SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
(Exact name of small business issuer as specified in its charter)
Delaware 36-3899950
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification or
organization) number)
Myrtle & Sixth Streets, Independence, Kansas 67301
(Address of principal executive offices)
(316) 331-1660
(issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 day Yes [X] No [ ]
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
State the number of Shares outstanding of each of the issuer's classes of
common equity, as of the latest date:
As of May 14, 1998, there were 957,319 shares of the Registrant's common
stock outstanding (including 8,734 shares of restricted stock).
<PAGE>
FIRST INDEPENDENCE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION (unaudited) PAGE NO.
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of
March 31, 1998 and September 30, 1997 3
Consolidated Condensed Statements of Earnings
for the Three and Six Months Ended March 31,
1998 and 1997 4
Consolidated Condensed Statement of Stockholders'
Equity for the Year Ended September 30, 1997 and
Six Months Ended March 31, 1998 5
Consolidated Condensed Statements of Cash
Flows for the Six Months Ended March 31,
1998 and 1997 6
Notes to Consolidated Condensed Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION 17
Signature Page 18
2
<PAGE>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 869,625 $ 961,350
Federal funds sold 5,300,000 1,600,000
Other interest-earning deposits 207,117 589,877
------------- -------------
Cash and cash equivalents 6,376,742 3,151,227
Investment securities held to maturity (fair value:
March 31, 1998 - $4,960,950; 5,000,000 3,000,000
September 30, 1997 - $2,996,300)
Investment securities available for sale 3,346,443 4,311,406
Mortgage-backed securities held to maturity (fair value:
March 31, 1998 - $21,093,661;
September 30, 1997 - $23,748,569) 20,902,199 23,527,689
Mortgage-backed securities available for sale -- 471,618
Loans receivable, net 85,263,856 74,558,783
Real estate acquired through foreclosure 15,320 12,131
Premises and equipment, net 1,307,769 1,297,500
Federal Home Loan Bank Stock, at cost 1,422,800 1,368,900
Accrued interest receivable 736,675 712,298
Other assets 122,179 111,107
------------- -------------
Total assets $ 124,493,983 $ 112,522,659
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 84,171,855 $ 76,229,176
Advances from borrowers for taxes and insurance 733,076 693,069
Checks issued in excess of cash items 280,881 --
Advances from Federal Home Loan Bank 27,300,000 23,700,000
Income taxes payable 63,882 1,306
Other accrued expenses and liabilities 390,582 369,827
------------- -------------
Total liabilities 112,940,276 100,993,378
Stockholders' equity
Preferred stock, $.01 par value, 500,000
shares authorized, none issued -- --
Common stock, $.01 par value, 2,500,000 shares authorized,
1,498,392 shares issued 14,984 14,984
Additional paid-in capital 7,188,447 7,122,744
Retained earnings - substantially restricted 9,689,322 9,441,054
Unrealized gain on securities available for sale, net 19,955 15,112
Treasury stock at cost, 542,699 shares at March 31, 1998
and 520,059 shares at September 30, 1997 (5,155,346) (4,802,767)
Required contributions for shares acquired by ESOP (181,843) (218,212)
Unearned stock compensation - recognition and retention
plan (RRP) (21,812) (43,634)
------------- -------------
Total stockholders' equity 11,553,707 11,529,281
------------- -------------
Total liabilities and stockholders' equity $ 124,493,983 $ 112,522,659
============= =============
</TABLE>
- --------------------------------
The accompanying notes are an integral part of these statements.
3
<PAGE>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans receivable $ 1,713,833 $ 1,396,150 $ 3,332,484 $ 2,778,864
Mortgage-backed securities 352,215 434,608 728,843 884,811
Investment securities 99,303 114,746 199,976 234,081
Other 66,184 38,807 115,505 72,161
----------- ----------- ----------- -----------
Total interest income 2,231,535 1,984,311 4,376,808 3,969,917
----------- ----------- ----------- -----------
Interest expense
Deposits 987,469 889,179 1,944,157 1,781,023
Borrowed funds 370,617 351,409 735,448 706,940
----------- ----------- ----------- -----------
Total interest expense 1,358,086 1,240,588 2,679,605 2,487,963
----------- ----------- ----------- -----------
Net interest income 873,449 743,723 1,697,203 1,481,954
Provision for loan losses -- -- -- --
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 873,449 743,723 1,697,203 1,481,954
Other income
Income (loss) from real estate operations (1,701) (2,041) (1,003) 1,412
Other income 49,221 54,079 114,025 104,466
----------- ----------- ----------- -----------
Total other income 47,520 52,038 113,022 105,878
----------- ----------- ----------- -----------
General, administrative and other expense
Employee compensation and benefits 324,740 306,132 659,977 600,983
Occupancy and equipment 60,975 46,400 117,677 73,435
Federal deposit insurance premiums 12,034 11,292 23,831 42,216
Data processing fees 48,571 40,991 90,177 75,364
Other 128,220 134,912 255,236 258,145
----------- ----------- ----------- -----------
Total non-interest expenses 574,540 539,727 1,146,898 1,050,143
----------- ----------- ----------- -----------
Earnings before income taxes 346,429 256,034 663,327 537,689
Income tax expense 150,983 90,454 288,091 205,415
----------- ----------- ----------- -----------
Net earnings $ 195,446 $ 165,580 $ 375,236 $ 332,274
=========== =========== =========== ===========
Earnings per common share
Basic $ .21 $ .17 $ .41 $ .33
=========== =========== =========== ===========
Diluted $ .20 $ .16 $ .38 $ .31
=========== =========== =========== ===========
Dividends per share $ .0750 $ .0625 $ .1375 $ .1125
=========== =========== =========== ===========
Weighted average shares outstanding
Basic 916,065 992,368 924,407 1,014,119
=========== =========== =========== ===========
Diluted 987,257 1,056,187 995,600 1,077,938
=========== =========== =========== ===========
</TABLE>
- -----------------------------
The accompanying notes are an integral part of these statements.
4
<PAGE>
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For The Six Months Ended March 31, 1998
and Year Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Required
Unrealized Contribu-
Gain (Loss) tion for Unearned
Additional on Securities Shares Stock
Common Paid-in Retained Available for Treasury Acquired Compen- Total
Stock Capital Earnings Sale, Net Stock by ESOP sation-RRP Equity
----- ------- -------- --------- ----- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996 $ 7,492 $7,053,143 $8,960,098 $(11,293) $(2,628,704) $(290,949) $(87,278) $13,002,509
Net earnings -- -- 711,680 -- -- -- -- 711,680
Cash dividends of $.2375 per -- -- (230,724) -- -- -- -- (230,724)
share
Common stock options exercised -- (12,499) -- -- 59,769 -- -- 47,270
Appreciation of securities
available -- -- -- 26,405 -- -- -- 26,405
for sale
ESOP loan repayments -- -- -- -- -- 72,737 -- 72,737
Fair value adjustment on ESOP
shares committed for release -- 89,592 -- -- -- -- -- 89,592
Amortization of unearned stock
compensation -- -- -- -- -- -- 43,644 43,644
Purchase of 197,963 shares of
treasury stock -- -- -- -- (2,233,832) -- -- (2,233,832)
Two-for-one stock split 7,492 (7,492) -- -- -- -- -- --
-------- ---------- ---------- -------- ----------- --------- -------- -----------
Balance at September 30, 1997 14,984 7,122,744 9,441,054 15,112 (4,802,767) (218,212) (43,634) 11,529,281
Net earnings -- -- 375,236 -- -- -- -- 375,236
Cash dividends of $.1375 per -- -- (126,968) -- -- -- -- (126,968)
share
Common stock options exercised -- (2,558) -- -- 11,858 -- -- 9,300
Appreciation of securities
available -- -- -- 4,843 -- -- -- 4,843
for sale
ESOP loan repayments -- -- -- -- -- 36,369 -- 36,369
Fair value adjustment on ESOP
shares committed for release -- 68,261 -- -- -- -- -- 68,261
Amortization of unearned stock
compensation -- -- -- -- -- -- 21,822 21,822
Purchase of 24,500 shares of
treasury stock -- -- -- -- (364,437) -- -- (364,437)
-------- ---------- ---------- -------- ----------- --------- -------- -----------
Balance at March 31, 1998 $ 14,984 $7,188,447 $9,689,322 $ 19,955 $(5,155,346) $(181,843) $(21,812) $11,553,707
======== ========== ========== ======== =========== ========= ======== ===========
</TABLE>
- --------------------
The accompanying notes are an integral part of these statements.
5
<PAGE>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended March 31,
----------------------------
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net Earnings $ 375,236 $ 332,274
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation 52,893 37,406
Amortization of premiums and discounts on investments
and mortgage-backed securities 37,309 65,717
Amortization of deferred loan origination fees (74,853) (30,784)
Amortization of expense related to employee
benefit plans 126,452 97,286
Net gain on sale of real estate acquired
through foreclosure (2,499) (436)
Increase (decrease) in cash due to changes in
Accrued interest receivable (24,377) (4,796)
Other assets (67,281) 39,357
Accrued expenses and other liabilities (2,536) (531,726)
Income taxes payable 139,268 140,820
------------ ------------
Net cash provided by operating activities 559,612 145,118
Cash flows from investing activities
Proceeds from maturities and repayment of securities
Available for sale 1,466,371 2,075,706
Held to maturity 5,576,007 3,074,425
Purchase of securities
Available for sale (63,705) (1,097,163)
Held to maturity (5,000,000) (2,000,000)
Net increase in loans (10,631,244) (2,566,948)
Capital expenditures (63,162) (407,445)
Proceeds from sale of real estate acquired through
foreclosure 174 10,194
------------ ------------
Net cash used in investing activities (8,715,559) (911,231)
Cash flows from financing activities
Net increase in deposits 7,942,679 4,784,477
Net increase (decrease) in advances from borrowers
for taxes and insurance 40,007 (3,998)
Increase (decrease) in checks issued in excess
of cash items 280,881 (267,374)
Advances from Federal Home Loan Bank 15,500,000 9,800,000
Repayment of Federal Home Loan Bank advances (11,900,000) (11,600,000)
Cash dividends paid (126,968) (112,683)
Purchase of treasury stock (364,437) (1,860,978)
Stock options exercised 9,300 38,180
------------ ------------
Net cash provided by financing activities 11,381,462 777,624
------------ ------------
Net increase in cash and cash equivalents 3,225,515 11,511
Cash and cash equivalents at beginning of period 3,151,227 1,763,429
------------ ------------
Cash and cash equivalents at end of period $ 6,376,742 $ 1,774,940
============ ============
</TABLE>
- --------------------------------
The accompanying notes are an integral part of these statements.
6
<PAGE>
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited Consolidated Condensed Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the Consolidated Condensed Financial
Statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the consolidated financial condition of
First Independence Corporation as of March 31, 1998, and the results of
operations and cash flows for all interim periods presented.
Operating results for the three and six months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1998.
(2) Earnings Per Share of Common Stock
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net earnings by the weighted average
number of common shares and common share equivalents outstanding. Stock options
are considered common share equivalents. Common shares outstanding excludes
unallocated and uncommitted shares held by the ESOP trust.
(3) Stock Dividend
On December 18, 1996, the Board of Directors declared a 100% stock dividend
paid on January 24, 1997, which is accounted for similar to a two for one stock
split. All earnings and dividends per share have been restated to reflect the
stock dividend. Weighted average number of shares outstanding used to compute
diluted earnings per share were 987,257 and 995,600 for the three and six months
ended March 31, 1998 and 1,056,187 and 1,077,938 for the three and six months
ended March 31, 1997.
7
<PAGE>
(4) Regulatory Capital Requirements
Pursuant to the Financial Institution Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), as implemented by rules promulgated by the Office of Thrift
Supervision, savings institutions must meet the following separate minimum
capital-to-asset requirements. The table below summarizes, as of March 31, 1998,
the capital requirements applicable to First Federal Savings and Loan
Association of Independence ("the Association") and its actual capital ratios.
As of March 31, 1998, the Association exceeded all current regulatory capital
standards.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------ ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ -------- ------------ --------- ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital $10,443 18.17% $4,598 >|+8.0% $5,748 >|+10.0%
Tier 1 risk-based capital 9,787 17.03 2,299 >|+4.0 3,449 >|+ 6.0
Tier 1 (core) capital 9,787 7.93 3,704 >|+3.0 6,173 >|+ 5.0
Tangible capital 9,787 7.93 1,852 >|+1.5 -- --
</TABLE>
(5) Supplemental Disclosure of Cash Flow Information
Six months ended March 31,
-------------------------
1998 1997
---------- ----------
Cash paid for:
Interest $2,642,896 $2,480,221
Income taxes 148,823 64,595
Noncash investing and financing activities:
Transfer from loans to real estate
acquired through foreclosure 56,574 8,781
Issuance of loans receivable in connection
with the sale of real estate acquired
through foreclosure 55,550 --
(6) Merger Conversion with Neodesha Savings and Loan Association
On February 26, 1998 the Board of Directors of First Independence
Corporation, parent of First Federal Savings and Loan Association of
Independence ("First Federal"), and Neodesha Savings and Loan Association
("Neodesha"), announced the execution of a definitive agreement pursuant to
which Neodesha will merge with and into First Federal. In connection with the
Merger, Neodesha will undertake to convert form a mutual to a stock institution.
The definitive agreement and proposed Plan of Merger Conversion is subject to
regulatory approval and must be approved by a majority of Neodesha member votes
in person or by proxy at a special meeting on a date to be announced.
8
<PAGE>
PART II
FIRST INDEPENDENCE CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The accompanying Consolidated Financial Statements include the accounts of
First Independence Corporation (the "Company") and its wholly-owned subsidiary,
First Federal Savings and Loan Association of Independence (the "Association").
All significant inter-company transactions and balances are eliminated in
consolidation. The Company's results of operations are primarily dependent on
the Association's net interest margin, which is the difference between interest
income on interest-earning assets and interest expense on interest-bearing
liabilities. The Company's net earnings are also affected by the level of its
non-interest expenses, such as employee compensation and benefits, occupancy
expenses, and other expenses.
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, and 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" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. 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. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
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 events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Year 2000 Compliance Issues
The Company has established a Year 2000 Committee to assess the risk of
potential problems that might arise from the failures of computer programming to
recognize the year 2000 and to develop a plan to mitigate any such risk. The
committee has determined that the
9
<PAGE>
greatest potential impact upon the Company is the risk related to vendors used
by the Company, particularly First Independence's data processing service
bureau. Quarterly progress reports from the service bureau indicate levels of
manpower and expertise sufficient to amend and test the adequacy of their
computer programming and systems prior to the arrival of the year 2000. All
other vendors used by the Company have been identified and requests for year
2000 certifications have been forwarded.
The year 2000 compliance program established by the committee includes quarterly
progress reports submitted to the Board of Directors and a target date of
December 31, 1998 for required internal testing, which is expected to be
minimal. The committee estimates that the impact upon the Company's results of
operations, liquidity and capital resources will be immaterial.
Financial Condition
The Company's total assets increased $12.0 million, or 10.64%, from $112.5
million at September 30, 1997 to $124.5 million at March 31, 1998. This increase
was primarily a result of an increase of $10.7 million in net loans receivable,
$3.2 million in cash and cash equivalents, and $1.0 million in investment
securities. These increases in assets were funded by increases in savings
deposits of $8.0 million, advances from the Federal Home Loan Bank of Topeka of
$3.6 million, checks issued in excess of cash items of $300,000, and a decrease
in mortgage-backed securities of $3.1 million.
Loans receivable increased $10.7 million from $74.6 million at September
30, 1997, to $85.3 million at March 31, 1998. The increase was primarily due to
construction loan originations at the Company's new loan production office in
Lawrence, Kansas. These construction loans generally have terms of six months or
less and interest rates tied to the prime rate plus a margin. To a lesser
extent, the increase was due to originations in the Company's market area
consisting primarily of 15- and 30-year fixed-rate loans, mortgage loans with a
fixed rate for the first three years of the loan term that automatically convert
to one-year adjustable rate loans during the fourth year of the loan term, and,
to a lesser extent, one-year adjustable rate mortgages.
The allowance for loan losses totaled $656,000, or .77% of total loans at
March 31, 1998, which represented a $12,000 decrease from the $668,000, or .90%
of total loans, at September 30, 1997. The ratio of the allowance for loan
losses as a percent of non-performing loans increased from 48.05% at September
30, 1997 to 105.50% at March 31, 1998. At March 31, 1998, the Company's
non-performing loans were comprised primarily of one- to four-family residential
loans. See "Non-performing Assets."
The allowance for loan losses is determined based upon an evaluation of
pertinent factors underlying the types and qualities of the Company's loans.
Management considers such factors as the repayment status of a loan, the
estimated net realizable value of the underlying collateral, the borrower's
ability to repay the loan, current and anticipated economic conditions which
might affect the borrower's ability to repay the loan and the Company's past
statistical history concerning charge-offs.
10
<PAGE>
Total deposits increased $8.0 million from $76.2 million at September 30,
1997, to $84.2 million at March 31, 1998. Deposits increased primarily as a
result of public units depositing short-term funds into the "Platinum" money
fund account. The "Platinum" money fund account offers tiered rates on a limited
transaction account with the highest rate paid on balances of $50,000 and above.
Management feels the "Platinum" money fund provides a lower risk, insured
alternative for deposit customers considering higher risk investments in order
to get higher yields than money market accounts.
Total borrowed funds increased $3.6 million from $23.7 million at September
30, 1997 to $27.3 million at March 31, 1998. The increase was from advances
obtained from the Federal Home Loan Bank of Topeka. The FHLB advances allowed
the Association to invest the funds borrowed in loans receivable at a positive
spread.
Total stockholders' equity increased $25,000 from $11,529,000 at September
30, 1997 to $11,554,000 at March 31, 1998. The increase was primarily due to the
Company's net earnings from operations of $375,000, fair value adjustment of
$68,000 on ESOP shares committed for release, the repayment of employee stock
ownership debt of $36,000, the amortization of unearned stock compensation of
$22,000, common stock options exercised of $9,300, and unrealized gains on
securities available for sale of $5,000. These increases were partially offset
by the Company's use of $364,000 to repurchase 24,500 shares of common stock and
dividends of $127,000 paid to stockholders.
Non-performing Assets
The ratio of non-performing assets to total assets is one indicator of the
Company's exposure to credit risk. Non-performing assets of the Company consist
of non-accruing loans, accruing loans delinquent 90 days or more, troubled debt
restructurings, and foreclosed assets which have been acquired as a result of
foreclosure or deed-in-lieu of foreclosure. At March 31, 1998, non-performing
assets were approximately $637,000, which represents a decrease of $766,000, or
54.6%, as compared to September 30, 1997. This decrease was due primarily to one
loan totaling $344,000 secured by a single family residence in Texas, which had
been classified as non-accruing at September 30, 1997, but was less than 90 days
delinquent at March 31, 1998. In February 1991, the borrowers experienced
financial difficulties and filed for protection under the bankruptcy statutes.
Pursuant to the plan of reorganization approved by the Bankruptcy Court, the
borrowers are required to make additional payments each month to make up the
delinquent payments and interest. At March 31, 1998 the borrowers were complying
with the terms of the repayment plan. To a lesser extent, the decrease was due
to one loan totaling $139,000 secured by a single family residence in Texas,
which had been classified as accruing delinquent 90 days or more at September
30, 1997, but was less than 90 days delinquent at March 31, 1998.
Included in non-accruing loans at March 31, 1998, were ten loans totaling
$528,000 secured by one- to four-family real estate, one loan totaling $21,000
secured by non-residential real estate, and two consumer loans totaling $24,000.
All non-accruing loans at March 31, 1998, were located in the Company's primary
market area. At March 31, 1998 there were no accruing loans delinquent 90 days
or more.
11
<PAGE>
A summary of non-performing assets by category is set forth in the
following table:
March 31, September 30,
1998 1997
------ ------
(Dollars In Thousands)
Non-Accruing Loans $ 573 $1,049
Accruing Loans Delinquent 90 Days or More -- 292
Trouble Debt Restructurings 49 50
Foreclosed Assets 15 12
------ ------
Total Non-Performing Assets $ 637 $1,403
====== ======
Total Non-Performing Assets as a
Percentage of Total Assets .51% 1.25%
====== ======
Foreclosed Assets. At March 31, 1998, the Company's real estate acquired
through foreclosure included two single family residences located in the
Company's primary market area with a carrying value of $15,000.
Results of Operations - Comparison of Three and Six Months Ended March 31, 1998
and March 31, 1997
- --------------------------------------------------------------------------------
General. Net earnings for the six months ended March 31, 1998 were $375,000
as compared to $332,000 for the six months ended March 31, 1997, resulting in an
increase of $43,000, or 12.9%. The increase in net earnings was primarily due to
increases in net interest income of $215,000 and non-interest income of $7,000.
These increases were partially offset by increases in non-interest expense of
$97,000 and income tax expense of $83,000.
Net earnings for the three months ended March 31, 1998 were $195,000 as
compared to $166,000 for the three months ended March 31, 1997, resulting in an
increase of $29,000, or 18.04%. The increase in net earnings was primarily due
to an increase in net interest income of $129,000, partially offset by increases
in income tax expense of $61,000 and non-interest expense of $35,000 and a
decrease in other income of $4,000.
Net Interest Income. Net interest income increased $215,000, or 14.52%, for
the six months ended March 31, 1998 as compared to the six months ended March
31, 1997. This increase was due primarily to an increase in interest income of
$407,000, or 10.25%; offset partially by an increase in interest expense of
$192,000, or 7.70%. Interest income increased primarily due to a $7.6 million
increase in the average balance of interest-earning assets, and a 22 basis point
increase in the average yield on interest-earning assets. The average yield on
interest-earning assets increased primarily due to construction loan
originations at the Lawrence loan production office which carry higher rates of
interest than loans originated in the Company's primary market area. Interest
expense increased primarily due to a $7.9 million increase in the average
balance of interest-bearing liabilities, offset partially by a 3 basis point
decrease in the average rate paid on interest-bearing liabilities. The average
rate paid on interest-bearing liabilities decreased primarily due to a $5.1
million increase in the average balance of low cost demand and now deposits and,
to a lesser extent, a decrease in market interest rates.
12
<PAGE>
Net interest income increased $129,000, or 17.44%, for the three months
ended March 31, 1998, as compared to the three months ended March 31, 1997. This
increase was due primarily to an increase in interest income of $248,000, or
12.46%; offset partially by an increase in interest expense of $117,000 or
9.47%. The increase was due to the same reasons as stated above for the six
months ended March 31, 1998, as compared to the six months ended March 31, 1997.
The ratio of average interest-earning assets to average interest-bearing
liabilities decreased from 110.5% for the three months ended March 31, 1997 to
109.3% for the three months ended March 31, 1998.
Interest Income. Interest income for the six months ended March 31, 1998,
increased to $4,377,000 from $3,970,000 for the six months ended March 31, 1997.
This increase was caused primarily by a $7.6 million increase in the average
outstanding amount of interest-earning assets during the six months ended March
31, 1998, as compared to the six months ended March 31, 1997; due to the
increase in the average balance of loans receivable financed by the increased
average balance of savings deposits. The average balance of savings deposits
during the six months ended March 31, 1998 was $7.4 million higher than during
the six months ended March 31, 1997. To a lesser extent, the increase in
interest income was due to an increase in the average yield on interest-earning
assets. The average yield on interest-earning assets increased 22 basis points
to 7.71% for the six months ended March 31, 1998, from 7.49% for the six months
ended March 31, 1997. This increase was caused primarily by increases in yield
on the Association's Federal Home Loan Bank stock from 6.48% to 7.75%, loan
portfolio from 8.01% to 8.20%, and mortgage-backed securities portfolio from
6.48% to 6.58% for the six months ended March 31, 1998, as compared to the six
months ended March 31, 1997. These increases were partially offset by a decrease
in the investment securities portfolio yield from 6.61% to 6.34% for the six
months ended March 31, 1998, as compared to the six months ended March 31, 1997.
The increase in yield on the loan portfolio was primarily due to construction
loan originations at the Company's new loan production office in Lawrence,
Kansas. These construction loans generally have terms of six months or less and
interest rates tied to the prime rate plus a margin.
Interest income for the quarter ended March 31, 1998, increased to
$2,232,000 from $1,984,000 for the quarter ended March 31, 1997. This increase
was caused primarily by a $10.6 million increase in the average outstanding
amount of interest-earning assets during the three months ended March 31, 1998,
as compared to the three months ended March 31, 1997 due to the increase in the
average balance of loans receivable financed by advances obtained from the
Federal Home Loan Bank of Topeka and increased savings deposits. To a lesser
extent, the increase was due to an increase in the average yield on
interest-earning assets. The average yield on interest-earning assets increased
16 basis points to 7.64% at March 31, 1998, from 7.48% at March 31, 1997. This
increase was caused primarily by increases in yield on the Association's Federal
Home Loan Bank stock from 6.52% to 7.35%, loan portfolio from 7.99% to 8.20%,
and mortgage-backed securities portfolio from 6.51% to 6.60% for the three
months ended March 31, 1998, as compared to the three months ended March 31,
1997. The increase in yield on the loan portfolio was due to the same reason as
stated above. These increases were partially offset by a decrease in the
investment portfolio yield from 6.63% to 5.43% for the three
13
<PAGE>
months ended March 31, 1998, as compared to the three months ended March 31,
1997.
Interest Expense. Interest expense for the six months ended March 31, 1998,
increased by $192,000 to $2,680,000 as compared to $2,488,000 for the six months
ended March 31, 1997. This increase in interest expense was due primarily to a
$7.9 million increase in the average outstanding amount of interest-bearing
liabilities during the six months ended March 31, 1998 as compared to the six
months ended March 31, 1997. This increase was partially offset by a 3 basis
point decrease in average interest rates paid on interest-bearing liabilities,
caused by decreases in market interest rates. The increase in interest-bearing
liabilities was primarily due to a $7.4 million increase in the average
outstanding balance of deposits due primarily to new accounts opened at the
Coffeyville, Kansas branch office and seasonal deposits from public units.
Interest expense for the quarter ended March 31, 1998, increased by
$117,000 to $1,358,000 as compared to $1,241,000 for the quarter ended March 31,
1997. This increase in interest expense was due primarily to a $10.9 million
increase in the average outstanding amount of interest-bearing liabilities
during the three months ended March 31, 1998, as compared to the three months
ended March 31, 1997. This increase in interest-bearing liabilities was due
primarily to the same reasons as stated above. However, the interest expense was
partially offset by a 9 basis point decrease in average interest rates paid on
interest-bearing liabilities, caused by decreases in market interest rates.
Provision for Loan Losses. Based upon management's analysis of established
reserves and its ongoing review of the composition of the loan portfolio,
including non-performing assets and other loans of concern, there was no
provision for losses on loans for the three and six months ended March 31, 1998
and March 31, 1997. The Company will continue to monitor its allowance for loan
losses and make future additions to the allowance through the provision for loan
losses as economic and regulatory conditions dictate. However, there can be no
assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, the Company's determinations as to the amount of the allowance for
loan losses is subject to review by the regulatory agencies which can order the
establishment of additional general or specific allowances.
Non-interest Income. Non-interest income increased $7,000 to $113,000
during the six months ended March 31, 1998 as compared to $106,000 for the six
months ended March 31, 1997. The increase was primarily due to increased
checking and deposit account fees as a result of new accounts in the Coffeyville
branch. To a lesser extent, the increase was due to increased late charges and
other fees associated with mortgage loans.
Non-interest income decreased $4,000 to $48,000 during the three months
ended March 31, 1998 as compared to $52,000 for the three months ended March 31,
1997. Recurring non-interest income generally consists of servicing fees as well
as deposit and other types of fees.
Non-interest Expense. Total non-interest expense increased to $1,147,000
for the six months ended March 31, 1998 from $1,050,000 for
14
<PAGE>
the six months ended March 31, 1997, an increase of $97,000, or 9.2%. The
increase was primarily due to increases in compensation and employee benefits of
$59,000, occupancy and equipment of $45,000, and data processing fees of
$15,000. These increases were primarily due to the opening of a new loan
production office in Lawrence, Kansas, resulting in additional staff, occupancy
and equipment, stationery, printing and office supplies expense. To a lesser
extent, the increase in compensation expense was the result of normal, annual
cost of living increases in salaries and bonuses, and increased compensation
expense associated with the Company's ESOP plan due to the increase in the
Company's stock price. These increases were partially offset by decreases in
federal deposit insurance premiums of $18,000, and other expenses of $3,000.
Total non-interest expense increased by $35,000 for the three months ended
March 31, 1998, as compared to the three months ended March 31, 1997. The
increase was due primarily to increases in compensation and employee benefits of
$19,000, occupancy and equipment of $15,000, and data processing fees of $8,000.
These increases were partially offset by decreases in other expenses of $7,000.
The increase in non-interest expense for the three months ended March 31, 1998
was due to the same reasons as stated above.
Income Tax Expense. Income tax expense was $288,000 for the six months
ended March 31, 1998 compared to $205,000 for the six months ended March 31,
1997, an increase of $83,000. This increase was primarily due to an increase in
pre-tax earnings during the 1998 period as compared to the 1997 period. The
Company's effective tax rates were 43.4% and 38.2% for the six months ended
March 31, 1998 and March 31, 1997, respectively. Rates exceed expected rates due
primarily to compensation expense associated with the ESOP which is not
deductible for income tax purposes.
Income tax expense was $151,000 for the quarter ended March 31, 1998
compared to $90,000 for the quarter ended March 31, 1997, an increase of
$61,000. This increase was primarily due to an increase in pre-tax earnings
during the 1998 period as compared to the 1997 period. The Company's effective
tax rates were 43.6% and 35.3% for the three months ended March 31, 1998 and
March 31, 1997, respectively. Rates exceed expected rates due primarily to
compensation expense associated with the ESOP which is not deductible for income
tax purposes.
Liquidity and Capital Resources. The Company's primary sources of funds are
deposits, principal and interest payments on loans and mortgage-backed
securities, Federal Home Loan Bank of Topeka advances and funds provided by
operations. While scheduled loan and mortgage-backed security repayments and
maturity of short-term investments are a relatively predictable source of funds,
deposit flows are greatly influenced by general interest rates, economic
conditions and competition. Current Office of Thrift Supervision ("OTS")
regulations require the Association to maintain cash and eligible investments in
an amount equal to at least 4% of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. Such
requirements may be changed from time to time by the OTS to reflect changing
economic conditions. Such investments are intended to provide a source of
relatively liquid funds upon which the Association may rely if necessary to fund
deposit withdrawals and other short-term funding needs. As of March 31, 1998,
the
15
<PAGE>
Association's liquidity ratio was 15.44% as compared to 7.20% at September 30,
1997. This increase was primarily due to an increase in short-term investments
funded with public unit deposits. These ratios exceeded the minimum regulatory
liquidity requirements on both dates.
The Company uses its capital resources principally to meet its ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments, to maintain liquidity,
and to meet operating expenses. At March 31, 1998, the Company had commitments
to originate loans totaling $694,000. The Company considers its liquidity and
capital resources to be adequate to meet its foreseeable short- and long-term
needs. The Company expects to be able to fund or refinance, on a timely basis,
its material commitments and long-term liabilities.
Regulatory standards impose the following capital requirements on the
Association: a risk-based capital standard expressed as a percent of
risk-adjusted assets, a leverage ratio of core capital to total adjusted assets,
and a tangible capital ratio expressed as a percent of total adjusted assets. As
of March 31, 1998, the Association exceeded all fully phased-in regulatory
capital standards.
At March 31, 1998, the Association's tangible capital was $9.8 million, or
7.93% of adjusted total assets, which is in excess of the 1.5% requirement by
$7.9 million. In addition, at March 31, 1998, the Association had core capital
of $9.8 million, or 7.93% of adjusted total assets, which exceeds the 3.0%
requirement by $6.1 million. The Association had risk-based capital of $10.4
million at March 31, 1998, or 18.17% of risk-adjusted assets, which exceeds the
8.0% risk-based capital requirements by $5.8 million.
Under the requirements of federal law, all the federal banking agencies,
including the OTS, must revise their risk-based capital requirements to ensure
that such requirements account for interest rate risk, concentration of credit
risk and the risks of non-traditional activities, and that they reflect the
actual performance of and expected loss on multi-family loans.
The OTS has adopted a final rule that generally requires a savings
association with more than normal interest rate risk 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 provides for a two-quarter lag between
calculating interest rate risk and recognizing any deductions from capital. The
OTS has announced that it will delay the effectiveness of the rule until it
adopts the process by which savings associations may appeal an interest rate
risk deduction determination. The OTS has instructed all savings associations
not to take any capital deductions for interest rate risk exposure until
notified to do so by the OTS. In addition, any savings association with less
than $300 million in assets and a total risk-based capital ratio in excess of
12%, such as the Association, is exempt from this requirement unless the OTS
determines otherwise.
16
<PAGE>
Part II - Other Information
Item 1 - Legal Proceedings
Not applicable.
Item 2 - Changes in Securities
Not applicable.
Item 3 - Defaults upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Sequentially
Numbered Page
Where attached
Exhibit
Exhibit Number is located
-------------- ----------
Exhibit 27, "Financial Data Schedule" 19
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirement 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
Registrant
Date: May 14, 1998 /s/ Larry G. Spencer
---------------------------------
Larry G. Spencer
President and Chief Executive
Officer
Date: May 14, 1998 /s/ James B. Mitchell
---------------------------------
James B. Mitchell
Vice President and Chief Financial
Accounting Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the quarterly
report on Form 10-QSB for the fiscal quarter ended March 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 869,625
<INT-BEARING-DEPOSITS> 207,117
<FED-FUNDS-SOLD> 5,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,346,443
<INVESTMENTS-CARRYING> 25,902,199
<INVESTMENTS-MARKET> 26,054,611
<LOANS> 85,919,601
<ALLOWANCE> 655,745
<TOTAL-ASSETS> 124,493,983
<DEPOSITS> 84,171,855
<SHORT-TERM> 6,400,000
<LIABILITIES-OTHER> 1,468,421
<LONG-TERM> 20,900,000
0
0
<COMMON> 14,984
<OTHER-SE> 11,538,723
<TOTAL-LIABILITIES-AND-EQUITY> 124,493,983
<INTEREST-LOAN> 3,332,484
<INTEREST-INVEST> 928,819
<INTEREST-OTHER> 115,505
<INTEREST-TOTAL> 4,376,808
<INTEREST-DEPOSIT> 1,944,157
<INTEREST-EXPENSE> 2,679,605
<INTEREST-INCOME-NET> 1,697,203
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,146,898
<INCOME-PRETAX> 663,327
<INCOME-PRE-EXTRAORDINARY> 375,236
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 375,236
<EPS-PRIMARY> .41
<EPS-DILUTED> .38
<YIELD-ACTUAL> 7.71
<LOANS-NON> 573,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 49,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 668,185
<CHARGE-OFFS> 12,440
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 655,745
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 655,745
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the quarterly
report on Form 10-QSB for the fiscal quarter ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 831,502
<INT-BEARING-DEPOSITS> 196,493
<FED-FUNDS-SOLD> 100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,866,279
<INVESTMENTS-CARRYING> 28,756,691
<INVESTMENTS-MARKET> 28,755,870
<LOANS> 70,428,556
<ALLOWANCE> 690,009
<TOTAL-ASSETS> 108,913,840
<DEPOSITS> 70,138,277
<SHORT-TERM> 14,700,000
<LIABILITIES-OTHER> 1,395,418
<LONG-TERM> 10,700,000
0
0
<COMMON> 14,984
<OTHER-SE> 11,965,161
<TOTAL-LIABILITIES-AND-EQUITY> 108,913,840
<INTEREST-LOAN> 1,382,714
<INTEREST-INVEST> 569,538
<INTEREST-OTHER> 33,354
<INTEREST-TOTAL> 1,985,606
<INTEREST-DEPOSIT> 891,844
<INTEREST-EXPENSE> 1,247,375
<INTEREST-INCOME-NET> 738,231
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 510,416
<INCOME-PRETAX> 281,655
<INCOME-PRE-EXTRAORDINARY> 166,694
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 166,694
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
<YIELD-ACTUAL> 7.51
<LOANS-NON> 304,000
<LOANS-PAST> 149,000
<LOANS-TROUBLED> 52,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 690,009
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 690,009
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 690,009
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the quarterly
report on Form 10-QSB for the fiscal quarter ended March 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 709,410
<INT-BEARING-DEPOSITS> 265,530
<FED-FUNDS-SOLD> 800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,795,589
<INVESTMENTS-CARRYING> 28,900,681
<INVESTMENTS-MARKET> 28,733,731
<LOANS> 70,961,880
<ALLOWANCE> 690,009
<TOTAL-ASSETS> 109,229,614
<DEPOSITS> 74,140,900
<SHORT-TERM> 9,800,000
<LIABILITIES-OTHER> 1,114,780
<LONG-TERM> 12,700,000
0
0
<COMMON> 14,984
<OTHER-SE> 11,458,950
<TOTAL-LIABILITIES-AND-EQUITY> 109,229,614
<INTEREST-LOAN> 2,778,864
<INTEREST-INVEST> 1,118,892
<INTEREST-OTHER> 72,161
<INTEREST-TOTAL> 3,969,917
<INTEREST-DEPOSIT> 1,781,023
<INTEREST-EXPENSE> 2,487,963
<INTEREST-INCOME-NET> 1,481,954
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,050,143
<INCOME-PRETAX> 537,689
<INCOME-PRE-EXTRAORDINARY> 332,274
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332,274
<EPS-PRIMARY> .33
<EPS-DILUTED> .31
<YIELD-ACTUAL> 7.49
<LOANS-NON> 440,000
<LOANS-PAST> 487,000
<LOANS-TROUBLED> 52,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 690,009
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 690,009
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 690,009
</TABLE>
