10-Q 1 g10q-25481.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ------------------------------ [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the transition period from to ------------- -------------- Commission file number 0-30680 -------------------------------------- First Federal of Olathe Bancorp, Inc. -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Kansas 48-1226075 -------------------------------- ----------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 100 East Park Street, Olathe, KS 66061 -------------------------------------------------------------------------------- (Address of principal executive offices) ( 913 ) 782 - 0026 ------------- --------------- ------------------------------------- (Issuer's telephone number) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 541,061 common stock, par value $.01 per share, as of June 25, 2001 ------------------------------------------------------------------------------- Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ] FIRST FEDERAL OF OLATHE BANCORP, INC. FORM 10-QSB THREE AND SIX MONTHS ENDED JUNE 30, 2001 PART I - FINANCIAL INFORMATION Interim Financial Information required by Rule 10-01 of Regulation S-X and Item 303 of Regulation S-B is included in this Form 10-QSB as referenced below:

FIRST FEDERAL OF OLATHE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS

See accompanying notes to the unaudited consolidated financial statements - 3 - FIRST FEDERAL OF OLATHE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements - 4 - CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED)

Treasury Total Stock Equity ----- ------ $14,836,079 BALANCE, DECEMBER 31, 2000 449,312 Net income Other comprehensive income: 47,975 Change in unrealized appreciation on available-for-sale securities, net of income taxes of $27,000 Issuance of 25,030 shares under recognition plan 112,464 Compensation cost on awards issued under recognition plan $(943,968) (943,968) Purchase of 40,297 shares of common stock for the treasury 27,613 ESOP shares released (99,311) Dividends on common stock ----------- ----------- ($.20 per share) $ (943,968) $14,430,164 BALANCE, JUNE 30, 2001 =========== =========== See accompanying notes to the unaudited consolidated financial statements - 5 - CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements -6- FIRST FEDERAL OF OLATHE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1: BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal recurring accruals, necessary to present fairly the consolidated financial position, results of operations, changes in stockholders' equity, and cash flows for the periods presented. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-KSB annual report for 2000 filed with the SEC. The consolidated statement of financial condition of the Company as of December 31, 2000 has been derived from the audited consolidated statement of financial condition of the Company as of that date. The results of operations and other data for the three and six months ended June 30, 2001 are not necessarily indicative of results to be expected for the full year. NOTE 2: COMMITMENTS TO ORIGINATE LOANS At June 30, 2001, the Association had outstanding commitments to originate loans amounting to approximately $1,005,700. NOTE 3: RECOGNITION AND RETENTION PLAN On April 25, 2001, the stockholders of the Company approved the Recognition and Retention Plan (the "Recognition Plan") for directors, officers and employees. Under the Recognition Plan, the Company may award up to 27,816 shares of common stock. During the quarter ended June 30, 2001, the Company granted 25,030 shares. The value of the shares awarded under the plan is determined based on the market price of the Company's stock on the date of grant. The shares vest and are earned by the recipient at a rate of 20% of the initially awarded amount per year, with the first installment being earned on the date of grant and succeeding installments earned on the following anniversaries of the date of grant. As shares were issued on grant date and then vest to holders over five years, the Company recorded deferred compensation in the amount of $513,115. The charge to compensation cost for the portion of shares vested during the quarter ended June 30, 2001, was $112,464. -7- FIRST FEDERAL OF OLATHE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4: STOCK OPTION PLAN On April 25, 2001, the stockholders of the Company approved the 2001 Stock Option Plan (the "Option Plan") for directors, officers and employees. Under the Option Plan, the Company may grant options for up to 55,632 shares of common stock. During the quarter ended June 30, 2001, the Company granted 50,066 options. The exercise price of each option is equal to the market price of the Company's stock on the date of grant ($20.50). The options vest at a rate of 20% per year, with the first installment being earned on the date of grant and succeeding installments earned on the following anniversaries of the date of grant. The maximum term of the options is 10 years. The fair value of the above options was estimated at the date of grant using the Black-Scholes option-pricing model with the key assumptions being risk-free rate of 6.0%, no expected dividends, and expected volatility of 30%. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The Company applies APB Opinion 25 and related Interpretations in accounting for its plans, and, no compensation cost has been recognized for the plan. Had compensation cost for the Company's plan been determined based on the fair value at the grant dates using Statement of Financial Accounting Standards No. 123, the Company's net income would have decreased by $75,167 for the quarter and six months ended June 30, 2001. Basic and diluted earnings per share would have been $.21 and $.20 for the quarter ended June 30, 2001 and $.72 (basic and diluted) for the six months ended June 30, 2001. NOTE 5: EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of shares outstanding during each year. Diluted earnings per share is computed using the weighted average common shares and all potential dilutive common shares outstanding during the period. -8- FIRST FEDERAL OF OLATHE BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5: EARNINGS PER SHARE (CONTINUED) The computation of per share earnings for the three and six months ended June 30, 2001 is as follows:

-9- FIRST FEDERAL OF OLATHE BANCORP, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion compares the consolidated financial condition of First Federal of Olathe Bancorp, Inc. and Subsidiary (the "Company") at June 30, 2001 to December 31, 2000 and the results of operations for the three and six months ended June 30, 2001 with the corresponding periods in 2000. Currently, the business and management of First Federal of Olathe Bancorp, Inc. is primarily the business and management of First Federal Savings and Loan Association of Olathe (the "Association"). This discussion should be read in conjunction with the interim consolidated financial statements and footnotes included herein. This quarterly report on Form 10-QSB includes statements that may constitute forward looking statements, usually containing the words "believe," "estimate," "expect," "intent" or similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause future results to vary from current expectations include, but are not limited to, the following: changes in economic conditions (both generally and more specifically in the markets in which the Company operates); changes in interest rates, accounting principles, policies or guidelines and in government legislation and regulation (which change from time to time and over which the Company has no control); and other risks detailed in this quarterly report on Form 10-QSB and the Company's other Securities and Exchange Commission filings. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. First Federal of Olathe Bancorp, Inc. is a Kansas corporation organized in December 1999, by the Association for the purpose of becoming a holding company of the Association. On April 11, 2000, the Company acquired all of the capital stock of the Association in exchange for 50% of the net conversion proceeds and issued shares of its common stock to persons who submitted orders in the subscription and community offerings. Immediately following the Conversion, the only significant assets of the Company were the capital stock of the Association, the Company's loan to the ESOP, and the remainder of the net Conversion proceeds retained by the Company. The business and management of the Company primarily consist of the business and management of the Association. The Company will neither own nor lease any property, but will instead use the premises, equipment and furniture of the Association. At the present time, the Company does not intend to employ any persons other than officers of the Association, and the Company will utilize the support staff of the Association from time to time. Additional employees will be hired as appropriate to the extent the Company expands or changes its business in the future. -10- FIRST FEDERAL OF OLATHE BANCORP, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management believes that the holding company structure will provide the Company with additional flexibility to diversify, should it decide to do so, its business activities through existing or newly formed subsidiaries, or through acquisitions of or mergers with other financial institutions and financial services related companies. Although there are no current arrangements, understandings or agreements, written or oral, regarding any such opportunities or transactions, the Company will be in a position, subject to regulatory limitations and the Company's financial position, to take advantage of any such opportunities that may arise. The initial activities of the Company are anticipated to be funded by the proceeds retained by the Company and earnings thereon or, alternatively, through dividends from the Association. To date, the Company has not engaged in any business activities other than those related to the Conversion. FINANCIAL CONDITION Total assets increased by $4.5 million, or 8.9%, to $54.9 million at June 30, 2001 from $50.4 million at December 31, 2000. This increase consisted of an increase of $3.0 million in federal funds sold, and an increase of $2.6 million in mortgage loans, offset by net maturities of $1.3 million in investments held to maturity. These changes were fueled by the overall growth in the Association during the quarter. Mortgage loans increased $2.6 million, or 7.2%, to $38.7 million at June 30, 2001 from $36.1 million at December 31, 2000. The increase reflects the Association's controlled growth strategy, including capitalizing on the strong housing market in the Association's market area during the six months ended June 30, 2001. Securities held to maturity decreased $1.3 million, or 10.3%, to $11.3 million at June 30, 2001 from $12.6 million at December 31, 2000, reflecting the maturity of federal agency debt securities. Federal funds sold increased $3.0 million from December 31, 2000 as the Company invested proceeds from security maturities and increased overall deposits in these short-term overnight investments. Deposits increased $6.3 million, or 22.1%, to $34.8 million at June 30, 2001 from $28.5 million at December 31, 2000. The change is primarily comprised of customer deposits in 30 month saving certificates, which increased during 2001 as the Company maintained higher competitive rates. The increase in deposits is also due to the Association's decision, during the first quarter of 2001, to accept brokered certificates of deposit from out of state sources. Advances from the Federal Home Loan Bank decreased $1.6 million, or 24.2%, to $5.0 million at June 30 2001 from $6.6 million at December 31, 2000. The decrease is due to $1.6 million in line of credit advances being paid-off as the Company has realized an increase in deposits during 2001. Total stockholders' equity decreased $.4 million, or 2.7%, to $14.4 million at June 30, 2001 from $14.8 million at December 31, 2000. The change is comprised of net income to date, offset by dividends charged to retained earnings of $99,581 and the acquisition of 40,297 shares of the Company's common stock at a cost of $943,968. In addition, additional paid-in capital increased $524,617, which is comprised principally of $512,865 of Deferred Compensation recognized on the 2001 Recognition and Retention Plan. Lastly, Deferred Compensation was recorded as a result of shares awarded under the Recognition and Retention Plan, which do not vest until future years. -11- FIRST FEDERAL OF OLATHE BANCORP, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000 NET INCOME. Net income for the quarter ended June 30, 2001 was $181,325 compared to net income of $263,718 for the quarter ended June 30, 2000. This represents an $82,393, or 31.2%, decrease. The decrease was due principally to the recognition of compensation cost related to the Recognition and Retention Plan that was approved by the Company's stockholders on April 25, 2001. Total compensation cost recognized under this Plan amounted to $112,464 for the quarter ended June 30, 2001. Compensation cost recognized under the Employee Stock Option Plan amounted to $27,613 for the quarter ended June 30, 2001. Earnings per share (EPS) decreased 25.5% to $.35 in the three-month period ended June 30, 2001 from $.47 in the same period of 2000. The Company's annualized return on average assets for the quarters ended June 30, 2001 and 2000 were 1.3% and 2.1%, respectively. The return on average stockholders' equity amounted to 4.8% and 9.6% for the quarters ended June 30, 2001 and 2000, respectively. NET INTEREST INCOME. For the quarter ended June 30, 2001, net interest income increased by $42,363, or 8.4%, to $548,815 from $506,452. The increase reflects an increase of $94,505 or 9.5%, in interest income to $1,087,275 for the quarter ended June 30, 2001 from $992,770 for the quarter ended June 30, 2000, and an increase of $52,142, or 10.7%, in interest expense, to $538,460 for the quarter ended June 30, 2001 from $486,318 for the quarter ended June 30, 2000. The net interest margin remained constant at 4.0% for the second quarter of 2001, as compared to the second quarter of 2000. Interest income increased principally as a result of the increase in interest earning assets. The annualized yield on average interest-earning assets remained constant at 8.0% for the second quarters of 2001 and 2000, while average earning assets increased to $55 million for the quarter ended June 30, 2001 as compared to $50 million for the same period in the prior year. The increase in average interest-earning assets was attributable principally to an increase in loans receivable due to favorable economic conditions and the strong single-family housing market in Johnson County, Kansas. The average yield on loans receivable remained steady at 8.7% for the three months ended June 30, 2001 and 2000. The interest expense increase is attributed principally to an increase in advances from the FHLB. The interest expense on Federal Home Loan Bank Advances increased $73,959 to $89,802 for the second quarter of 2001 from $15,843 for the same period in 2000, which reflected the increase in the average outstanding balances of advances from the Federal Home Loan Bank. This increase was offset, however, by the decrease in deposit interest expense. Interest expense on deposits decreased $21,817 to $448,658 for the first quarter of 2001 from $470,475 for the same period in 2000, which reflected the decrease in the average outstanding deposit balances for the two periods. During 2000, the Association had an outflow of brokered deposits that matured during that period and were not renewed. The Association received attractive rates on the FHLB advances and utilized these advances in late 2000 and early 2001 to fund loans, which were subsequently paid down as deposits began to increase late in the quarter ended June 30, 2001. -12- FIRST FEDERAL OF OLATHE BANCORP, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PROVISION FOR LOAN LOSSES. The allowance for loan losses was $175,000 at June 30, 2001 and 2000. Although no additions were made to the provision for loan losses during 2001, management continues to closely assess the loan portfolio for inherent losses and reports all loans greater than 30 days past due to the Board of Directors. In addition, detail review and discussion occurs with management and the Board for those loans that approach the 60 and 90 days past due levels. Management deemed no additional provision was necessary for the quarters ended June 30, 2001 and 2000. At June 30, 2001 and 2000, the allowance for loan losses represents .5% of net loans for each period. The allowance for loan losses at June 30, 2001 represents 91.5% of non-performing loans. There were no non-performing loans at June 30, 2000. Loans in the over 90-day category amounted to $241,000 and $250,000, or .4% and .5% of total assets as of June 30, 2001 and 2000. NON-INTEREST INCOME. Non-interest income increased $17,599 to $20,180 for the quarter ended June 30, 2001 from $2,581 for the quarter ended June 30, 2000. The increase is primarily attributable to the gain on the sale of an asset in other real estate owned of $14,253. NON-INTEREST EXPENSE. Non-interest expense increased $207,855 to $300,170 for the quarter ended June 30, 2001 from $92,315 for the quarter ended June 30, 2000. This increase was principally due to two factors affecting the second quarter of 2001. The first relates to the increase in professional fees of 167.3%, or $45,880, from $27,419 to $73,299 for the quarters ended June 30, 2001 and 2000. This increase was due to increased services provided in preparing for and holding the annual shareholder meeting as well as preparing and accounting for the 2001 Stock Option and Recognition and Retention plans set up during the quarter ended June 30, 2001. In addition, the Recognition and Retention Plan vested 20% of shares awarded on April 25, 2001. Thus, compensation cost of $112,464 was recognized during the quarter ended June 30, 2001 for the 20% immediate vesting under the plan. INCOME TAXES. Income taxes decreased by $65,500 to $87,500 for the three months ended June 30, 2001 from $153,000 for the three months ended June 30, 2000. The effective tax rates were 32.5% and 36.7% for the three months ended June 30, 2001 and 2000, respectively. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 NET INCOME. Net income for the six months ended June 30, 2001 was $449,312, as compared to net income of $483,747 for the six months ended June 30, 2000. This represents a $34,435, or 7.1% decrease. The decrease was due principally to the recognition of compensation cost related to the Recognition and Retention Plan, that was approved by the Company's stockholders on April 25, 2001. Total compensation cost recognized under this Plan amounted to $112,464 for the six months ended June 30, 2001. Compensation cost recognized under the Employee Stock Option Plan amounted to $27,613 for the six months ended June 30, 2001. Basic earnings per share (EPS) amounted to $.87 for the six months ended June 30, 2001. EPS data was not calculated for the quarter ended June 30, 2000 as the conversion did not occur until April 2000. The Company's annualized return on average assets for the six months ended June 30, 2001 and 2000 was 1.7% and 2.0%, respectively. The return on average stockholders' equity amounted to 6.0% and 9.5% for the six months ended June 30, 2001 and 2000, respectively. -13- FIRST FEDERAL OF OLATHE BANCORP, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET INTEREST INCOME. For the six months ended June 30, 2001, net interest income increased by $148,755, or 15.8%, to $1,089,211 from $940,456. The increase reflects an increase of $223,058, or 11.7%, in interest income to $2,135,421 for the six months ended June 30, 2001 from $1,912,363 for the six months ended June 30, 2000, and an increase of $74,303, or 7.7% in interest expense, to $1,046,210 for the six months ended June 30, 2001 from $971,907 for the six months ended June 30, 2000. The net interest margin increased to 4.0% during the first half of 2001, from 3.9% for the first half of 2000. Interest income increased principally as a result of the increase in interest-earning assets. The annualized yield on average interest-earning assets remained constant at 7.9% for the first half of 2001 and 2000, while average earning assets increased to $54 million for the six months ended June 30, 2001 as compared to $48 million for the same period in the prior year. The increase in average interest-earning assets was attributable principally to an increase in loans receivable due to favorable economic conditions and the strong single-family housing market in Johnson County, Kansas. In addition, the average yield on loans receivable increased to 8.7% for the six months ended June 30, 2001 from 8.6% for the first half of 2000, as a result of higher rates on mortgage loans originated during the last three quarters of 2000. The interest expense increase is attributed principally to an increase in advances from the FHLB. The interest expense on Federal Home Loan Bank Advances increased $160,183 to $190,198 for the first half of 2001 from $30,015 for the same period in 2000, which reflected the increase in the average outstanding balances of advances from the Federal Home Loan Bank. This increase was offset, however, by the decrease in deposit interest expense. Interest expense on deposits decreased $85,780 to $856,012 for the first half of 2001 from $941,792 for the same period in 2000, which reflected the decrease in the average outstanding deposit balances for the two periods, as well as a slight decrease in rates on CD's during the first six months of 2001. During 2000, the Association had an outflow of brokered deposits, which matured during that period and were not renewed. The Association received attractive rates on the FHLB advances and utilized these advances in late 2000 and early 2001 to fund loans. During the second quarter of 2001, the Company again accepted brokered out-of-state deposits, which helped to increase deposits later in the second quarter of 2001. PROVISION FOR LOAN LOSSES. The allowance for loan losses was $175,000 at June 30, 2001 and 2000. Management deemed no additional provision was necessary for the six months ended June 30, 2001 and 2000. NON-INTEREST INCOME. Non-interest income increased $19,973 to $24,512 for the six months ended June 30, 2001 from $4,539 for the six months ended June 30, 2000. The increase is principally attributable to the gain of $14,253 on the disposal of other real estate owned during the six months ended June 30, 2001. Non-interest expense increased $229,663 to $416,911 for the six months ended June 30, 2001 from $187,248 for the six months ended June 30, 2000. This increase was principally due to two factors affecting the second quarter of 2001. The first relates to the increase in professional fees of 90.5%, or $55,202, from $60,989 to $116,191 for the quarters ended June 30, 2000 and 2001. This increase was due to increased services provided in preparing for and holding the annual shareholder meeting as well as preparing and accounting for the 2001 Stock Option and Recognition and Retention plans set up during the quarter ended June 30, 2001. In addition, the Recognition and Retention Plan vested 20% of shares awarded on April 25, 2001. Thus, compensation cost of $112,464 was recognized during the quarter ended June 30, 2001 for the 20% immediate vesting under the plan. -14- FIRST FEDERAL OF OLATHE BANCORP, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCOME TAXES. Income taxes decreased by $26,500 to $247,500 for the six months ended June 30, 2001 from $274,000 for the six months ended June 30, 2000. The effective tax rates were 35.5% and 36.2% for the six months ended June 30, 2001 and 2000, respectively. LIQUIDITY AND CAPITAL RESOURCES The Association's primary sources of funds are deposits, FHLB advances, repayments on loans, the maturity of investment securities and interest income. Although maturity and scheduled amortization of loans are relatively predictable sources of funds, deposit flows and prepayments on loans are influenced significantly by general interest rates, economic conditions and competition. The Association is required to maintain minimum levels of liquid assets under the OTS regulations. Savings institutions are required to maintain an average daily balance of liquid assets (including cash, certain time deposits, and specified U.S. Government, state, or federal agency obligations) of not less than 4.0% of its average daily balance of net withdrawal accounts, plus short-term borrowings. It is the Association's policy to maintain its liquidity portfolio in excess of regulatory requirements. The Association's most liquid assets are cash and cash equivalents, which include overnight deposits at First National Bank of Olathe and the FHLB of Topeka. The levels of these assets are dependent on the Association's operating, financing, lending, and investment activities during any given period. At June 30, 2001 and at December 31, 2000, cash and cash equivalents were $3.1 million and $133,000, respectively. The increase in cash and cash equivalents at June 30, 2001, compared to December 31, 2000, resulted primarily from the maturity of held-to-maturity securities and an increase in deposits. Liquidity management for the Association is both an ongoing and long-term function of the Association's asset/liability management strategy. Excess funds generally are invested in overnight deposits at the FHLB of Topeka and the First National Bank of Olathe. Should the Association require funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances. The Association would pledge its mortgage loans, FHLB stock or certain other assets as collateral for such advances. At June 30, 2001, the Association had a balance of $5.0 million in FHLB advances. In addition to the $3.0 million in deposits available at the FHLB, the Association had unused advance commitments with the FHLB of $2.6 million at June 30, 2001. The Association is required to maintain regulatory capital sufficient to meet tangible, core and risk-based capital ratios of at least 1.5%, 4.0% and 8.0%, respectively. At June 30, 2001, the Association exceeded each of its capital requirements, with tangible, core and risk-based capital ratios of 22.9%, 22.9% and 54.5% respectively. -15- FIRST FEDERAL OF OLATHE BANCORP, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Association's assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on the Association's performance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than by interest rates. -16- FIRST FEDERAL OF OLATHE BANCORP, INC. FORM 10-QSB THREE MONTHS ENDED JUNE 30, 2001 PART II - OTHER INFORMATION --------------------------- ITEM 1: LEGAL PROCEEDINGS Neither the Company nor the Association is a party to any material legal proceedings at this time. From time to time the Association may be involved in various claims and legal actions arising in the ordinary course of business. ITEM 2: CHANGES IN SECURITIES Not applicable ITEM 3: DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 25, 2001, the Company held its annual meeting of stockholders to consider the election of one director of the Company, to ratify the appointment of BKD, LLP as the auditors of the Company for the fiscal year ending December 31, 2001, to ratify the adoption of the First Federal of Olathe Bancorp, Inc. 2001 Stock Option Plan, and to ratify the adoption of the First Federal of Olathe Bancorp, Inc. 2001 Recognition and Retention Plan. The results of the meeting were as follows: o Mitch Ashlock was elected to serve as a director of the Company for a three-year term with 489,798 votes for, 11,000 votes withheld and no broker non-votes. o The appointment of BKD, LLP to act as the Company's auditors for the fiscal year ending December 31, 2001 was ratified with 494,768 votes for, 6,000 votes against, 30 votes abstaining and no broker non-votes. o The First Federal of Olathe Bancorp, Inc. 2001 Stock Option Plan was approved with 459,313 votes for, 40,455 votes against, 1,030 votes abstaining and no broker non-votes. o The First Federal of Olathe Bancorp, Inc. 2001 Recognition and Retention Plan was approved with 402,088 votes for, 53,453 votes against, 45,255 votes abstaining and no broker non-votes. o The term of office of Directors Donald K. Ashlock, Marvin Eugene Wollen, John M. Bowen and Carl R. Palmer continued after the meeting. -17- FIRST FEDERAL OF OLATHE BANCORP, INC. FORM 10-QSB THREE MONTHS ENDED JUNE 30, 2001 PART II - OTHER INFORMATION --------------------------- ITEM 5: OTHER INFORMATION None ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits None b. Reports on Form 8-K None -18- SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST FEDERAL OF OLATHE BANCORP, INC. Date: August 14, 2001 By /s/ Mitch Ashlock ------------------------------------- Mitch Ashlock, President and Chief Executive Officer (Duly authorized officer and principal executive and financial officer) -19-

FIRST FEDERAL OF OLATHE BANCORP INC 10-Q