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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------------- --------------------
COMMISSION FILE NUMBER 0-30680
FIRST FEDERAL OF OLATHE BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Kansas 48-1226075
- --------------------------------- -----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 East Park Street, Olathe, Kansas 66061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 782-0026
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Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES X . NO .
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
The Registrant's revenues for the fiscal year ended December 31, 2002 were
$3.9 million.
As of March 7, 2003, there were 556,328 shares issued and 459,263 shares
outstanding of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the registrant, computed by reference to
the last sale price of such stock on the Over-the-Counter Electronic Bulletin
Board as of March 7, 2003, was $23.65. (The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the registrant that such person is an affiliate of the registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and III of Form 10-KSB - Portions of Annual Report to Stockholders
for the fiscal year ended December 31, 2002.
Part III of Form 10-KSB - Portions of Proxy Statement for 2003 Annual
Meeting of Stockholders.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
First Federal of Olathe Bancorp, Inc. was formed in December 1999 at the
direction of First Federal Savings and Loan Association of Olathe ("First
Federal Savings") for the purpose of owning all of the outstanding stock of
First Federal Savings issued upon the conversion of First Federal Savings from
the mutual to stock form. On April 11, 2000, First Federal of Olathe Bancorp
acquired all of the shares of First Federal Savings in connection with the
completion of the conversion. All references to First Federal of Olathe Bancorp,
unless otherwise indicated, at or before April 11, 2000 refer to First Federal
Savings. First Federal of Olathe Bancorp's common stock is quoted on the
Over-the-Counter Electronic Bulletin Board under the symbol "FFOL."
First Federal Savings is a federally chartered savings association located
in Olathe, Kansas. First Federal Savings was founded in 1923 as a
state-chartered mutual savings association under the name Central Building and
Loan Association. In 1934, First Federal Savings converted to a federal mutual
savings association charter and adopted its current name. First Federal Savings
is regulated by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation. First Federal Savings' deposits have been federally
insured since 1934 and are currently insured by the Federal Deposit Insurance
Corporation under the Savings Association Insurance Fund. First Federal Savings
has been a member of the Federal Home Loan Bank System since 1933. At December
31, 2002, First Federal of Olathe Bancorp had total assets of $49.7 million,
deposits of $35.3 million and stockholders' equity of $11.8 million.
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. First Federal Savings holds its loans for long-term investment
purposes. First Federal Savings also invests in various investment securities.
The executive office of First Federal of Olathe Bancorp and First Federal
Savings is located at 100 East Park Street, Olathe, Kansas 66061 and their
telephone number is (913) 782-0026.
LENDING ACTIVITIES
GENERAL. At December 31, 2002, First Federal Savings' net loan portfolio
totaled $40.0 million, representing approximately 80.5% of First Federal
Savings' $49.7 million of total assets at that date. The principal lending
activity of First Federal Savings is the origination of fixed-rate, one- to
four-family residential loans with terms of up to 25 years. At December 31, 2001
and 2002 First Federal Savings' loan portfolio consisted primarily of first
mortgage, one- to four-family residential loans, with small amounts of
commercial real estate loans and loans secured by deposit accounts. First
Federal Savings also occasionally originates construction/permanent loans to
individuals for the construction and permanent financing of one- to four-family
dwellings, although First Federal Savings has originated very few
construction/permanent loans in recent years. First Federal Savings retains in
its portfolio all loans that it originates.
Following completion of the stock conversion in April 2000, First Federal
Savings implemented a program for offering longer-term, fixed-rate residential
mortgage loans with terms of up to 25 years and fixed-rate commercial real
estate loans for retention in its portfolio. Prior to the implementation of this
program, First Federal Savings originated fixed-rate one- to four-family
residential loans with terms to maturity of no greater than 15 years. First
Federal Savings also intends to explore adjustable rate lending through the
purchase of adjustable rate loans on a limited basis. To a lesser extent, First
Federal Savings also intends to originate loans secured by deposit accounts.
First Federal may hire additional staff to expand its lending activities.
The types of loans that First Federal Savings may originate are subject to
federal and state laws and regulations. Interest rates charged by First Federal
Savings on loans are affected principally by the demand for such loans and the
supply of money available for lending purposes and the rates offered by its
competitors. These factors are, in turn, affected by general and economic
conditions, the monetary policy of the federal government, including the Federal
Reserve Board, legislative and tax policies, and governmental budgetary matters.
Under OTS regulations, a thrift institution's loans-to-one borrower limit
is generally limited to the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation--Federal Regulation of Savings Associations." At
December 31, 2002, First Federal Savings' limit on loans-to-one borrower was
$1.8 million. At that date, First Federal Savings' largest amount of loans to
one borrower, including the borrower's related interests, was $1.6 million and
consisted of 17 residential mortgage loans secured by non-owner occupied,
investor-owned homes and a personal home loan. These loans were performing
according to their original terms at December 31, 2002.
LOAN PORTFOLIO COMPOSITION. The following table shows the composition of
First Federal Savings' loan portfolio by type of loan at the dates indicated.
First Federal Savings' loan portfolio is composed solely of loans with fixed
rates of interest.
AT DECEMBER 31,
-------------------------------------------------
2002 2001
---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Real Estate Loans:
- ------------------
One- to four-family(1)............................. $ 40,349 99 % $ 38,671 99 %
Commercial......................................... 69 -- 121 --
--------- -------- --------- --------
Total real estate loans............................ 40,418 99 38,792 99
--------- -------- --------- --------
Loans on Deposits.................................. 73 1 223 1
--------- -------- --------- --------
Total Loans........................................ 40,491 100 % 39,015 100 %
--------- ======== --------- ========
Less:
- -----
Deferred fees and discounts....................... (323) (425)
Allowance for losses.............................. (175) (175)
--------- ---------
Total loans receivable, net....................... $ 39,993 $ 38,415
========= =========
- ---------------
(1) Includes construction/permanent loans in the amount of $474,000 for 2002
and $213,000 for 2001.
ONE- TO FOUR-FAMILY MORTGAGE LOANS. First Federal Savings' primary lending
activity is the origination of first mortgage loans secured by one- to
four-family residential property located in First Federal Savings' market area.
A portion of the one- to four-family mortgage loans originated by First Federal
Savings are secured by investor-owned, non-owner occupied residences. Loans are
generated through First Federal Savings' existing customers and referrals, real
estate brokers and other marketing efforts. First Federal Savings generally has
limited its real estate loan originations to the financing of properties located
within its market area and has not made out-of-state loans. At December 31,
2002, First Federal Savings had $40.3 million, or 99% of its loan portfolio
invested in mortgage loans secured by one- to four-family residences.
Historically, First Federal Savings' residential mortgage loans had terms
of up to 15 years. However, during fiscal 2000, First Federal Savings commenced
originating residential mortgage loans with terms to maturity of up to 25 years.
First Federal Savings has originated only fixed-rate residential loans. First
Federal Savings has no current plans to originate adjustable rate mortgages.
However, First Federal Savings intends to explore adjustable rate lending
through the purchase of adjustable rate loans on a limited basis. All of the
loans made by First Federal Savings are retained in its portfolio for long-term
investment. First Federal Savings has not sold loans in the secondary mortgage
market, and First Federal Savings' loans generally are not underwritten for
resale in the secondary mortgage market. First Federal Savings' fixed-rate
mortgage loans amortize monthly with principal and interest due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option.
2
Under First Federal Savings' real estate lending policy, a title insurance
policy must be obtained for each real estate loan. First Federal Savings also
requires fire and extended coverage casualty insurance, in order to protect the
properties securing its real estate loans. Borrowers must also obtain flood
insurance policies when the property is in a flood hazard area. First Federal
Savings requires borrowers to advance funds to an escrow account for the payment
of real estate taxes but does not require escrowed funds for hazard insurance
premiums, provided other proof of an effective hazard insurance policy is
provided to First Federal Savings. First Federal Savings generally makes loans
up to a maximum amount of $125,000, subject to exceptions by the Board of
Directors. In recent years, as a result of increasing property values, the Board
has granted frequent waivers from this maximum loan amount.
First Federal Savings' residential mortgage loans customarily include
due-on-sale clauses, which are provisions giving First Federal Savings the right
to declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are a means of increasing
the interest rate on First Federal Savings' mortgage portfolio during periods of
rising interest rates.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations generally permit a
maximum loan-to-value ratio of 95% for residential property and 90% for all
other real estate loans. First Federal Savings' lending policies, however,
generally limit the maximum loan to value ratio to 80% of the lesser of the
appraised value or the purchase price of the property securing the loan.
First Federal Savings originates mortgage loans secured by
non-owner-occupied residential properties. At December 31, 2002, such loans
totaled $15.0 million, or 37.2% of First Federal Savings' loan portfolio. Most
of these loans are made to investors and are secured by one- to four-family
rental properties. These loans are made on the same general terms as loans
secured by owner-occupied properties, including loan-to-value ratios of up to
80% and terms of up to 25 years. However, First Federal Savings generally
charges higher interest rates on investor loans.
When underwriting residential real estate loans, First Federal Savings
reviews and verifies each loan applicant's employment, income and credit history
and, if applicable, First Federal Savings' experience with the borrower. First
Federal Savings' policy is to obtain credit reports and financial statements on
all borrowers and guarantors, and to verify references. Properties securing real
estate loans are appraised by First Federal Savings-approved independent
appraisers. Appraisals are subsequently reviewed by the First Federal Savings'
Board. Management believes that stability of income, past credit history and
adequacy of the proposed security are integral parts in the underwriting
process. Written appraisals are generally required on real estate property
offered to secure an applicant's loan.
Currently, First Federal Savings does not offer adjustable-rate residential
mortgage loans. First Federal Savings intends to explore the purchase of
adjustable rate loans, provided such loans are secured by local properties and
are serviced by the originator of the loan or a third party. First Federal
Savings does not currently plan to originate adjustable rate loans, although it
may determine to do so in the future.
RESIDENTIAL CONSTRUCTION LOANS. On a very limited basis, First Federal
Savings originates residential construction loans to individuals for the
construction and permanent financing of their personal residence. Such loans are
generally made to individuals with whom First Federal Savings has a pre-existing
customer relationship. First Federal Savings' originations of
construction/permanent loans have been minimal during recent years. Construction
loans to individuals are made on the same general terms as First Federal
Savings' one- to four-family mortgage loans, but provide for the payment of
interest only during the construction phase, which is usually six months. At the
end of the construction phase, the loan converts to a permanent mortgage loan.
Prior to making a commitment to fund a construction loan, First Federal
Savings requires an appraisal of the property by an independent appraiser. First
Federal Savings also reviews and inspects each project prior to disbursement of
funds during the term of the construction loan. Loan proceeds are disbursed
after inspection of the project based on percentage of completion.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. In the past, First Federal
Savings on infrequent occasions has originated loans secured by commercial real
estate. During 2001 and 2000, First Federal Savings
3
originated two loans and one loan, respectively, secured by commercial real
estate. First Federal Savings plans to maintain a program for offering
fixed-rate, commercial real estate loans.
Historically, any multi-family and commercial real estate loans originated
by First Federal Savings have been made on the same general terms as one- to
four-family loans, including fixed rates of interest, but with terms to maturity
and amortization schedules of up to 10 years, and in amounts up to 50% of the
lesser of the appraised value of the property or the sales price.
CONSUMER LOANS. Historically, First Federal Savings' consumer lending
activities have been limited to deposit account loans. At December 31, 2002,
$73,000 consumer loans were outstanding, all secured by deposit accounts. First
Federal Savings does not expect to become an active consumer lender, although it
does expect to place some additional emphasis on making deposit account loans in
the future.
First Federal Savings offers loans secured by savings deposits at First
Federal Savings. Generally, these loans are made at an interest rate that is 2%
above the account rate for up to 100% of the account balance and for a term
through the next semi-annual earnings date of June 30 or December 31.
First Federal Savings does not originate second mortgage or home equity
loans, but does make loans to existing borrowers for the purpose of home
improvement. These home improvement loans typically involve a modification to
First Federal Savings' first mortgage. These loans are generally limited to 80%
or less of the appraised value of the property securing the loan based either
upon the old appraisal of the property or, if appropriate, a new appraisal of
the property. These loans are originated as fixed-rate loans and generally have
maximum terms of 15 years. First Federal Savings also makes "additional advance"
loans, which are advances up to the amount of the original first mortgage and
which must be repaid prior to the original loan maturity. Because First Federal
Savings' additional advance loans and loans for the purpose of home improvements
are secured by a first mortgage, rather than a second mortgage, First Federal
Savings classifies these loans as one- to four-family residential loans.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans,
First Federal Savings receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the mortgage loan
and are charged to the borrower in connection with the origination of the loan.
First Federal Savings generally charges loan origination fees equal to 2% of the
loan amount.
In accordance with Statement of Financial Accounting Standards No. 91,
which deals with the accounting for non-refundable fees and costs associated
with originating or acquiring loans, First Federal Savings' loan origination
fees and certain related direct loan origination costs are offset, and the
resulting net amount is deferred and amortized as interest income over the
contractual life of the related loans as an adjustment to the yield of such
loans. At December 31, 2002, First Federal Savings had $323,000 of net deferred
loan fees which will be amortized using the interest method.
LOAN MATURITY SCHEDULE. The following schedule illustrates the contractual
maturity and weighted average rates of First Federal Savings' total loan
portfolio at December 31, 2002. The schedule does not reflect the effects of
scheduled payments, possible prepayments or enforcement of due-on-sale clauses.
4
REAL ESTATE
----------------------------------------
ONE- TO
FOUR-FAMILY COMMERCIAL LOANS ON DEPOSITS TOTAL
------------------- ------------------ -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- --------- -------- -------- ---------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Due During Years Ending December 31,
- ------------------------------------
2003............................. $ 1,098 7.13 % $ -- -- % $ 73 8.40 $ 1,171 7.21 %
2004............................. 1,128 7.18 -- -- -- -- 1,128 7.18
2005............................. 167 8.55 -- -- -- -- 167 8.55
2006 and 2007.................... 667 7.98 -- -- -- -- 667 7.98
2008 to 2012..................... 5,727 7.55 69 8.50 -- -- 5,727 7.55
2013 to 2027..................... 31,563 7.93 -- -- -- -- 31,632 7.93
-------- --------- -------- --------- -------- --------- -------- --------
Total....................... $ 40,350 7.84 % $ 69 8.50 % $ 73 8.40 % $ 40,492 7.84 %
======== ========= ======== ========= ======== ========= ======== ========
The total amount of loans due after December 31, 2003 that have
predetermined interest rates is $39.3 million, while no loans due after such
date had floating or adjustable interest rates.
Scheduled contractual maturities of loans do not necessarily reflect the
actual expected term of First Federal Savings' portfolio. The average life of
mortgage loans is substantially less than their average contractual terms
because of prepayments. The average life of mortgage loans tends to increase
when current mortgage loans rates are higher than rates on existing mortgage
loans and, conversely, decrease when rates on existing mortgage loans are lower
than current mortgage loan rates, due to refinancing of fixed-rate loans at
lower rates. Under the latter circumstance, the weighted average yield on loans
decreases as higher yielding loans are repaid or refinanced at lower rates.
ORIGINATION OF LOANS. The lending activities of First Federal Savings are
subject to the written underwriting standards and loan origination procedures
established by First Federal Savings' Board of Directors and management. Loan
originations are obtained through a variety of sources, including referrals from
existing customers and real estate brokers. Written loan applications are taken
by First Federal Savings' staff, and Mitch Ashlock, First Federal Savings'
President and Chief Executive Officer, supervises the procurement of credit
reports, appraisals and other documentation involved with a loan. Property
valuations are performed by independent outside appraisers approved by First
Federal Savings' Board of Directors. First Federal Savings' loan approval
process is intended to assess the borrower's ability to repay the loan, the
viability of the loan and the adequacy of the value of the property that will
secure the loan. All loans are approved by First Federal Savings' Board of
Directors.
First Federal Savings holds all loans for long-term investment purposes. As
noted above, First Federal Savings intends to explore the purchase of adjustable
rate residential loans, provided such loans are secured by local properties and
are serviced by the originator of the loan or a third party.
5
The following table shows total loans originated and repaid during the
periods indicated. During 2002, First Federal Savings purchased $1.8 million of
fixed rate real estate (one- to four-family) loans which are included in the
table below. No loans were purchased or sold during 2001.
YEARS ENDED
DECEMBER 31,
--------------------------
2002 2001
---------- ----------
(IN THOUSANDS)
Originations by Type:
- ---------------------
Fixed rate:
- -----------
Real estate - one- to four-family................................ $ 16,042 $ 17,286
---------- ----------
Real estate - commercial......................................... -- 78
---------- ----------
Deposit loans.................................................... 119 232
---------- ----------
Total fixed-rate................................................. 16,161 17,596
---------- ----------
Adjustable Rate.................................................. -- --
---------- ----------
Total loans originated........................................... 16,161 17,596
---------- ----------
Total loans purchased............................................ 1,800 --
Sales and Repayments:
- ---------------------
Total loans sold................................................. -- --
Principal repayments............................................. 16,345 15,123
---------- ----------
Total reductions................................................. 16,345 15,123
(Increase) in other items, net (1)............................... (38) (90)
---------- ----------
Net increase............................................ $ 1,578 $ 2,383
========== ==========
- --------------------------
(1) Other items, net include the effects relating to loans in process, deferred
loan origination fees or costs, escrow funds held and the allowance for loan
losses.
LOAN COMMITMENTS. First Federal Savings issues commitments for mortgage
loans conditioned upon the occurrence of certain events. Commitments are made in
writing on specified terms and conditions and are honored for up to 180 days
from approval. At December 31, 2002, First Federal Savings had loan commitments
totaling $474,000. See Note 12 of the Notes to Financial Statements included in
the back of the annual report.
ASSET QUALITY. All loan payments are due on the first day of each month.
When a borrower fails to make a required loan payment, First Federal Savings
attempts to cure the deficiency by contacting the borrower and seeking the
payment. A late notice is mailed on the 16th day of the month and a second late
notice is mailed on the 23rd day of the month. In most cases, deficiencies are
cured promptly. If a delinquency continues beyond the 27th day of the month,
additional contact is made either through additional notices or other means and
First Federal Savings will attempt to work out a payment schedule. While First
Federal Savings generally prefers to work with borrowers to resolve the
problems, First Federal Savings will institute foreclosure or other proceedings,
as necessary, to minimize any potential loss.
First Federal Savings' Board of Directors is informed monthly of the
amounts of loans delinquent more than 30 days, all loans in foreclosure and all
foreclosed and repossessed property owned by First Federal Savings.
Loans are placed on non-accrual status when the collection of principal
and/or interest becomes doubtful. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is deducted from interest income.
Real estate acquired by First Federal Savings as a result of foreclosure or
by deed-in-lieu of foreclosure are classified as real estate owned until sold.
First Federal Savings had no properties owned at December 31, 2002, and two
properties owned at December 31, 2001, for a total of $218,000.
6
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at December 31, 2002, in dollar amount and as a percentage of
First Federal Savings' total loan portfolio. The dollar amounts shown equal the
total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due. At December 31, 2002, First Federal
Savings had no consumer loans, construction loans or land loans which were
delinquent 30 or more days.
LOANS DELINQUENT FOR:
--------------------------------------------------
60-89 DAYS 90 DAYS AND OVER TOTAL DELINQUENT LOANS
------------------------ ------------------------ ------------------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY
------ ------ -------- ------ ------ -------- ------ ------ --------
(DOLLARS IN THOUSANDS)
Real Estate:
One- to four-family ....... 3 $ 394 1.00% -- $ -- --% 3 $ 394 1.00%
Multi-family .............. -- -- -- -- -- -- -- -- --
Commercial ................ 1 13 .03 -- -- -- 1 13 .03
Construction or development -- -- -- -- -- -- -- -- --
Consumer .................... -- -- -- -- -- -- -- -- --
------ ------ -------- ------ ------ -------- ------ ------ --------
Total .................. 4 $ 407 1.01% -- $ -- --% 4 $ 407 1.01%
====== ====== ======== ====== ====== ======== ====== ====== ========
NON-PERFORMING ASSETS. The following table sets forth information regarding
non-performing loans and real estate owned by First Federal Savings at the dates
indicated. As of the dates indicated, First Federal Savings had no material
restructured loans within the meaning of SFAS No. 15.
AT
DECEMBER 31,
------------------------
2002 2001
--------- ---------
(DOLLARS IN THOUSANDS)
Non-accruing loans:......................................... $ -- $ --
Accruing loans delinquent more than 90 days:
One- to four-family....................................... -- 57
--------- ---------
Total.................................................. -- 57
--------- ---------
Foreclosed assets:.......................................... -- 218
--------- ---------
Total non-performing assets................................. $ -- $ 274
Total as a percentage of total assets....................... -- % .49 %
========= =========
For the year ended December 31, 2002, First Federal Savings had no
non-accruing loans, and therefore had no gross interest income which would have
been recorded had non-accruing loans been current in accordance with their
original terms. There was no interest income on such loans for the year ended
December 31, 2002.
OTHER LOANS OF CONCERN. In addition to the non-performing loans set forth
in the tables above, at December 31, 2002, there were no loans classified by
First Federal Savings, with respect to which known information about the
possible credit problems of the borrowers or the cash flows of the security
properties have caused management to have some doubts as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the non-performing asset categories.
CLASSIFIED ASSETS. Federal regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have
7
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a higher
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge-off such amount. General loss
allowances established to cover losses related to assets classified substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses do not qualify as regulatory
capital. Federal examiners may disagree with an insured institution's
classifications and amounts reserved.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for losses in an amount deemed
prudent by management. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss," it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge-off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the
regulatory authorities, who may order the establishment of additional general or
specific loss allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, First Federal Savings
reviews loans in its portfolio monthly to determine whether such assets require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at December 31, 2002, First Federal Savings
had classified none of its assets as substandard, none as doubtful and none as
loss. These loans have been considered by management in its analysis of First
Federal Savings' allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES. In originating loans, First Federal Savings
recognizes that losses will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan, general economic conditions and, in the
case of a secured loan, the quality of the security for the loan. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses charged to
operations. The provision for loan losses is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specified impaired
loans, and economic conditions.
At December 31, 2002, First Federal Savings had an allowance for loan
losses of $175,000. Although management believes that it uses the best
information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be significantly and adversely affected if circumstances differ
substantially from the assumptions used in making the determinations.
Furthermore, while First Federal Savings believes it has established its
existing allowance for loan losses in accordance with generally accepted
accounting principles, there can be no assurance that regulators, in reviewing
First Federal Savings' loan portfolio, will not request First Federal Savings to
increase significantly its allowance for loan losses. In addition, because
future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan losses
is adequate or that substantial increases will not be necessary should the
quality of any loans deteriorate as a result of the factors discussed above. Any
material increase in the allowance for loan losses may adversely affect First
Federal Savings' financial condition and results of operations.
First Federal Savings' management believes that it determines the size of
the allowance based on the best information available at the time, the allowance
will need to be adjusted as circumstances change and assumptions are updated.
Future adjustments to the allowance could significantly affect net income.
8
The following table sets forth the allocation for loan losses by category
for the periods indicated.
AT DECEMBER 31,
--------------------------------------------------------------------
2002 2001
---------------------------------- ------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
LOAN IN EACH LOAN IN EACH
AMOUNT OF AMOUNTS CATEGORY AMOUNT OF AMOUNTS CATEGORY
LOAN LOSS BY TO TOTAL LOAN LOSS BY TO TOTAL
ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS
---------- ---------- ---------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
Real estate--One- to four-family... $ 175 $ 40,349 100% $ 175 $ 38,671 100%
Real estate--commercial............ -- -- -- -- -- --
Deposit loans...................... -- -- -- -- -- --
Unallocated........................ -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- ---------
Total......................... $ 175 $ 40,349 100% $ 175 $ 38,671 100%
========== ========== ========== ========== =========== =========
The following table sets forth information with respect to First Federal
Savings' allowance for loan losses for the periods indicated.
YEARS ENDED
DECEMBER 31,
2002 2001
--------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.................................................. $ 175 $ 175
Charge-offs..................................................................... -- --
Recoveries...................................................................... -- --
Net charge-offs................................................................. -- --
Additions charged to operations................................................. -- --
--------- ---------
Balance at end of period........................................................ $ 175 $ 175
========= =========
Ratio of net charge-offs during the period to
average loans outstanding during the period................................... N/A N/A
Ratio of net charge-offs during the period to
average non-performing assets.................................................. N/A N/A
Ratio of allowance for loan losses to loans receivable, net, at end of period... .44% .46%
========= =========
Ratio of allowance for loan losses to
non-performing assets at end of period........................................ N/A 63.87%
========= =========
9
INVESTMENT ACTIVITIES
First Federal Savings is permitted under federal law to invest in various
types of liquid assets, including U.S. Government obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
Federal Home Loan Bank of Topeka, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Within certain
regulatory limits, First Federal Savings may also invest a portion of its assets
in commercial paper and corporate debt securities. Savings institutions like
First Federal Savings are also required to maintain an investment in FHLB stock.
First Federal Savings is required under federal regulations to maintain a
minimum amount of liquid assets. At December 31, 2002, First Federal Savings'
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 18.8%. See "Regulation" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that investments be
categorized as "held to maturity," "trading securities" or "available for sale,"
based on management's intent as to the ultimate disposition of each security.
Statement of Financial Accounting Standards No. 115 allows debt securities to be
classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings.
First Federal Savings does not currently use or maintain a trading account. Debt
and equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." These securities are
reported at fair value, and unrealized gains and losses on the securities are
excluded from earnings and reported, net of deferred taxes, as a separate
component of equity.
All of First Federal Savings' investment securities carry market risk
insofar as increases in market rates of interest may cause a decrease in their
market value. They also carry prepayment risk insofar as they may be called
prior to maturity in times of low market interest rates, so that First Federal
Savings may have to invest the funds at a lower interest rate. First Federal
Savings' investment policy does not permit engaging directly in hedging
activities or purchasing high risk mortgage derivative products. Investments are
made based on certain considerations, which include the interest rate, yield,
settlement date and maturity of the investment, First Federal Savings' liquidity
position, and anticipated cash needs and sources. The effect that the proposed
investment would have on First Federal Savings' credit and interest rate risk
and risk-based capital is also considered. First Federal Savings purchases
investment securities to provide necessary liquidity for day-to-day operations.
First Federal Savings also purchases investment securities when investable funds
exceed loan demand.
Generally, the investment policy of First Federal Savings, as established
by the Board of Directors, is to invest funds among various categories of
investments and maturities based upon First Federal Savings' liquidity needs,
asset/liability management policies, investment quality, marketability and
performance objectives.
MORTGAGE-BACKED SECURITIES. First Federal Savings has the legal authority
to invest in mortgage-backed securities to supplement residential loan
production, and First Federal Savings' investment policy as adopted by the Board
permits investments in certain mortgage-backed securities. In recent years,
however, First Federal Savings has chosen not to purchase any mortgage-backed
securities.
OTHER INVESTMENTS. At December 31, 2002, First Federal Savings' investment
securities consisted of U.S. government/federal agency securities, FHLB stock,
Freddie Mac stock and other interest-earning assets. All of the U.S.
government/federal agency securities are held to maturity. The Freddie Mac stock
is accounted for as available for sale. The U.S. government/federal agency
securities consisted primarily of Fannie Mae and Freddie Mac bonds and Federal
Home Loan Bank bonds, with fixed rates of interest.
10
The following table sets forth the composition of First Federal Savings'
investment securities, net of premiums and discounts, at the dates indicated.
AT DECEMBER 31,
--------------------------------------------
2002 2001
------------------- -------------------
BOOK % OF BOOK % OF
VALUE TOTAL VALUE TOTAL
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Investment securities held to maturity:
U.S. government/federal Agency securities $ 2,014 22.10 % $ 5,500 34.32 %
Investment securities available for sale:
Freddie Mac stock......................... 1,819 19.96 1,848 11.53
FHLB stock.................................. 380 4.17 380 2.37
-------- -------- -------- --------
Total investment securities
and FHLB stock........................ 4,213 46.23 7,728 48.22
-------- -------- -------- --------
Average remaining life of
investment securities (1)................. 13 yrs 13 yrs
Other interest-earning assets:
Interest-bearing deposits with banks...... 4,900 53.77 8,300 51.78
-------- -------- -------- --------
Total.................................. $ 9,113 100.00 % $ 16,028 100.00 %
======== ======== ======== ========
- ---------------------
(1) Average remaining life is subject to call provisions on all U.S.
government/federal agency securities and excludes available-for-sale
securities.
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for
First Federal Savings' investment securities excluding FHLB stock and Freddie
Mac stock at December 31, 2002.
AT DECEMBER 31, 2002
-----------------------------------------------------------------
LESS
THAN 1 1 TO 5 5 TO 10 OVER 10 TOTAL INVESTMENT
YEAR YEARS YEARS YEARS SECURITIES
-------- -------- --------- --------- --------------------
BOOK BOOK BOOK BOOK BOOK MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
U.S. government/federal agency securities...... $ -- $ -- $ 1,000 $ 1,014 $ 2,014 $ 1,867
Weighted average yield......................... -- % -- % 6.05 % 7.00 % 6.53 %
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of First Federal Savings' funds
for lending and other investment purposes. In addition to deposits, First
Federal Savings derives funds primarily from principal and interest payments on
loans. Loan repayments are a relatively stable source of funds, while deposit
inflows and outflows are significantly influenced by general interest rates and
money market conditions. Borrowings may also be used on a short- term basis to
compensate for reductions in the availability of funds from other sources and
may be used on a longer-term basis for general business purposes.
DEPOSITS. First Federal Savings' deposits are attracted principally from
within its primary market area. Deposit account terms vary, with the principal
differences being the minimum balance required, the time periods the funds must
remain on deposit and the interest rate.
11
During the first quarter of 2001, First Federal Savings began accepting
additional brokered certificates of deposit from out-of-state sources for the
purpose of raising funds during periods of strong loan demand. At December 31,
2002, First Federal Savings had approximately $7.3 million of brokered
certificates of deposit.
First Federal Savings' deposit products include non-interest bearing demand
accounts, passbook accounts, money market accounts and term certificate
accounts. Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by First Federal Savings on a periodic basis.
Management determines the rates and terms based on rates paid by competitors,
First Federal Savings' needs for funds or liquidity, growth goals and federal
and state regulations.
SAVINGS PORTFOLIO. The following table sets forth the dollar amount of
savings deposits in the various types of deposit programs offered by First
Federal Savings as of the dates indicated.
AT DECEMBER 31,
--------------------------------------------
2002 2001
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Transactions and Savings Deposits:
- ----------------------------------
Non-interest bearing Accounts...................... $ -- -- % $ 167 0.44 %
Passbook Accounts.................................. 3,172 8.98 4,108 10.90
Money Market Accounts.............................. 1,730 4.90 1,861 4.94
-------- --------- -------- ---------
Total Non-Certificates............................. 4,902 13.88 6,136 16.28
-------- --------- -------- ---------
Certificates:
- -------------
1.00 - 5.99%....................................... 24,003 67.94 21,274 56.47
6.00 - 7.99%....................................... 6,423 18.18 10,261 27.25
-------- --------- -------- ---------
Total Certificates................................. 30,426 86.12 31,535 83.72
-------- --------- -------- ---------
Total Deposits..................................... $ 35,328 100.00 % $ 37,671 100.00 %
======== ========= ======== =========
DEPOSIT ACTIVITY. The following table sets forth the deposit activities of
First Federal Savings for the periods indicated:
YEARS ENDED DECEMBER 31,
-------------------------
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Opening balance.................................... $ 37,671 $ 28,504
Deposits........................................... 21,535 23,330
Withdrawals........................................ 23,878 14,163
---------- ----------
Ending balance..................................... $ 35,328 $ 37,671
========== ==========
Net increase (decrease)............................ $ (2,343) $ 9,167
========== ==========
Percent increase (decrease)........................ (6.22)% 32.16%
========== ==========
12
TIME DEPOSIT MATURITY SCHEDULE. The following table shows rate and maturity
information for First Federal Savings' certificates of deposit at December 31,
2002.
1.00- 6.00- PERCENT
5.99% 7.99% TOTAL OF TOTAL
-------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Certificate accounts maturing in quarter ending:
March 31, 2003................................................... $ 3,533 $ 3,073 $ 6,606 21.71%
June 30, 2003................................................... 2,337 851 3,188 10.48
September 30, 2003............................................... 7,401 1,589 8,990 29.55
December 31, 2003............................................... 1,823 -- 1,823 5.99
March 31, 2004................................................... 2,449 -- 2,449 8.05
June 30, 2004................................................... 1,621 -- 1,621 5.33
September 30, 2004............................................... 617 -- 617 2.03
December 31, 2004............................................... 499 -- 499 1.64
March 31, 2005................................................... 440 1 441 1.45
June 30, 2005................................................... 456 50 506 1.66
September 30, 2005............................................... -- 138 138 .45
December 31, 2005................................................ -- 199 199 .65
Thereafter ..................................................... 2,827 522 3,349 11.01
-------- ------- -------- -------
Total ....................................................... $ 24,003 $ 6,423 $ 30,426 100.00 %
======== ======= ======== =======
Percent of Total............................................. 78.89% 21.11% 100.00%
======== ======= ========
The following table indicates the amount of First Federal Savings' jumbo
certificates of deposit and other certificates of deposit by time remaining
until maturity at December 31, 2002.
MATURITY
----------------------------------------
OVER OVER
3 MONTHS 3 TO 6 6 TO 12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS)
Certificates of deposit less than $100,000................... $ 4,689 $ 2,728 $ 9,304 $ 8,095 $ 24,816
Certificates of deposit of $100,000 or more.................. 1,917 460 1,509 1,724 5,610
-------- -------- -------- -------- --------
Total certificates of deposit................................ $ 6,606 $ 3,188 $ 10,813 $ 9,819 $ 30,426
======== ======== ======== ======== ========
13
BORROWINGS. First Federal Savings may obtain advances from the FHLB of
Topeka upon the security of the common stock it owns in that bank and certain of
its residential mortgage loans and mortgage-backed securities, provided certain
standards related to creditworthiness have been met. These advances are made
pursuant to several credit programs, each of which has its own interest rate and
range of maturities. FHLB advances are generally available to meet seasonal and
other withdrawals of deposit accounts and to permit increased lending. See
"Regulation--Federal Regulation of Savings Associations--Federal Home Loan Bank
System."
At December 31, 2002, First Federal Savings had available credit lines of
approximately $18.3 million from the FHLB of Topeka, contingent upon additional
purchase of FHLB stock. First Federal Savings had $2.0 million of FHLB advances
outstanding at December 31, 2002.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances, for the periods indicated.
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
-------- --------
(IN THOUSANDS)
Maximum Balance:
- ----------------
FHLB advances......................................... $ 5,000 $ 6,600
Average Balance:
- ----------------
FHLB advances......................................... 3,816 5,621
The following table sets forth certain information as to First Federal
Savings' FHLB advances at the dates indicated.
AT DECEMBER 31,
-----------------------
2002 2001
-------- --------
(DOLLARS IN THOUSANDS)
FHLB advances........................................... $ 2,000 $ 5,000
Weighted average interest rate of FHLB advances......... 5.46 % 5.88 %
EMPLOYEES
At December 31, 2002, First Federal Savings had a total of 4 full-time and
no part-time employees. First Federal Savings' employees are not represented by
any collective bargaining group. Management considers its employee relations to
be good.
SERVICE CORPORATION ACTIVITIES
As a federally chartered savings association, First Federal Savings is
permitted by OTS regulations to invest up to 2% of its assets in the stock of,
or loans to, service corporation subsidiaries. First Federal Savings may invest
an additional 1% of its assets in service corporations where such additional
funds are used for inner-city or community development purposes and up to 50% of
its total capital in conforming loans to service corporations in which it owns
more than 10% of the capital stock. In addition to investments in service
corporations, federal associations are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities in which a federal
association may engage. At December 31, 2002, First Federal Savings had no
subsidiaries.
FIRST FEDERAL SAVINGS' MARKET AREA
First Federal Savings considers its primary market area to consist of
Johnson County, Kansas, with a concentration of business activity in the city of
Olathe, which is the county seat, and the immediate surrounding area. Johnson
County is part of the Kansas City metropolitan statistical area. Olathe and the
surrounding areas have experienced increases in population as the Kansas City
outer suburbs have expanded. Since 1990, Johnson County has experienced
significant increases in population. The Johnson County population has increased
from approximately
14
355,000 in 1990 to approximately 480,000 in 2002. Employment in Johnson County
is generally diversified, including employment in services, wholesale and retail
trade and government.
COMPETITION
First Federal Savings faces significant competition both in attracting
deposits and in making loans. Its most direct competition for deposits has come
historically from commercial banks, credit unions and other savings institutions
located in its primary market area, including many large financial institutions
which have greater financial and marketing resources available to them. In
addition, First Federal Savings faces significant competition for investors'
funds from short-term money market securities, mutual funds and other corporate
and government securities. First Federal Savings does not rely upon any
individual group or entity for a material portion of its deposits. First Federal
Savings' ability to attract and retain deposits depends on its ability to
generally provide a rate of return, liquidity and risk comparable to that
offered by competing investment opportunities.
First Federal Savings' competition for real estate loans comes principally
from mortgage banking companies, commercial banks, other savings institutions
and credit unions. First Federal Savings competes for loan originations
primarily through the interest rates and loan fees it charges, and the
efficiency and quality of services it provides borrowers. Factors which affect
competition include general and local economic conditions, current interest rate
levels and volatility in the mortgage markets. Competition may increase as a
result of the continuing reduction of restrictions on the interstate operations
of financial institutions and the anticipated slowing of refinancing activity.
REGULATION
GENERAL
First Federal Savings is regulated, examined and supervised by the OTS, as
its chartering agency, and the FDIC, as the insurer of its deposits. The
activities of federal savings institutions are governed by the Home Owners' Loan
Act, as amended and, in certain respects, the Federal Deposit Insurance Act and
the regulations issued by the OTS and the FDIC to implement these statutes.
These laws and regulations delineate the nature and extent of the activities in
which federal savings associations may engage. Lending activities and other
investments must comply with various statutory and regulatory capital
requirements. In addition, First Federal Savings' relationship with its
depositors and borrowers is also regulated to a great extent, especially in
matters such as the ownership of deposit accounts and the form and content of
First Federal Savings' mortgage documents. First Federal Savings must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to review
First Federal Savings' compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in policies, whether by the OTS, the FDIC or Congress, could have a
material adverse impact on First Federal Savings and its operations.
As the savings and loan holding company of First Federal Savings, First
Federal of Olathe Bancorp also is subject to federal regulation and oversight.
The purpose of the regulation of First Federal of Olathe Bancorp and other
holding companies is to protect subsidiary savings and loan associations.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of the
Treasury. It generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank System,
consisting of 12 banks, is under the jurisdiction of the Federal Housing Finance
Board. First Federal Savings is a member of the Federal Home Loan Bank of
Topeka. First Federal Savings holds shares of capital stock in the Federal Home
Loan Bank of Topeka in an
15
amount equal to the greater of 1.0% of the aggregate outstanding principal
amount of residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 1/20 of its borrowings from the
Federal Home Loan Bank of Topeka. First Federal Savings holds an investment in
Federal Home Loan Bank of Topeka stock of $380,000 at December 31, 2002. Among
other benefits, the Federal Home Loan Bank of Topeka provides a central credit
facility primarily for member institutions.
INSURANCE OF DEPOSIT ACCOUNTS. The FDIC has adopted a risk-based deposit
insurance assessment system. The FDIC assigns an institution to one of three
capital categories based on the institution's financial information, as of the
reporting period ending seven months before the assessment period, and one of
three supervisory subcategories within each capital group. The three capital
categories are well capitalized, adequately capitalized and undercapitalized.
The supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information which the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. The FDIC is authorized to raise
the assessment rates. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If this type of action is
taken by the FDIC, it could have an adverse effect on the earnings of the
Association.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC.
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution is
required to maintain liquid assets in an amount that would ensure the
institution's safe and sound operation. The Association's liquidity ratio at
December 31, 2002 was 18.8%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
PROMPT CORRECTIVE ACTION. Under the OTS Prompt Corrective Action
regulations, the OTS is required to take supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's level of capital. Generally, a savings institution that has total
risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 core
capital ratio that is less than 4.0% is considered to be undercapitalized. A
savings institution that has total risk-based capital less than 6.0%, a Tier 1
core risk-based capital ratio of less than 3.0% or a leverage ratio that is less
than 3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Generally, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date
an institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
At December 31, 2002, First Federal Savings was categorized as "well
capitalized" under the prompt corrective action regulations.
STANDARDS FOR SAFETY AND SOUNDNESS. Federal law requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under the Federal law. The
guidelines set forth the safety and soundness standards that the federal
16
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The guidelines address internal
controls and information systems; internal audit systems; credit underwriting;
loan documentation; interest rate risk exposure; asset growth; and compensation,
fees and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to
submit a compliance plan.
QUALIFIED THRIFT LENDER TEST. As a federal savings institution, the
Association is required to satisfy a qualified thrift lender test whereby it
must maintain at least 65% of its "portfolio assets" in "qualified thrift
investments" consisting primarily of residential mortgages and related
investments, including mortgage-backed and related securities. "Portfolio
assets" generally means total assets less specified liquid assets up to 20% of
total assets, goodwill and other intangible assets, and the value of property
used to conduct business. A savings association that fails the qualified thrift
lender test must either convert to a bank charter or operate under specified
restrictions. As of December 31, 2002, the Association met the qualified thrift
lender test.
CAPITAL REQUIREMENTS. OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
rating system) and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMELS financial institution rating system), and,
together with the risk-based capital standard itself, a 4% Tier 1 risk-based
capital standard. OTS regulations also require that, in meeting the tangible,
leverage and risk-based capital standards, institutions must generally deduct
investments in and loans to subsidiaries engaged in activities as principal that
are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core capital is defined as common
stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk capital charge.
At December 31, 2002, First Federal Savings had tangible capital of $11.8
million, or 23.5% of adjusted total assets, which is approximately $11.1 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date. At December 31, 2002, First Federal Savings had core capital equal to
$11.8 million, or 23.5% of adjusted total assets, which is $10.3 million above
the minimum leverage ratio requirement of 4% as in effect on that date. At
December 31, 2002, First Federal Savings had total risk based capital of $12.4
million (including approximately $11.8 million in core capital and $0.6 million
in qualifying supplementary capital) and risk-weighted assets of $11.8 million
(with no converted off-balance sheet assets); or total capital of 51.7% of
risk-weighted assets. This amount was $10.4 million above the 8% requirement in
effect on that date.
CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings institution to make
capital distributions. A savings institution must file an application for OTS
approval of the capital distribution if either (1) the
17
total capital distributions for the applicable calendar year exceed the sum of
the institution's net income for that year to date plus the institution's
retained net income for the preceding two years, (2) the institution would not
be at least adequately capitalized following the distribution, (3) the
distribution would violate any applicable statute, regulation, agreement or
OTS-imposed condition, or (4) the institution is not eligible for expedited
treatment of its filings. If an application is not required to be filed, savings
institutions which are a subsidiary of a holding company, as well as certain
other institutions, must still file a notice with the OTS at least 30 days
before the board of directors declares a dividend or approves a capital
distribution.
LOANS TO ONE BORROWER. Savings institutions are generally required to
follow the national bank limit on loans to one borrower. Generally, this limit
is 15% of its unimpaired capital and surplus, plus an additional 10% of
unimpaired capital and surplus, if the loan is secured by readily marketable
collateral, which is defined to include certain financial instruments and
bullion. The OTS by regulation has amended the loans to one borrower rule to
permit savings associations meeting certain requirements, including capital
requirements, to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. See "Business of First Federal Savings--Lending Activities" for
further information.
ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. A savings association
may establish operating subsidiaries to engage in any activity that the savings
association may conduct directly and may establish service corporation
subsidiaries to engage in certain pre-approved activities or, with approval of
the OTS, other activities reasonably related to the activities of financial
institutions. When a savings association establishes or acquires a subsidiary or
elects to conduct any new activity through a subsidiary that the association
controls, the savings association must notify the FDIC and the OTS 30 days in
advance and provide the information each agency may, by regulation, require.
Savings associations also must conduct the activities of subsidiaries in
accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices. Based upon that determination, the
FDIC or the OTS has the authority to order the savings association to divest
itself of control of the subsidiary. The FDIC also may determine by regulation
or order that any specific activity poses a serious threat to the Savings
Association Insurance Fund. If so, it may require that no Savings Association
Insurance Fund member engage in that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the Home
Owners Loan Act. Generally, Sections 23A and 23B limit the extent to which the
insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of the institution's
capital and surplus and place an aggregate limit on all transactions with
affiliates to an amount equal to 20% of capital and surplus, and require that
all transactions be on terms substantially the same, or at least as favorable to
the institution or subsidiary, as those provided to a non-affiliate. The
term"covered transaction" includes the making of loans, the purchase of assets,
the issuance of a guarantee and similar types of transactions.
Any loan or extension of credit by First Federal Savings to an affiliate
must be secured by collateral in accordance with Section 23A.
Three additional rules apply to savings associations. First, a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies. Second, a savings association may not purchase or invest insecurities
issued by an affiliate, other than securities of a subsidiary. Third, the OTS
may, for reasons of safety and soundness, impose more stringent restrictions on
savings associations but may not exempt transactions from or otherwise abridge
Section 23A or 23B. Exemptions from Section 23A or 23B may be granted only by
the Federal Reserve, as is currently the case with respect to all FDIC-insured
banks.
First Federal Savings' authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by those persons,
is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
18
and Regulation O thereunder. Among other things, these regulations require that
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
First Federal Savings may make to those persons based, in part, on First Federal
Savings' capital position, and requires certain board approval procedures to be
followed. The OTS regulations, with certain minor variances, apply Regulation O
to savings institutions.
COMMUNITY REINVESTMENT ACT. Savings associations are required to follow the
provisions of the Community Reinvestment Act of 1977, which requires the
appropriate federal bank regulatory agency, in connection with its regular
examination of a savings association, to assess the savings association's record
in meeting the credit needs of the community serviced by the savings
associations, including low and moderate income neighborhoods. The regulatory
agency's assessment of the savings association's record is made available to the
public. Further, an assessment is required of any savings associations which has
applied, among other things, to establish a new branch office that will accept
deposits, relocate an existing office or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution. First Federal Savings received a "satisfactory" rating as a result
of its most recent examination.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. Federal law and regulation generally prohibit
a savings and loan holding company, without prior OTS approval, from acquiring
more than 5% of the voting stock of any other savings association or savings and
loan holding company or controlling the assets thereof. They also prohibit,
among other things, any director or officer of a savings and loan holding
company, or any individual who owns or controls more than 25% of the voting
shares of First Federal of Olathe Bancorp, Inc., from acquiring control of any
savings association not a subsidiary of a savings and loan holding company,
unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. First Federal of Olathe Bancorp is a unitary
savings and loan holding company under federal law because First Federal Savings
is its only insured subsidiary. Formerly, a unitary savings and loan holding
company was not restricted as to the types of business activities in which it
could engage, provided that its subsidiary savings association continued to be a
qualified thrift lender. Recent legislation, however, restricts unitary saving
and loan holding companies not existing or applied for before May 4, 1999 to
activities permissible for a financial holding company as defined under the
legislation, including insurance and securities activities, and those permitted
for a multiple savings and loan holding company as described below. In view of
the holding company's size and business plan, the Board of Directors of First
Federal of Olathe Bancorp does not believe that the recent legislation will have
a material impact on the holding company. Upon any non-supervisory acquisition
by First Federal of Olathe Bancorp of another savings association as a separate
subsidiary, First Federal of Olathe Bancorp would become a multiple savings and
loan holding company and would have extensive limitations on the types of
business activities in which it could engage. The Home Owner's Loan Act limits
the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for the
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act,
provided the prior approval of the Office of Thrift Supervision is obtained, and
to other activities authorized by Office of Thrift Supervision regulation.
Multiple savings and loan holding companies are generally prohibited from
acquiring or retaining more than 5% of a non-subsidiary company engaged in
activities other than those permitted by the Home Owners. Loan Act.
The activities authorized by the Federal Reserve Board as permissible for
bank holding companies also must be approved by the OTS prior to being engaged
in by a multiple savings and loan holding company.
QUALIFIED THRIFT LENDER TEST. Federal law provides that any savings and
loan holding company that controls a savings association that fails the
qualified thrift lender test, as explained under "--Federal Regulation of
Savings Associations--Qualified Thrift Lender Test," must, within one year after
the date on which the association ceases to be a qualified thrift lender,
register as and be deemed a bank holding company under all applicable laws and
regulations.
19
FEDERAL SECURITIES LAW
The stock of First Federal of Olathe Bancorp is registered with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). First Federal of Olathe Bancorp is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
First Federal of Olathe Bancorp stock held by persons who are affiliates
(generally officers, directors and principal stockholders) of First Federal of
Olathe Bancorp may not be resold without registration or unless sold in
accordance with certain resale restrictions. If First Federal of Olathe Bancorp
meets specified current public information requirements, each affiliate of First
Federal of Olathe Bancorp is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At December
31, 2002 First Federal Savings was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "- Liquidity Requirements."
Savings and loan associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
THE USA PATRIOT ACT
In response to the events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls; (ii) specific designation of an
anti-money laundering compliance officer; (iii) ongoing employee
training programs; and (iv) an independent audit function to test the
anti-money laundering program.
o Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations that provide for minimum standards with respect to
customer identification at the time new accounts are opened.
o Section 312 of the Act requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondence accounts in the United States for non-United States
persons or their representatives (including foreign individuals
visiting the United States) to establish appropriate, specific, and,
where necessary, enhanced due diligence policies, procedures, and
controls designed to detect and report money laundering.
20
o Effective December 25, 2001, financial institutions are prohibited
from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do
not have a physical presence in any country), and will be subject to
certain record keeping obligations with respect to correspondent
accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These proposed and interim
regulations would require financial institutions to adopt the policies and
procedures contemplated by the USA PATRIOT Act.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of
2002 implementing legislative reforms intended to address corporate and
accounting irregularities. In addition to the establishment of a new accounting
oversight board which will enforce auditing, quality control and independence
standards and will be funded by fees from all publicly traded companies, the Act
restricts accounting companies from providing both auditing and consulting
services. To ensure auditor independence, any non-audit services being provided
to an audit client will require preapproval by the company's audit committee
members. In addition, the audit partners must be rotated. The Act requires chief
executive officers and chief financial officers, or their equivalent, to certify
to the accuracy of periodic reports filed with the SEC, subject to civil and
criminal penalties if they knowingly or willfully violate this certification
requirement. In addition, under the Act, counsel will be required to report
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company to its chief executive officer or its chief legal officer,
and, if such officer does not appropriately respond, to report such evidence to
the audit committee or other similar committee of the board of directors or the
board itself.
The legislation accelerates the time frame for disclosures by public
companies, as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in ownership in a company's securities
within two business days of the change. The period during which certain types of
law suits can be instituted against a company or its officers has been extended,
and bonuses issued to top executives prior to restatement of a company's
financial statements are now subject to disgorgement if such restatement was due
to corporate misconduct. Executives are also prohibited from insider trading
during retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, civil and criminal penalties have been enhanced.
The Act also increases the oversight of, and codifies certain requirements
relating to, audit committees of public companies and how they interact with the
company's "registered public accounting firm" (RPAF). Audit Committee members
must be independent and are barred from accepting consulting, advisory or other
compensatory fees from the issuer. In addition, companies must disclose whether
at least one member of the committee is a "financial expert" (as such term will
be defined by the SEC) and if not, why not. Under the Act, a RPAF is prohibited
from performing statutorily mandated audit services for a company if such
company's chief executive officer, chief financial officer, comptroller, chief
accounting officer or any person serving in equivalent positions has been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. The Act also prohibits any
officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent public or certified accountant engaged in the audit
of the company's financial statements for the purpose of rendering the financial
statement's materially misleading. In accordance with the Act, the SEC proposed
rules requiring inclusion of an internal control report and assessment by
management in the annual report to shareholders. The Act requires the RPAF that
issues the audit report to attest to and report on management's assessment of
the company's internal controls. In addition, the Act requires that each
financial report required to be prepared in accordance with (or reconciled to)
generally accepted accounting principles and filed with the SEC reflect all
material correcting adjustments that are identified by a RPAF in accordance with
generally accepted accounting principles and the rules and regulations of the
SEC.
21
TAXATION
FEDERAL TAXATION
First Federal of Olathe Bancorp and First Federal Savings report their
income using the accrual method of accounting and will be taxed under federal
income tax laws in the same manner as other corporations with some exceptions,
including particularly First Federal Savings' reserve for bad debts discussed
below. First Federal of Olathe Bancorp's and First Federal Savings' tax years
end on December 31 of each year. The following discussion of tax matters is
intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to First Federal Savings or First
Federal of Olathe Bancorp.
BAD DEBT RESERVE. Historically, savings institutions such as First Federal
Savings which met certain definitional tests primarily related to their assets
and the nature of their business were permitted to establish a reserve for bad
debts and to make annual additions thereto, which may have been deducted in
arriving at their taxable income. First Federal Savings' deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on First
Federal Savings' actual loss experience, or a percentage equal to 8% of First
Federal Savings' taxable income, computed with certain modifications and reduced
by the amount of any permitted additions to the non-qualifying reserve. Due to
First Federal Savings' loss experience, First Federal Savings generally
recognized a bad debt deduction equal to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the 8% of taxable income method for deducting additions to the tax
bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also required that all institutions recapture all or a portion
of their bad debt reserves added since the base year, defined as the last
taxable year beginning before January 1, 1988. First Federal Savings has no
post-1987 reserves that would be recaptured. For taxable years beginning after
December 31, 1995, First Federal Savings' bad debt deduction will be determined
under the experience method using a formula based on actual bad debt experience
over a period of years. The unrecaptured base year reserves will not be
recaptured as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad debt reserves continue to
be treated under the provisions of present law referred to below that require
recapture in the case of certain excess distributions to shareholders.
DISTRIBUTIONS. To the extent that First Federal Savings makes "nondividend
distributions" to First Federal of Olathe Bancorp, the distributions will be
considered to result in distributions from the balance of its bad debt reserve
as of December 31, 1987, or a lesser amount if First Federal Savings' loan
portfolio decreased since December 31, 1987, and then from the supplemental
reserve for losses on loans. An amount based on the supplemental reserve for
loan losses will be included in First Federal Savings' taxable income.
Nondividend distributions include distributions in excess of First Federal
Savings' current and accumulated earnings and profits, distributions in
redemption of stock and distributions in partial or complete liquidation.
However, dividends paid out of First Federal Savings' current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from First Federal Savings' bad debt
reserve. The amount of additional taxable income created from an excess
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, First Federal
Savings makes a "nondividend distribution," then approximately one and one-half
times the amount based on the supplemental reserve for loan losses would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate federal income tax rate. See "Regulation" for limits on the payment of
dividends by First Federal Savings. First Federal Savings does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes a tax
on alternative minimum taxable income at a rate of 20%. The excess of the tax
bad debt reserve deduction using the percentage of taxable income method over
the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the alternative minimum
taxable income. In addition, only 90% of alternative minimum taxable income can
be offset by net operating loss carryovers. Alternative minimum taxable income
is increased by an amount equal to 75% of the amount by which First Federal
Savings' adjusted current earnings exceeds its alternative minimum taxable
income determined without regard to this preference and prior to reduction for
net operating losses. For taxable years beginning after December 31, 1986, and
before January 1, 1996, an environmental tax of 0.12% of the excess of
alternative minimum taxable income (with certain modification) over $2.0 million
is
22
imposed on corporations, including First Federal Savings, whether or not an
alternative minimum tax is paid.
DIVIDENDS-RECEIVED DEDUCTION. First Federal of Olathe Bancorp may exclude
from its income 100% of dividends received from First Federal Savings as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which First Federal of Olathe Bancorp and
First Federal Savings will not file a consolidated tax return, except that if
First Federal of Olathe Bancorp or First Federal Savings owns more than 20% of
the stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
AUDITS. The IRS has not audited First Federal Savings' federal income tax
returns for the past five years.
KANSAS TAXATION
First Federal Savings files Kansas income tax returns. The State of Kansas
also imposes a privilege tax on savings institutions. Savings institutions are
presently taxed at a rate of up to 4.5% of net income, which is calculated based
on federal taxable income, subject to certain adjustments. If First Federal of
Olathe Bancorp generates any taxable income, it could be taxed up to the maximum
Kansas corporate rate of 7.35%.
First Federal Savings' state tax returns have not been audited by the State
of Kansas during the past five years.
EXECUTIVE OFFICERS OF FIRST FEDERAL SAVINGS AND FIRST FEDERAL OF OLATHE BANCORP
WHO ARE NOT DIRECTORS
None.
ITEM 2. DESCRIPTION OF PROPERTY
At December 31, 2002, First Federal Savings conducted its business from its
headquarters and sole office located at 100 East Park, Olathe, Kansas. First
Federal Savings' main office is leased, with the lease term expiring in 2004.
The estimated net book value of First Federal Savings' leasehold improvements,
and furniture and equipment at December 31, 2002 was approximately $2,250.
First Federal Savings believes that its current facilities are adequate to
meet the present needs of First Federal Savings and its holding company.
However, if First Federal Savings determines to expand its staff, First Federal
Savings may need to obtain new facilities or expand its existing facility.
ITEM 3. LEGAL PROCEEDINGS
First Federal Savings is involved, from time to time, as plaintiff or
defendant in various legal actions arising in the normal course of its
businesses. At December 31, 2002, First Federal Savings was not involved in any
legal proceedings that it believes would have a material adverse effect on the
financial condition or operations of First Federal Savings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
Page 41 of the attached 2002 Annual Report to Shareholders is herein
incorporated by reference.
23
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Pages 4 to 13 of the attached 2002 Annual Report to Shareholders are herein
incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS
Pages 14 to 40 of the attached 2002 Annual Report to Shareholders are
herein incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning Directors of the Registrant is incorporated herein
by reference from First Federal of Olathe Bancorp's definitive Proxy Statement
for the Annual Meeting of Shareholders scheduled to be held on April 25, 2003.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from First Federal of Olathe Bancorp's definitive Proxy Statement for
the Annual Meeting of Shareholders scheduled to be held on April 25, 2003.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and
management and related stockholder matters is incorporated herein by reference
from First Federal of Olathe Bancorp's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on April 25, 2003.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and transactions is
incorporated herein by reference from First Federal of Olathe Bancorp's
definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to
be held on April 25, 2003.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS:
The following information appearing in the Registrant's Annual Report
to Shareholders for the year ended December 31, 2002, is incorporated by
reference in this Form 10-KSB Annual Report as Exhibit 13.
Page in
Annual
Annual Report Section Report
--------------------- ------
Report of Independent Auditors...................................................................... 14
Consolidated Balance Sheets at December 31, 2002 and 2001........................................... 15
Consolidated Statements of Income for the Years ended December 31, 2002 and 2001.................... 17
Consolidated Statements of Changes in Stockholders' Equity for the Years ended
December 31, 2002 and 2001....................................................................... 18
Consolidated Statements of Cash Flows for the Years ended December 31, 2002 and 2001................ 19
Notes to Consolidated Financial Statements.......................................................... 20
24
(a)(2) FINANCIAL STATEMENT SCHEDULES - All financial statement
schedules have been omitted as the information is either inapplicable or not
required under the related instructions.
(a)(3) EXHIBITS - The following exhibits are either filed or attached
as part of this report or are incorporated herein by reference.
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
---------- -------------------------------------------------- ---------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3.1 Articles of Incorporation *
3.2 Bylaws *
4 Instruments defining the rights of *
security holders, including indentures
9 Voting trust agreement None
10.1 Proposed Stock Option Plan **
10.2 Proposed Recognition and Retention Plan **
10.3 Form of Employment Agreement for Mitch Ashlock *
10.4 Employee Stock Ownership Plan *
11 Statement re: computation of per share earnings None
12 Statement re: computation or ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountant None
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters None
submitted to vote of security holders
23 Consent of experts and counsel None
24 Power of Attorney Not Required
28 Information from reports furnished to None
State insurance regulatory authorities
99 Certification of Chief Executive Officer and Chief 99
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
25
- -----------------
*Filed on December 16, 1999, as exhibits to the Registrant's Form SB-2
registration statement (Registration No. 333-92929), pursuant to the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-B.
**Filed on March 30, 2001, as exhibits to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 2000 (File No. 0-30680).
(b) Reports on Form 8-K - No Form 8-K was filed during the last quarter
of the fiscal year covered by this Form 10-KSB.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to us (or our consolidated subsidiaries) required to be included in our
periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST FEDERAL OF OLATHE BANCORP, INC.
Date: March 28, 2003 By: /s/ Mitch Ashlock
----------------------------------------
Mitch Ashlock, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Mitch Ashlock By: /s/ Donald K. Ashlock
-------------------------------------- ------------------------------------------
Mitch Ashlock, Chief Executive Donald K. Ashlock, Chairman of the Board
Officer and Director
(Principal Executive, Financial and
Accounting Officer)
Date: March 28, 2003 Date: March 28, 2003
By: /s/ John M. Bowen By: /s/ Carl R. Palmer
-------------------------------------- ------------------------------------------
John M. Bowen, Director Carl R. Palmer, Director
Date: March 28, 2003 Date: March 28, 2003
By: /s/ Marvin E. Wollen
--------------------------------------
Marvin E. Wollen, Director
Date: March 28, 2003
27
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mitch Ashlock, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of First Federal of
Olathe Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
March 28, 2003 /s/ Mitch Ashlock
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Date Mitch Ashlock
President and Chief Executive Officer
28
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mitch Ashlock, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of First Federal of
Olathe Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
March 28, 2003 /s/ Mitch Ashlock
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Date Mitch Ashlock
Chief Financial Officer
29
INDEX TO EXHIBITS
Exhibit 13 2002 Annual Report to Stockholders
Exhibit 21 Subsidiaries of the Registrant
Exhibit 99 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002