<PAGE>
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, 1999
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 12, 1999, there were 1,061,830 shares of the Registrant's common
stock outstanding.
<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, 1999 and September 30, 1998 3
Consolidated Condensed Statements of Earnings
for the Three and Six Months Ended March 31,
1999 and 1998 4
Consolidated Condensed Statements of Comprehensive
Income for the Three and Six Months Ended
March 31, 1999 and 1998 5
Consolidated Condensed Statement of Stockholders'
Equity for the Year Ended September 30, 1998 and
Six Months Ended March 31, 1999 6
Consolidated Condensed Statements of Cash
Flows for the Six Months Ended March 31,
1999 and 1998 7
Notes to Consolidated Condensed Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
PART II. OTHER INFORMATION 19
Signature Page 20
<PAGE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, September 30,
1999 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,025,931 $ 474,406
Federal funds sold 8,700,000 ---
Other interest-earning deposits 1,389,430 439,174
------------ -------------
Cash and cash equivalents 11,115,361 913,580
Investment securities held to maturity (fair value:
March 31, 1999 - $2,632,324;
September 30, 1998 - $5,004,700) 2,619,984 5,000,000
Investment securities available for sale 2,027,200 3,418,311
Mortgage-backed securities held to maturity (fair value:
March 31, 1999 - $12,968,906;
September 30, 1998 - $17,403,143) 12,965,248 17,274,238
Loans receivable, net 107,661,954 93,684,258
Real estate acquired through foreclosure 129,356 71,596
Premises and equipment, net 1,297,252 1,309,633
Federal Home Loan Bank Stock, at cost 1,885,000 1,574,000
Accrued interest receivable 829,507 753,970
Other assets 98,304 337,008
------------- -------------
Total assets $ 140,629,166 $ 124,336,594
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $95,044,692 $80,573,077
Advances from borrowers for taxes and insurance 803,894 745,520
Advances from Federal Home Loan Bank 30,400,000 30,100,000
Income taxes payable 60,859 128,473
Other accrued expenses and liabilities 1,231,453 690,483
------------- -------------
Total liabilities 127,540,898 112,237,553
Stockholders' equity
Preferred stock, $.01 par value, 500,000
shares authorized, none issued --- ---
Common stock, $.01 par value, 2,500,000 shares authorized,
1,649,288 shares issued March 31, 1999; 1,498,392 shares
issued September 30, 1998 16,493 14,984
Additional paid-in capital 8,091,702 7,239,207
Retained earnings - substantially restricted 10,439,014 10,077,091
Accumulated other comprehensive income 20,070 52,497
Treasury stock at cost, 544,873 shares at March 31, 1999
and 539,073 shares at September 30, 1998 (5,232,807) (5,139,263)
Required contributions for shares acquired by ESOP (246,204) (145,475)
------------- -------------
Total stockholders' equity 13,088,268 12,099,041
------------- -------------
Total liabilities and stockholders' equity $ 140,629,166 $ 124,336,594
============= =============
- ---------------------------------
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------- --------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans receivable $2,161,234 $1,713,833 $4,101,871 $3,332,484
Mortgage-backed securities 210,410 352,215 462,399 728,843
Investment securities 74,759 99,303 194,564 199,976
Other 134,146 66,184 187,618 115,505
---------- --------- ---------- ----------
Total interest income 2,580,549 2,231,535 4,946,452 4,376,808
---------- --------- ---------- ----------
Interest expense
Deposits 1,114,225 987,469 2,125,962 1,944,157
Borrowed funds 406,883 370,617 832,969 735,448
---------- ---------- ---------- ----------
Total interest expense 1,521,108 1,358,086 2,958,931 2,679,605
---------- ---------- ---------- ----------
Net interest income 1,059,441 873,449 1,987,521 1,697,203
Provision for loan losses 15,000 --- 30,000 ---
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 1,044,441 873,449 1,957,521 1,697,203
Noninterest income
Income (loss) from real estate operations 7,566 (1,701) 2,681 (1,003)
Other 105,056 49,221 149,387 114,025
---------- ---------- ---------- ----------
Total noninterest income 112,622 47,520 152,068 113,022
---------- ---------- ---------- ----------
Noninterest expense
Employee compensation and benefits 393,801 324,740 687,814 659,977
Occupancy and equipment 70,996 60,975 134,576 117,677
Federal deposit insurance premiums 14,035 12,034 25,874 23,831
Data processing fees 66,306 48,571 127,224 90,177
Other 166,162 128,220 282,931 255,236
---------- ---------- ---------- ----------
Total noninterest expenses 711,300 574,540 1,258,419 1,146,898
---------- ---------- ---------- ----------
Earnings before income taxes 445,763 346,429 851,170 663,327
Income tax expense 167,485 150,983 325,228 288,091
---------- ---------- ---------- ----------
Net earnings $278,278 $195,446 $525,942 $375,236
======== ========== ========== ========
Earnings per common share
Basic $ .26 $ .21 $ .53 $ .41
====== ====== ====== ======
Diluted $ .25 $ .20 $ .50 $ .38
====== ====== ====== ======
Dividends per share $ .0875 $ .0750 $ .1625 $ .1375
======= ======= ======= =======
Weighted average shares outstanding
Basic 1,061,724 916,065 997,749 924,407
========== ========== ========== ==========
Diluted 1,113,919 987,257 1,049,943 995,600
========== ========== ========== ==========
- ------------------------------
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Earnings $ 278,278 $ 195,446 $ 525,942 $ 375,236
Other Comprehensive Income
Unrealized gains (losses) on securities
available for sale arising during the
period, net of tax (16,080) (4,763) (32,427) 4,843
--------- --------- --------- ---------
Comprehensive income $ 262,198 $ 190,683 $ 493,515 $ 380,079
========= ========= ========= =========
- ------------------------------
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For The Six Months Ended March 31, 1999
and Year Ended September 30, 1998
(Unaudited)
Required
Contribu-
Accumulated tion for Unearned
Additional Other Shares Stock
Common Paid-in Retained Comprehensive Treasury Acquired Compen- Total
Stock Capital Earnings Income Stock by ESOP sation-RRP Equity
------- ---------- ---------- ------------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1997 $14,984 $7,122,744 $9,441,054 $15,112 $(4,802,767) $(218,212) $(43,634) $11,529,281
Net earnings --- --- 901,420 --- --- --- --- 901,420
Cash dividends of $.2875
per share --- --- (265,383) --- --- --- --- (265,383)
Common stock options
exercised --- (8,641) --- --- 40,061 --- --- 31,420
Appreciation of securities
available for sale --- --- --- 37,385 --- --- --- 37,385
ESOP loan repayments --- --- --- --- --- 72,737 --- 72,737
Fair value adjustment
on ESOP shares committed
for release --- 125,104 --- --- --- --- --- 125,104
Amortization of unearned
stock compensation --- --- --- --- --- --- 43,634 43,634
Purchase of 25,298 shares
of treasury stock --- --- --- --- (376,557) --- --- (376,557)
------- ---------- ---------- -------- ----------- -------- -------- ----------
Balance at September 30,
1998 14,984 7,239,207 10,077,091 52,497 (5,139,263) (145,475) --- 12,099,041
Net earnings --- --- 525,942 --- --- --- --- 525,942
Cash dividends of $.1625
per share --- --- (164,019) --- --- --- --- (164,019)
Issuance of 150,896 shares
of common stock 1,509 817,968 --- --- --- (142,176) --- 677,301
Common stock options
exercised --- (3,987) --- --- 46,831 --- --- 42,844
Decrease in unrealized gain on
securities available for sale --- --- --- (32,427) --- --- --- (32,427)
ESOP loan repayments --- --- --- --- --- 41,447 --- 41,447
Fair value adjustment on ESOP
shares committed for release --- 38,514 --- --- --- --- ---
38,514
Purchase of 13,300 shares of
treasury stock --- --- --- --- (140,375) --- --- (140,375)
------- -------- ----------- -------- ----------- --------- -------- -----------
Balance at March 31, 1999 $16,493 $8,091,702 $10,439,014 $20,070 $(5,232,807) $(246,204) --- $13,088,268
======= ========== =========== ======= =========== ========= ======== ===========
- ---------------------------------
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended March 31,
-------------------------------------
1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net Earnings $ 525,942 $ 375,236
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation 56,013 52,893
Amortization of premiums and discounts on investments
and mortgage-backed securities 31,535 37,309
Amortization of deferred loan origination fees (104,374) (74,853)
Amortization of expense related to employee
benefit plans 79,961 126,452
Provision for losses on loans 30,000 ---
Net gain on sale of real estate acquired
through foreclosure (13,057) (2,499)
Increase (decrease) in cash due to changes in
Accrued interest receivable 20,962 (24,377)
Other assets 292,219 (67,281)
Accrued expenses and other liabilities (314,520) 278,345
Income taxes payable (50,669) 139,268
----------- -----------
Net cash provided by operating activities 554,012 840,493
Cash flows from investing activities
Proceeds from maturities and repayment of securities
Available for sale 355,053 1,466,371
Held to maturity 10,869,379 5,576,007
Purchase of securities
Available for sale (215,852) (63,705)
Held to maturity (1,000,000) (5,000,000)
Net increase in loans (5,044,065) (10,631,244)
Capital expenditures (43,632) (63,162)
Proceeds from sale of real estate acquired through
foreclosure 58,825 174
Cash acquired in acquisition 2,114,968 ---
----------- -----------
Net cash provided by (used in) investing activities 7,094,676 (8,715,559)
Cash flows from financing activities
Net increase in deposits 1,800,602 7,942,679
Net increase in advances from borrowers
for taxes and insurance 36,740 40,007
Advances from Federal Home Loan Bank 6,700,000 15,500,000
Repayment of Federal Home Loan Bank advances (6,400,000) (11,900,000)
Cash dividends paid (164,019) (126,968)
Purchase of treasury stock (140,375) (364,437)
Net proceeds from sale of stock 677,301 ---
Stock options exercised 42,844 9,300
----------- -----------
Net cash provided by financing activities 2,553,093 11,100,581
----------- -----------
Net increase in cash and cash equivalents 10,201,781 3,225,515
Cash and cash equivalents at beginning of period 913,580 3,151,227
----------- -----------
Cash and cash equivalents at end of period $11,115,361 $ 6,376,742
=========== ===========
- ---------------------------------------
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<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, 1999, and the results of
operations and cash flows for all interim periods presented.
Operating results for the three and six months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1999.
(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 exclude
unallocated and uncommitted shares held by the ESOP trust.
(3) Comprehensive Income
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no effect on the
Company's net earnings or stockholders' equity. SFAS No. 130 requires other
comprehensive income to include unrealized gains or losses on securities
available for sale, which prior to adoption were reported separately in
stockholders' equity. Prior period financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
<PAGE>
(4) Merger Conversion with Neodesha Savings and Loan Association
On January 6, 1999 the Board of Directors of First Independence
Corporation, parent of First Federal Savings and Loan Association of
Independence ("First Federal"), and The Neodesha Savings and Loan Association,
FSA ("Neodesha"), announced the completion of Neodesha's conversion from a
federally-chartered mutual savings and loan association to a federally-chartered
stock savings and loan association and its simultaneous merger with First
Independence's subsidiary, First Federal Savings and Loan Association of
Independence. In connection with the merger conversion, First Independence sold
150,896 shares of its common stock at $9.42 per share. Total assets of Neodesha
were $13.7 million at December 31, 1998. The financial statements include
results of operations of Neodesha beginning January 6, 1999. The transaction was
accounted for under the purchase method of accounting for business combinations.
(5) 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, 1999,
the capital requirements applicable to First Federal Savings and Loan
Association of Independence ("the Association") and its actual capital ratios.
As of March 31, 1999, 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 $12,230 18.55% $5,275 >8.0% $6,594 >10.0%
- -
Tier 1 risk-based capital 11,467 17.39 2,637 >4.0 3,956 > 6.0
- -
Tier 1 (core) capital 11,467 8.21 4,189 >3.0 6,982 > 5.0
- -
Tangible capital 11,467 8.21 2,094 >1.5 --- ---
-
</TABLE>
(6) Supplemental Disclosure of Cash Flow Information
Six months ended March 31,
--------------------------
1999 1998
---------- ----------
Cash paid for:
Interest $2,954,008 $2,642,896
Income taxes 375,897 148,823
Noncash investing and financing activities:
Transfer from loans to real estate
acquired through foreclosure 119,888 56,574
Issuance of loans receivable in connection
with the sale of real estate acquired
through foreclosure 24,800 55,550
Liabilities assumed in conjunction
with acquisition 13,700,846 ---
<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.
<PAGE>
Financial Condition
The Company's total assets increased $16.3 million, or 13.1%, from $124.3
million at September 30, 1998 to $140.6 million at March 31, 1999. This increase
was primarily due to increases in net loans receivable of $14.0 million, cash
and cash equivalents of $10.2 million and Federal Home Loan Bank Stock of
$300,000. These increases in assets were funded by increases in savings deposits
of $14.4 million, other accrued expenses and liabilities of $500,000, advances
from the Federal Home Loan Bank of Topeka of $300,000, and the redeployment of
funds received from decreases in investment securities of $3.8 million and
mortgage-backed securities of $4.3 million. These increases were primarily due
to assets and liabilities acquired in the merger conversion with The Neodesha
Savings and Loan Association, FSA ("Neodesha").
Loans receivable increased $14.0 million from $93.7 million at September
30, 1998, to $107.7 million at March 31, 1999. The increase was primarily due to
loans acquired in the Neodesha merger conversion totaling $8.9 million and, to a
lesser extent, construction loan originations at the Company's loan production
office in Lawrence, Kansas. These construction loans generally have terms of
nine months or less and interest rates tied to the prime rate plus a margin. The
increase was also 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.
Total deposits increased $14.4 million from $80.6 million at September 30,
1998, to $95.0 million at March 31, 1999. Deposits increased primarily due to
deposits acquired in the Neodesha merger conversion totaling $12.7 million. To a
lesser extent, the increase was due to public units depositing short-term funds
into the "Platinum" money fund account and new accounts being opened at the
Coffeyville, Kansas branch office. 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 standard money market
accounts.
Total borrowed funds increased $300,000 from $30.1 million at September 30,
1998 to $30.4 million at March 31, 1999. The increase was from advances obtained
from the Federal Home Loan Bank of Topeka. The Association invested the funds
borrowed in loans receivable at a positive spread.
<PAGE>
Total stockholders' equity increased $1.0 million from $12.1 million at
September 30, 1998 to $13.1 million at March 31, 1999. The increase was
primarily due to net proceeds of $677,000 from the Company's issuance of 150,896
shares of common stock in connection with the merger conversion of Neodesha and
net earnings from operations of $526,000. To a lesser extent, the increase was
due to common stock options exercised of $43,000, the repayment of employee
stock ownership debt of $41,000 and a fair value adjustment of $39,000 on ESOP
shares committed for release. These increases were partially offset by dividends
of $164,000 paid to stockholders, the Company's use of $140,000 to repurchase
13,300 shares of common stock and a decrease in the unrealized gains on
securities available for sale of $32,000.
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, 1999, non-performing
assets were approximately $1,524,000, which represents an increase of $199,000,
or 15.0%, as compared to September 30, 1998. The ratio of non-performing assets
to total assets at March 31, 1999 was 1.08% compared to 1.07% at September 30,
1998. A summary of non-performing assets by category is set forth in the
following table:
March 31, September 30,
1999 1998
---------- -------------
(Dollars In Thousands)
Non-Accruing Loans $1,395 $335
Accruing Loans Delinquent 90 Days or More --- 918
Foreclosed Assets 129 72
------ ------
Total Non-Performing Assets $1,524 $1,325
====== ======
Total Non-Performing Assets as a
Percentage of Total Assets 1.08% 1.07%
==== ====
Included in non-accruing loans at March 31, 1999, were twenty four loans
totaling $1,160,000 secured by one- to four-family real estate, one loan
totaling $20,000 secured by non-residential real estate and sixty five consumer
loans totaling $215,000. All non-accruing loans at March 31, 1999, were located
in the Company's primary market area. At March 31, 1999, there were no accruing
loans delinquent 90 days or more. At March 31, 1999, the Company's real estate
acquired through foreclosure consisted of five single family residences located
in the Company's primary market area. The properties have a total carrying value
of $129,000 and are currently offered for sale.
<PAGE>
Management has taken into account its non-performing assets and the
composition of the loan portfolio in establishing its allowance for loan losses.
The allowance for loan losses totaled $763,000 at March 31, 1999, which
represented a $107,000 increase from the allowance for loan losses at September
30, 1998. This increase was primarily due to the transfer of $84,000 in
allowance for loan losses from Neodesha. The ratio of the allowance for loan
losses as a percent of total loans increased from .70% at September 30, 1998 to
.71% at March 31, 1999. The allowance for loan losses as a percent of
non-performing loans increased from 52.30% at September 30, 1998 to 54.71% at
March 31, 1999. The percentage change in the allowance for loan losses to total
loans and non-performing loans was minimal even though the allowance increased
$107,000, due to the acquisition of additional performing and non-performing
loans from Neodesha.
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.
Results of Operations - Comparison of Three and Six Months Ended March 31, 1999
and March 31, 1998
General. Net earnings for the six months ended March 31, 1999 were $526,000
as compared to $375,000 for the six months ended March 31, 1998, resulting in an
increase of $151,000, or 40.2%. The increase in net earnings was primarily due
to increases in net interest income of $291,000 and non-interest income of
$39,000. These increases were partially offset by increases in non-interest
expense of $111,000 and income tax expense of $37,000.
Net earnings for the three months ended March 31, 1999 were $278,000 as
compared to $195,000 for the three months ended March 31, 1998, resulting in an
increase of $83,000, or 42.4%. The increase in net earnings was primarily due to
an increase in net interest income of $186,000 and non-interest income of
$65,000. These increases were partially offset by increases in non-interest
expense of $136,000 and income tax expense of $16,000.
Net Interest Income. Net interest income increased $291,000, or 17.11%, for
the six months ended March 31, 1999 as compared to the six months ended March
31, 1998. This increase was due primarily to an increase in interest income of
$569,000, or 13.02%, offset partially by an increase in interest expense of
$279,000, or 10.42%. Interest income increased primarily due to a $16.6 million
increase in the average balance of interest-earning assets, offset partially by
an 11 basis point decrease in the average yield on interest-earning assets.
Interest expense increased primarily due to a $15.8 million increase in the
average balance of interest-bearing liabilities, offset partially by a 22 basis
point decrease in the average rate paid on interest-bearing liabilities. The
average balance of interest-earning assets and interest-bearing liabilities
increased primarily due to the Neodesha merger conversion. The average rate
earned on interest-earning assets and paid on interest-bearing liabilities
decreased primarily due to a decrease in market interest rates.
<PAGE>
Net interest income increased $186,000, or 21.29%, for the three months
ended March 31, 1999, as compared to the three months ended March 31, 1998. This
increase was due primarily to an increase in interest income of $349,000, or
15.64%, offset partially by an increase in interest expense of $163,000 or
12.00%. The increase was due to the same reasons as stated above for the six
months ended March 31, 1999, as compared to the six months ended March 31, 1998.
The ratio of average interest-earning assets to average interest-bearing
liabilities increased from 109.3% for the three months ended March 31, 1998 to
109.5% for the three months ended March 31, 1999.
Interest Income. Interest income for the six months ended March 31, 1999,
increased to $4,946,000 from $4,377,000 for the six months ended March 31, 1998.
This increase was caused primarily by a $16.6 million increase in the average
outstanding amount of interest-earning assets during the six months ended March
31, 1999, as compared to the six months ended March 31, 1998 due to assets
acquired in the Neodesha merger conversion. To a lesser extent, the increase in
interest-earning assets was due to an increase in the average balance of loans
receivable financed by advances obtained from the Federal Home Loan Bank of
Topeka and increased savings deposits. This increase was partially offset by a
decrease in the average yield on interest-earning assets. The average yield on
interest-earning assets decreased 11 basis points to 7.60% for the six months
ended March 31, 1999, from 7.71% for the six months ended March 31, 1998. This
decrease was caused primarily by the general decline in interest rates resulting
in a reduction in yield on the Company's loan portfolio from 8.20% to 8.06%. To
a lesser extent, the decrease in yield was due to a decrease in yield on the
Company's mortgage-backed securities portfolio from 6.58% to 6.30% for the six
months ended March 31, 1999, as compared to the same period in fiscal 1998.
Interest income for the quarter ended March 31, 1999, increased to
$2,581,000 from $2,232,000 for the quarter ended March 31, 1998. This increase
was caused primarily by a $19.9 million increase in the average outstanding
amount of interest-earning assets during the three months ended March 31, 1999,
as compared to the three months ended March 31, 1998. The increase was due to
the same reasons as stated above for the six months ended March 31, 1999, as
compared to the six months ended March 31, 1998. This increase was partially
offset by a decrease in the average yield on interest-earning assets. The
average yield on interest-earning assets decreased 9 basis points to 7.55% at
March 31, 1999, from 7.64% at March 31, 1998. This decrease was caused primarily
by the general decline in interest rates resulting in a reduction in yield on
the Company's loan portfolio from 8.20% to 8.06%. To a lesser extent, the
decrease in yield was due to a decrease in yield on the Company's
mortgage-backed securities portfolio from 6.60% to 6.21% for the quarter ended
March 31, 1999, as compared to the same period in fiscal 1998.
<PAGE>
Interest Expense. Interest expense for the six months ended March 31, 1999,
increased by $279,000 to $2,959,000 as compared to $2,680,000 for the six months
ended March 31, 1998. This increase in interest expense was due primarily to a
$15.8 million increase in the average outstanding amount of interest-bearing
liabilities during the six months ended March 31, 1999 as compared to the six
months ended March 31, 1998. This increase was partially offset by a 22 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 $9.7 million increase in the average
outstanding balance of deposits due primarily to savings deposits acquired in
the Neodesha merger conversion and, to a lesser extent, an increase in advances
obtained from the Federal Home Loan Bank of Topeka.
Interest expense for the quarter ended March 31, 1999, increased by
$163,000 to $1,521,000 as compared to $1,358,000 for the quarter ended March 31,
1998. This increase in interest expense was due primarily to a $17.9 million
increase in the average outstanding amount of interest-bearing liabilities
during the three months ended March 31, 1999, as compared to the three months
ended March 31, 1998. This increase in interest-bearing liabilities was due
primarily to the same reasons as stated above. However, the increase in interest
expense was partially offset by a 21 basis point decrease in average interest
rates paid on interest-bearing liabilities, caused by decreases in market
interest rates.
Provision for Loan Losses. The provision for loan losses represents a
charge to earnings to maintain the allowance for loan losses at a level
management believes is adequate to absorb potential losses in the loan
portfolio. The provision for loan losses amounted to $15,000 and $30,000 for the
three and six months ended March 31, 1999 as compared to no provision for the
same periods in 1998. This increase in provision for loan losses was in
recognition of the increased balance of construction loans in the Company's loan
portfolio. Although management believes that it uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate at March 31, 1999, future adjustments to the allowance could be
necessary and net earnings could be affected if circumstances and/or economic
conditions differ substantially from the assumptions used in making the initial
determinations.
Non-interest Income. Non-interest income increased $39,000 to $152,000
during the six months ended March 31, 1999 as compared to $113,000 for the six
months ended March 31, 1998. The increase was primarily due to increased
checking and deposit account fees as a result of accounts acquired in the
Neodesha merger conversion. To a lesser extent, the increase was due to the
amortization of negative goodwill acquired in the Neodesha merger conversion and
increased late charges and other fees associated with mortgage loans.
<PAGE>
Non-interest income increased $65,000 to $113,000 during the three months
ended March 31, 1999 as compared to $48,000 for the three months ended March 31,
1998. The increase was due to the same reasons as stated above for the six
months ended March 31, 1999, as compared to the six months ended March 31, 1998.
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 $1,258,000
for the six months ended March 31, 1999 from $1,147,000 for the six months ended
March 31, 1998, an increase of $111,000, or 9.7%. The increase was primarily due
to increases in data processing fees of $37,000, compensation and employee
benefits of $28,000, other expense of $28,000, occupancy and equipment of
$17,000, and federal deposit insurance premiums of $2,000. These increases were
primarily due to the merger conversion with Neodesha Savings and Loan, 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,
offset partially by a decrease in compensation expense associated with the
Company's ESOP plan due to the decrease in the Company's stock price.
Total non-interest expense increased by $136,000 for the three months ended
March 31, 1999, as compared to the three months ended March 31, 1998. The
increase was due primarily to increases in compensation and employee benefits of
$69,000, other expense of $38,000, data processing fees of $17,000, occupancy
and equipment of $10,000, and federal deposit insurance premiums of $2,000. The
increase in non-interest expense for the three months ended March 31, 1999 was
due to the same reasons as stated above.
Income Tax Expense. Income tax expense was $325,000 for the six months
ended March 31, 1999 compared to $288,000 for the six months ended March 31,
1998, an increase of $37,000. This increase was primarily due to an increase in
pre-tax earnings during the 1999 period as compared to the 1998 period. The
Company's effective tax rates were 38.2% and 43.4% for the six months ended
March 31, 1999 and March 31, 1998, respectively. Rates exceeded expected rates
for the March 31, 1998 period due primarily to compensation expense associated
with the ESOP which is not deductible for income tax purposes. The
non-deductible ESOP compensation expense was partially offset for the March 31,
1999 period by negative goodwill amortization which is not included in income
for income tax calculation purposes, resulting in a lower effective tax rate.
Income tax expense was $167,000 for the quarter ended March 31, 1999
compared to $151,000 for the quarter ended March 31, 1998, an increase of
$16,000. This increase was primarily due to an increase in pre-tax earnings
during the 1999 period as compared to the 1998 period. The Company's effective
tax rates were 37.6% and 43.6% for the three months ended March 31, 1999 and
March 31, 1998, respectively. The effective tax rate decreased for the three
months ended March 31, 1999 due to the same reasons as stated above.
<PAGE>
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, 1999,
the Association's liquidity ratio was 10.59% as compared to 7.01% at September
30, 1998. 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, 1999, the Company had commitments
to originate loans totaling $1,361,000. 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, 1999, the Association exceeded all fully phased-in regulatory
capital standards.
At March 31, 1999, the Association's tangible capital was $11.5 million, or
8.21% of adjusted total assets, which is in excess of the 1.5% requirement by
$9.4 million. In addition, at March 31, 1999, the Association had core capital
of $11.5 million, or 8.21% of adjusted total assets, which exceeds the 3%
requirement by $7.3 million. The Association had total risk-based capital of
$12.2 million at March 31, 1999, or 18.55% of risk-adjusted assets, which
exceeds the 8.0% risk-based capital requirements by $7.0 million.
<PAGE>
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.
Year 2000 Compliance Issues
The year 2000 ("Y2K") issue confronting the Company and its suppliers,
customers' suppliers and competitors centers on the inability of computer
systems to recognize the year 2000. Many existing computer programs and systems
originally were programmed with six digit dates that provided only two digits to
identify the calendar year in the date field. With the impending new millennium,
these programs and computers will recognize "00" as the year 1900 rather than
the year 2000.
The Board of Directors and management view the year 2000-date (Y2K) issue
as a potentially serious interruption to the conduct of our day-to-day
operations. To alleviate this potential interruption, 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. This committee reports to the
Board at least quarterly about the status and progress of our Y2K plan.
<PAGE>
Our Y2K action plan covers five areas; awareness of the problem, inventory
& assessment of hardware and software for Y2K problems, renovation of necessary
systems, validation of testing plans and implementation of system changes. We
have completed all areas of the plan and are believed to be Y2K compliant at the
time of this report.
The Company is expensing all costs associated with training and software as
those costs are incurred, and such costs are being funded through operating cash
flows. Hardware cost will be capitalized and expensed under our fixed asset
guidelines. The total cost of the Y2K conversion project for the Company is
estimated to be $110,000. Expenses of approximately $92,500 were incurred and
expensed by the Company through March 31, 1999. The Company does not expect
significant increases in future data processing costs relating to Y2K
compliance. While we believe this amount will be sufficient to complete the
requirements of becoming Y2K compliant, it is an estimate. As such, we will
review our budget monthly to help ensure that we have allocated sufficient
resources to this project. Any deviations to the preliminary budget will be
reported to the Board of Directors.
During the assessment phase, the Company began to develop back-up or
contingency plans for each of its mission critical systems. Virtually all of the
Company's mission critical systems are dependent upon third-party vendors or
service providers. Therefore, contingency plans include selecting a new vendor
or service provider and converting to their system. In the event a current
vendor's system fails during the validation phase and it is determined that the
vendor is unable or unwilling to correct the failure, the Company will convert
to a new system from a pre-selected list of prospective vendors. In each case,
realistic trigger dates have been established to allow for orderly and
successful conversions. For some systems, contingency plans consist of using
spreadsheet software or reverting to manual systems until system problems can be
corrected.
The potential impact on the Company for Y2K risk includes, but is not
limited to, the risk of insufficient liquidity, communication loss, power loss
and the inability to process customer data. The potential impact to the
profitability of the Company related to these risks and those not yet identified
cannot be measured or known at this time.
<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 - Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - none
<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 12, 1999 /s/Larry G. Spencer
------------- -----------------------------------
Larry G. Spencer
President and Chief Executive
Officer
Date: May 12, 1999 /s/James B. Mitchell
------------- -----------------------------------
James B. Mitchell
Vice President and Chief Financial
Accounting Officer
<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, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,025,931
<INT-BEARING-DEPOSITS> 1,389,430
<FED-FUNDS-SOLD> 8,700,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,027,200
<INVESTMENTS-CARRYING> 15,585,232
<INVESTMENTS-MARKET> 15,601,230
<LOANS> 108,425,028
<ALLOWANCE> 763,074
<TOTAL-ASSETS> 140,629,166
<DEPOSITS> 95,044,692
<SHORT-TERM> 2,900,000
<LIABILITIES-OTHER> 2,096,206
<LONG-TERM> 27,500,000
<COMMON> 16,493
0
0
<OTHER-SE> 13,071,775
<TOTAL-LIABILITIES-AND-EQUITY> 140,629,166
<INTEREST-LOAN> 4,101,871
<INTEREST-INVEST> 656,963
<INTEREST-OTHER> 187,618
<INTEREST-TOTAL> 4,946,452
<INTEREST-DEPOSIT> 2,125,962
<INTEREST-EXPENSE> 2,958,931
<INTEREST-INCOME-NET> 1,987,521
<LOAN-LOSSES> 30,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,258,419
<INCOME-PRETAX> 851,170
<INCOME-PRE-EXTRAORDINARY> 525,942
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 525,942
<EPS-PRIMARY> .53
<EPS-DILUTED> .50
<YIELD-ACTUAL> 7.60
<LOANS-NON> 1,394,887
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 655,745
<CHARGE-OFFS> 6,505
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 763,074
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 763,074
</TABLE>
