UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 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 September 30, 1998

                                       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 0-22184

                         FIRST INDEPENDENCE CORPORATION
           (Name of small business issuer as specified in its charter)

            Delaware                                             36-3899950
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

Myrtle and Sixth Streets, Independence, Kansas                     67301       
   (Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code:  (316) 331-1660

           Securities Registered Pursuant to Section 12(b) of the Act:

                                      None

           Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                                (Title of Class)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the issuer was required to file such  reports),  and (2) has
been subject to such 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]

     State the issuer's revenues for its most recent fiscal year: $9,264,444.

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant, computed by reference to the average of the bid and asked prices
of such stock on the  NASDAQ  Stock  Market as of  December  4,  1998,  was $7.8
million. (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.)

     As of December 4, 1998, there were issued and outstanding 963,819 shares of
the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Part II of Form 10-KSB - Annual Report to Stockholders  for the fiscal year
ended September 30, 1998.

     Part  III of Form  10-KSB - Proxy  Statement  for 1999  Annual  Meeting  of
Stockholders.

         Transitional Small Business Disclosure Format: YES ___. NO _X_.


<PAGE>



                                     PART I

Item 1.    Description of Business

General

     First  Independence  Corporation (the "Company") is a Delaware  corporation
which was formed at the direction of First Federal Savings and Loan  Association
of  Independence  ("First  Federal" or the  "Association")  in June 1993 for the
purpose of becoming the savings and loan holding  company of First Federal.  The
Company owns all of the outstanding  stock of First Federal issued on October 5,
1993 in connection  with the completion of First  Federal's  conversion from the
mutual to the stock form of organization (the "Conversion").  The Company issued
727,375 shares of common stock at a price of $10.00 per share in the Conversion.
All  references  to the  Company  at or before  October  5, 1993  refer to First
Federal.  At September 30, 1998, the Company had total assets of $124.3 million,
and stockholders' equity of $12.1 million.

     First Federal is a federally  chartered stock savings and loan  association
headquartered in Independence, Kansas. First Federal was originally organized in
1905 as a state-chartered  savings and loan association and later converted to a
federally chartered institution.

     First Federal has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Association attracts deposits from the general
public and uses such  deposits,  together with  borrowings  and other funds,  to
originate  one- to  four-family  residential  mortgage  loans.  To a much lesser
extent,  the Association also originates loans secured by  non-residential  real
estate and consumer loans and a limited amount of loans secured by  multi-family
real estate.  Subject to market  conditions  and loan demand in its market area,
the  Association  expects to  continue to  originate  the same types of loans it
currently  offers,  which  include  the  origination  of  a  limited  number  of
commercial and multi-family real estate loans secured by property located in its
market area. The Association does not intend to originate or purchase  interests
in commercial or  multi-family  real estate loans secured by properties  located
outside of its market area.

     The  Association  also  invests  in  mortgage-backed  securities  which are
insured by or guaranteed by federal  agencies and other  investment  securities.
See  "Lending  Activities  -  Originations,  Purchases  and  Sales of Loans  and
Mortgage-Backed Securities."

     Like  all  federally  chartered  savings   associations,   First  Federal's
operations are regulated by the Office of Thrift Supervision (the "OTS").  First
Federal is a member of the Federal Home Loan Bank System  ("FHLB  System") and a
stockholder in the Federal Home Loan Bank ("FHLB") of Topeka. The Association is
also a member of the Savings Association Insurance Fund ("SAIF") and its deposit
accounts are insured up to applicable  limits by the Federal  Deposit  Insurance
Corporation ("FDIC").

     The principle  sources of funds for the  Association's  lending  activities
include  deposits,  amortization  and  prepayment of loan  principal  (including
mortgage-backed  securities),  sales or  maturities  of  investment  securities,
mortgage-backed  securities  and  short-term  investments,  borrowings and funds
provided from operations.

     The  Association's  revenues  are  derived  principally  from  interest  on
mortgage   loans  and   mortgage-backed   securities,   interest  on  investment
securities, dividends on FHLB stock and loan origination income.

     On  February  18,  1998,  the  Board  of  Directors  of  the  Company,  the
Association and The Neodesha  Savings and Loan  Association,  FSA  ("Neodesha"),
respectively, adopted a Plan of Merger Conversion (the

                                        2

<PAGE>



"Plan").  Pursuant  to the Plan,  Neodesha  will  combine  with the  Association
through the conversion of Neodesha from a mutual savings and loan association to
s stock savings and loan  association  and the  simultaneous  merger of Neodesha
into the Association. On December 22, 1998, at a special meeting, the members of
Neodesha  approved  the merger  conversion.  Approval  from the Office of Thrift
Supervision was recieved November 9, 1998. The transaction is scheduled to close
during  January  1999.  See  Note  N of  the  Notes  to  Consolidated  Financial
Statements.

     The  executive  offices  of the  Company  are  located  at Myrtle and Sixth
Streets  in  Independence,  Kansas  67301  and its  telephone  number  is  (316)
331-1660.  Unless the context otherwise  requires,  all references herein to the
Association  or the  Company  include  the  Company  and  the  Association  on a
consolidated basis.

Forward-Looking Statements

     When used in this Form  10-KSB or future  filings by the  Company  with the
Securities  and Exchange  Commission,  in the Company's  press releases or other
public  or  shareholder  communications,  or in oral  statements  made  with the
approval of an authorized  executive officer,  the words or phrases "will likely
result",  "are expected to",  "will  continue",  "is  anticipated",  "estimate",
"project",   "believe"   or  similar   expressions   are  intended  to  identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995.  The  Company  wishes to caution  readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national  economic  conditions,  changes in levels of market interest rates,
credit risks of lending  activities,  and  competitive  and regulatory  factors,
could affect the Company's  financial  performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected.

     The Company does not undertake,  and specifically disclaims any obligation,
to  publicly  release  the  result  of any  revisions  which  may be made to any
forward-looking   statements  to  reflect  the   occurrence  of  anticipated  or
unanticipated events or circumstances after the date of such statements.

Market Area

     Through its offices in Independence and Coffeyville,  Kansas, First Federal
currently serves primarily  Montgomery  County,  Kansas and, to a lesser extent,
Wilson  County  and the  eastern  part  of  Chautauqua  County  in  Kansas.  The
Association  competes  in loan  originations  and in  attracting  deposits  with
approximately  ten financial  institutions  serving its primary market area. The
Association estimates its share of the savings market in Montgomery County to be
approximately 15%.

     First Federal  established  a loan  production  office in Lawrence,  Kansas
effective October 15, 1997. The office primarily  originates  construction loans
in  Lawrence  and  the  surrounding   area.  Loan  approvals  are  made  at  the
Association's main office with disbursements and collections handled at the loan
production  office.  The office is currently  staffed with a loan originator and
two processors.

     Independence,  Kansas, located in southeastern Kansas, is approximately 110
miles from Wichita, Kansas. Independence is the County Seat of Montgomery County
and the location of Independence Community College.

     Montgomery  County has a population of approximately  38,000.  Although the
economy of southeast  Kansas is closely  tied to the gas,  oil and  agricultural
industries, Montgomery County has attracted a variety of other industries. Major
employers in  Montgomery  County  include  Automotive  Controls  Corp.,  Inc., a
manufacturer  of electronic and electrical  parts,  City Publishing  Company,  a
publisher of

                                        3

<PAGE>



cross-reference  directories,  Emerson  Electric  Co., a  manufacturer  of small
electric  motors,  Hackney & Sons  (Midwest)  Inc., a  manufacturer  of beverage
delivery truck bodies,  Heartland  Cement,  a manufacturer  of cement and Cessna
Aircraft, a manufacturer of single engine airplanes.

Lending Activities

     General.  Historically,  the  Association  originated  fixed-rate  mortgage
loans. Since 1982,  however,  the Association has emphasized,  subject to market
conditions,  the origination  and holding of  adjustable-rate  mortgage  ("ARM")
loans and  loans  with  shorter  terms to  maturity  than  traditional  30-year,
fixed-rate loans.  Management's  strategy has been to increase the percentage of
assets in its portfolio with more frequent repricing or shorter  maturities.  In
response to customer demand, however, the Association continues to originate for
its loan portfolio fixed-rate mortgages with terms not greater than 30 years.

     The Association's primary focus in lending activities is on the origination
of loans  secured by first  mortgages  on  owner-occupied,  one- to  four-family
residences.  Recently,  a significant  portion of the Associations'  lending has
been in the form of construction loans. To a much lesser extent, the Association
also originates loans secured by non-residential  real estate and consumer loans
and a limited amount of  multi-family  real estate loans.  See "-  Originations,
Purchases and Sales of Loans and  Mortgage-Backed  Securities." At September 30,
1998, the Association's net loan portfolio totaled $93.7 million.

     All loans must be reviewed by a committee  comprised  of the  Association's
President  and three  other  officers  of the  Association.  The  committee  has
authority to approve  loans  secured by real estate to any one borrower of up to
$500,000.  The executive committee has authority to approve loans up to $750,000
which provide for a personal  guarantee  from the  borrower.  Loans in excess of
this limit require  approval of the Board of Directors.  All loan approvals made
by the loan committee are ratified by the Board of Directors.

     The  aggregate  amount of loans that the  Association  is permitted to make
under  applicable  federal  regulations to any one borrower,  including  related
entities,  is generally  equal to the greater of 15% of  unimpaired  capital and
surplus or  $500,000.  At  September  30,  1998,  the maximum  amount  which the
Association  could  have lent to any one  borrower  and the  borrower's  related
entities was approximately $1.6 million. See "Regulation - Federal Regulation of
Savings Associations."

                                        4

<PAGE>



     Loan  Portfolio  Composition.  The  following  information  sets  forth the
composition  of the  Association's  loan  portfolio  in  dollar  amounts  and in
percentages  (before  deductions (or  additions) for loans in process,  deferred
fees and discounts and allowances for losses) as of the dates indicated.

<TABLE>
<CAPTION>
                                                                                 September 30,
                                             --------------------------------------------------------------------------------------
                                                      1998                            1997                          1996
                                             ------------------------       ------------------------       ------------------------
                                              Amount        Percent          Amount        Percent          Amount         Percent
                                             --------      ----------       --------      ----------       --------      ----------
                                                                            (Dollars in Thousands)
<S>                                          <C>                <C>         <C>                <C>         <C>                <C>   
Real Estate Loans

 One- to four-family ..................      $ 71,855           71.06%      $ 64,152           84.30%      $ 57,353           82.29%
 Multi-family .........................         1,001             .99          1,164            1.53          1,371            1.97
 Non-residential ......................         9,065            8.97          7,479            9.83          7,224           10.36
 Construction .........................        16,050           15.87            764            1.00          1,834            2.63
                                             --------      ----------       --------      ----------       --------      ----------
    Total real estate loans ...........        97,971           96.89         73,559           96.66         67,782           97.25
                                             --------      ----------       --------      ----------       --------      ----------

Consumer Loans:

 Deposit account ......................           397            0.39            350            0.46            364            0.52
 Automobile ...........................           961            0.95            705            0.93            402            0.58
 Home equity ..........................           837            0.83            550            0.72            781            1.12
 Home improvement .....................           234            0.23            274            0.36            183            0.26
 Other ................................           714            0.71            661            0.87            185            0.27
                                             --------      ----------       --------      ----------       --------      ----------

    Total consumer loans ..............         3,143            3.11          2,540            3.34          1,915            2.75
                                             --------      ----------       --------      ----------       --------      ----------

     Total Loans ......................       101,114          100.00%        76,099          100.00%        69,697          100.00%
                                                           ==========                     ==========                     ==========

Less:

 Loans in process .....................         6,437                            572                          1,050
 Deferred fees and discounts ..........           337                            300                            274
 Allowance for losses .................           656                            668                            690
                                             --------                       --------                       --------
 Total loans receivable, net ..........      $ 93,684                       $ 74,559                       $ 67,683
                                             ========                       ========                       ========
</TABLE>

                                        5

<PAGE>



     The  following  table  shows  the  composition  of the  Association's  loan
portfolio by fixed- and adjustable-rate categories at the dates indicated.

<TABLE>
<CAPTION>
                                                                                        September 30,
                                                            -----------------------------------------------------------------------
                                                                    1998                     1997                    1996
                                                            ---------------------    ---------------------    ---------------------
                                                             Amount     Percent       Amount      Percent      Amount      Percent
                                                            --------   ----------    --------   ----------    --------   ----------
                                                                            (Dollars in Thousands)
<S>                                                         <C>             <C>      <C>             <C>      <C>             <C>   
Fixed-Rate Loans
 Real estate:
  One- to four-family ...................................   $ 50,637        50.08%   $ 37,581        49.38%   $ 31,231        44.81%
  Multi-family ..........................................        639         0.63         683         0.90         871         1.25
  Non-residential .......................................      6,361         6.29       5,055         6.64       4,835         6.94
  Construction ..........................................     16,050        15.87         764         1.00        --           --
                                                            --------   ----------    --------   ----------    --------   ----------
    Total fixed-rate real estate loans ..................     73,687        72.87      44,083        57.92      36,937        53.00
 Consumer ...............................................        837          .83       1,990         2.62       1,437         2.06
                                                            --------   ----------    --------   ----------    --------   ----------
    Total fixed-rate loans ..............................     74,524        73.70      46,073        60.54      38,374        55.06
                                                            --------   ----------    --------   ----------    --------   ==========

Adjustable-Rate Loans
 Real estate:
  One- to four-family ...................................     21,218        20.98      26,571        34.92      26,122        37.47
  Multi-family ..........................................        362         0.36         481         0.63         500         0.72
  Non-residential .......................................      2,704         2.68       2,424         3.19       2,389         3.43
  Construction ..........................................       --           --          --           --         1,834         2.63
                                                            --------   ----------    --------   ----------    --------   ----------
     Total adjustable-rate real estate loans ............     24,284        24.02      29,476        38.74      30,845        44.25
 Consumer ...............................................      2,306         2.28         550         0.72         478         0.69
                                                            --------   ----------    --------   ----------    --------   ----------
     Total adjustable-rate loans ........................     26,590        26.30      30,026        39.46      31,323        44.94
                                                            --------   ----------    --------   ----------    --------   ----------

     Total Loans ........................................    101,114       100.00%     76,099       100.00%     69,697       100.00%
                                                                       ==========               ==========               ==========

Less
 Loans in process .......................................      6,437                      572                    1,050
 Deferred fees and discounts ............................        337                      300                      274
 Allowance for losses ...................................        656                      668                      690
                                                            --------                 --------                 --------

 Total loans receivable, net ............................   $ 93,684                 $ 74,559                 $ 67,683
                                                            ========                 ========                 ========
</TABLE>


                                        6

<PAGE>



     The following  schedule shows the scheduled  contractual  maturities of the
Association's  loan  portfolio  at  September  30,  1998.  Mortgages  which have
adjustable or  renegotiable  interest  rates are shown as repaying in the period
during which the  contract is due. The schedule  does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>
                                   Real Estate
                    ---------------------------------------
                          One- to         Multi-family, and
                         Four-Family       Non-Residential      Construction              Consumer                Total
                    ------------------    -----------------    ------------------    -------------------    ------------------
                              Weighted             Weighted              Weighted              Weighted               Weighted
                               Average             Average               Average                Average               Average
                     Amount     Rate      Amount     Rate      Amount      Rate       Amount     Rate       Amount      Rate
                     ------   --------    ------   --------    ------    --------     ------   ---------    ------    --------
                                                           (Dollars in Thousands)

Due During Periods
Ending September 30,
--------------------
<S>                  <C>         <C>      <C>        <C>       <C>          <C>      <C>          <C>      <C>          <C>  
1999(1) ..........   $   137     8.56%    $   898    9.50%     $14,085      9.62%    $  1,342     8.44%    $ 16,462     9.51%
2000 .............        80     7.93         114    9.70          957      9.50          284     8.98        1,435     9.33
2001 .............       297     7.65          52    7.56           --        --          506     9.23          855     8.58
2002 and 2003 ....     1,298     7.76         413    8.12           --        --          402     8.96        2,113     8.06
2004 to 2008 .....     7,977     7.66         932    8.73          906      7.60          321     8.67       10,136     7.79
2009 to 2023 .....    34,083     7.59       7,511    8.28           --        --          151     8.65       41,745     7.72
2024 and following    27,983     7.37         146    8.25          102      7.50          137     8.73       28,368     7.38
                     -------              -------              -------               --------              --------
       Total .....   $71,855              $10,066              $16,050               $  3,143              $101,114
                     =======              =======              =======               ========              ========
</TABLE>

----------
(1)  Includes demand loans, loans having no stated maturity and overdraft loans.

     The total  amount  of loans  due  after  September  30,  1999,  which  have
predetermined  interest rates is $58.6 million,  while the total amount of loans
due after such date which have  floating or adjustable  interest  rates is $26.1
million.


                                        7

<PAGE>



     One-  to  Four-Family   Residential  Mortgage  Lending.   Residential  loan
originations are generated by the Association's  marketing efforts,  its present
customers,  walk-in  customers  and  referrals  from  real  estate  brokers  and
builders.  The  Association  has focused its lending  efforts  primarily  on the
origination of loans secured by first mortgages on owner-occupied, single-family
residences in its market area. At September 30, 1998, the Association's  one- to
four-family  residential  mortgage loans, totaled $71.9 million, or 71.1% of the
Association's loan portfolio.

     The  Association  currently  makes  adjustable-rate,  one-  to  four-family
residential  mortgage  loans in amounts  up to 95% of the  appraised  value,  or
selling  price,  of the security  property,  whichever is less. For loans with a
loan-to-value ratio of 90% or greater, the Association requires private mortgage
insurance  equal to 20% of the loan value in order to reduce  the  Association's
exposure level. For loans with loan-to-value ratios of greater than 80% but less
than 90%, the  Association  typically  requires  private  mortgage  insurance to
reduce the  Association's  exposure.  The  determination as to whether to obtain
such  insurance is made on a case-by-case  basis,  based on a variety of factors
including the borrower's  payment history,  the borrower's length of employment,
the quality of the  property,  the term of the loan and the debt to income ratio
of the borrower.  At September 30, 1998, the  Association had 570 loans totaling
$31.3 million with a  loan-to-value  ratio of greater than 80% but less than 90%
and 365  loans  totaling  $18.1  million  with a  loan-to-value  ratio of 90% or
greater.

     The Association  currently offers one-year ARM loans at rates determined in
accordance with market and competitive factors for a term of up to 30 years. The
interest rate charged on ARM loans  currently  originated by the  Association is
based upon the one year Constant  Maturity  Treasury Index. The  adjustable-rate
loans currently  originated by the  Association  provide for a 1% annual cap and
floor,  and a 5% lifetime cap on the interest rate  adjustment  over the rate in
effect  on  the  date  of  origination.   The  actual  interest  rate  on  these
adjustable-rate loans may not be reduced below 5% over the life of the loan. The
annual and lifetime caps on interest rate  increases  reduce the extent to which
these loans can help protect the  Association  against  interest rate risk.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -  Asset/Liability  Management"  in the  Company's  Annual  Report to
Stockholders attached hereto as Exhibit 13 (the "Annual Report").  Approximately
28.6% of the loans secured by one- to four-family real estate  originated by the
Association  during  fiscal  1998  were  originated  with  adjustable  rates  of
interest. See "- Originations,  Purchases and Sales of Loans and Mortgage-Backed
Securities."

     Adjustable-rate  loans  decrease  the  risks  associated  with  changes  in
interest  rates but involve  other risks,  primarily  because as interest  rates
rise, the payment by the borrower rises to the extent  permitted by the terms of
the loan,  thereby  increasing the potential for default.  At the same time, the
marketability  of the  underlying  property may be adversely  affected by higher
interest rates. The Association  believes that these risks, which have not had a
material  adverse effect on the Association to date, are more than outweighed by
the benefits received by the Association in offering ARM loans.

     The Association also originates fixed-rate mortgage loans. Fixed-rate loans
currently  originated by the Association have terms of up to 30 years.  Interest
rates charged on these  fixed-rate loans are  competitively  priced according to
local market conditions.

     In underwriting  residential real estate loans,  the Association  evaluates
the borrower's  ability to make monthly  payments,  employment  history,  credit
history and the value of the property securing the loan. Potential borrowers are
typically  qualified for both  adjustable-  and fixed-rate  loans based upon the
initial or stated rate of the loan.  Adjustable  rate loans increase the risk of
default to the extent the  interest  rate  adjusts  upward and the  borrower  is
unable  to make the  payments  at the  increased  rate.  Although  borrowers  on
adjustable-rate  loans are qualified based upon the initial rate of the loan, if
a borrower's debt to income ratios are marginal,  the Association will take into
consideration the borrower's ability to make

                                        8

<PAGE>



future payments in the event the interest rate adjusts upward. Since the size of
the  Association's  average  new  loan  originated  is  approximately   $50,000,
management  believes  increases  in  interest  rates do not  generally  increase
payment amounts to levels that would significantly impair the borrower's ability
to make monthly payments.

     An appraisal of the security  property is obtained on all loan applications
from  Board-approved   independent  fee  appraisers.   In  connection  with  the
origination of residential real estate loans, the Association generally requires
that the borrower obtain an opinion from an attorney  regarding the title to the
property or title  insurance and fire and casualty  insurance,  as well as flood
insurance, where applicable, to protect the Association's interest.

     Approximately   $1.7  million,   or  2.4%  of  the  Association's  one-  to
four-family   residential   mortgage  loan  portfolio,   was  purchased  by  the
Association.  These loans are primarily secured by property located in Texas and
have been in the Association's  portfolio for several years. The Association has
purchased  only a limited  amount of one- to  four-family  residential  mortgage
loans since 1989.  However,  in connection with the opening of a loan production
office in  Lawrence,  Kansas  during  fiscal  1998,  the  Association  purchased
approximately  $5.0  million  construction  real estate  loans.  These loans are
secured by one- to four-family  real estate located in the Lawrence market area.
The level of  delinquencies  in the  Association's  portfolio of purchased loans
secured by one- to four-family  residential  real estate is consistent with that
of the loans originated and retained by the Association.

     The   Association's   residential   mortgage  loans   customarily   include
due-on-sale  clauses  giving  the  Association  the  right to  declare  the loan
immediately due and payable in the event, among other things, the borrower sells
or otherwise  disposes of the  property  subject to the mortgage and the loan is
not repaid.  The  Association has enforced  due-on-sale  clauses in its mortgage
contracts  for the purpose of increasing  its loan  portfolio  yield.  The yield
increase is obtained through the  authorization of assumptions of existing loans
at higher rates of interest  and the  imposition  of  assumption  fees.  One- to
four-family  real  estate  loans may be assumed  provided  home  buyers meet the
Association's  underwriting  standards and the loan terms are  modified,  to the
extent necessary, to conform with present yield and maturity requirements.

     Construction  Lending.  The Association  also makes  construction  loans to
builders and  individuals for the  construction of residences.  There were $16.1
million of construction loans outstanding at September 30, 1998.

     Although  the  Association  has offered  construction  loans for years,  it
recently  expanded  its efforts for this type of lending with the opening of its
Lawrence,  Kansas production office. The majority of the construction loans were
originated  at the  Lawrence,  Kansas  loan  production  office.  This office is
staffed with an  originator  and two  processors,  each of whom has  substantial
experience in construction lending. Construction loans are made to both builders
and  individuals  and  generally  have terms of nine months of less and interest
rates  tied to the prime rate plus a margin.  Once the loan rate is  determined,
however,  it remains fixed for the term of the loan.  The borrower pays interest
only  during  the  construction  period.   Residential  construction  loans  are
generally  underwritten  pursuant to the same  guidelines  used for  originating
permanent residential loans, and are approved at the Association's  headquarters
in Independence. The amount loaned to any one builder is subject to pre-approved
guidance  lines  with  the  maximum  amount  not  to  exceed  the  Association's
loans-to-one-borrower limit.

     Construction loans are generally  considered to involve a greater degree of
risk than permanent one-to four- family residential mortgage loans. Risk of loss
on a  construction  loan  depends  largely upon the  concurrence  of the initial
estimate of the property's value at completion of construction and the estimated
cost  (including  interest)  of  construction,  as well as the  availability  of
permanent take-out financing. During the construction phase, a number of factors
could result in delays and cost overruns. If the estimate of

                                        9

<PAGE>



value proves to be inaccurate, the Company may be confronted, at or prior to the
maturity of the loan, with a project which, when completed, has a value which is
insufficient to ensure full repayment.  Because of these uncertainties  inherent
in estimating  development and construction costs, it is relatively difficult to
evaluate  accurately the total loan funds required to complete a project.  Also,
the funding of loan fees and interest  during the  construction  phase makes the
monitoring of the progress of the project particularly  important,  as customary
early warning signals of project difficulties may not be present.

     Non-Residential/Multi-Family  Real Estate Lending.  In order to enhance the
yield  on  and  decrease  the  average  term  to  maturity  of its  assets,  the
Association  has  originated  and purchased  permanent  loans and  participation
interests in loans  originated by other lenders secured by  non-residential  and
multi-family  real estate.  The  Association  also has a limited amount of loans
secured  by  land.  See  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations - Asset/Liability  Management" in the Annual
Report.   At  September  30,  1998,  the   Association   had  $10.1  million  in
non-residential/  multi-family  real  estate  loans,  representing  10.0% of the
Association's loan portfolio.

     Approximately   10.3%   of  the   property   securing   the   Association's
non-residential/multi-family  (including  land) real  estate loan  portfolio  is
located  outside the  Association's  primary market area. Many of the properties
securing  these  purchased  loans or  participations  are  located  in Texas and
neighboring  states.  Some of these  areas  have  experienced  adverse  economic
conditions  including a general  softening in real estate  markets and the local
economy,  which may result in  increased  loan  delinquencies  and loan  losses.
However, most of the Association's non-residential/multi-family real estate loan
portfolio is seasoned and,  during the past five years,  the Association has had
no significant purchases or participations in such loans.

     The table below sets forth, by type of security property, the Association's
non-residential/ multi-family real estate loans at September 30, 1998.

<TABLE>
<CAPTION>
                                                                                  Number        Outstanding         Amount
                                                                                   of            Principal      Non-Performing
                                                                                  Loans           Balance       or of Concern
                                                                                 -------          -------       --------------
                                                                                          (Dollars in Thousands)
<S>                                                                                  <C>          <C>              <C>    
Multi-family ..........................................................                5          $ 1,001          $  --
Small business facilities and office buildings ........................               43            3,413               21
Health care facility ..................................................               12            2,112             --
Churches ..............................................................                3              174             --
Warehouse/mini-storage ................................................                3              313             --
Hotel/motel ...........................................................                3            1,233             --
Land ..................................................................               33            1,820             --
                                                                                 -------          -------          -------

    Total multi-family residential and non-residential real
        estate loans ..................................................              102          $10,066          $    21
                                                                                 =======          =======          =======
</TABLE>



     Permanent  non-residential and multi-family real estate loans originated by
the  Association  generally  have terms  ranging  from 5 to 20 years and up to a
30-year  amortization  schedule.  Rates on  permanent  loans  either  (i) adjust
(subject,  in some cases, to specified interest rate caps) at one year intervals
to  specified  spreads over an index,  (ii) float  (subject,  in some cases,  to
specified  interest  rate caps) with changes in a specified  prime rate or (iii)
carry   fixed   rates.   Under   the   Association's    current   loan   policy,
multi-family/non-residential  real estate loans (other than loans to facilitate)
are written in amounts of up to 80% of the appraised value of the properties.

                                       10

<PAGE>



     Appraisals on properties  securing  non-residential  and multi-family  real
estate  property  loans  originated  by  the  Association  are  performed  by an
independent  appraiser  designated  by the  Association  at the time the loan is
made. All appraisals on multi-family and  non-residential  real estate loans are
reviewed  by  the  Association's  management.  In  addition,  the  Association's
underwriting  procedures generally require verification of the borrower's credit
history, income and financial statements, banking relationships,  references and
income projections for the property.  Personal guarantees are generally obtained
for all or a  portion  of the  Association's  multi-family/non-residential  real
estate    loans.     While    the     Association     continues    to    monitor
multi-family/non-residential   real  estate  loans  on  a  regular  basis  after
origination,  updated  appraisals are not normally obtained after closing unless
the Association  believes that there are questions regarding the progress of the
loan or the value of the collateral.

     At September 30, 1998, the Association had no  non-residential/multi-family
real estate loans to one borrower, or group of borrowers,  which had an existing
carrying  value in excess of  $500,000,  except for the loans to four  unrelated
borrowers or groups of borrowers described below. The first loan is secured by a
residential  care  facility  located  in Caney,  Kansas  and had an  outstanding
balance at September 30, 1998 of $840,000. The other loans in excess of $500,000
at September 30, 1998, included a loan to one borrower totaling $680,000 secured
by a hotel located in Columbia,  Missouri; a loan with an outstanding balance of
$592,000  secured by an apartment  building located in Rogers,  Arkansas;  and a
loan with an outstanding  balance of $531,000 secured by a guest home located in
Caney,  Kansas.  All of these loans were  current at  September  30,  1998.  See
"-Regulation - Federal Regulation of Savings Associations."

     Non-residential/multi-family real estate lending affords the Association an
opportunity to receive  interest at rates higher than that  generally  available
from one- to four-family  residential  lending.  Nevertheless,  loans secured by
such  properties are generally  larger and involve a greater degree of risk than
one- to  four-family  residential  mortgage  loans.  Because  payments  on loans
secured  by  non-residential/multi-family   real  estate  properties  are  often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse  conditions in the real estate market or
the  economy.  If the cash flow from the  project is reduced  (for  example,  if
leases are not obtained or renewed),  the  borrower's  ability to repay the loan
may be impaired.  The  Association has attempted to minimize these risks through
its underwriting standards and by lending primarily on existing income-producing
properties.

     The Association also generally  maintains an escrow account for most of its
loans  secured by real  estate,  in order to ensure that the  borrower  provides
funds to cover property taxes in advance of the required payment. These accounts
are analyzed  annually to confirm that adequate funds are  available.  For loans
which do not include an escrow requirement,  an annual review of tax payments is
performed by the  Association in order to confirm  payment.  In order to monitor
the adequacy of cash flows on income-producing  properties, the borrower or lead
lender is notified annually,  requesting financial  information including rental
rates and income,  maintenance  costs and an update of real estate  property tax
payments.

     Consumer  Lending.  Consumer loans generally have shorter terms to maturity
(thus reducing First Federal's  exposure to changes in interest rates) and carry
higher rates of interest than do one- to four-family residential mortgage loans.
In addition,  management  believes  that the offering of consumer  loan products
helps to expand and create  stronger  ties to its  existing  customer  base,  by
increasing the number of customer  relationships  and providing  cross-marketing
opportunities.  At September 30, 1998, the Association's consumer loan portfolio
totaled $3.1 million,  or 3.1% of its loan portfolio.  Under applicable  federal
law, the Association is authorized to invest up to 35% of its assets in consumer
loans.

     First Federal offers a variety of secured  consumer  loans,  including home
equity loans,  home improvement  loans, auto loans, and loans secured by savings
deposits and other consumer collateral. The

                                       11

<PAGE>



Association  also offers a limited amount of unsecured  loans.  The  Association
currently  originates  all  of  its  consumer  loans  in its  market  area.  The
Association's  home equity and home  improvement  loans comprised  approximately
34.1% of the  Association's  total  consumer  loan  portfolio.  These  loans are
generally originated in amounts,  together with the amount of the existing first
mortgage,  of up to 100% of the  appraised  value of the  property  securing the
loan.  The  term to  maturity  on such  loans  may be up to seven  years.  Other
consumer loan terms vary according to the type of collateral, length of contract
and  credit  worthiness  of  the  borrower.  The  Association's  consumer  loans
generally  have a fixed rate of  interest,  except for the home equity  lines of
credit which adjust based upon changes in the prime rate.

     The Association  does not originate any consumer loans on an indirect basis
(i.e.,  where loan  contracts are purchased  from retailers of goods or services
which have extended credit to their customers).

     The underwriting  standards  employed by the Association for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment  of the  ability to meet  existing  obligations  and  payments on the
proposed  loan.  Although   creditworthiness  of  the  applicant  is  a  primary
consideration,  the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.

     Consumer loans may entail greater risk than do residential  mortgage loans,
particularly in the case of consumer loans which are unsecured, such as checking
account overdraft privilege loans, or are secured by rapidly depreciable assets,
such as automobiles.  In such cases, any repossessed  collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan  balance  as a  result  of  the  greater  likelihood  of  damage,  loss  or
depreciation.  In  addition,  consumer  loan  collections  are  dependent on the
borrower's  continuing  financial  stability,  and thus are  more  likely  to be
affected by adverse  personal  circumstances.  Furthermore,  the  application of
various federal and state laws,  including  bankruptcy and insolvency  laws, may
limit the amount  which can be  recovered  on such loans.  Although the level of
delinquencies  in the  Association's  consumer loan portfolio has generally been
low (at September 30, 1998,  $50,000, or approximately 1.6% of the consumer loan
portfolio,  was 60 days or more  delinquent),  there  can be no  assurance  that
delinquencies will not increase in the future.

Originations, Purchases and Sales of Loans and Mortgage-Backed Securities

     The Association originates real estate loans through marketing efforts, the
Association's  customer base, walk-in customers,  and referrals from real estate
brokers.  The Association  originates both adjustable-rate and fixed-rate loans.
Its  ability  to  originate  loans is  dependent  upon the  relative  demand for
fixed-rate or ARM loans in the origination market, which is affected by the term
structure  (short-term  compared to long-term) of interest  rates as well as the
current and expected future level of interest rates.

     Historically,   the   Association   has  also  purchased   loans  and  loan
participations,  predominantly  for  non-residential  real  estate  and  one- to
four-family  residential  loans.  Such  purchases  have enabled First Federal to
offset the  relatively low level of loan demand in the  Association's  principal
market areas,  to take  advantage of favorable  lending  opportunities  in other
markets,  to diversify  its portfolio and to limit  origination  expenses  while
generally  providing the  Association  with a higher yield than was available on
mortgage-backed securities.

     The Association has underwritten its loan purchases using the same criteria
it  uses in  originating  loans.  Servicing  of  purchased  loans  is  generally
performed by the seller.  At September 30, 1998,  approximately  $3.4 million of
First  Federal's  loan  portfolio was serviced by others.  During the year ended
September  30, 1998,  the  Association  purchased  loans  totaling  $5.0 million
secured by construction real estate.


                                       12

<PAGE>



     During recent years, most of the Association's loan purchase  opportunities
have been at yields that management  believed were not sufficiently  higher than
the yields of comparable  mortgage-backed  securities  that were guaranteed by a
Federal agency as to principal and interest (or derived from  certificates  that
were  so  guaranteed)  to  offset  such  credit  protection.   Accordingly,  the
Association  has recently  increased its  mortgage-backed  securities  portfolio
rather  than  loan  purchases.   See  "Investment  Activities   -Mortgage-Backed
Securities."

     The  Association  had $1.7  million  in loans  serviced  for  others  as of
September 30, 1998.

     The  following  table  shows  the  loan  origination,  purchase,  sale  and
repayment activities of the Association for the periods indicated.

<TABLE>
<CAPTION>
                                                                                     Year Ended September 30,
                                                                      -----------------------------------------------------
                                                                        1998                   1997                  1996
                                                                      --------               --------              --------
                                                                                           (In Thousands)
<S>                                                                   <C>                    <C>                   <C>     
Originations by type
 Adjustable-rate:
  Real estate - one- to four-family .........................         $  5,984               $  6,437              $  4,465
                - non-residential ...........................              250                    633                   614
  Consumer - home equity ....................................              117                    673                   314
                                                                      --------               --------              --------
         Total adjustable-rate ..............................            6,351                  7,743                 5,393
                                                                      --------               --------              --------
 Fixed-rate:
  Real estate - one- to four-family .........................           14,968                 10,167                14,879
                  - non-residential .........................            3,028                  1,492                   320
  Construction ..............................................           23,621                     --                    --
  Consumer - non-residential ................................            2,294                  1,965                 1,429
                                                                      --------               --------              --------
         Total fixed-rate ...................................           43,911                 13,624                16,628
                                                                      --------               --------              --------
         Total loans originated .............................           50,262                 21,367                22,021
                                                                      --------               --------              --------

Purchases
  Real estate - non-residential .............................               --                    546                    --
  Construction ..............................................            4,984                     --                    --
  Mortgage-backed securities (excluding
    REMICs and CMOs) ........................................               --                     --                 4,660
                                                                      --------               --------              --------
         Total purchased ....................................            4,984                    546                 4,660
                                                                      --------               --------              --------

Sales and Repayments
  Mortgage-backed securities ................................            6,164                  4,412                 5,237
  Principal repayments(1) ...................................           30,231                 15,512                13,956
                                                                      --------               --------              --------
        Total reductions ....................................           36,395                 19,924                19,193
  Increase (decrease) in other items, net(2) ................           (5,979)                   375                  (730)
                                                                      --------               --------              --------
         Net increase (decrease) ............................         $ 12,872               $  2,364              $  6,758
                                                                      ========               ========              ========
</TABLE>

----------
(1)  Includes transfers to real estate acquired through foreclosure.

(2)  Consists of loans in process, net deferred  origination costs,  unamortized
     discounts and allowance for loan losses.

Asset Quality

     When a borrower fails to make a required payment on a loan, the Association
attempts to cause the delinquency to be cured by contacting the borrower. In the
case of loans secured by real estate,  a computer  generated late notice is sent
15 days after the due date. If the delinquency is not cured between the 30th and
60th day, a personal  letter is sent to the borrower and if the  delinquency  is
not  cured  by the  75th  day,  contact  with  the  borrower  is made by  phone.
Additional written and verbal contacts are made

                                       13

<PAGE>



with the borrower to the extent the borrower  appears to be cooperative.  If the
delinquency  is not  cured or a  payment  plan  arranged  by the 90th  day,  the
Association sends a 30-day default letter and, once that period elapses, usually
institutes  appropriate action to foreclose on the property.  Interest income on
loans at this  point is reduced by the full  amount of accrued  and  uncollected
interest.  If  foreclosed,  the property is sold at a sheriff's  sale and may be
purchased by the Association. Delinquent consumer loans are handled in a similar
manner. If these efforts fail to bring the loan current,  appropriate action may
be taken to collect any loan payment that remains delinquent.  The Association's
procedures  for  repossession  and sale of  consumer  collateral  are subject to
various requirements under Kansas consumer protection laws.

     Real estate acquired by First Federal as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate acquired through foreclosure
until it is sold. When property is acquired,  it is recorded at the lower of the
loan's unpaid  principal  balance  (cost) or fair value less  estimated  selling
expenses at the date of acquisition  and any write-down  resulting  therefrom is
charged  to the  allowance  for  losses  on  loans.  See Note A of the  Notes to
Consolidated  Financial  Statements in the Annual Report. Upon acquisition,  all
costs incurred in maintaining the property are expensed. However, costs relating
to the development and improvement of the property are capitalized to the extent
of net realizable value.

                                       14

<PAGE>



     Delinquent  Loans.  The following table sets forth  information  concerning
delinquent loans at September 30, 1998, in dollar amounts and as a percentage of
the  Association's  loan portfolio.  The amounts  presented  represent the total
remaining  principal  balances  of the  related  loans,  rather  than the actual
payment amounts which are overdue.

<TABLE>
<CAPTION>
                                                    Loans Delinquent for:  
                              ------------------------------------------------------------------         Total Loans Delinquent
                                         60-90 Days                       Over 90 Days                     60 Days or more
                              -------------------------------    -------------------------------    --------------------------------
                                                   Percent of                         Percent of                          Percent of
                                                  Total Loan                          Total Loan                          Total Loan
                              Number      Amount   Portfolio     Number      Amount   Portfolio     Number      Amount    Portfolio
                              ------      ------  -----------    ------      ------   ----------    ------      ------    ---------
                                                                (Dollars in Thousands)
<S>                               <C>     <C>         <C>            <C>     <C>         <C>            <C>     <C>         <C>  
Real Estate:
  One- to four-family .....       11      $  421      0.41%          18      $  907      0.90%          29      $1,328      1.31%
  Non-residential .........       --          --        --            1          21      0.02            1          21      0.02
Construction ..............        3         223      0.22            1          62      0.06            4         285      0.28
Consumer ..................        1          10      0.01            6          40      0.04            7          50      0.05
                              ------      ------      ----       ------      ------      ----       ------      ------      ----

     Total ................       15      $  654      0.64%          26      $1,030      1.02%          41      $1,684      1.66%
                              ======      ======      ====       ======      ======      ====       ======      ======      ====
</TABLE>

     The following table sets forth information  concerning  delinquent loans at
September 30, 1997, in dollar  amounts and as a percentage of the  Association's
loan portfolio.  The amounts presented  represent the total remaining  principal
balances of the related loans,  rather than the actual payment amounts which are
overdue.


<TABLE>
<CAPTION>
                                                    Loans Delinquent for:  
                              ------------------------------------------------------------------         Total Loans Delinquent
                                         60-90 Days                       Over 90 Days                     60 Days or more
                              -------------------------------    -------------------------------    --------------------------------
                                                   Percent of                         Percent of                          Percent of
                                                  Total Loan                          Total Loan                          Total Loan
                              Number      Amount   Portfolio     Number      Amount   Portfolio     Number      Amount    Portfolio
                              ------      ------  -----------    ------      ------   ----------    ------      ------    ---------
                                                                (Dollars in Thousands)
<S>                             <C>        <C>         <C>           <C>      <C>         <C>           <C>      <C>         <C>  
Real Estate:
  One- to four-family .....         8      $  235      0.31%          27      $1,211      1.59%          35      $1,446      1.90%
  Non-residential .........         2         264      0.35            1          98      0.13            3         362      0.48
Consumer ..................         3          11      0.01            4          32      0.04            7          43      0.05
                               ------      ------      ----       ------      ------      ----       ------      ------      ----

     Total ................        13      $  510      0.67%          32      $1,341      1.76%          45      $1,851      2.43%
                               ======      ======      ====       ======      ======      ====       ======      ======      ====
</TABLE>



                                       15

<PAGE>



     Non-Performing   Assets.  The  table  below  sets  forth  the  amounts  and
categories  of the  Association's  non-performing  assets.  Loans are  placed on
non-accrual  status when the  collection of principal  and/or  interest  becomes
doubtful.  As a matter of policy,  the  Association  does not  generally  accrue
interest  on loans  past  due more  than 90  days.  For all  periods  presented,
troubled debt  restructurings  (which involve forgiving a portion of interest or
principal  on any loans or making loans at a rate  materially  less than that of
market rates) are included in the following table.  Real estate acquired through
foreclosure  includes  assets  acquired in  settlement of loans and reflects the
lower of cost or fair value less selling expense.

<TABLE>
<CAPTION>
                                                               Year Ended September 30,
                                                          --------------------------------
                                                           1998         1997         1996
                                                          ------       ------       ------
                                                                (Dollars in Thousands)
<S>                                                       <C>          <C>          <C>   
Non-accruing loans:
  One- to four-family ..............................      $  217       $  919       $  148
  Non-residential real estate ......................          21           98           99
  Construction .....................................          62           --           94
  Consumer .........................................          35           32           26
                                                          ------       ------       ------
     Total non-accruing loans ......................         335        1,049          367
                                                          ------       ------       ------

Accruing loans delinquent 90 days or more:
   One- to four-family .............................         690          292          183
   Construction ....................................         223           --           --
   Consumer ........................................           5           --           --
                                                          ------       ------       ------
     Total accruing loans delinquent 90 days or more         918          292          183
                                                          ------       ------       ------

Troubled debt restructurings:
   One- to four-family .............................          --           50           52
                                                          ------       ------       ------

     Total non-performing loans ....................       1,253        1,391          602
                                                          ------       ------       ------

Real estate acquired through foreclosure:
  One- to four-family ..............................          72           12           12
                                                          ------       ------       ------

Total non-performing assets ........................      $1,325       $1,403       $  614
                                                          ======       ======       ======
Total as a percentage of total assets ..............        1.07%        1.25%        0.57%
                                                          ======       ======       ======
</TABLE>

     For the year ended  September 30, 1998,  gross interest  income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their original terms amounted to $14,871. The amount included in interest income
on such loans was $15,720 for the year ended September 30, 1998.

     Included in  non-accruing  loans at  September  30,  1998,  were nine loans
totaling $279,000 secured by one- to four-family real estate,  one loan totaling
$21,000  secured  by  non-residential  real  estate,  and eight  consumer  loans
totaling $35,000.  All non-accruing loans at September 30, 1998, were located in
the  Association's  primary  market area. At September 30, 1998,  accruing loans
delinquent 90 days or more included 13 loans totaling  $913,000  secured by one-
to four-family real estate and one consumer loan totaling  $5,000.  At September
30, 1998, all of the  Association's  accruing  loans  delinquent 90 days or more
secured by real estate were located in the  Association's  primary  market area,
except  for one loan  totaling  $336,000  secured by a single  family  residence
located in Texas.



                                       16

<PAGE>



     Management   has   considered   loans  of  concern  in   establishing   the
Association's allowance for loan losses.

     Real Estate  Acquired  through  Foreclosure.  At September  30,  1998,  the
Association's real estate acquired through  foreclosure  consisted of two single
family residences located in the Association's  market area. The properties have
a carrying value of $72,000 and are currently offered for sale.

     Classified Assets.  Federal  regulations  provide for the classification of
loans and other assets, such as debt and equity securities considered by the OTS
to be of lesser  quality,  as  "substandard,"  "doubtful" or "loss." An asset is
considered  "substandard"  if it is  inadequately  protected  by the current net
worth and paying capacity of the obligor or of the collateral  pledged,  if any.
"Substandard"  assets include those characterized by the "distinct  possibility"
that the insured  institution  will sustain "some loss" if the  deficiencies are
not  corrected.  Assets  classified  as  "doubtful"  have all of the  weaknesses
inherent in those classified  "substandard," with the added  characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently  existing facts,  conditions,  and values,  "highly  questionable  and
improbable."  Assets  classified as "loss" are those considered  "uncollectible"
and  of  such  little  value  that  their  continuance  as  assets  without  the
establishment  of a specific loss reserve is not warranted.  Assets which do not
currently  expose  the  insured   institution  to  sufficient  risk  to  warrant
classification in one of the  aforementioned  categories but possess  weaknesses
are placed on a "watch list" by management.

     When an insured institution classifies problem assets as either substandard
or doubtful,  it may establish  general  allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been  established  to recognize the inherent risk  associated  with lending
activities,  but which, unlike specific  allowances,  have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss," it is required  either to establish a specific  allowance  for losses
equal to 100% of that portion of the asset so classified  or to charge-off  such
amount.  An institution's  determination as to the  classification of its assets
and  the  amount  of its  valuation  allowances  is  subject  to  review  by the
regulatory authorities, who may order the establishment of additional general or
specific loss allowances.

     In connection  with the filing of its periodic  reports with the OTS and in
accordance with its classification of assets policy,  the Association  regularly
reviews  the  problem  loans in its  portfolio  to  determine  whether any loans
require  classification  in accordance with applicable  regulations.  Classified
assets of the  Association  all of which, at September 30, 1998, are included in
the table of non-performing assets on the previous page, were as follows:


                                                        September 30,
                                            ------------------------------------
                                             1998           1997           1996
                                            ------         ------         ------
                                                       (In Thousands)

Substandard .......................         $1,320         $1,261         $  676
Doubtful ..........................              5             92             95
Loss ..............................             --             --             --
                                            ------         ------         ------

Total classified assets ...........         $1,325         $1,353         $  771
                                            ======         ======         ======

     Allowance for Loan Losses.  The  allowance  for loan losses is  established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan  portfolio and changes in the nature and volume of its loan
activity. Such evaluation, which includes a review of all loans for which full

                                       17

<PAGE>



collectibility may not be reasonably assured, considers among other matters, the
estimated  fair  value  of  the  underlying  collateral,   economic  conditions,
historical  loan loss  experience and other factors that warrant  recognition in
providing for an adequate loan allowance.  Although  management believes it uses
the best information  available to make such determinations,  future adjustments
to the  allowance  may be  necessary,  and net  income  could  be  significantly
affected if  circumstances  differ  substantially  from the assumptions  used in
making the initial determinations. At September 30, 1998, the Association had an
allowance for loan losses of $656,000.

     The following table sets forth an analysis of the  Association's  allowance
for loan losses at the dates indicated.

<TABLE>
<CAPTION>
                                                                   Year Ended September 30,
                                                               ------------------------------
                                                               1998       1997        1996
                                                               ----       ----       -------
                                                                   (Dollars In Thousands)

<S>                                                            <C>        <C>        <C>    
Balance at beginning of period ..........................      $668       $690       $   690

Charge-offs:
  One- to four-family ...................................        12         22            --

Recoveries ..............................................        --         --            --
                                                               ----       ----       -------

  Net charge-offs .......................................        12         22            --
                                                               ----       ----       -------
Balance at end of period ................................      $656       $668       $   690
                                                               ====       ====       =======

Ratio of net charge-offs during the period
to total loans at end of period .........................       .01%      0.03%         0.00%
                                                               ====       ====       =======

Allowance for loan losses to total loans at end of period       .70%      0.90%         1.02%
                                                               ====       ====       =======

Allowance for loan losses to non-performing
loans at end of period ..................................      52.30%     48.05%      114.62%
                                                               ====       ====       =======
</TABLE>

                                       18

<PAGE>



     The  distribution  of the  allowance  for  losses  on  loans  at the  dates
indicated is summarized as follows:

<TABLE>
<CAPTION>
                                                                          September 30,
                                            ---------------------------------------------------------------------------------------
                                                     1998                           1997                             1996
                                            ----------------------          -----------------------          ----------------------
                                                           Percent                          Percent                          Percent
                                                          of Loans                         of Loans                         of Loans
                                                           in Each                          in Each                          in Each
                                                          Category                         Category                         Category
                                                          to Total                         to Total                         to Total
                                            Amount         Loans            Amount           Loans           Amount           Loans
                                            ------         -----            ------           -----           ------           -----
                                                                           (Dollars in Thousands)
<S>                                         <C>             <C>              <C>             <C>              <C>             <C>   
Real Estate
  One- to four-family ...........           $286            71.06%           $391            84.30%           $357            82.29%
  Multi-family ..................             --              .99              --             1.53              --             1.97
  Non-residential ...............            103             8.97              92             9.83              87            10.36
  Construction ..................            214            15.87              --             1.00              11             2.63
Consumer ........................             20             3.11              35             3.34              30             2.75
Unallocated .....................             33               --             150               --             205               --
                                            ----           ------            ----           ------            ----           ------
    Total .......................           $656           100.00%           $668           100.00%           $690           100.00%
                                            ====           ======            ====           ======            ====           ======
</TABLE>

Investment Activities

     General.  First Federal must maintain  minimum levels of  investments  that
qualify as liquid  assets  under OTS  regulations.  Liquidity  may  increase  or
decrease  depending upon the  availability  of funds and  comparative  yields on
investments in relation to the return on loans.  Historically,  the  Association
has maintained liquid assets at levels above the minimum requirements imposed by
the OTS regulations and at levels believed  adequate to meet the requirements of
normal operations,  including  repayments of maturing debt and potential deposit
outflows.  Cash flow  projections  are regularly  reviewed and updated to assure
that adequate liquidity is maintained.  At September 30, 1998, the Association's
liquidity  ratio  (liquid  assets as a percentage  of net  withdrawable  savings
deposits and current  borrowings)  was 7.0%.  See  "Management's  Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital Resources" in the Annual Report and "Regulation - Liquidity."

     Federally  chartered  savings  institutions have the authority to invest in
various types of liquid assets,  including  United States Treasury  obligations,
securities  of various  federal  agencies,  certain  certificates  of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements  and  federal  funds.  Subject  to  various  restrictions,  federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally  chartered savings  institution is otherwise
authorized to make directly.

     Generally,  the  investment  policy of the Company is to invest funds among
various  categories  of  investments  and  maturities  based upon the  Company's
asset/liability  management  policies,  investment  quality  and  marketability,
liquidity needs and performance objectives.

     Investment Securities. At September 30, 1998, investment securities totaled
$8.4 million, or 6.8% of total assets. As of such date, the Association also had
a $1.6  million  investment  in  FHLB  stock,  satisfying  its  requirement  for
membership in the FHLB of Topeka. It is the Company's general policy to purchase
investment  securities  which are U.S.  Government  securities or federal agency
obligations  or other  issues  that are rated  investment  grade or have  credit
enhancements.  At September 30, 1998,  the average term to maturity or repricing
of the investment portfolio was 3.3 years.

                                       19

<PAGE>



     The following table sets forth the composition of the Company's  securities
portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                                           September 30,
                                                               --------------------------------------------------------------------
                                                                     1998                      1997                     1996
                                                               ------------------       ------------------       ------------------
                                                                Book        % of         Book        % of        Book         % of
                                                               Value       Total        Value        Total       Value        Total
                                                               ------      ------       ------      ------       ------      ------
                                                                                     (Dollars in Thousands)
<S>                                                            <C>          <C>         <C>          <C>         <C>          <C>   
Securities held to maturity:
  Federal agency obligations ..............................    $5,000       50.04%      $3,000       34.56%      $2,000       23.60%

Securities available for sale:
  U.S. Government securities ..............................        --          --          999       11.51        1,993       23.52
  Federal agency obligations ..............................     3,065       30.68        2,985       34.39        2,934       34.62
  Other marketable equity securities(1) ...................       353        3.53          327        3.77          308        3.63
                                                               ------      ------       ------      ------       ------      ------
     Total securities available for sale ..................     3,418       34.21        4,311       49.67        5,235       61.77
                                                               ------      ------       ------      ------       ------      ------

  FHLB stock ..............................................     1,574       15.75        1,369       15.77        1,240       14.63
                                                               ------      ------       ------      ------       ------      ------
     Total securities and FHLB stock ......................    $9,992      100.00%      $8,680      100.00%      $8,475      100.00%
                                                               ======      ======       ======      ======       ======      ======

  Average remaining life or term to repricing of securities
  (excluding FHLB stock and other marketable 
  equity securities) ......................................         3.51 yrs.                  4.61 yrs.               5.04 yrs.
Other Interest-Earning Assets:
  Short-term money market investments .....................    $  439      100.00%      $2,190      100.00%      $1,010      100.00%
                                                               ======      ======       ======      ======       ======      ====== 
Average remaining life or term to repricing of
securities and other interest-earning assets
(excluding FHLB stock and other marketable
equity securities) ........................................         3.33 yrs.                  3.51 yrs.               4.40 yrs.
</TABLE>

----------
(1)  Represents  primarily   investments  in  mutual  funds  investing  in  U.S.
     Government securities and federal agency obligations.




                                       20

<PAGE>



     The composition and maturities of the securities portfolio,  excluding FHLB
of Topeka stock, are indicated in the following table.

<TABLE>
<CAPTION>
                                                                      September 30, 1998
                                         -----------------------------------------------------------------------------
                                            Less Than         1 to 5         5 to 10            Total Investment
                                             1 Year           Years           Years                Securities
                                         --------------   --------------   --------------  ---------------------------
                                         Amortized Cost   Amortized Cost   Amortized Cost  Amortized Cost   Fair Value
                                         --------------   --------------   --------------  --------------   ----------
                                                               (Dollars in Thousands)
<S>                                          <C>              <C>             <C>             <C>             <C>   
Held to Maturity:                                                                                          
  Federal agency obligations ..........      $     --         $5,000          $     --        $5,000          $5,005
                                             --------         ------          --------        ------          ------
     Weighted average yield ...........           --%           6.30%               --%         6.30%      
                                             ========         ======          --------        ======       
                                                                                                           
Available for Sale:                                                                                        
  Federal agency obligations ..........      $    994         $1,993          $     --        $2,987          $3,066
  Other marketable equity securities(1)           347             --                --           347             352
                                             --------         ------          --------        ------          ------
     Total investment securities ......      $  1,341         $1,993          $     --        $3,334          $3,418
                                             ========         ======          ========        ======          ======
     Weighted average yield ...........          5.50%          5.86%               --%         5.71%      
                                             ========         ======          ========        ======       
</TABLE>

----------
(1)  Represents  primarily   investments  in  mutual  funds  investing  in  U.S.
     Government securities and federal agency obligations.


     The Company's  securities  portfolio at September 30, 1998, did not contain
securities  of any issuer with an  aggregate  book value in excess of 10% of the
Company's stockholders' equity, excluding securities issued by the United States
Government, or its agencies.

     The  Association's  securities  portfolio is managed in  accordance  with a
written investment policy adopted by the Board of Directors.  Investments may be
made by the Association's  officers within specified limits and must be approved
in advance by the Board of  Directors  for  transactions  over  certain  limits.
Effective October 1, 1994, the Company adopted Statement of Financial Accounting
Standards  No.  115  "Accounting  for  Certain  Investments  in Debt and  Equity
Securities"  ("SFAS  No.  115").  SFAS No.  115  requires  that  securities  and
mortgage-backed securities be classified as held to maturity, available for sale
or trading  purposes.  Under SFAS No. 115,  securities  that the Company has the
positive  intent and ability to hold until  maturity are  classified  as held to
maturity and are reported at amortized cost.  Securities classified as available
for sale are those the  Company may sell in response  to  liquidity  needs,  for
asset/liability  management  purposes and other reasons and are reported at fair
value. Unrealized gains and losses on securities available for sale are reported
as a  separate  component  of equity.  Trading  securities  are those  which are
purchased for sale in the near future and are reported at fair value. Unrealized
gains and losses on trading securities are included in income. Transfers between
categories  are accounted for as sales and  repurchases  at fair value.  For any
sales or transfers of securities classified as held to maturity, the cost basis,
the realized gain or loss, and the circumstances lending to the decision to sell
are  required  to be  disclosed.  At the  time of  purchase  of new  securities,
management  of  the  Company  makes  a  determination   as  to  the  appropriate
classification  of  securities  as available  for sale or held to  maturity.  At
September 30, 1998, the Company held no investments  for trading  purposes,  but
did hold securities and mortgage-backed securities as available for sale with an
amortized cost and market value of $3.3 million and $3.4 million, respectively.

     Mortgage-Backed   Securities.   The   Association   has  a   portfolio   of
mortgage-backed  securities and has utilized such  investments to complement its
mortgage  lending   activities.   At  September  30,  1998,  the   Association's
mortgage-backed  securities totaled $17.3 million. For information regarding the
carrying  and  fair  values  of  First  Federal's   mortgage-backed   securities
portfolio,  see Note C of the Notes to Consolidated  Financial Statements in the
Annual Report.


                                       21

<PAGE>



     At September  30,  1998,  $10.4  million,  or 60.4%,  of the  Association's
mortgage-backed securities carried adjustable-rates of interest. Under the OTS's
risk-based  capital  requirements,   Government  National  Mortgage  Association
("GNMA")  mortgage-backed  securities  have a zero  percent risk  weighting  and
Federal   National   Mortgage   Association   ("FNMA"),   FHLMC   and   AA-rated
mortgage-backed  securities  have a 20% risk  weighting,  in contrast to the 50%
risk weighting carried by one- to four-family  performing  residential  mortgage
loans.

     The  following  table  sets  forth  the   contractual   maturities  of  the
mortgage-backed securities at September 30, 1998.

<TABLE>
<CAPTION>
                                                                                                                       September 30,
                                                                           Due in                                          1998
                                    ----------------------------------------------------------------------------------    -------
                                    6 months    6 months       1 to        3 to 5      5 to 10    10 to 20     Over 20     Book 
                                    or Less     to 1 Year    3 Years        Years       Years       Years       Years      Value
                                    --------    --------     --------     --------     -------     -------     -------    -------
                                                                            (In Thousands)
<S>                                 <C>         <C>          <C>          <C>          <C>         <C>         <C>        <C>    
Held to Maturity
Adjustable-Rate Mortgage-Backed
Securities:
  Federal Home Loan Mortgage
     Corporation .................  $     --    $     --     $     --     $     --     $    --     $   131     $ 4,993    $ 5,124
  Federal National Mortgage
     Association .................        --          --           --           --          --       1,462       3,853      5,315
                                    --------    --------     --------     --------     -------     -------     -------    -------
     Total adjustable-rate .......        --          --           --           --          --       1,593       8,846     10,439
                                    --------    --------     --------     --------     -------     -------     -------    -------

Fixed-Rate Mortgage-Backed
Securities:
Federal Home Loan Mortgage
   Corporation ...................        --          --           --           --       2,806       1,283          --      4,089
Federal National Mortgage
   Association ...................        --          --           --           --       1,806         901          --      2,707
Government National Mortgage
   Association ...................        --          --           --           --          --          --          39         39
                                    --------    --------     --------     --------     -------     -------     -------    -------
  Total fixed-rate ...............        --          --           --           --       4,612       2,184          39      6,835
                                    --------    --------     --------     --------     -------     -------     -------    -------
Total mortgage-backed 
    securities held to maturity ..  $     --    $     --     $     --     $     --     $ 4,612     $ 3,777     $ 8,885    $17,274
                                    ========    ========     ========     ========     =======     =======     =======    =======
</TABLE>

Sources of Funds

     General. The Company's primary sources of funds are deposits,  amortization
and repayment of loan principal (including mortgage-backed securities), sales or
maturities of investment securities,  mortgage-backed  securities and short-term
investments, borrowings, and funds provided from operations.

     Borrowings  may be used on a short-term  basis to  compensate  for seasonal
reductions in deposits or deposit  inflows at less than  projected  levels,  and
have been used in the past on a longer-term basis to support lending activities.
The Association had $30.1 million in FHLB advances  outstanding at September 30,
1998.

     Deposits.  First Federal offers a variety of deposit accounts having a wide
range of  interest  rates and  terms.  The  Association's  deposits  consist  of
passbook accounts,  NOW accounts, and money market and certificate accounts. The
Association  relies primarily on advertising,  competitive  pricing policies and
customer  service to attract and retain these deposits.  First Federal  solicits
deposits from its market area only and does not use brokers to obtain deposits.


                                       22

<PAGE>



     The flow of  deposits  is  influenced  significantly  by  general  economic
conditions,   changes  in  money  market  and  prevailing   interest  rates  and
competition.  The variety of deposit  accounts  offered by the  Association  has
allowed it to be competitive in obtaining funds and to respond with  flexibility
to changes in consumer  demand.  The Association has become more  susceptible to
short-term  fluctuations in deposit flows as customers have become more interest
rate conscious.  The Association  manages the pricing of its deposits in keeping
with its asset/liability  management and profitability objectives.  Based on its
experience,    the   Association   believes   that   its   passbook,   NOW   and
non-interest-bearing   checking   accounts  are  relatively  stable  sources  of
deposits.  However,  the  ability of the  Association  to attract  and  maintain
certificates of deposit, and the rates paid on these deposits, has been and will
continue to be significantly affected by market conditions.

     Effective  April 1, 1993, the  Association  introduced a new certificate of
deposit program in an attempt to reduce deposit outflows and attract longer term
deposits  which were lost as a result of the general  decline in market rates of
interest.  This program offers two new certificate products which have four- and
five-year terms. The following table sets forth information regarding the dollar
amount and percent of certificates of deposit of this program.


                                                                   % of Total
                                     At September 30, 1998        Certificates
                                     ---------------------       ---------------
                                   (Dollars in Thousands)

Four-Year Certificate..........             $1,279                         2.46%
Five-Year Certificate..........              6,297                        12.12



                                       23

<PAGE>



     The following table sets forth the dollar amount of savings deposits in the
various  types of  deposit  programs  offered by the  Association  for the dates
indicated  and the rates  offered.  See Note H of the Notes to the  Consolidated
Financial Statements in the Annual Report for weighted average nominal rates.

<TABLE>
<CAPTION>
                                                                             September 30,
                                                ------------------------------------------------------------------------
                                                        1998                     1997                      1996
                                                --------------------      --------------------      --------------------
                                                            Percent                   Percent                   Percent
                                                Amount      of Total      Amount      of Total      Amount      of Total
                                                ------      --------      ------      --------      ------      --------
                                                                        (Dollars In Thousands)
<S>                                             <C>          <C>          <C>          <C>          <C>          <C>    
Transactions and Savings Deposits:

 Passbook Demand (2.85%) .................      $ 2,745        3.40%      $ 2,703        3.54%      $ 2,649        3.82%
 NOW Accounts (2.00-2.50%) ...............        3,939        4.88         3,763        4.93         3,232        4.66
 Money Market Accounts (2.50-5.25%) ......       21,952       27.22        20,702       27.13        15,553       22.40
                                                -------      ------       -------      ------       -------      ------

   Total Transactions and Savings Deposits       28,636       35.50        27,168       35.60        21,434       30.88
                                                -------      ------       -------      ------       -------      ------

Certificates:

 0.00 - 3.99% ............................            3         .01             5        0.01             9        0.01
 4.00 - 4.99% ............................        1,792        2.22         2,189        2.87         4,216        6.07
 5.00 - 5.99% ............................       45,364       56.24        39,911       52.30        30,296       43.64
 6.00 - 6.99% ............................        4,751        5.89         6,930        9.08        13,367       19.25
 7.00% and over ..........................           27         .03            26        0.03            34        0.05
                                                -------      ------       -------      ------       -------      ------

Total Certificates .......................       51,937       64.39        49,061       64.29        47,922       69.02
                                                -------      ------       -------      ------       -------      ------
Accrued Interest .........................           85         .11            82        0.11            70        0.10
                                                -------      ------       -------      ------       -------      ------
Total Deposits ...........................      $80,658      100.00%      $76,311      100.00%      $69,426      100.00%
                                                =======      ======       =======      ======       =======      ======
</TABLE>


                                       24

<PAGE>



     The following table sets forth the savings flows at the Association  during
the periods  indicated.  Net increase  refers to the amount of deposits during a
period less the amount of withdrawals during the period.


                                           Year Ended September 30,
                               -----------------------------------------------
                                  1998               1997               1996
                               ---------          ---------          ---------
                                             (Dollars In Thousands)

Opening balance .......        $  76,229          $  69,356          $  67,927
Deposits ..............          101,678             86,304             65,771
Withdrawals ...........         (100,512)           (82,247)           (67,067)
Interest credited .....            3,178              2,816              2,725
                               ---------          ---------          ---------
Ending balance ........        $  80,573          $  76,229          $  69,356
                               =========          =========          =========

Net increase ..........        $   4,344          $   6,873          $   1,429
                               =========          =========          =========

Percent increase ......             5.70%              9.91%              2.10%
                               =========          =========          =========


     The  following   table  shows  rate  and  maturity   information   for  the
Association's certificates of deposit as of September 30, 1998.

<TABLE>
<CAPTION>
                                     0.00-          4.00-          5.00-          6.00-         7.00% or                    Percent
                                     3.99%          4.99%          5.99%          6.99%         greater         Total       of Total
                                    -------        -------        -------        -------        -------        -------      --------
Certificate accounts maturing in quarter ending:

<S>                                 <C>            <C>            <C>            <C>            <C>            <C>            <C>   
December 31, 1998 ...........       $     3        $ 1,033        $ 6,361        $   187             --        $ 7,584        14.60%
March 31, 1999 ..............            --            759          9,322             37             --         10,118        19.48
June 30, 1999 ...............            --             --          8,248             67             --          8,315        16.01
September 30, 1999 ..........            --             --         12,538            680             --         13,218        25.45
December 31, 1999 ...........            --             --          2,469            427             --          2,896         5.58
March 31, 2000 ..............            --             --          2,223            739        $    27          2,989         5.76
June 30, 2000 ...............            --             --            760            156             --            916         1.76
September 30, 2000 ..........            --             --            677            198             --            875         1.68
December 31, 2000 ...........            --             --            777            580             --          1,357         2.61
March 31, 2001 ..............            --             --            833             --             --            833         1.60
June 30, 2001 ...............            --             --            110             75             --            185         0.36
September 30, 2001 ..........            --             --              7            422             --            429         0.83
December 31, 2001 ...........            --             --             85            682             --            767         1.48
Thereafter ..................                           --            954            501             --          1,455         2.80
                                    -------        -------        -------        -------        -------        -------       ------

  TOTAL .....................       $     3        $ 1,792        $45,364        $ 4,751        $    27        $51,937       100.00%
                                    =======        =======        =======        =======        =======        =======       ======

Percent of Total ............          0.01%          3.45%         87.34%          9.15%         0.05%
                                    =======        =======        =======        =======        ======
</TABLE>


                                       25

<PAGE>



     The following table indicates the amount of the Association's  certificates
of deposit and other deposits by time  remaining  until maturity as of September
30, 1998.

<TABLE>
<CAPTION>
                                                                                   Maturity
                                                             --------------------------------------------------------
                                                                              Over            Over
                                                             3 Months        3 to 6          6 to 12          Over
                                                             or Less         Months          Months         12 Months         Total
                                                             -------         ------          ------         ---------         -----
                                                                                          (In Thousands)
<S>                                                          <C>             <C>             <C>             <C>             <C>    
Certificates of deposit less than $100,000 .........         $ 6,637         $ 8,776         $20,253         $11,650         $47,316
Certificates of deposit of $100,00 or more .........             246             514             821           1,052           2,633
Public funds(1) ....................................             701             828             459              --           1,988
                                                             -------         -------         -------         -------         -------
Total certificates of deposit ......................         $ 7,584         $10,118         $21,533         $12,702         $51,937
                                                             =======         =======         =======         =======         =======
</TABLE>

----------
(1)  Deposits from governmental and other public entities.

     Borrowings.  Although  deposits are the Company's  primary source of funds,
the Company's policy has been to utilize  borrowings when they are a less costly
source of funds or can be invested at a positive  rate of return.  In  addition,
the Association has relied upon borrowings for short-term liquidity needs.

     First Federal may obtain advances from the FHLB of Topeka upon the security
of its capital stock in the FHLB of Topeka and certain of its mortgage loans and
mortgage-backed  securities.  Such  advances  may be made  pursuant  to  several
different credit programs,  each of which has its own interest rate and range of
maturities.  At September 30, 1998,  the  Association  had $30.1 million in FHLB
advances outstanding.

     The following  table sets forth the maximum  month-end  balance and average
balance of the  Association's  FHLB advances and other borrowings at and for the
dates indicated.

                                        At and for the Year Ended September 30,
                                       -----------------------------------------
                                        1998              1997            1996
                                       -------          -------          -------
                                                    (In Thousands)

Maximum Balance:
 FHLB advances ..............          $30,100          $25,000          $24,400

Average Balance:
 FHLB advances ..............          $26,492          $23,583          $19,133

     The following table sets forth certain  information as to the Association's
FHLB advances at the dates indicated.


                                                   September 30,
                                    -------------------------------------------
                                      1998             1997              1996
                                    -------           -------           -------
                                                  (In Thousands)

FHLB advances ............          $30,100           $23,700           $24,300

Weighted average interest
rate of FHLB advances ....            5.684%            5.930%            5.682%



                                       26

<PAGE>



Regulation

     General.   First  Federal  is  a  federally   chartered  savings  and  loan
association,  the deposits of which are federally insured and backed by the full
faith and credit of the United States Government.  Accordingly, First Federal is
subject  to  broad  federal  regulation  and  oversight  extending  to  all  its
operations.  First  Federal  is a member of the FHLB of Topeka and is subject to
certain  limited  regulation  by the Board of Governors  of the Federal  Reserve
System  ("Federal  Reserve  Board").  As the savings and loan holding company of
First Federal,  the Company also is subject to federal regulation and oversight.
The purpose of the  regulation of the Company and other holding  companies is to
protect  subsidiary  savings  associations.  First  Federal  is a member  of the
Savings  Association  Insurance  Fund  ("SAIF"),  which  together  with the Bank
Insurance Fund ("BIF") are the two deposit  insurance funds  administered by the
FDIC,  and the deposits of First  Federal are insured by the FDIC.  As a result,
the FDIC has certain regulatory and examination authority over First Federal.

     Certain of these  regulatory  requirements  and  restrictions are discussed
below or elsewhere in this document.

     Federal Regulation of Savings Associations. The OTS has extensive authority
over the operations of savings  associations.  As part of this authority,  First
Federal is  required  to file  periodic  reports  with the OTS and is subject to
periodic  examinations  by the OTS and the FDIC.  The last  regular OTS and FDIC
examinations  of First Federal were  commenced as of July 1998 and October 1992,
respectively.  Under  agency  scheduling  guidelines,  it is likely that another
examination  will be initiated in the near future.  When these  examinations are
conducted by the OTS and the FDIC,  the  examiners  may require First Federal to
provide  for  higher  general  or  specific  loan  loss  reserves.  All  savings
associations  are subject to a  semi-annual  assessment,  based upon the savings
association's  total assets,  to fund the operations of the OTS. First Federal's
OTS assessment for the fiscal year ended September 30, 1998, was $35,577.

     The  OTS  also  has  extensive   enforcement  authority  over  all  savings
institutions  and their  holding  companies,  including  First  Federal  and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate  injunctive  actions.  In  general,  these  enforcement  actions may be
initiated  for  violations  of  laws  and  regulations  and  unsafe  or  unsound
practices.  Other  actions or  inactions  may provide the basis for  enforcement
action,  including  misleading or untimely  reports  filed with the OTS.  Except
under certain  circumstances,  public disclosure of final enforcement actions by
the OTS is required.

     In  addition,  the  investment,  lending and  branching  authority of First
Federal is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance,  no savings institution may
invest in  non-investment  grade  corporate debt  securities.  In addition,  the
permissible  level of  investment  by federal  associations  in loans secured by
non-residential real property may not exceed 400% of total capital,  except with
approval of the OTS. Federal savings  associations are also generally authorized
to  branch   nationwide.   First  Federal  is  in  compliance   with  the  noted
restrictions.

     First Federal's general permissible lending limit for loans-to-one-borrower
is equal to the  greater of $500,000  or 15% of  unimpaired  capital and surplus
(except for loans fully secured by certain  readily  marketable  collateral,  in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1998,  First  Federal's  lending limit under this  restriction was
approximately $1.6 million.  At September 30, 1998, the Association had no loans
in excess of its loans-to-one-borrower limit.

     The  OTS,  as well as the  other  federal  banking  agencies,  has  adopted
guidelines  establishing  safety and soundness standards on such matters as loan
underwriting and  documentation,  asset quality,  earnings  standards,  internal
controls and audit  systems,  interest rate risk exposure and  compensation  and
other

                                       27

<PAGE>



employee  benefits.  Any institution  which fails to comply with these standards
must submit a  compliance  plan. A failure to submit a plan or to comply with an
approved plan will subject the institution to further enforcement action.

     Insurance of Accounts and Regulation by the FDIC. First Federal is a member
of the SAIF,  which is  administered  by the FDIC.  Deposits  are  insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States  Government.  As insurer,  the FDIC imposes  deposit
insurance  premiums and is authorized to conduct  examinations of and to require
reporting by FDIC-insured  institutions.  It also may prohibit any  FDIC-insured
institution  from engaging in any activity the FDIC  determines by regulation or
order  to pose a  serious  risk to the SAIF or the  BIF.  The FDIC  also has the
authority to initiate  enforcement actions against savings  associations,  after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.

     The FDIC's  deposit  insurance  premiums are assessed  through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to  risk-weighted  assets  ("Tier 1  risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based  capital  ratio  of less  than  8%)  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.

     The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it  determines  that the  reserve  ratio of the  SAIF  will be less  than the
designated  reserve ratio of 1.25% of  SAIF-insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC.  The FDIC may also impose  special  assessments  on SAIF  members to repay
amounts  borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

     Regulatory Capital  Requirements.  Federally insured savings  associations,
such as First  Federal,  are required to maintain a minimum  level of regulatory
capital. The OTS has established capital standards, including a tangible capital
requirement,  a leverage  ratio (or core capital)  requirement  and a risk-based
capital  requirement  applicable  to such savings  associations.  These  capital
requirements   must  be  generally  as  stringent  as  the  comparable   capital
requirements  for national  banks.  The OTS is also authorized to impose capital
requirements in excess of these  standards on individual  associations on a case
by case basis.

     The  capital  regulations  require  tangible  capital  of at least  1.5% of
adjusted total assets (as defined by  regulation).  Tangible  capital  generally
includes  common   stockholders'   equity  and  retained  income,   and  certain
noncumulative  perpetual  preferred stock and related income.  In addition,  all
intangible  assets,  other than a limited amount of purchased mortgage servicing
rights,  must be deducted from  tangible  capital.  At September  30, 1998,  the
Association did not have any intangible assets.

     The OTS  regulations  establish  special  capitalization  requirements  for
savings associations that own subsidiaries.  In determining  compliance with the
capital requirements,  all subsidiaries engaged solely in activities permissible
for national  banks or engaged in certain other  activities  solely as agent for
its customers are  "includable"  subsidiaries  that are consolidated for capital
purposes in proportion to the association's  level of ownership.  For excludable
subsidiaries, the debt and equity investments in such

                                       28

<PAGE>



subsidiaries  are deducted from assets and capital.  At September 30, 1998,  the
Association had no subsidiaries.

     At September 30, 1998, First Federal had tangible capital of $10.5 million,
or 8.54% of adjusted total assets, which is approximately $8.7 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

     The capital  standards  also require  core capital  equal to at least 3% of
adjusted total assets.  Core capital generally consists of tangible capital plus
certain intangible  assets,  including a limited amount of purchased credit card
relationships.  As a result of the prompt corrective action provisions discussed
below,  however, a savings  association must maintain a core capital ratio of at
least  4%  to  be  considered  adequately  capitalized  unless  its  supervisory
condition  is such to allow it to maintain a 3% ratio.  At  September  30, 1998,
First Federal had no intangibles which were subject to these tests.

     At  September  30,  1998,  First  Federal had core  capital  equal to $10.5
million,  or 8.54% of adjusted  total  assets,  which is $6.8 million  above the
minimum leverage ratio requirement of 3% in effect on that date.

     The OTS risk-based  requirement requires savings associations to have total
capital of at least 8% of risk-weighted  assets.  Total capital consists of core
capital,  as defined above, and  supplementary  capital.  Supplementary  capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based  requirement  only to the extent of core capital.  The
OTS is  also  authorized  to  require  a  savings  association  to  maintain  an
additional  amount of total capital to account for  concentration of credit risk
and the risk of non-traditional activities. At September 30, 1998, First Federal
had no capital instruments that qualify as supplementary capital and $656,000 of
general  loss  reserves,  none of which was in excess of 1.25% of  risk-weighted
assets.

     Certain  exclusions from capital and assets are required to be made for the
purpose  of  calculating  total  capital.  Such  exclusions  consist  of  equity
investments  (as  defined  by  regulation)  and that  portion  of land loans and
non-residential  construction loans in excess of an 80% loan-to-value  ratio and
reciprocal holdings of qualifying capital instruments. First Federal had no such
exclusions from capital and assets at September 30, 1998.

     In determining the amount of risk-weighted  assets,  all assets,  including
certain  off-balance sheet items,  will be multiplied by a risk weight,  ranging
from 0% to 100%,  based on the risk inherent in the type of asset.  For example,
the OTS has assigned a risk weight of 50% for prudently  underwritten  permanent
one- to four-family  first lien mortgage loans not more than 90 days  delinquent
and  having a loan to value  ratio of not more  than 80% at  origination  unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.

     OTS regulations also require that every savings  association with more than
normal  interest  rate risk  exposure  to deduct  from its  total  capital,  for
purposes of determining compliance with such requirement, an amount equal to 50%
of its  interest-rate  risk  exposure  multiplied  by the  present  value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings  association,  greater  than 2% of the  present  value of its
assets,  based upon a  hypothetical  200 basis  point  increase  or  decrease in
interest rates (whichever results in a greater decline).  Net portfolio value is
the  present  value  of  expected  cash  flows  from  assets,   liabilities  and
off-balance  sheet  contracts.  The rule will not become effective until the OTS
evaluates the process by which savings  associations may appeal an interest rate
risk deduction determination.  It is uncertain as to when this evaluation may be
completed. Any savings

                                       29

<PAGE>



association  with less than $300 million in assets and a total  capital ratio in
excess of 12%, such as the Association,  is exempt from this requirement  unless
the OTS determines otherwise.

     On September 30, 1998, First Federal had total risk-based  capital of $11.2
million  (including  $10.5  million in core capital and  $656,000 in  qualifying
supplementary  capital)  and  risk-weighted  assets of $62.6  million;  or total
capital of 17.82% of  risk-weighted  assets.  This amount was $6.1 million above
the 8% requirement in effect on that date.

     The OTS and the  FDIC  are  authorized  and,  under  certain  circumstances
required, to take certain actions against savings associations that fail to meet
their  capital  requirements.  The OTS is  generally  required to take action to
restrict the activities of an "undercapitalized  association" (generally defined
to be  one  with  less  than  either  a 4%  core  capital  ratio,  a 4%  Tier  1
risked-based  capital  ratio  or an  8%  risk-based  capital  ratio).  Any  such
association  must  submit a  capital  restoration  plan and  until  such plan is
approved by the OTS may not increase its assets,  acquire  another  institution,
establish a branch or engage in any new  activities,  and generally may not make
capital   distributions.   The  OTS  is  authorized  to  impose  the  additional
restrictions that are applicable to significantly undercapitalized associations.

     As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited  capital  maintenance   guarantee  with  respect  to  the  institution's
achievement of its capital requirements.

     Any savings  association  that fails to comply with its capital  plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less  than 3% or a  risk-based  capital  ratio of less  than 6%) must be made
subject  to  one  or  more  of  additional   specified   actions  and  operating
restrictions  which may cover all aspects of its operations and include a forced
merger  or  acquisition  of  the   association.   An  association  that  becomes
"critically  undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly  undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator  with the concurrence of the FDIC) for a
savings  association,  with certain limited exceptions,  within 90 days after it
becomes critically  undercapitalized.  Any undercapitalized  association is also
subject to the general enforcement  authority of the OTS and the FDIC, including
the appointment of a conservator or receiver.

     The OTS is also generally  authorized to reclassify an  association  into a
lower capital category and impose the  restrictions  applicable to such category
if the institution is engaged in unsafe or unsound  practices or is in an unsafe
or unsound condition.

     The  imposition  by the OTS or the FDIC of any of these  measures  on First
Federal may have a substantial adverse effect on First Federal's  operations and
profitability and the value of the Company's common stock.  Company shareholders
do not have preemptive rights, and therefore,  if the Company is directed by the
OTS or the FDIC to issue  additional  shares of common stock,  such issuance may
result  in the  dilution  in  the  percentage  of  ownership  of  the  Company's
shareholders.

     Limitations on Dividends and Other Capital  Distributions.  OTS regulations
impose  various  restrictions  on  savings  associations  with  respect to their
ability  to make  distributions  of  capital,  which  include  dividends,  stock
redemptions or repurchases,  cash-out mergers and other transactions  charged to
the capital account.  OTS regulations  also prohibit a savings  association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result,  the regulatory  capital of the  association  would be reduced below the
amount  required to be maintained  for the  liquidation  account  established in
connection with its mutual to stock conversion.


                                       30

<PAGE>



     Generally,  savings  associations,  such as First Federal,  that before and
after the  proposed  distribution  meet  their  capital  requirements,  may make
capital  distributions  during any calendar year equal to the greater of 100% of
net  income for the  year-to-date  plus 50% of the amount by which the lesser of
the  association's  tangible,  core or  risk-based  capital  exceeds its capital
requirement  for such  capital  component,  as measured at the  beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However,  an association deemed to be in need of more than normal supervision by
the OTS may have its dividend  authority  restricted by the OTS. The Company may
pay dividends in accordance with this general authority.

     Savings  associations  proposing to make any capital distribution need only
submit  written  notice to the OTS 30 days prior to such  distribution.  Savings
associations  that do not,  or would  not meet  their  current  minimum  capital
requirements following a proposed capital distribution, however, must obtain OTS
approval  prior  to  making  such  distribution.  The  OTS  may  object  to  the
distribution  during that 30-day  period  notice  based on safety and  soundness
concerns. See "- Regulatory Capital Requirements."

     The OTS has  proposed  regulations  that would  revise the current  capital
distribution  restrictions.  Under the proposal a savings association may make a
capital  distribution  without notice to the OTS (unless it is a subsidiary of a
holding  company)  provided  that  it  has a  CAMEL  1 or 2  rating,  is  not of
supervisory concern, and would remain adequately  capitalized (as defined in the
OTS prompt corrective action regulations)  following the proposed  distribution.
Savings  associations  that would remain  adequately  capitalized  following the
proposed  distribution but do not meet the other noted  requirements must notify
the OTS 30 days prior to  declaring  a capital  distribution.  The OTS stated it
will generally regard as permissible that amount of capital  distributions  that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings  association  may not make a capital
distribution  without  prior  approval  of  the  OTS  and  the  FDIC  if  it  is
undercapitalized  before,  or as a result of, such a distribution.  As under the
current  rule,  the  OTS  may  object  to a  capital  distribution  if it  would
constitute  an unsafe  or  unsound  practice.  No  assurance  may be given as to
whether or in what form the regulations may be adopted.

     Liquidity. All savings associations,  including First Federal, are required
to  maintain  an  average  daily  balance  of liquid  assets  equal to a certain
percentage of the sum of its average daily balance of net  withdrawable  deposit
accounts and  borrowings  payable in one year or less.  For a discussion of what
the  Association  includes in liquid assets,  see  "Management's  Discussion and
Analysis of Financial Condition and Results of Operations -Liquidity and Capital
Resources" in the Annual Report.  This liquid asset ratio  requirement  may vary
from time to time (between 4% and 10%)  depending  upon economic  conditions and
savings  flows of all savings  associations.  At the present  time,  the minimum
liquid asset ratio is 4%. At September 30, 1998, First Federal was in compliance
with this requirement, with a liquid asset ratio of 7.0%.

     Accounting.  An OTS policy statement applicable to all savings associations
clarifies  and  reemphasizes  that  the  investment   activities  of  a  savings
association  must be in  compliance  with  approved  and  documented  investment
policies and strategies,  and must be accounted for in accordance with generally
accepted accounting principles ("GAAP"). Under the policy statement,  management
must  support its  classification  of and  accounting  for loans and  securities
(i.e.,   whether  held  for  investment,   sale  or  trading)  with  appropriate
documentation. First Federal is in compliance with these amended rules.

     OTS accounting  regulations,  which may be made more stringent than GAAP by
the OTS,  require that  transactions  be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must  incorporate any other accounting  regulations or orders  prescribed by the
OTS.


                                       31

<PAGE>



     Qualified  Thrift Lender Test. All savings  associations,  including  First
Federal,  are required to meet a qualified  thrift lender  ("QTL") test to avoid
certain  restrictions  on  their  operations.   This  test  requires  a  savings
association  to have  at  least  65% of its  portfolio  assets  (as  defined  by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative,  the savings  association
may maintain 60% of its assets in those assets specified in Section  7701(a)(19)
of the Internal Revenue Code.  Under either test, such assets primarily  consist
of residential  housing  related loans and  investments.  At September 30, 1998,
First Federal met the test and has always met the test since its  effectiveness.
At September 30, 1998, First Federal's QTL percentage was 92.4%.

     Any savings  association  that fails to meet the QTL test must convert to a
national bank charter,  unless it requalifies as a QTL and thereafter  remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  If such an  association  has not yet  requalified  or  converted  to a
national  bank,  its  new  investments  and  activities  are  limited  to  those
permissible  for both a  savings  association  and a  national  bank,  and it is
limited to national bank branching  rights in its home state.  In addition,  the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "- Holding Company Regulation."

     Community  Reinvestment Act. Under the Community  Reinvestment Act ("CRA"),
every FDIC insured  institution  has a  continuing  and  affirmative  obligation
consistent  with safe and sound banking  practices to help meet the credit needs
of its entire community,  including low and moderate income  neighborhoods.  The
CRA does not establish  specific lending  requirements or programs for financial
institutions nor does it limit an institution's  discretion to develop the types
of products  and  services  that it believes  are best suited to its  particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of First Federal, to assess the institution's  record of meeting
the credit  needs of its  community  and to take such record into account in its
evaluation of certain  applications,  such as a merger or the establishment of a
branch, by First Federal. An unsatisfactory  rating may be used as the basis for
the denial of an application by the OTS.

     The federal banking agencies,  including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's  compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years,  the  Association  may be  required  to devote  additional  funds for
investment and lending in its local community.  The Association was examined for
CRA compliance in March 1998 and received a rating of satisfactory.

     Transactions  with Affiliates.  Generally,  transactions  between a savings
association or its  subsidiaries  and its affiliates are required to be on terms
as  favorable  to  the  association  as  transactions  with  non-affiliates.  In
addition,  certain of these  transactions,  such as loans to an  affiliate,  are
restricted to a percentage  of the  association's  capital.  Affiliates of First
Federal  include the Company and any company which is under common  control with
First Federal. In addition,  a savings association may not lend to any affiliate
engaged in activities not  permissible for a bank holding company or acquire the
securities  of most  affiliates.  First  Federal's  subsidiaries  are not deemed
affiliates; however, the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.

     Certain  transactions with directors,  officers or controlling  persons are
also  subject to  conflict of interest  regulations  enforced by the OTS.  These
conflict of interest regulations and other statutes also

                                       32

<PAGE>



impose restrictions on loans to such persons and their related interests.  Among
other  things,  such loans must be made on terms  substantially  the same as for
loans to unaffiliated individuals.

     Holding  Company  Regulation.  The  Company is a unitary  savings  and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is  required  to  register  and  file  reports  with the OTS and is  subject  to
regulation  and  examination  by the OTS. In addition,  the OTS has  enforcement
authority over the Company and its non-savings  association  subsidiaries  which
also permits the OTS to restrict or prohibit  activities  that are determined to
be a serious risk to the subsidiary savings association.

     As a unitary savings and loan holding company, the Company generally is not
subject to activity  restrictions.  If the Company  acquires  control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan  holding  company,  and the  activities  of the  Company and any of its
subsidiaries  (other  than the  Association  or any other  SAIF-insured  savings
association)  would  become  subject  to such  restrictions,  unless  such other
associations  each  qualify  as  a  QTL  and  were  acquired  in  a  supervisory
acquisition.

     If First Federal  fails the QTL test,  the Company must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries,  any  business  activity  other than those  approved  for multiple
savings and loan holding companies or their  subsidiaries.  In addition,  within
one year of such failure the Company must  register as, and will become  subject
to, the  restrictions  applicable  to bank  holding  companies.  The  activities
authorized  for a bank holding  company are more limited than are the activities
authorized for a unitary or multiple  savings and loan holding  company.  See "-
Qualified Thrift Lender Test."

     The Company must obtain approval from the OTS before  acquiring  control of
any other SAIF-insured  association.  Such acquisitions are generally prohibited
if they  result in a  multiple  savings  and loan  holding  company  controlling
savings  associations  in  more  than  one  state.   However,   such  interstate
acquisitions  are  permitted  based  on  specific  state  authorization  or in a
supervisory acquisition of a failing savings association.

     Federal Securities Law. The stock of the Company is registered with the SEC
under the  Exchange  Act.  The  Company  is subject  to the  information,  proxy
solicitation,  insider trading  restrictions  and other  requirements of the SEC
under the Exchange Act.

     Company  stock  held by persons  who are  affiliates  (generally  officers,
directors and principal  stockholders)  of the Company may not be resold without
registration or unless sold in accordance with certain resale  restrictions.  If
the Company  meets  specified  current  public  information  requirements,  each
affiliate  of the  Company  is  able  to  sell  in the  public  market,  without
registration, a limited number of shares in any three-month period.

     Federal Reserve  System.  The Federal Reserve Board requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking accounts).  At September 30, 1998, First Federal 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."

     Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust  other  reasonable   alternative   sources  of  funds,   including  FHLB
borrowings, before borrowing from the Federal Reserve Bank.

                                       33

<PAGE>



     Federal  Home Loan Bank  System.  First  Federal is a member of the FHLB of
Topeka,  which is one of 12 regional FHLBs that  administers  the home financing
credit  function  of  savings  associations.  Each FHLB  serves as a reserve  or
central bank for its members within its assigned region.  It is funded primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes loans to members (i.e.,  advances) in accordance with policies
and  procedures,  established  by the board of directors of the FHLB,  which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition,  all long-term  advances are required to provide funds
for residential home financing.

     As a member,  First  Federal is required to purchase and maintain  stock in
the FHLB of Topeka.  At September  30, 1998,  First  Federal had $1.6 million in
FHLB stock, which was in compliance with this requirement.  In past years, First
Federal has received substantial dividends on its FHLB stock. Over the past five
fiscal years such  dividends  have averaged 6.67% and were 7.66% for fiscal year
1998.

     Under  federal  law,  the  FHLBs  are  required  to  provide  funds for the
resolution  of  troubled  savings  associations  and to  contribute  to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income  housing
projects.  These  contributions  have  affected  adversely  the  level  of  FHLB
dividends  paid and could continue to do so in the future.  These  contributions
could also have an adverse  effect on the value of FHLB stock in the  future.  A
reduction in value of First  Federal's FHLB stock may result in a  corresponding
reduction in First Federal's capital.

     For the fiscal year ended September 30, 1998, dividends paid by the FHLB of
Topeka to First Federal totaled  $109,591,  which  constitute a $20,410 increase
over the amount of dividends received in fiscal year 1997.

     Federal  Taxation.  Savings  associations  such as the Association that met
certain  definitional  tests  relating  to the  composition  of assets and other
conditions  prescribed  by the Internal  Revenue  Code of 1986,  as amended (the
"Code"),  were permitted to establish  reserves for bad debts and to make annual
additions  thereto which could,  within specified  formula limits, be taken as a
deduction  in  computing  taxable  income for federal  income tax  purposes  for
taxable  years  beginning  prior to January 1, 1997.  The amount of the bad debt
reserve deduction for  "non-qualifying  loans" was computed under the experience
method.  The  amount of the bad debt  reserve  deduction  for  "qualifying  real
property  loans"  (generally  loans  secured by improved  real estate)  could be
computed under either the experience  method or the percentage of taxable income
method (based on an annual election).

     Under the experience  method,  the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.

     The  percentage  of  specially  computed  taxable  income  that was used to
compute a savings  association's bad debt reserve deduction under the percentage
of taxable  income  method (the  "percentage  bad debt  deduction")  was 8%. The
percentage bad debt deduction thus computed was reduced by the amount  permitted
as a  deduction  for  non-qualifying  loans  under the  experience  method.  The
availability  of the  percentage of taxable income method  permitted  qualifying
savings  associations to be taxed at a lower  effective  federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).

     Under the  percentage of taxable  income  method,  the  percentage bad debt
deduction  could not exceed the amount  necessary to increase the balance in the
reserve for  "qualifying  real property  loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the

                                       34

<PAGE>



amount  deductible  under the  experience  method or (ii) the amount  which when
added to the bad debt deduction for "non-qualifying loans" equaled the amount by
which 12% of the amount comprising savings accounts at year end exceeded the sum
of surplus, undivided profits and reserves at the beginning of the year.

     In August 1996,  legislation  was enacted that repeals the  above-described
reserve method of accounting (including the percentage of taxable income method)
used by many thrift institutions to calculate their bad debt reserve for federal
income tax  purposes.  Thrift  institutions  with $500 million or less in assets
may, however,  continue to use the experience method. As a result, First Federal
must  recapture  that  portion of the reserve that exceeds the amount that could
have been taken  under the  experience  method  for  post-1987  tax  years.  The
legislation  also requires  thrifts to account for bad debts for federal  income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995.  The recapture will occur over a six-year  period  commencing
with the year ended  September 30, 1997. The  legislation  also requires  thrift
institutions  to account  for bad debts for federal  income tax  purposes on the
same basis as commercial banks for tax years beginning after December 31, 1995.

     In addition to the regular  income  tax,  corporations,  including  savings
associations such as the Association, generally are subject to a minimum tax. An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative  minimum  taxable  income.  For taxable years  beginning
after 1986 and before 1997, corporations, including savings associations such as
First  Federal,  are also subject to an  environmental  tax equal to .12% of the
excess of alternative  minimum  taxable income for the taxable year  (determined
without regard to net operating  losses and the deduction for the  environmental
tax) over $2 million.

     To the extent  earnings  appropriated to a savings  association's  bad debt
reserves for  "qualifying  real property  loans" and deducted for federal income
tax purposes  exceed the allowable  amount of such reserves  computed  under the
experience method and to the extent of the association's  supplemental  reserves
for  losses on loans  ("Excess"),  such  Excess  may not,  without  adverse  tax
consequences,   be  utilized  for  the  payment  of  cash   dividends  or  other
distributions   to  a  shareholder   (including   distributions  on  redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of September 30, 1998,  the  Association's  Excess for tax purposes
totaled approximately $2.5 million.

     The Company and Association file consolidated federal income tax returns on
a fiscal year basis using the accrual method of accounting. Thrift institutions,
such as the  Association,  that file  federal  income  tax  returns as part of a
consolidated  group are required by applicable  Treasury  regulations  to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings  association members of
the consolidated  group that are  functionally  related to the activities of the
savings association member.

     The Company has not been  audited by the Internal  Revenue  Service for the
last 10 years and has federal  income tax returns  which are open and subject to
audit for the years  1995  through  1997.  In the  opinion  of  management,  any
examination  of still open returns would not result in a deficiency  which could
have a material adverse effect on the financial condition of the Association.

     Kansas  Taxation.  The Company and Association  file separate Kansas income
and Kansas privilege tax returns on a fiscal year basis using the accrual method
of accounting.


                                       35

<PAGE>



     Kansas law permits savings and loan associations to deduct from net income,
a reserve  established for the sole purpose of meeting or absorbing  losses,  in
the amount of five percent of such net income determined  without the benefit of
such deduction,  or, in the alternative,  a reasonable addition to a reserve for
losses based on past  experiences.  The Kansas  privilege tax is computed on the
basis of 4.5% of  taxable  income,  plus  2.25% of  taxable  income in excess of
$25,000 for tax years  commencing prior to January 1, 1998. For years commencing
on or after January 1, 1998 the Kansas privilege tax is computed on the basis of
2.5% of taxable income, plus 2.25% of taxable income in excess of $25,000.

     The Company has not been  audited by the Kansas  Department  of Revenue for
the last ten years  and has  Kansas  privilege  tax  returns  which are open and
subject to audit for the years 1995 through 1997. In the opinion of  management,
any  examination  of such open returns  would not result in a  deficiency  which
could have a material adverse effect on the financial condition of the Company.

     Delaware Taxation.  As a Delaware holding company,  the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of  Delaware.  The Company is also subject to
an annual franchise tax imposed by the State of Delaware.

     For additional  information regarding taxation,  see Note K of the Notes to
the Consolidated Financial Statements in the Annual Report.

Competition

     First Federal faces strong competition, both in originating real estate and
other loans and in attracting  deposits.  Competition in originating real estate
loans comes primarily from commercial banks and credit unions.

     The  Association  attracts all of its deposits,  primarily from  Montgomery
County where the Association's offices are located;  therefore,  competition for
those deposits is principally from commercial banks and credit unions located in
the same communities.  The Association competes for these deposits by offering a
variety of deposit accounts at competitive rates and convenient  business hours.
The Association  estimates its share of the savings market in its primary market
area to be approximately 15%.

Executive Officers of the Company

     The following table sets forth certain  information with respect to each of
the executive officers of the Company.


       NAME             AGE(1)                   POSITION(S) HELD
       ----             ------                   ----------------
Larry G. Spencer          50        President and Chief Executive Officer

Gary L. Overfield         46        Senior Vice President and Secretary

James B. Mitchell         43        Vice President and Chief Financial Officer

----------
(1)    At September 30, 1998.


                                       36

<PAGE>



Executive Officers of the Association

     The following table sets forth certain  information with respect to each of
the executive officers of the Association.


       NAME             AGE(1)                      POSITION(S) HELD
       ----             ------                      ----------------

Larry G. Spencer          50       President and Chief Executive Officer 
                                   and Director

Gary L. Overfield         46       Senior Vice President, and Secretary 
                                   and Chief Loan Officer

Jim L. Clubine            45       Vice President and Asset Manager

James B. Mitchell         43       Vice President and Chief Financial Officer

----------
(1)  At September 30, 1998.

     Larry G. Spencer.  Mr. Spencer is President and Chief Executive  Officer of
the  Association.  Mr. Spencer has been employed by First Federal since 1974 and
has held a variety of positions including Executive Vice President.  Mr. Spencer
was promoted to his present  position in 1990. Mr. Spencer  received a degree in
Business  Administration  from Pittsburg State University and served in the U.S.
Army for three  years.  He has served on the board of the  Chamber of  Commerce,
Main Street, the Independence Community College Endowment Association, Community
Chest and Junior Achievement. He is presently a member of the board of Heartland
Community Bankers, USD #446 Endowment  Association,  Independence Food Bank, and
Independence Industries. He is also a member of the Rotary Club.

     Gary L. Overfield.  Mr.  Overfield is Senior Vice President,  Secretary and
Chief Loan Officer of the  Association,  a position he has held since 1990.  Mr.
Overfield  has been  employed by First Federal since 1976 and has held a variety
of positions  including  Vice  President and Loan Officer from 1985 to 1990. Mr.
Overfield is a graduate of Pittsburg State University.  He is currently licensed
by the State of Kansas as a Life and Accident and Health Insurance agent. He was
a member of the Board of Directors  and previous  Secretary of the  Independence
Rotary Club, a youth coach for the Independence Recreation Commission,  previous
Treasurer for the local chapter of Duck's  Unlimited,  and previous Director and
Treasurer for the Independence Chamber of Commerce.

     Jim L. Clubine. Mr. Clubine is Vice President and Asset Manager, a position
he has held since  1990.  Prior to joining  First  Federal,  he was  employed as
Branch Manager by MidAmerica  Federal of Parsons,  Kansas from 1979 to 1990. Mr.
Clubine is a member of Independence Chamber of Commerce (Ambassador Club), Mercy
Hospital  Foundation  Fund Raising  Committee,  Eisenhower  Site  Council  team,
Chairman of the Airport Advisory Board,  Carnival  Chairman for Neewolah,  and a
member of the Rotary Club. He was a previous  Chairman of the March of Dimes and
former  board  member  for  Chamber  of  Commerce,  Community  Chest and  Junior
Achievement. Mr. Clubine is a graduate of Kansas State University.

     James B.  Mitchell.  Mr.  Mitchell is Vice  President  and Chief  Financial
Officer of the  Association,  a position he has held since March 1992.  Prior to
joining First Federal,  he was employed by Eureka Savings Bank, Eureka,  Kansas,
in the capacity of Strategic Asset Manager from 1988 to 1991 and Chief Financial
Officer from 1991 to 1992.  From 1976 to 1988, Mr.  Mitchell was Chief Financial
Officer for Peoples Savings and Loan, Parsons,  Kansas. He is presently a member
of the board of Junior  Achievement.  Mr. Mitchell has an accounting degree from
Pittsburg State University.


                                       37

<PAGE>



Employees

     At September 30, 1998,  the  Association  had a total of 27 employees.  The
Association's  employees are not represented by any collective bargaining group.
Management considers its employee relations to be good.

Item 2.  Description of Property

     The Company owns its offices  located at Myrtle and Sixth in  Independence,
Kansas and  McArthur  and Eleventh in  Coffeyville,  Kansas.  The total net book
value of the  Company's  premises  and  equipment at  September  30,  1998,  was
$1,300,400.  Subsequent to the  Merger/Conversion  with The Neodesha Savings and
Loan Association,  FSA, the Company will own a branch office located at 801 Main
Street, Neodesha, Kansas.

     First Federal  established  a loan  production  office in Lawrence,  Kansas
effective October 15, 1997. The office primarily  originates  construction loans
in  Lawrence  and  the  surrounding   area.  Loan  approvals  are  made  at  the
Associations main office with disbursements and collections  handled at the loan
production  office.  The office is currently  staffed with a loan originator and
two processors.

     The Company  maintains  depositor and borrower customer files on an on-line
basis with the FiServ Data Processing System, Milwaukee, Wisconsin. The net book
value of the data processing and computer  equipment  utilized by the Company at
September 30, 1998, was approximately $122,760.

Item 3.  Legal Proceedings

     First  Federal is involved  as  plaintiff  or  defendant  in various  legal
actions  arising  in the normal  course of their  business.  While the  ultimate
outcome of these  proceedings  cannot be  predicted  with  certainty,  it is the
opinion of  management,  after  consultation  with  counsel  representing  First
Federal in the proceedings,  that the resolution of these proceedings should not
have a material effect on the Company's  results of operations.  The Company was
not involved in any legal proceedings at September 30, 1998.

Item 4.  Submission of Matters to a Vote of Security Holders

     No  matter  was  submitted  to a vote  of  security  holders,  through  the
solicitation  of proxies or otherwise,  during the quarter  ended  September 30,
1998.

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

     Page 34 and the inside back cover of the  attached  1998  Annual  Report to
Stockholders is herein incorporated by reference.

Item 6.  Management's Discussion and Analysis or Plan of Operation

     Pages 4 through 14 of the attached  1998 Annual Report to  Stockholders  is
herein incorporated by reference.


                                       38

<PAGE>



Item 7.  Financial Statements

     The  following  information  appearing in the  Company's  Annual  Report to
Stockholders for the year ended September 30, 1998, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.

                                                                       Pages in
                                                                        Annual
                     Annual Report Section                              Report  
                     ---------------------                              ------  

Report of Independent Certified Public Accountants.................         15

Consolidated Balance Sheets (September 30, 1998 and 1997)..........         16

Consolidated Statements of Earnings (For the Years Ended
September 30, 1998 and 1997).......................................         17

Consolidated Statements of Stockholders' Equity (For the
Years Ended September 30, 1998 and 1997)...........................         18

Consolidated Statements of Cash Flows (For the Years Ended
September 30, 1998 and 1997).......................................         19

Notes to Consolidated Financial Statements.........................   20 to 33

     With the exception of the aforementioned information in Part II of the Form
10-KSB,  the  Corporation's  Annual  Report to  Stockholders  for the year ended
September  30, 1998 is not deemed  filed as part of this  Annual  Report on Form
10-KSB.

Item 8.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure

     There has been no Current  Report on Form 8-K filed  within 24 months prior
to the  date of the most  recent  financial  statements  reporting  a change  of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act 

Directors

     Information  concerning  Directors of the Company is incorporated herein by
reference  from  the  definitive  Proxy  Statement  for the  Annual  Meeting  of
Stockholders  to be held in 1999,  a copy of which  will be filed not later than
120 days after the close of fiscal year.

Executive Officers

     Information  regarding the business experience of the executive officers of
the  Company  and the  Association  contained  in Part I of this Form  10-KSB is
incorporated herein by reference.


                                       39

<PAGE>



Item 10. Executive Compensation

     Information  concerning  executive  compensation is incorporated  herein by
reference  from  the  definitive  Proxy  Statement  for the  Annual  Meeting  of
Stockholders  to be held in 1999,  a copy of which  will be filed not later than
120 days after the close of the fiscal year.

Item 11. Security Ownership of Certain Beneficial Owners and Management

     Information  concerning security ownership of certain beneficial owners and
management  is  incorporated  herein  by  reference  from the  definitive  Proxy
Statement for the Annual Meeting of  Stockholders  to be held in 1999, a copy of
which will be filed not later than 120 days after the close of the fiscal year.

Item 12. Certain Relationships and Related Transactions

     Information  concerning certain  relationships and related  transactions is
incorporated  herein by reference  from the definitive  Proxy  Statement for the
Annual Meeting of Stockholders to be held in 1999, a copy of which will be filed
not later than 120 days after the close of the fiscal year.



                                       40

<PAGE>



Item 13. Exhibits and Reports on Form 8-K

         (a)  Exhibits

<TABLE>
<CAPTION>
                                                                              Reference to
                                                                              Prior Filing
                                                                               or Exhibit
                                                                                 Number
Regulation S-B                                                                  Attached
Exhibit Number                             Document                               Hereto
--------------                             --------                               ------
<S>             <C>                                                                 <C>
       2        Plan of acquisition, reorganization, arrangement,                   None
                liquidation, or succession

       3(a)     Articles of Incorporation                                             *

       3(b)     By-Laws                                                               *

       4        Instruments defining the rights of security holders,                  *
                including debentures

       9        Voting Trust Agreement                                              None

       10       Executive Compensation Plans and Arrangements

                (a)  1994 Stock Option and Incentive Plan                            **

                (b)  Recognition and Retention Plan                                   *

                (c)  Employment Agreements                                            *

       11       Statement re:  computation of per share earnings                     ***

       12       Statement re:  computation of ratios                            Not required

       13       Annual Report to Security Holders                                    13

       16       Letter on change in certifying accountants                          None

       18       Letter on change in accounting principles                           None

       21       Subsidiaries of the Registrant                                       21

       23       Consents of Experts and Counsel                                      23

       24       Power of Attorney                                               Not required

       27       Financial Data Schedule                                              27

       99       Additional exhibits                                                 None
</TABLE>

----------
*    Filed as exhibits to the Company's Form S-1 registration statement filed on
     June 22, 1994 (File No.  33-64812)  pursuant to Section 5 of the Securities
     Act of 1933. All of such previously filed documents are hereby incorporated
     herein by reference in accordance with Item 601 of Regulation S-B.

**   Filed as an exhibit to the Company's  Annual Report on Form 10-KSB filed on
     December 29, 1994 (File No.  0-22184)  pursuant to the Securities  Exchange
     Act of 1934.

***  See Note A of Notes to  Consolidated  Financial  Statements  in the  Annual
     Report to Shareholders' attached hereto as Exhibit 13.


     (b) Reports on Form 8-K

     During the quarter ended  September 30, 1998,  the Company did not file any
Current Reports on Form 8-K.

                                       41

<PAGE>


                                   SIGNATURES

     Pursuant to the  requirements  of Section 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 INDEPENDENCE CORPORATION




Date:  December 29, 1998             By:    /s/ Larry G. Spencer  
                                            ------------------------------------
                                            Larry G. Spencer, President, Chief 
                                            Executive Officer and Director 
                                            (Duly Authorized Representative)

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.

<TABLE>
<S>                                                              <C>
/s/ Larry G. Spencer                                             /s/ James B. Mitchell                      
----------------------------------------------                   --------------------------------------------
Larry G. Spencer, President, Chief Executive                     James B. Mitchell, Vice President and Chief
Officer, Officer and Director (Principal                         Financial Officer (Principal Financial and 
Executive and  Operating Officer)                                Accounting Officer)                        
                                                                                                            
Date:  December 29, 1998                                         Date:  December 29, 1998                   
                                                                                                            
                                                                                                            
                                                                                                            
/s/ Donald E. Aitken                                             /s/ William T. NewKirk II                           
----------------------------------------------                   --------------------------------------------
Donald E. Aitken, Chairman of the Board                          William T. NewKirk II, Director            
                                                                                                            
Date:  December 29, 1998                                         Date:  December 29, 1998                            
                                                                                                            
                                                                                                            
                                                                                                            
/s/ Harold L. Swearingen                                         /s/ John T. Updegraff                               
----------------------------------------------                   --------------------------------------------
Harold L. Swearingen, Director                                   John T. Updegraff, Director                
                                                                                                            
Date:  December 29, 1998                                         Date:  December 29, 1998                            
                                                                                                            
                                                                                                            
                                                                                                            
/s/ Lavern W. Strecker                                           /s/ Joseph M. Smith                                 
----------------------------------------------                   --------------------------------------------
Lavern W. Strecker, Director                                     Joseph M. Smith, Director                  
                                                                                                            
Date:  December 29, 1998                                         Date:  December 29, 1998                            
</TABLE>

                                       42

<PAGE>



                                INDEX TO EXHIBITS



 Exhibit
 Number
 ------
   11          Statement  Regarding  Computation of Per Share Earnings (included
               under Note A of Notes to Consolidated Financial Statements in the
               Annual Report to Stockholders' attached hereto as Exhibit 13)

   13          Annual Report to Security Holders

   21          Subsidiaries of the Registrant

   23          Consent of Accountants

   27          Financial Data Schedule

                                       43