632 shares of
common stock for the treasury -- -- -- -- -- --
ESOP shares released -- 171,583 (780) 142,752 --
Dividends on common stock ($.40
per share) -- -- -- (193,155) -- --
Special cash distribution ($4.00
per share) -- -- (1,876,880) -- -- --
----------- --------- ----------- ----------- ---------- ----------
$ 572,607
===========
BALANCE, DECEMBER 31, 2001 5,563 3,336,145 9,996,392 (291,696) (340,203)
Net income $ 766,751 -- -- 766,751 -- --
Other comprehensive income
Change in unrealized
appreciation on
available-for-sale
securities, net of income
taxes of $10,000 (18,512) -- -- -- -- --
Compensation cost on awards
issued under recognition plan -- -- -- -- -- 102,623
Purchase of 50,811 shares of
common stock for the treasury -- -- -- -- -- --
ESOP shares released -- -- 65,016 (7,147) 49,926 --
Dividends on common stock ($.40
per share) -- -- (174,075) -- --
----------- --------- ----------- ----------- ---------- ----------
$ 748,239
==========
BALANCE, DECEMBER 31, 2002 $ 5,563 $ 3,401,161 $ 10,581,921 $ (241,770) $ (237,580)
========= =========== ============ ========== ==========
ACCUMULATED
OTHER
COMPRE-
HENSIVE TREASURY TOTAL
INCOME STOCK EQUITY
-------------------------------------------------
BALANCE, JANUARY 1, 2001 $ 523,452 $ -- $ 14,836,079
Net income -- -- 560,411
Other comprehensive income
Change in unrealized
appreciation on
available-for-sale
securities, net of income
taxes of $7,000 12,196 -- 12,196
Issuance of 25,030 shares under
recognition plan -- 583,269 --
Compensation cost on awards
issued under recognition plan -- -- 172,912
Purchase of 67,632 shares of
common stock for the treasury -- (1,584,350) (1,584,350)
ESOP shares released -- -- 313,555
Dividends on common stock ($.40
per share) -- -- (193,155)
Special cash distribution ($4.00
per share) -- -- (1,876,880)
--------- ----------- ------------
BALANCE, DECEMBER 31, 2001 535,648 (1,001,081) 12,240,768
Net income -- -- 766,751
Other comprehensive income
Change in unrealized
appreciation on
available-for-sale (18,512) -- (18,512)
securities, net of income
taxes of $10,000 -- -- 102,623
Compensation cost on awards
issued under recognition plan -- (1,184,302) (1,184,302)
Purchase of 50,811 shares of -- -- 107,795
common stock for the treasury
ESOP shares released -- -- (174,075)
Dividends on common stock ($.40
per share)
BALANCE, DECEMBER 31, 2002 $ 517,136 $(2,185,383) $ 11,841,048
========= =========== ============
See Notes to Consolidated Financial Statements 18
FIRST FEDERAL OF OLATHE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
---------------------------------
OPERATING ACTIVITIES
Net income $ 766,751 $ 560,411
Items not requiring (providing) cash
Depreciation 5,831 5,732
Amortization (accretion) of premiums (discounts) on
securities 10,732 (5,939)
Gain on disposal of other real estate owned (6,864) (14,253)
Deferred income taxes 56,900 47,744
Compensation expense recognized on allocated ESOP shares 107,795 313,555
Compensation expense on 2001 Recognition and Retention Plan 102,623 172,912
Changes in
Accrued interest and dividends 14,009 123,705
Prepaid expenses (41,295) 6,499
Interest payable on deposits (4,278) 14,104
Accrued expenses 1,391 6,884
Income taxes 60,999 (138,515)
------------- ------------
Net cash provided by operating activities 1,074,594 1,092,839
------------- ------------
INVESTING ACTIVITIES
Net originations of loans 1,578,359) (2,587,402)
Proceeds from sale of other real estate owned 224,746 28,681
Purchase of available-for-sale securities -- (1,000,000)
Purchase of FHLB stock -- (50,000)
Proceeds from maturities of held-to-maturity securities 5,500,000 12,850,000
Purchase of held-to-maturity securities 2,025,041) (5,750,000)
------------- ------------
Net cash provided by investing activities 2,121,346 3,491,279
------------- ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 2,342,888) 9,166,214
FHLB repayments 3,000,000) (1,600,000)
Purchase of treasury stock 1,184,302) (1,584,350)
Dividends paid (184,237) (201,675)
Special cash distribution -- (1,876,880)
Net increase (decrease) in advances from borrowers for
taxes and insurance 2,767 (2,746)
------------- ------------
Net cash provided by (used in) financing activities (6,708,660) 3,900,563
------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,512,720) 8,484,681
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,617,541 132,860
------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,104,821 $ 8,617,541
============= ============
ADDITIONAL CASH PAYMENT INFORMATION
Interest paid $ 1,969,521 $ 2,129,974
Income taxes paid 360,499 545,771
NON-CASH INVESTING ACTIVITY
Conversion of loans to other real estate -- 350,910
Sale of other real estate under mortgage loan -- (118,600)
19
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
First Federal of Olathe Bancorp, Inc. ("Company") is a holding company
whose principal activity is the ownership and management of its wholly
owned subsidiary, First Federal Savings and Loan Association of Olathe
("Association"). The Association provides financial services to
individual and corporate customers through its office in Olathe,
Kansas. The Association's primary source of revenue is interest and
fees on one-to-four family dwelling loans. The Association's lending
activity is concentrated within Johnson County, Kansas. The Association
is subject to competition from other financial institutions. The
Association also is subject to the regulation of certain federal and
state agencies and undergoes periodic examinations by those regulatory
authorities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its 100% owned subsidiary, the Association. Significant
intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the 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.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans. In connection with the determination of the
allowance for loan losses and the valuation of foreclosed assets held for
sale, management obtains independent appraisals for significant
properties.
CASH EQUIVALENTS
The Company considers all liquid investments with original maturities of
three months or less to be cash equivalents. At December 31, 2002 and
2001, cash equivalents consisted of federal funds sold in overnight
transactions.
20
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
SECURITIES
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the
future, are carried at fair value. Unrealized gains and losses are
recorded, net of related income tax effects, in other comprehensive
income.
Held-to-maturity securities, which include any security for which the
Company has the positive intent and ability to hold until maturity, are
carried at historical cost adjusted for amortization of premiums and
accretion of discounts.
Realized gains and losses, based on amortized cost of the specific
security, are included in other income. Interest and dividends on
investments in debt and equity securities are included in income when
earned. Premiums and discounts are amortized and accreted, respectively,
to interest income using a method that approximates the level-yield
method over the period to maturity.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-offs are reported at their
outstanding principal, adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans. Interest income is
reported on the interest method and includes amortization of net deferred
loan fees and costs over the loan term. Generally, loans are placed on
non-accrual status at 90 days past due and interest is considered a loss,
unless the loan is well-secured and in the process of collection.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral
and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revision as more information becomes available.
21
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
A loan is considered impaired when, based on current information and
events, it is probable that the Association will be unable to collect
the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration
all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the
borrower's prior payment record and the amount of the shortfall in
relation to the principal and interest owed. Impairment is measured on
a loan-by-loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price or the fair
value of the collateral if the loan is collateral dependent.
EQUIPMENT
Depreciable assets, consisting of computer and office equipment, are
stated at cost less accumulated depreciation. Depreciation is charged to
expense using the straight-line method over the five year estimated
useful lives of the assets.
FEDERAL HOME LOAN BANK (FHLB) STOCK
FHLB stock is a required investment for institutions that are members of
the Federal Home Loan Bank system. The required investment in the common
stock is based on a predetermined formula.
FORECLOSED ASSETS HELD FOR SALE
Assets acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the
lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are
included in net income or expense from foreclosed assets.
TREASURY STOCK
Treasury stock is stated at cost. Cost is determined by the first-in,
first-out method.
22
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
STOCK OPTIONS
At December 31, 2002, the Company has a stock-based employee compensation
plan, which is described more fully in Note 15. The Company accounts for
this plan under the recognition and measurement principles of APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the
grant date. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value provisions
of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to
stock-based employee compensation.
YEARS ENDED
DECEMBER 31,
2002 2001
---------------------------
Net income, as reported $ 766,751 $ 560,411
Less: Total stock-based employee compensation cost
determined under the fair value based method, net
of income taxes (46,261) (98,488)
---------- ----------
Pro forma net income $ 720,490 $ 461,923
========== ==========
Earnings per share
Basic - as reported $ 1.65 $ 1.12
====== ======
Basic - pro forma $ 1.55 $ 0.92
====== ======
Diluted - as reported $ 1.63 $ 1.11
====== ======
Diluted - pro forma $ 1.53 $ 0.90
====== ======
INCOME TAXES
Deferred tax assets and liabilities are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax asset will not
be realized.
EARNINGS PER SHARE
Earnings per share have been computed based upon the weighted-average
common shares outstanding for each year. Unearned ESOP and recognition
and retention plan shares have been excluded from the computation of
average shares outstanding.
23
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 2: SECURITIES
AVAILABLE-FOR-SALE SECURITIES
The amortized cost and approximate fair values of securities are as
follows:
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------------------------------------------------------
DECEMBER 31, 2002
Equity securities $ 1,010,960 $ 808,024 $ 1,818,984
============ ============ ============
DECEMBER 31, 2001
Equity securities $ 1,010,960 $ 836,949 $ 1,847,909
============ ============ ============
HELD-TO-MATURITY SECURITIES
The amortized cost and approximate fair values of securities are as
follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------------------------------------------------------
DECEMBER 31, 2002
United States Government and
Agency obligations $ 2,014,309 $ 66 $ (147,059) $ 1,867,316
============ ============ =========== ============
DECEMBER 31, 2001
United States Government and
Agency obligations $ 5,500,000 $ 33,580 $ (58,420) $ 5,475,160
============ ============ =========== ============
The amortized cost and fair value of held-to-maturity securities at
December 31, 2002, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without
prepayment penalties.
AMORTIZED FAIR
COST VALUE
-------------------------------
Within one year $ -- $ --
One to five years -- --
Five to ten years 1,000,000 852,941
After ten years 1,014,309 1,014,375
------------- -------------
$ 2,014,309 $ 1,867,316
============= =============
24
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
There were no sales of available-for-sale securities for the years ended
December 31, 2002 and 2001.
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at December 31 include:
2002 2001
---------------------------------
One-to-four family $ 40,349,434 $ 38,670,722
Commercial real estate loans 69,154 120,934
Other 73,061 223,161
------------- -------------
Total loans 40,491,649 39,014,817
Less:
Deferred loan fees, net (323,438) (424,965)
Allowance for loan losses (175,000) (175,000)
------------- -------------
Net loans $ 39,993,211 $ 38,414,852
============= =============
Activity in the allowance for loan losses was as follows:
Balance, beginning of year $ 175,000 $ 175,000
Provision for loan losses -- --
------------- -------------
Balance, end of year $ 175,000 $ 175,000
============= =============
NOTE 4: EQUIPMENT
Major classifications of equipment, stated at cost, are as follows:
2002 2001
---------------------------------
Computer equipment $ 72,456 $ 72,456
Office equipment 4,114 4,114
------------- -------------
76,570 76,570
Less accumulated depreciation 74,320 68,489
------------- -------------
Net equipment $ 2,250 $ 8,081
============= =============
25
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 5: INTEREST-BEARING DEPOSITS
Deposits at December 31 are summarized as follows:
2002 2001
--------------------------------
Money market $ 1,730,241 $ 1,860,473
Savings accounts 3,171,847 4,274,717
Certificates of deposit 30,425,634 31,535,420
------------- -------------
$ 35,327,722 $ 37,670,610
============= =============
At December 31, 2002, the scheduled maturities of certificates of deposit
are as follows:
2003 $ 20,607,284
2004 5,186,145
2005 1,284,429
2006 2,952,235
2007 and thereafter 395,541
--------------
$ 30,425,634
==============
Interest-bearing deposits in denominations of $100,000 or more were
$7,735,755 and $9,569,467 as of December 31, 2002 and 2001, respectively.
Brokered deposits are received in the normal course of business. As of
December 31, 2002 and 2001, brokered deposits of $7,323,000 and
$7,328,000 respectively, were included in interest-bearing deposits.
NOTE 6: FEDERAL HOME LOAN BANK ADVANCES
The Association is able to borrow from the FHLB of Topeka in order to
meet operating and long-term financing needs. The borrowings are limited
to an investment ratio of 20 to 1 of the Association's investment in FHLB
stock, and are further limited to 40% of total assets. The borrowings
must be further secured by one-to-four family dwelling loans pledged to
the FHLB. Maximum available borrowings, based upon a percentage of assets
and contingent upon the purchase of additional stock, amounted to
approximately $20.3 million as of December 31, 2002. The total advances
available from the FHLB as of December 31, 2002, based on the ratio of
stock owned, amount to $7,600,000, of which $2,000,000 had been extended.
26
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Long-term advances from the FHLB at December 31, 2002 and 2001 consisted
of the following components:
2002 2001
-----------------------------
$1,000,000 advance, 1 year at 5.46%, due January 2002 $ -- $ 1,000,000
$1,000,000 advance, 2 years at 5.29%, due January 2003 1,000,000 1,000,000
$1,000,000 advance, 5 years at 5.63%, due January 2006 1,000,000 1,000,000
$2,000,000 advance, 2 years at 6.51%, due November 2002 -- 2,000,000
----------- -----------
$ 2,000,000 $ 5,000,000
=========== ===========
Aggregate annual maturities of FHLB advances at December 31, 2002 are:
YEAR ENDING AMOUNT
------------- --------------
2003 $ 1,000,000
2004 --
2005 --
2006 1,000,000
-------------
$ 2,000,000
=============
NOTE 7: EMPLOYEE BENEFIT PLAN
The Association is a participant in a pension fund known as the
Financial Institutions Retirement Fund. This Fund is a multi-employer
plan; separate actuarial valuations are not made with respect to each
participating employer. The plan required contributions in the amount of
$20,488 and $0 for the years ended December 31, 2002 and 2001,
respectively. The plan provides pension benefits for substantially all
of the Association's employees.
NOTE 8: REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Association must meet
specific capital guidelines that involve quantitative measures of the
Association's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and
other factors.
27
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and ratios
(set forth in the table below). Management believes, as of December 31,
2002 and 2001, that the Association meets all capital adequacy
requirements to which it is subject.
As of June 4, 2001, the most recent notification from the Office of
Thrift Supervision categorized the Association 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 I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the Association's category.
The Association's actual capital amounts and ratios are also presented
in the table.
TO BE WELL CAPITALIZED
UNDER THE PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
----------------------- ----------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- --------- --------------- ------- --------------- -----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2002
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 12,360 51.7% $ 1,912 8.0% $ 2,389 10.0%
========== ===== ========= ==== ======== =====
Tier 1 Capital
(to Risk-Weighted Assets) $ 11,821 49.5% NA NA $ 1,434 6.0%
========== ===== == == ======== ====
Tier 1 Capital
(to Adjusted Total Assets) $ 11,821 23.5% $ 1,510 4.0% $ 2,518 5.0%
========== ===== ========= ==== ======== ====
Tangible Capital
(to Adjusted Tangible Assets) $ 11,821 23.5% $ 755 1.5% NA NA
========== ===== ========= ==== == ==
DECEMBER 31, 2001
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 12,189 48.7% $ 2,004 8.0% $ 2,505 10.0%
========== ===== ========= ==== ======== =====
Tier 1 Capital
(to Risk-Weighted Assets) $ 11,637 46.5% NA NA $ 1,503 6.0%
========== ===== == == ======== ====
Tier 1 Capital
(to Adjusted Total Assets) $ 11,637 20.3% $ 2,289 4.0% $ 2,861 5.0%
========== ===== ========= ==== ======== ====
Tangible Capital
(to Adjusted Tangible Assets) $ 11,637 20.3% $ 858 1.5% NA NA
========== ===== ========= ==== == ==
The Association is subject to certain restrictions that prohibit the
declaration or payment of dividends without prior regulatory approval.
28
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 9: TRANSACTIONS WITH RELATED PARTIES
At December 31, 2002 and 2001, the Association had loans outstanding to
executive officers, directors, significant shareholders and their
affiliates (related parties), in the amount of $271,233 and $449,236,
respectively.
In management's opinion, such loans and other extensions of credit and
deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral)
as those prevailing at the time for comparable transactions with other
persons. Further, in management's opinion, these loans did not involve
more than normal risk of collectibility or present other unfavorable
features.
NOTE 10: INCOME TAXES
The provision for income taxes includes these components:
2002 2001
---------------------------
Taxes currently payable $ 405,100 $ 407,256
Deferred income taxes 56,900 47,744
----------- -----------
Income tax expense $ 462,000 $ 455,000
=========== ===========
A reconciliation of income tax expense at the statutory rate to the
Company's actual income tax expense is shown below:
2002 2001
---------------------------
Computed at the statutory rate (34%) $ 418,000 $ 345,000
Increase (decrease) resulting from:
State income taxes - net of federal tax benefit 60,000 47,000
Nondeductible ESOP compensation expense 20,000 58,000
Dividend exclusion on FHLMC preferred stock (16,000) --
Other (20,000) 5,000
----------- -----------
Actual tax expense $ 462,000 $ 455,000
=========== ===========
29
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The tax effects of temporary differences related to deferred taxes shown
on the consolidated balance sheets were:
2002 2001
-----------------------------
Deferred tax assets
Deferred compensation $ 27,400 $ 17,000
Allowance for loan losses 68,300 69,076
Net operating losses 17,700 --
----------- -----------
113,400 86,076
----------- -----------
Deferred tax liabilities
Deferred loan fees (114,400) (39,000)
ESOP dividend (19,700) (26,000)
Unrealized gains on available-for-sale securities (291,000) (301,000)
Other (24,589) (9,878)
----------- -----------
(449,689) (375,878)
----------- -----------
Net deferred tax liability $ (336,289) $ (289,802)
=========== ===========
Retained earnings at December 31, 2002 and 2001, include approximately
$813,000, for which no deferred federal income tax liability has been
recognized. These amounts represent an allocation of income to bad debt
deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debt losses or adjustments arising from
carryback of net operating losses would create income for tax purposes
only, which would be subject to the then-current corporate income tax
rate. The deferred income tax liabilities on the preceding amounts that
would have been recorded if they were expected to reverse into taxable
income in the foreseeable future were approximately $325,000 at
December 31, 2002 and 2001.
30
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 11: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments
were calculated by discounting expected cash flows, which method
involves significant judgments by management and uncertainties. Fair
value is the estimated amount at which financial assets or liabilities
could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Because no market exists
for certain of these financial instruments and because management does
not intend to sell these financial instruments, the Company does not
know whether the fair values shown below represent values at which the
respective financial instruments could be sold individually or in the
aggregate.
DECEMBER 31,
2002 2001
-------------------------------------- ------------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------- ------------------------------------
Assets
Cash and cash equivalents $ 5,104,821 $ 5,104,821 $ 8,617,541 $ 8,617,541
Securities 3,833,293 3,686,300 7,347,909 7,323,069
FHLB stock 380,000 380,000 380,000 380,000
Loans 39,993,211 40,315,406 38,414,852 38,640,029
Accrued interest and dividends 317,596 317,596 331,605 331,605
Liabilities
Deposits 35,327,722 36,192,953 37,670,610 38,700,674
Advances from FHLB 2,000,000 2,153,956 5,000,000 5,153,411
Interest payable on deposits 49,766 49,766 54,044 54,044
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
CASH AND CASH EQUIVALENTS, INTEREST-BEARING DEPOSITS AND FHLB STOCK
The carrying amounts approximate fair value.
SECURITIES
Fair values equal quoted market prices, if available. If quoted market
prices are not available, fair values are estimated based on quoted
market prices of similar securities.
31
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
LOANS
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. Loans
with similar characteristics were aggregated for purposes of the
calculations. The carrying amount of accrued interest approximates its
fair value.
DEPOSITS
Deposits include demand deposits, savings accounts and money market
deposits. The carrying amount approximates fair value. The fair value of
fixed-maturity time deposits is estimated using a discounted cash flow
calculation that applies the rates currently offered for deposits of
similar remaining maturities. The carrying amount of accrued interest
payable approximates its fair value.
ADVANCES FROM THE FHLB
Rates currently available to the Association for debt with similar
terms and remaining maturities are used to estimate fair value of
existing debt.
COMMITMENTS TO ORIGINATE LOANS
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of commitments to extend credit is
not presented since management believes the fair value to be
insignificant.
NOTE 12: COMMITMENTS AND CREDIT RISK
Commitments to originate loans are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since a portion
of the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Each customer's creditworthiness is evaluated on a case-by-case basis.
The amount of collateral obtained, if deemed necessary, is based on
management's credit evaluation of the counter-party. Collateral held
varies, but may include property, plant and equipment, commercial real
estate and residential real estate.
32
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
At December 31, 2002 and 2001, the Association had outstanding
commitments to originate fixed rate loans and undisbursed loan proceeds
for loans in process aggregating approximately $564,000 and $1,075,000,
respectively. The commitments extended over varying periods of time with
the majority being disbursed within a one-year period. At December 31,
2002, the interest rates on the outstanding commitments ranged from
7.0% to 8.3%.
NOTE 13: EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion to stock form, the Association
established an internally leveraged employee stock ownership plan (ESOP)
for the exclusive benefit of eligible employees (all salaried employees
who have completed at least 1,000 hours of service in a 12-month period
and have attained the age of 21). The ESOP borrowed funds from the
Company in an amount sufficient to purchase 44,506 shares (8% of the
common stock issued in the stock offering). The loan is secured by the
shares purchased and will be repaid by the ESOP with funds from
contributions made by the Association, dividends received by the ESOP and
any other earnings on ESOP assets. The Association makes annual
contributions to the ESOP equal to the ESOP's debt service less dividends
received by the ESOP. All dividends received by the ESOP are used to pay
debt service. Contributions will be applied to repay interest on the loan
first, then the remainder will be applied to principal. The loan is
expected to be repaid over a period of up to 30 years. Shares purchased
with the loan proceeds are 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 are allocated among
participants in proportion to their compensation relative to total
compensation of all active participants. Participants will vest in their
accrued benefits under the employee stock ownership plan at the rate of
20% per year. Vesting is accelerated upon retirement, death or disability
of the participant or a change in control of the Association. Forfeitures
will be reallocated to remaining plan participants. Benefits may be
payable upon retirement, death, disability, separation from service or
termination of the ESOP. Since the Association's annual contributions
are discretionary, benefits payable under the ESOP cannot be
estimated.
The Association accounts for its ESOP in accordance with Statement of
Position ("SOP") 93-6, EMPLOYERS ACCOUNTING FOR EMPLOYEE STOCK
OWNERSHIP PLANS. Accordingly, the debt of the ESOP is eliminated in
consolidation and the shares pledged as collateral are reported as
unearned ESOP shares in the consolidated balance sheets. Contributions
to the ESOP shall be sufficient to pay principal and interest currently
due under the loan agreement. As shares are committed to be released from
collateral, the Company reports compensation expense equal to the average
market price of the shares for the respective period, and the shares
become outstanding for earnings per share computations. ESOP compensation
expense was $107,795 and $313,555 in 2002 and 2001, respectively.
Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as
a reduction of debt and accrued interest.
33
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
A summary of ESOP shares at December 31 is as follows:
2002 2001
---------------------------
Released shares 20,327 15,336
Unreleased shares 24,179 29,170
---------- ----------
Total 44,506 44,506
========== ==========
Fair value of unreleased shares at December 31 $ 561,678 $ 736,543
========== ==========
The Association is obligated, at the option of each beneficiary, to
repurchase shares of the ESOP upon the beneficiary's termination or after
retirement. At December 31, 2002, the fair value of the 20,327 released
shares held by the ESOP is $474,635. There are no outstanding shares held
by former employees.
NOTE 14: RECOGNITION AND RETENTION PLAN
On April 25, 2001, the stockholders of the Company approved the
Recognition and Retention Plan (the "Recognition Plan") for directors,
officers and employees. Under the Recognition Plan, the Company may
award up to 27,816 shares of common stock. During 2001, the Company
granted 25,030 shares to eligible participants. The value of the
shares awarded under the plan is determined based on the market price
of the Company's stock on the date of grant. The shares vest and are
earned by the recipient at a rate of 20% of the initially awarded
amount per year, with the first installment being earned on the date
of grant and succeeding installments earned on the following
anniversaries of the date of grant.
As shares were issued on grant date and vest to holders over four years,
the Company recorded deferred compensation in the amount of $513,115. The
charge to compensation expense for the portion of shares vested during
the years ended December 31, 2002 and 2001 amounted to $102,623 and
$172,912, respectively.
NOTE 15: STOCK OPTION PLAN
The Company has a fixed option plan under which the Company may grant
options that vest at a rate of 20% per year, with the first installment
vesting on the date of grant and succeeding installments vesting on the
following anniversaries of the date of grant to directors, officers and
employees for up to 55,632 shares of common stock. The exercise price of
each option is intended to equal the market price of the Company's stock
on the date of grant. The maximum term of the options is ten years.
34
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
The Company granted 50,066 options to eligible participants in 2001, all
of which are outstanding at December 31, 2002, with an exercise price of
$20.50. There were 20,026 and 10,013 shares exercisable at December 31,
2002 and 2001, respectively.
The fair value of the options granted was estimated on the date of grant
using the Black-Scholes option-pricing model with the key assumptions
being risk-free interest rate of 4.77%, expected dividends of $.40 per
year, and expected volatility of 25%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plan, and, no compensation cost has been recognized
for the plan. Had compensation cost for the Company's plan been
determined based on the fair value at the grant dates using Statement
of Financial Accounting Standards No. 123, the Company's net income
would have decreased by $46,261 and $98,488 for the years ended
December 31, 2002 and 2001, respectively. Basic and diluted earnings
per share would have decreased by $.10 for the year ended December 31,
2002 and by $.20 and $.21, respectively for the year ended December
31, 2001.
35
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 16: EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
YEAR ENDED DECEMBER 31, 2002
WEIGHTED-
AVERAGE PER SHARE
INCOME SHARES AMOUNT
---------------------------------------------
Basic earnings per share
Net income $ 766,751 463,921 $ 1.65
=======
Effect of dilutive securities
Stock options (46,261) 5,971
---------- ---------
Diluted earnings per share
Income available to common stockholders $ 720,490 469,892 $ 1.63
========== ========= =======
YEAR ENDED DECEMBER 31, 2001
WEIGHTED-
AVERAGE PER SHARE
INCOME SHARES AMOUNT
---------------------------------------------
Basic earnings per share
Net income $ 560,411 500,664 $ 1.12
=======
Effect of dilutive securities
Stock options (98,488) 3,780
---------- ---------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 461,923 504,444 $ 1.11
========== ========= =======
36
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 17: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial
position, results of operations and cash flows of the Company:
CONDENSED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
----------------------------------
ASSETS
Cash and cash equivalents $ 592,108 $ 1,922,985
Investment in First Federal Savings and Loan
Association of Olathe 12,100,018 11,832,364
Due from subsidiary 424,505 559,766
Other assets 17,000 28,398
------------- -------------
Total assets $ 13,133,631 $ 14,343,513
============= =============
LIABILITIES
Dividends payable $ 92,583 $ 102,745
Notes payable to subsidiary 1,200,000 2,000,000
------------- -------------
Total liabilities 1,292,583 2,102,745
STOCKHOLDERS' EQUITY 11,841,048 12,240,768
------------- -------------
Total liabilities and stockholders' equity $ 13,133,631 $ 14,343,513
============= =============
37
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
----------------------------------
INCOME
Investment securities $ -- $ 16,573
Dividend from subsidiary 800,000 1,000,000
Other income 35,975 67,452
------------- -------------
835,975 1,084,025
EXPENSES 311,135 168,523
------------- -------------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARY 524,840 915,502
INCOME TAX BENEFIT (108,000) (26,000)
------------- -------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARY 632,840 941,502
EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY
LESS DIVIDEND FROM SUBSIDIARY 133,911 (381,091)
------------- -------------
NET INCOME $ 766,751 $ 560,411
============= =============
38
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
----------------------------------
OPERATING ACTIVITIES
Net income $ 766,751 $ 560,411
Items not requiring (providing) cash
Accretion of discounts on securities -- (5,939)
Deferred taxes 8,600 (25,988)
Equity in undistributed earnings of subsidiary (133,911) 381,091
Changes in
Other assets 2,798 25,541
Other liabilities -- (42,812)
------------- -------------
Net cash provided by operating activities 644,238 892,304
------------- -------------
INVESTING ACTIVITIES
Payments received from subsidiary 193,424 746,263
Proceeds from maturities of held-to-maturity securities -- 2,100,000
------------- -------------
Net cash provided by investing activities 193,424 2,846,263
------------- -------------
FINANCING ACTIVITIES
Proceeds on loan from subsidiary -- 2,000,000
Principal payments on loan from subsidiary (800,000) (521,448)
Purchases of treasury stock (1,184,302) (1,584,350)
Dividends paid (184,237) (201,675)
Special cash distribution -- (2,054,904)
------------- -------------
Net cash used in financing activities (2,168,539) (2,362,377)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,330,877) 1,376,190
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,922,985 546,795
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 592,108 $ 1,922,985
============= =============
NON-CASH FINANCING ACTIVITY
Treasury stock issued under stock award plan $ -- $ 513,115
39
FIRST FEDERAL OF OLATHE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 18: FUTURE CHANGE IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board (FASB) recently issued
Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS,
effective for guarantees issued or modified after December 15, 2002,
which is not expected to have a material effect on the Company's
financial statements.
In addition, FASB issued Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, effective for financial statements
issued for fiscal years beginning after December 15, 2001, Statement No.
145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS, issued April 2002, Statement
No. 147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, AN AMENDMENT OF
FASB STATEMENTS NO. 72 AND 144 AND FASB INTERPRETATION NO. 9, issued
October 2002 and Statement No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE, issued December 2002, which are
not expected to have a material effect on the Company's financial
position or results of operations.
40
COMMON STOCK AND RELATED MATTERS
The Company's Common Stock is listed on the Over-the-Counter Electronic
Bulletin Board under the symbol "FFOL.OB." As of December 31, 2002, the
Company had 152 stockholders of record (excluding the number of persons
or entities holding stock in street name through various brokerage
firms), and 462,915 shares outstanding.
The following tables set forth market price and dividend information for
the Common Stock for the years ended December 31, 2002 and 2001. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions, and may not necessarily represent actual transactions.
YEAR ENDED CASH DIVIDENDS
DECEMBER 31, 2002 HIGH LOW DECLARED
-------------------------------------------------------------------------
First Quarter $ 25.78 $ 21.37 N/A
Second Quarter 23.80 22.93 $.20 per share
Third Quarter 26.00 23.00 N/A
Fourth Quarter 24.00 23.15 $.20 per share
YEAR ENDED CASH DIVIDENDS
DECEMBER 31, 2001 HIGH LOW DECLARED
-------------------------------------------------------------------------
First Quarter $ 16.88 $ 14.98 N/A
Second Quarter 20.04 16.40 $.20 per share
Third Quarter 19.94 19.41 N/A
Fourth Quarter 25.25 19.20 $4.20 per share*
* Includes a $4.00 per share special cash distribution.
Payment of dividends on the Company's common stock is subject to
determination and declaration by the Board of Directors and depends upon
a number of factors, including capital requirements, regulatory
limitations on the payment of dividends, the Company's results of
operations and financial condition, tax considerations and general
economic conditions. No assurance can be given that dividends will be
declared or, if declared, what the amount of the dividends will be, or
whether such dividends, once declared, will continue.
41
CORPORATE AND
STOCKHOLDER INFORMATION
CORPORATE OFFICES COUNSEL
- ----------------- -------
First Federal of Olathe Bancorp, Inc. Luse Gorman Pomerenk & Schick
100 E. Park 5335 Wisconsin Ave NW - Suite 400
Olathe, KS 66061 Washington, D.C. 20015
(913) 782-0026
ANNUAL MEETING OF SHAREHOLDERS INDEPENDENT AUDITORS
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The annual meeting of First Federal of Olathe Bancorp, BKD, LLP
Inc. will be held April 25, 2003 at 3:00 p.m. at 100 E. Twelve Wyandotte Plaza
Park, Olathe, Kansas 120 W. 12th Street - Suite 1200
Kansas City, MO 64105
ANNUAL REPORT ON FORM 10-K MARKET INFORMATION FOR COMMON STOCK
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For the 2002 fiscal year, First Federal of Olathe The Common Stock of First Federal of Olathe Bancorp, Inc.
Bancorp, Inc. has filed an Annual Report on Form 10-K trades on the Over-the-Counter Bulletin Board under the
with the Securities and Exchange Commission. The Form symbol "FFOL." At March 11, 2003, there were approximately
10-K is available on the World Wide Web as part of the 149 shareholders of record not including the number of
SEC EDGAR database at WWW.SEC.GOV. SHAREHOLDERS MAY persons or entities holding stock in nominee or street names
ALSO OBTAIN A COPY FREE OF CHARGE BY WRITING TO: FIRST through various brokers and banks. Common stock was issued
FEDERAL OF OLATHE BANCORP, INC., 100 E. PARK, OLATHE, at $10.00 per share in connection with the Company's initial
KS 66061. public offering competed on April 11, 2000.
STOCK TRANSFER AGENT & REGISTRAR DIRECTORS AND OFFICERS
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Shareholders wishing to change name, address or Mitch Ashlock: PRESIDENT, DIRECTOR, CHIEF EXECUTIVE
ownership of stock, or to report lost certificates or OFFICER
to consolidate accounts should contact the Company's Donald K. Ashlock: CHAIRMAN, DIRECTOR
stock registrar and transfer agent directly at: John M. Bowen: DIRECTOR, OWNER - JOHN M. BOWEN &
ASSOCIATES, KANSAS CITY, MO
Registrar & Transfer Company Carl R. Palmer: DIRECTOR, OWNER - CARL PALMER REALTY,
10 Commerce Drive OLATHE, KS
Cranford, NJ 07016 Marvin Eugen Wollen: DIRECTOR, OPTOMETRIST,
(800) 368-5948 OLATHE, KS
Kenda K. Camp: SECRETARY AND TREASURER
Milynn VanDeKerkhove: ASSISTANT SECRETARY
AND TREASURER
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[LOGO] FIRST FEDERAL OF OLATHE BANCORP, INC.
100 EAST PARK
P.O. BOX 636
OLATHE, KS 66051