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 December 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
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(Exact name of small business issuer as specified in its charter)
Delaware 36-3899950
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(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification or
organization) number)
Myrtle & Sixth Streets, Independence, Kansas 67301
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(Address of principal executive offices)
(316) 331-1660
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(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 February 12, 1999, there were 1,117,715 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
December 31, 1998 and September 30, 1998 3
Consolidated Condensed Statements of Earnings
for the Three Months Ended December 31, 1998
and 1997 4
Consolidated Condensed Statements of Comprehensive
Income for the Three Months Ended December 31,
1998 and 1997 5
Consolidated Condensed Statement of Stockholders'
Equity for the Year Ended September 30, 1998 and
Three Months Ended December 31, 1998 6
Consolidated Condensed Statements of Cash
Flows for the Three Months Ended December 31,
1998 and 1997 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 18
Signature Page 19
<PAGE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
December 31, September 30,
1998 1998
<S> <C> <C>
------------------ -----------------
(Unaudited)
ASSETS
Cash and due from banks $ 1,220,896 $ 474,406
Federal funds sold 5,000,000 ---
Other interest-earning deposits 582,502 439,174
------------- -------------
Cash and cash equivalents 6,803,398 913,580
Investment securities held to maturity (fair value:
September 30, 1998 - $5,004,700) --- 5,000,000
Investment securities available for sale 3,401,590 3,418,311
Mortgage-backed securities held to maturity (fair value:
December 31, 1998 - $15,104,513;
September 30, 1998 - $17,403,143) 15,084,442 17,274,238
Loans receivable, net 97,161,631 93,684,258
Real estate acquired through foreclosure 77,973 71,596
Premises and equipment, net 1,315,246 1,309,633
Federal Home Loan Bank Stock, at cost 1,749,500 1,574,000
Accrued interest receivable 717,512 753,970
Other assets 383,881 337,008
------------- -------------
Total assets $ 126,695,173 $ 124,336,594
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 81,907,067 $ 80,573,077
Advances from borrowers for taxes and insurance 404,627 745,520
Advances from Federal Home Loan Bank 30,400,000 30,100,000
Income taxes payable 254,768 128,473
Other accrued expenses and liabilities 1,403,139 690,483
------------- -------------
Total liabilities 114,369,601 112,237,553
Stockholders' equity
Preferred stock, $.01 par value, 500,000
shares authorized, none issued --- ---
Common stock, $.01 par value, 2,500,000 shares authorized,
1,498,392 shares issued 14,984 14,984
Additional paid-in capital 7,257,736 7,239,207
Retained earnings - substantially restricted 10,254,988 10,077,091
Unrealized gain on securities available for sale, net 36,150 52,497
Treasury stock at cost, 534,573 shares at December 31, 1998
and 539,073 shares at September 30, 1998 (5,110,995) (5,139,263)
Required contributions for shares acquired by ESOP (127,291) (145,475)
------------- -------------
Total stockholders' equity 12,325,572 12,099,041
------------- -------------
Total liabilities and stockholders' equity $ 126,695,173 $124,336,594
============= =============
</TABLE>
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The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
Three Months Ended
December 31,
-------------------------------
<S> <C> <C>
1998 1997
-------------- --------------
Interest income (Unaudited)
Loans receivable $1,940,637 $1,618,651
Mortgage-backed securities 251,989 376,628
Investment securities 119,805 100,673
Other 53,472 49,321
--------- ----------
Total interest income 2,365,903 2,145,273
--------- ----------
Interest expense
Deposits 1,011,737 956,688
Borrowed funds 426,086 364,831
--------- -----------
Total interest expense 1,437,823 1,321,519
--------- -----------
Net interest income 928,080 823,754
Provision for loan losses 15,000 ---
--------- ----------
Net interest income after provision
for loan losses 913,080 823,754
Noninterest income
Income (loss) from real estate operations (4,885) 698
Other 44,331 42,790
-------- ----------
Total noninterest income 39,446 43,488
-------- ----------
Noninterest expense
Employee compensation and benefits 294,013 313,223
Occupancy and equipment 3,580 56,702
Federal deposit insurance premiums 11,839 11,797
Data processing fees 60,918 41,606
Other 116,769 127,016
-------- ----------
Total noninterest expenses 547,119 550,344
-------- ----------
Earnings before income taxes 405,407 316,898
Income tax expense 157,743 137,108
-------- ----------
Net earnings $ 247,664 $ 179,790
========= ==========
Earnings per common share
Basic $ .27 $ .19
====== ======
Diluted $ .25 $ .18
====== ======
Dividend per share $ .0750 $ .0625
======= =======
</TABLE>
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The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended
December 31,
-----------------------------
1998 1997
------------ --------------
(Unaudited)
Net Earnings $ 247,664 $ 179,790
Other Comprehensive Income
Unrealized gains (losses) on securities available for
sale arising during the period, net of tax (16,347) 9,606
--------- --------
Comprehensive income $ 231,317 $ 189,396
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For The Three Months Ended December 31, 1998
and Year Ended September 30, 1998
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
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
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 --- --- (265,383) --- --- --- --- (265,383)
share
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 --- --- 247,664 --- --- --- --- 247,664
Cash dividends of $.075 per --- --- (69,767) --- --- --- --- (69,767)
share
Common stock options exercised --- (424) --- --- 28,268 --- --- 27,844
Decrease in unrealized gain on
securities available for sale --- --- --- (16,347) --- --- --- (16,347)
ESOP loan repayments --- --- --- --- --- 18,184 --- 18,184
Fair value adjustment on ESOP
shares committed for release --- 18,953 --- --- --- 18,953
----- -------- -------- ----- --------- --------- -------- --------
Balance at December
31, 1998 $14,984 $7,257,736 $10,254,988 $36,150$(5,110,995)$(127,291) --- $12,325,572
======= ========== =========== ======= ========= ========= ======== ===========
- ---------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended December 31,
-----------------------------------------
<S> <C> <C>
1998 1997
--------------- ---------------
Cash flows from operating activities (Unaudited)
Net Earnings 247,664 179,790
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation 28,235 26,876
Amortization of premiums and discounts on investments
and mortgage-backed securities 14,496 19,360
Amortization of deferred loan origination fees (59,690) (14,886)
Amortization of expense related to employee
benefit plans 37,138 62,946
Provision for losses on loans 15,000 ---
Net gain on sale of real estate acquired
through foreclosure --- (916)
Increase (decrease) in cash due to changes in
Accrued interest receivable 36,458 (33,795)
Other assets (62,270) 26,454
Accrued expenses and other liabilities 711,465 1,008,162
Income taxes payable 152,901 127,878
----------- -----------
Net cash provided by operating activities 1,121,397 1,401,869
Cash flows from investing activities
Proceeds from maturities and repayment of securities
Available for sale --- 203,642
Held to maturity 7,170,573 4,383,085
Purchase of securities
Available for sale (180,419) (33,044)
Net increase in loans (3,445,259) (6,876,980)
Capital expenditures (33,848) (62,761)
Proceeds from sale of real estate acquired through
foreclosure 6,200 853
----------- -----------
Net cash provided by (used in) investing activities 3,517,247 (2,385,205)
Cash flows from financing activities
Net increase (decrease) in deposits 1,333,990 (109,806)
Net decrease in advances from borrowers
for taxes and insurance (340,893) (292,371)
Advances from Federal Home Loan Bank 6,700,000 5,500,000
Repayment of Federal Home Loan Bank advances (6,400,000) (4,900,000)
Cash dividends paid (69,767) (58,418)
Purchase of treasury stock --- (364,437)
Stock options exercised 27,844 800
----------- -----------
Net cash provided by (used in) financing activities 1,251,174 (224,232)
----------- ------------
Net increase (decrease) in cash and cash equivalents 5,889,818 (1,207,568)
Cash and cash equivalents at beginning of period 913,580 3,151,227
----------- -----------
Cash and cash equivalents at end of period $ 6,803,398 $ 1,943,659
=========== ===========
- ---------------------------------
The accompanying notes are an integral part of these statements.
</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 December 31, 1998, and the results of
operations and cash flows for all interim periods presented.
Operating results for the three months ended December 31, 1998 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) 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. Total assets of Neodesha approximated $14.0 million at December
31, 1998. In connection with the Merger Conversion, First Independence sold
150,896 shares of its Common Stock at the discounted price of $9.42 per share.
The transaction will be accounted for under the purchase method of accounting
for business combinations.
<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
December 31, 1998, the capital requirements applicable to First Federal Savings
and Loan Association of Independence ("the Association") and its actual capital
ratios. For purposes of calculating regulatory capital, adjustments required by
Statement of Financial Accounting Standards No. 115 are not taken into account.
As of December 31, 1998, the Association exceeded all current regulatory capital
standards.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
To be well capitalized
under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------ ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ -------- ------------ --------- ------------ ---------
(Dollars in Thousands)
Total risk-based capital $11,423 19.16% $4,769 >8.0% $5,962 >10.0%
- -
Tier 1 risk-based capital 10,753 18.04 2,385 >4.0 3,577 > 6.0
- -
Tier 1 (core) capital 10,753 8.58 3,761 >3.0 6,268 > 5.0
- -
Tangible capital 10,753 8.58 1,880 >1.5 --- ---
-
</TABLE>
(5) Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
<S> <C> <C>
Three months ended December 31,
1998 1997
Cash paid for:
Interest $1,436,941 $1,347,815
Income taxes 4,842 9,230
Noncash investing and financing activities:
Transfer from loans to real estate
acquired through foreclosure 38,405 56,574
Issuance of loans receivable in connection
with the sale of real estate acquired
through foreclosure 24,800 ---
</TABLE>
<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 $2.4 million, or 1.90%, from
$124.3 million at September 30, 1998 to $126.7 million at December 31, 1998.
This increase was primarily due to increases in cash and cash equivalents of
$5.9 million, net loans receivable of $3.5 million and Federal Home Loan Bank
Stock of $200,000. These increases in assets, along with a reduction in advanced
payments by borrowers' for taxes and insurance of $300,000, were funded by
increases in savings deposits of $1.3 million, other accrued expenses and
liabilities of $700,000, advances from the Federal Home Loan Bank of Topeka of
$300,000, and the redeployment of funds received from decreases in investment
securities of $5.0 million and mortgage-backed securities of $2.2 million.
Loans receivable increased $3.5 million from $93.7 million at September
30, 1998, to $97.2 million at December 31, 1998. The increase was primarily due
to 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. 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.
Total deposits increased $1.3 million from $80.6 million at September
30, 1998, to $81.9 million at December 31, 1998. Deposits increased primarily as
a result of public units depositing short-term funds into the "Platinum" money
fund account and new accounts 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 money market accounts.
Total borrowed funds increased $300,000 from $30.1 million at September
30, 1998 to $30.4 million at December 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 $227,000 from $12.1 million at
September 30, 1998 to $12.3 million at December 31, 1998. The increase was
primarily due to the Company's net earnings from operations of $248,000, common
stock options exercised of $28,000, fair value adjustment of $19,000 on ESOP
shares committed for release, and the repayment of employee stock ownership debt
<PAGE>
of $18,000. These increases were partially offset by dividends of $70,000 paid
to stockholders and a decrease in the unrealized gains on securities available
for sale of $16,000.
Non-performing Assets
<TABLE>
<CAPTION>
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 December 31, 1998,
non-performing assets were approximately $1,525,000, which represents an
increase of $200,000, or 15.1%, as compared to September 30, 1998. The ratio of
non-performing assets to total assets at December 31, 1998 was 1.20% compared to
1.07% at September 30, 1998. A summary of non-performing assets by category is
set forth in the following table:
<S> <C> <C>
December 31, September 30,
1998 1998
------------------ -----------------
(Dollars In Thousands)
Non-Accruing Loans $1,292 $335
Accruing Loans Delinquent 90 Days or More 155 918
Foreclosed Assets 78 72
------ ------
Total Non-Performing Assets $1,525 $1,325
====== ======
Total Non-Performing Assets as a
Percentage of Total Assets 1.20% 1.07%
==== ====
</TABLE>
Included in non-accruing loans at December 31, 1998, were twenty loans
totaling $1,104,000 secured by one- to four-family real estate, two loans
totaling $143,000 secured by non-residential real estate and five consumer loans
totaling $45,000. All non-accruing loans at December 31, 1998, were located in
the Company's primary market area. At December 31, 1998, accruing loans
delinquent 90 days or more included three loans totaling $155,000 secured by
one- to four-family real estate. At December 31, 1998, all of the Company's
accruing loans delinquent 90 days or more were secured by real estate located in
the Company's primary market area. At December 31, 1998, the Company's real
estate acquired through foreclosure consisted of three single family residences
located in the Company's primary market area. The properties have a carrying
value of $78,000 and are currently offered for sale.
Management has taken into account its non-performing assets and the
composition of the loan portfolio in establishing its allowance for loan losses.
<PAGE>
The allowance for loan losses totaled $670,000 at December 31, 1998, which
represented a $14,000 increase from the allowance for loan losses at September
30, 1998. The ratio of the allowance for loan losses as a percent of total loans
decreased from .70% at September 30, 1998 to .69% at December 31, 1998,
primarily due to the increase in total loans receivable at December 31, 1998.
The allowance for loan losses as a percent of non-performing loans decreased
from 52.3% at September 30, 1998 to 46.3% at December 31, 1998, due to the
increase in non-performing loans at December 31, 1998. At December 31, 1998, the
Company's non-performing loans were comprised primarily of one- to four-family
residential loans.
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.
<PAGE>
Results of Operations - Comparison of Three Months Ended December 31, 1998 and
December 31, 1997
General. Net earnings for the three months ended December 31, 1998 were
$248,000 as compared to $180,000 for the three months ended December 31, 1997,
resulting in an increase of $68,000, or 37.8%. The increase in net earnings was
primarily due to an increase of $104,000 in net interest income. This increase
was partially offset by a $21,000 increase in income tax expense and a $15,000
increase in provision for loan losses.
Net Interest Income. Net interest income increased $105,000, or 12.7%,
for the three months ended December 31, 1998 as compared to the three months
ended December 31, 1997. This increase was due primarily to an increase in
interest income of $221,000, or 10.3%, offset partially by an increase in
interest expense of $116,000, or 8.8%. Interest income increased primarily due
to a $13.4 million increase in average interest-earning assets, partially offset
by a 13 basis point decrease in yield on interest-earning assets. Interest
expense increased primarily due to a $13.6 million increase in average
interest-bearing liabilities, partially offset by a 22 basis point decrease in
the average rate paid on interest-bearing liabilities.
Interest Income. Interest income for the quarter ended December 31,
1998, increased to $2.4 million from $2.1 million for the quarter ended December
31, 1997. This increase resulted primarily from a $13.4 million increase in the
average outstanding balance of interest-earning assets (due to the increase in
the average balance of loans receivable and investment securities financed with
borrowings from the Federal Home Loan Bank of Topeka, a decrease in
mortgage-backed securities and increased savings deposits) during the three
months ended December 31, 1998, as compared to the three months ended December
31, 1997. These increases were partially offset by a decrease in the average
yield on interest-earning assets. The average yield on interest-earning assets
decreased by 13 basis points to 7.65% during the first quarter of fiscal 1999,
from 7.78% during the first quarter of fiscal 1998. This decrease was caused
primarily by a decrease in yield on the Company's loans receivable from 8.20% to
8.07% due to new loans being originated at lower, current rates than those
adjusting in the loan portfolio.
Interest Expense. Interest expense for the quarter ended December 31,
1998, increased by $116,000 to $1.4 million as compared to $1.3 million for the
quarter ended December 31, 1997. This increase was primarily the result of a
$13.6 million increase in the average outstanding balance of interest-bearing
liabilities during the three months ended December 31, 1998 as compared to the
three months ended December 31, 1997. This increase was partially offset by a 22
basis point decrease in the average interest rate paid on interest-bearing
liabilities, caused by a decrease in interest rates on Federal Home Loan Bank
<PAGE>
advances and demand and NOW deposits. The increase in interest-bearing
liabilities was primarily due to a $7.7 million increase in the average
outstanding amount of advances obtained from the Federal Home Loan Bank of
Topeka and a $5.8 million increase in the average outstanding amount of
deposits. The advances were used by the Company to invest in loans receivable at
a positive spread over the term of the advances.
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 for the three
months ended December 31, 1998 as compared to no provision for the same period
in 1997. Although management believes that it uses the best information
available in providing for possible loan losses and believes that the allowance
is adequate at December 31, 1998, 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 decreased $4,000 to $39,000
during the three months ended December 31, 1998 as compared to $43,000 for the
three months ended December 31, 1997. The decrease was primarily due to a
decrease of $6,000 in income from real estate operations for the three months
ended December 31, 1998 as compared to the three months ended December 31, 1997.
Recurring non-interest income generally consists of servicing fees as well as
deposit and other types of fees. Non-interest income levels are anticipated to
remain stable in the future due to the small number of checking accounts held by
the Company.
Non-interest Expense. Total non-interest expense decreased to $547,000
for the three months ended December 31, 1998 from $550,000 for the three months
ended December 31, 1997, a decrease of $3,000, or 0.6%. The decrease was due
primarily to decreases in compensation and employee benefits of $19,000 and
other expenses of $10,000. These decreases were partially offset by increases in
data processing fees of $19,000 and occupancy and equipment of $7,000. The
decrease in compensation expense was primarily due to the decrease in the
Company's stock price and its impact on the Company's ESOP expense. Data
processing expenses increased due to increased account volumes at the
Coffeyville branch and processing price increases.
Income Tax Expense. Income tax expense was $158,000 for the quarter
ended December 31, 1998 compared to $137,000 for the quarter ended December 31,
1997, an increase of $21,000. 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 38.9% and 43.3% for the three months ended
<PAGE>
December 31, 1998 and December 31, 1997, respectively. Rates exceed effective
combined federal and state statutory rates of 38% due primarily to compensation
expense associated with the ESOP, of which a portion is not deductible for
income tax purposes. The amount of compensation expense associated with the ESOP
was greater during the 1997 period than the 1998 period, accounting for the
higher effective tax rate during the 1997 period.
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 December 31, 1998,
the Association's liquidity ratio was 6.83% 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 December 31, 1998, the Company had
commitments to originate loans totaling $1,066,000. 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 December 31, 1998, the Association exceeded all fully phased-in regulatory
capital standards.
<PAGE>
At December 31, 1998, the Association's tangible capital was $10.8
million, or 8.58% of adjusted total assets, which is in excess of the 1.5%
requirement by $8.9 million. In addition, at December 31, 1998, the Association
had core capital of $10.8 million, or 8.58% of adjusted total assets, which
exceeds the 3% requirement by $7.0 million. The Association had risk-based
capital of $11.4 million at December 31, 1998, or 19.16% of risk-adjusted
assets, which exceeds the 8.0% risk-based capital requirements by $6.7 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.
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.
<PAGE>
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.
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. At the time of this report we have completed the first three steps of
the plan and are working on the last two steps. We anticipate that we will be
through the testing phase by the first quarter of 1999 and will have
implementation completed by the middle of 1999. Our major Y2K system critical
function lies with our third party data processing service bureau, Fi-Serv.
Fi-Serv is working closely with their clients and they have advised us that they
will be Y2K compliant before the middle of the 1999 deadline.
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 $70,000 were incurred and
expensed by the Company through December 31, 1998. 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.
<PAGE>
The impact on the Company for Y2K risk are many and include, but are 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
The Annual Meeting of Shareholders (the "Meeting") of First
Independence Corporation was held on January 27, 1999. The matters approved by
shareholders at the Meeting and the number of votes cast for, against or
withheld (as well as the number of abstentions and broker non-votes) as to each
matter are set forth below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PROPOSAL NUMBER OF VOTES
Broker
For Withheld Non-Votes
----------------- ------------------ ------------------
----------------- ------------------ ------------------
Election of the following directors for the terms indicated:
Lavern W. Strecker (three years) 900,156 --- ---
Robert A. Johnson (three years) 899,156 1,000 ---
Broker
For Against Abstain Non-Votes
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Ratification of Grant Thornton LLP
as auditors for the fiscal year ending September 30,
1999 881,156 19,000 --- ---
</TABLE>
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: February 12, 1999 /s/Larry G. Spencer
----------------------------------
Larry G. Spencer
President and Chief Executive
Officer
Date: February 12, 1999 /s/James B. Mitchell
----------------------------------
James B. Mitchell
Vice President and Chief Financial
Accounting Officer
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27, "Financial Data Schedule"
The schedule contains summary financial information extracted from the
quarterly report on Form 10-QSB for the fiscal quarter ended December 31, 1998
and is qualified in its entirety by reference to such financial statements.
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-END> Dec-31-1998
<CASH> 1,220,896
<INT-BEARING-DEPOSITS> 582,502
<FED-FUNDS-SOLD> 5,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,401,590
<INVESTMENTS-CARRYING> 15,084,442
<INVESTMENTS-MARKET> 15,104,513
<LOANS> 97,831,348
<ALLOWANCE> 669,717
<TOTAL-ASSETS> 126,695,173
<DEPOSITS> 81,907,067
<SHORT-TERM> 2,900,000
<LIABILITIES-OTHER> 2,062,534
<LONG-TERM> 27,500,000
0
0
<COMMON> 14,984
<OTHER-SE> 12,310,588
<TOTAL-LIABILITIES-AND-EQUITY> 126,695,173
<INTEREST-LOAN> 1,940,637
<INTEREST-INVEST> 371,794
<INTEREST-OTHER> 53,472
<INTEREST-TOTAL> 2,365,903
<INTEREST-DEPOSIT> 1,011,737
<INTEREST-EXPENSE> 1,437,823
<INTEREST-INCOME-NET> 928,080
<LOAN-LOSSES> 15,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 547,119
<INCOME-PRETAX> 405,407
<INCOME-PRE-EXTRAORDINARY> 247,664
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 247,664
<EPS-PRIMARY> .27
<EPS-DILUTED> .25
<YIELD-ACTUAL> 7.65
<LOANS-NON> 1,292,077
<LOANS-PAST> 154,797
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 655,745
<CHARGE-OFFS> 1,028
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 669,717
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 669,717
</TABLE>
