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 June 30, 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 August 6, 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
June 30, 1999 and September 30, 1998 3
Consolidated Condensed Statements of Earnings
for the Three and Nine Months Ended June 30,
1999 and 1998 4
Consolidated Condensed Statements of Comprehensive
Income for the Three and Nine Months Ended
June 30, 1999 and 1998 5
Consolidated Condensed Statement of Stockholders'
Equity for the Year Ended September 30, 1998 and
Nine Months Ended June 30, 1999 6
Consolidated Condensed Statements of Cash
Flows for the Nine Months Ended June 30,
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>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
June 30, September 30,
1999 1998
---------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,141,904 $ 474,406
Federal funds sold 3,900,000 ---
Other interest-earning deposits 1,397,746 439,174
--------- -------
Cash and cash equivalents 6,439,650 913,580
Investment securities held to maturity (fair value:
June 30, 1999 - $1,988,596;
September 30, 1998 - $5,004,700) 2,005,118 5,000,000
Investment securities available for sale 2,003,500 3,418,311
Mortgage-backed securities held to maturity (fair value:
June 30, 1999 - $11,667,510;
September 30, 1998 - $17,403,143) 11,747,954 17,274,238
Loans receivable, net 110,781,430 93,684,258
Real estate acquired through foreclosure 195,751 71,596
Premises and equipment, net 1,296,009 1,309,633
Federal Home Loan Bank Stock, at cost 1,917,800 1,574,000
Accrued interest receivable 844,159 753,970
Other assets 151,601 337,008
------------- -------------
Total assets $ 137,382,972 $ 124,336,594
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 95,402,059 $ 80,573,077
Advances from borrowers for taxes and insurance 389,291 745,520
Advances from Federal Home Loan Bank 27,500,000 30,100,000
Income taxes payable 64,780 128,473
Other accrued expenses and liabilities 1,194,818 690,483
----------- -----------
Total liabilities 124,550,948 112,237,553
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 June 30, 1999; 1,498,392 shares
issued September 30, 1998 16,493 14,984
Additional paid-in capital 8,111,624 7,239,207
Retained earnings - substantially restricted 10,642,935 10,077,091
Accumulated other comprehensive income 5,165 52,497
Treasury stock at cost, 587,458 shares at June 30, 1999
and 539,073 shares at September 30, 1998 (5,721,251) (5,139,263)
Required contributions for shares acquired by ESOP (222,942) (145,475)
---------- ----------
Total stockholders' equity 12,832,024 12,099,041
----------- -----------
Total liabilities and stockholders' equity $ 137,382,972 $ 124,336,594
============= =============
</TABLE>
- ---------------------------------
The accompanying notes are an integral part of these statements.
<PAGE>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
<TABLE>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans receivable $2,202,439 $1,818,091 $6,304,310 $5,150,575
Mortgage-backed securities 171,108 328,124 633,507 1,056,967
Investment securities 59,567 131,170 254,131 331,146
Other 123,671 70,871 311,289 186,376
--------- --------- --------- ---------
Total interest income 2,556,785 2,348,256 7,503,237 6,725,064
--------- --------- --------- ---------
Interest expense
Deposits 1,126,994 1,041,117 3,252,956 2,985,274
Borrowed funds 382,622 386,180 1,215,591 1,121,628
--------- --------- --------- ---------
Total interest expense 1,509,616 1,427,297 4,468,547 4,106,902
--------- --------- --------- ---------
Net interest income 1,047,169 920,959 3,034,690 2,618,162
Provision for loan losses 15,000 --- 45,000 ---
--------- ------- --------- --------
Net interest income after provision
for loan losses 1,032,169 920,959 2,989,690 2,618,162
Noninterest income
Loss from real estate operations (23,570) (3,184) (20,889) (4,187)
Other 124,571 49,085 273,958 135,564
------- ------ ------- -------
Total noninterest income 101,001 45,901 253,069 131,377
------- ------ ------- -------
Noninterest expense
Employee compensation and benefits 367,565 310,753 1,055,379 943,184
Occupancy and equipment 72,770 53,066 207,346 170,743
Federal deposit insurance premiums 13,870 11,812 39,744 35,643
Data processing fees 75,249 47,638 202,473 137,815
Other 138,873 91,389 421,804 346,625
------- ------- --------- ---------
Total noninterest expenses 668,327 514,658 1,926,746 1,634,010
------- ------- --------- ---------
Earnings before income taxes 464,843 452,202 1,316,013 1,115,529
Income tax expense 171,194 183,719 496,422 471,810
------- ------- --------- --------
Net earnings $293,649 $268,483 $819,591 $643,719
======== ======== ======== ========
Earnings per common share
Basic $ .28 $ .29 $ .81 $ .70
====== ====== ====== ======
Diluted $ .27 $ .27 $ .77 $ .65
====== ====== ====== ======
Dividends per share $ .0875 $ .0750 $ .2500 $ .2125
======= ======= ======= =======
Weighted average shares outstanding
Basic 1,033,633 922,265 1,009,710 923,320
========= ======= ========= =======
Diluted 1,085,827 986,282 1,061,904 987,338
========= ======= ========= =======
</TABLE>
- ------------------------------
The accompanying notes are an integral part of these statements.
<PAGE>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net earnings $ 293,649 $ 268,483 $ 819,591 $ 643,719
Other comprehensive income
Unrealized gains (losses) on securities
available for sale arising during the
period, net of tax (14,905) 385 (47,332) 5,228
--------- --------- --------- ---------
Comprehensive income $ 278,744 $ 268,868 $ 772,259 $ 648,947
========= ========= ========= =========
</TABLE>
- ------------------------------
The accompanying notes are an integral part of these statements.
<PAGE>
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For The Nine Months Ended June 30, 1999
and Year Ended September 30, 1998
(Unaudited)
<TABLE>
Additional Accumulated
Common Paid-in Retained Other Compre-
Stock Capital Earnings hensive Income
------ ---------- -------- --------------
<S> <C> <C> <C> <C>
Balance at October 1, 1997 $ 14,984 $ 7,122,744 $ 9,441,054 $ 15,112
Net earnings --- --- 901,420
---
Cash dividends of $.2875 per --- --- (265,383) ---
share
Common stock options exercised --- (8,641) --- ---
Appreciation of securities
available --- --- --- 37,385
for sale
ESOP loan repayments --- --- --- ---
Fair value adjustment on ESOP
shares committed for release --- 125,104 --- ---
Amortization of unearned stock
compensation --- --- --- ---
Purchase of 25,298 shares of
treasury stock --- --- --- ---
------------ ------------ ------------ ------------
Balance at September 30, 1998 14,984 7,239,207 10,077,091 52,497
Net earnings --- --- 819,591 ---
Cash dividends of $.25 per share --- --- (253,747) ---
Issuance of 150,896 shares of
common stock 1,509 817,968 --- ---
Common stock options exercised --- (3,987) --- ---
Decrease in unrealized gain on
securities available for sale --- --- --- (47,332)
ESOP loan repayments --- --- --- ---
Fair value adjustment on ESOP
shares committed for release --- 58,436 --- ---
Purchase of 55,885 shares of
treasury stock --- --- --- ---
------------ ------------ ------------ ------------
Balance at June 30, 1999 $ 16,493 $ 8,111,624 $ 10,642,935 $ 5,165
============ ============ ============ ============
<PAGE>
Required
Contribu-
tion for Unearned
Shares Stock
Treasury Acquired Compen- Total
Stock by ESOP sation-RRP Equity
-------- -------- ---------- -----------
Balance at October 1, 1997 $ (4,802,767) $ (218,212) $ (43,634) $ 11,529,281
Net earnings --- --- --- 901,420
Cash dividends of $.2875 per --- --- --- (265,383)
share
Common stock options exercised 40,061 --- --- 31,420
Appreciation of securities
available --- --- --- 37,385
for sale
ESOP loan repayments --- 72,737 --- 72,737
Fair value adjustment on ESOP
shares committed for release --- --- --- 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 (5,139,263) (145,475) --- 12,099,041
Net earnings --- --- --- 819,591
Cash dividends of $.25 per share --- --- --- (253,747)
Issuance of 150,896 shares of
common stock --- (142,176) --- 677,301
Common stock options exercised 46,831 --- --- 42,844
Decrease in unrealized gain on
securities available for sale --- --- --- (47,332)
ESOP loan repayments --- 64,709 --- 64,709
Fair value adjustment on ESOP
shares committed for release --- --- --- 58,436
Purchase of 55,885 shares of
treasury stock (628,819) --- --- (628,819)
------------ ------------ ------------ ------------
Balance at June 30, 1999 $ (5,721,251) $ (222,942) --- $ 12,832,024
============ ============ ============ ============
</TABLE>
- ---------------------------------
The accompanying notes are an integral part of these statements.
<PAGE>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
Nine Months Ended June 30,
-----------------------------------------
1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net Earnings $819,591 $643,719
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation 83,899 77,851
Amortization of premiums and discounts on investments
and mortgage-backed securities 62,601 54,644
Amortization of deferred loan origination fees (164,919) (119,992)
Amortization of expense related to employee
benefit plans 123,145 188,261
Provision for losses on loans 45,000 ---
Net (gain) loss on sale of real estate acquired
through foreclosure (13,057) 1,816
Increase (decrease) in cash due to changes in
Accrued interest receivable 6,310 (158,760)
Other assets 234,687 (176,311)
Accrued expenses and other liabilities (351,155) 916,165
Income taxes payable (33,377) 183,164
------- ---------
Net cash provided by operating activities 812,725 1,610,557
Cash flows from investing activities
Proceeds from maturities and repayment of securities
Available for sale 355,053 1,466,371
Held to maturity 12,670,132 6,938,115
Purchase of securities
Available for sale (248,652) (95,223)
Held to maturity (1,000,000) (5,000,000)
Net increase in loans (8,184,391) (15,971,837)
Capital expenditures (70,275) (63,696)
Proceeds from sale of real estate acquired through
foreclosure 58,825 11,147
Cash acquired in acquisition 2,114,968 ---
--------- ---------
Net cash provided by (used in) investing activities 5,695,660 (12,715,123)
Cash flows from financing activities
Net increase in deposits 2,157,969 5,097,606
Net decrease in advances from borrowers
for taxes and insurance (377,863) (285,509)
Advances from Federal Home Loan Bank 6,700,000 18,700,000
Repayment of Federal Home Loan Bank advances (9,300,000) (14,000,000)
Cash dividends paid (253,747) (196,039)
Purchase of treasury stock (628,819) (376,557)
Net proceeds from sale of stock 677,301 ---
Stock options exercised 42,844 21,419
--------- ---------
Net cash provided by (used in) financing activities (982,315) 8,960,920
-------- ---------
Net increase (decrease) in cash and cash equivalents 5,526,070 (2,143,646)
Cash and cash equivalents at beginning of period 913,580 3,151,227
--------- ----------
Cash and cash equivalents at end of period $6,439,650 $1,007,581
=========== ==========
</TABLE>
- ---------------------------------------
The accompanying notes are an integral part of these statements.
<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 June 30, 1999, and the results of
operations and cash flows for all interim periods presented.
Operating results for the three and nine months ended June 30, 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 June
30, 1999, the capital requirements applicable to First Federal Savings and Loan
Association of Independence ("the Association") and its actual capital ratios.
As of June 30, 1999, the Association exceeded all current regulatory capital
standards.
<TABLE>
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 $12,523 18.89% $5,305 >8.0% $6,631 >10.0%
Tier 1 risk-based capital 11,763 17.74 2,652 >4.0 3,979 > 6.0
Tier 1 (core) capital 11,763 8.62 4,092 >3.0 6,821 > 5.0
Tangible capital 11,763 8.62 2,046 >1.5 --- ---
</TABLE>
(6) Supplemental Disclosure of Cash Flow Information
<TABLE>
Nine months ended June 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Cash paid for:
Interest $4,488,473 $4,071,510
Income taxes 529,799 288,646
Noncash investing and financing activities:
Transfer from loans to real estate
acquired through foreclosure 186,283 102,333
Issuance of loans receivable in connection
with the sale of real estate acquired
through foreclosure 24,800 65,550
Liabilities assumed in conjunction
with acquisition 13,700,846 ---
</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.
Financial Condition
The Company's total assets increased $13.1 million, or 10.5%, from
$124.3 million at September 30, 1998 to $137.4 million at June 30, 1999. This
increase was primarily due to increases in net loans receivable of $17.1
million, cash and cash equivalents of $5.5 million and Federal Home Loan Bank
Stock of $344,000. These increases in assets, along with reductions in advances
from the Federal Home Loan Bank of Topeka of $2.6 million, were funded by
increases in savings deposits of $14.8 million and other accrued expenses and
liabilities of $505,000, and the redeployment of funds received from decreases
in mortgage-backed securities of $5.6 million and investment securities of $4.4
million. These increases were primarily due to assets and liabilities acquired
in the merger conversion with The Neodesha Savings and Loan Association, FSA
("Neodesha").
<PAGE>
Loans receivable increased $17.1 million from $93.7 million at
September 30, 1998, to $110.8 million at June 30, 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 $14.8 million from $80.6 million at September
30, 1998, to $95.4 million at June 30, 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 decreased $2.6 million from $30.1 million at
September 30, 1998 to $27.5 million at June 30, 1999. The decrease was due to
scheduled principal repayment of advances obtained from the Federal Home Loan
Bank of Topeka. Most of the advances obtained from the Federal Home Loan Bank of
Topeka were used by the Company to invest in loans receivable at a positive
spread over the term of the advances.
Total stockholders' equity increased $700,000 from $12.1 million at
September 30, 1998 to $12.8 million at June 30, 1999. The increase was primarily
due to net earnings from operations of $820,000 and 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. To a lesser extent, the increase was due to
the repayment of employee stock ownership debt of $65,000, a fair value
adjustment of $58,000 on ESOP shares committed for release and common stock
options exercised of $43,000. These increases were partially offset by the
Company's use of $629,000 to repurchase 55,885 shares of common stock, dividends
of $254,000 paid to stockholders, and a decrease in the unrealized gains on
securities available for sale of $47,000.
<PAGE>
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 June 30, 1999,
non-performing assets were approximately $2,284,000, which represents an
increase of $959,000, or 72.4%, as compared to September 30, 1998. The ratio of
non-performing assets to total assets at June 30, 1999 was 1.66% compared to
1.07% at September 30, 1998. A summary of non-performing assets by category is
set forth in the following table:
<TABLE>
June 30, September 30,
1999 1998
------------------ -----------------
(Dollars In Thousands)
<S> <C> <C>
Non-Accruing Loans $1,442 $ 335
Accruing Loans Delinquent 90 Days or More 640 918
Foreclosed Assets 202 72
------ ------
Total Non-Performing Assets $2,284 $1,325
====== ======
Total Non-Performing Assets as a
Percentage of Total Assets 1.66% 1.07%
==== ====
</TABLE>
Included in non-accruing loans at June 30, 1999, were seven
construction loans totaling $649,000 secured by one- to four-family real estate,
eighteen loans totaling $609,000 secured by one- to four-family real estate, one
loan totaling $20,000 secured by non-residential real estate and forty-five
consumer loans totaling $164,000. All non-accruing loans at June 30, 1999, were
located in the Company's primary market area. At June 30, 1999, accruing loans
delinquent 90 days or more included fourteen loans totaling $640,000 secured by
one- to four-family real estate. 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 June 30, 1999, the Company's real estate acquired through
foreclosure consisted of eight single family residences located in the Company's
primary market area. The properties have a total carrying value of $202,000 and
are currently offered for sale. The increase in non-performing assets was due to
growth in the respective loan portfolios and also from non-performing loans and
foreclosed assets totaling $405,000 acquired in the Neodesha merger conversion.
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 $760,000 at June 30, 1999, which
represented a $104,000 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 decreased from .70% at September 30, 1998 to
.69% at June 30, 1999. The allowance for loan losses as a percent of
non-performing loans decreased from 52.30% at September 30, 1998 to 36.50% at
June 30, 1999, due to the increase in non-performing loans at June 30, 1999. At
June 30, 1999, the Company's non-performing loans were comprised primarily of
one- to four-family residential loans.
<PAGE>
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 Nine Months Ended June 30, 1999
and June 30, 1998
General. Net earnings for the nine months ended June 30, 1999 were
$820,000 as compared to $644,000 for the nine months ended June 30, 1998,
resulting in an increase of $176,000, or 27.3%. The increase in net earnings was
primarily due to increases in net interest income of $417,000 and non-interest
income of $122,000. These increases were partially offset by increases in
non-interest expense of $293,000, provision for loan losses of $45,000 and
income tax expense of $24,000.
Net earnings for the three months ended June 30, 1999 were $294,000 as
compared to $268,000 for the three months ended June 30, 1998, resulting in an
increase of $26,000, or 9.7%. The increase in net earnings was primarily due to
an increase in net interest income of $126,000, non-interest income of $55,000
and a decrease in income tax expense of $13,000. These changes were partially
offset by increases in non-interest expense of $153,000 and provision for loan
losses of $15,000.
Net Interest Income. Net interest income increased $417,000, or 15.93%,
for the nine months ended June 30, 1999 as compared to the nine months ended
June 30, 1998. This increase was due primarily to an increase in interest income
of $778,000, or 11.57%, offset partially by an increase in interest expense of
$362,000, or 8.81%. Interest income increased primarily due to a $15.6 million
increase in the average balance of interest-earning assets, offset partially by
a 13 basis point decrease in the average yield on interest-earning assets.
Interest expense increased primarily due to a $15.0 million increase in the
average balance of interest-bearing liabilities, offset partially by a 24 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. The variance in
the decrease was due to interest-earning assets and interest-bearing liabilities
acquired in the Neodesha merger conversion having a greater spread than
interest-earning assets and interest-bearing liabilities on the Company's
balance sheet.
<PAGE>
Net interest income increased $126,000, or 13.68%, for the three months
ended June 30, 1999, as compared to the three months ended June 30, 1998. This
increase was due primarily to an increase in interest income of $209,000, or
8.90%, offset partially by an increase in interest expense of $83,000 or 5.82%.
The increase was due to the same reasons as stated above for the nine months
ended June 30, 1999, as compared to the nine months ended June 30, 1998. The
ratio of average interest-earning assets to average interest-bearing liabilities
decreased from 110.0% for the three months ended June 30, 1998 to 109.0% for the
three months ended June 30, 1999.
Interest Income. Interest income for the nine months ended June 30,
1999, increased to $7,503,000 from $6,725,000 for the nine months ended June 30,
1998. This increase was caused primarily by a $15.6 million increase in the
average outstanding amount of interest-earning assets during the nine months
ended June 30, 1999, as compared to the nine months ended June 30, 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 13 basis points to 7.61% for
the nine months ended June 30, 1999, from 7.74% for the nine months ended June
30, 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
8.19% 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 6.57% to
6.10% for the nine months ended June 30, 1999, as compared to the same period in
fiscal 1998. The decreased yield was caused by accelerated amortization of
premiums on the mortgage-backed securities due to an increase in prepayment
speeds.
Interest income for the quarter ended June 30, 1999, increased to
$2,557,000 from $2,348,000 for the quarter ended June 30, 1998. This increase
was caused primarily by a $13.5 million increase in the average outstanding
amount of interest-earning assets during the three months ended June 30, 1999,
as compared to the three months ended June 30, 1998. The increase was due to the
same reasons as stated above for the nine months ended June 30, 1999, as
compared to the nine months ended June 30, 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 16 basis points to 7.62% at
June 30, 1999, from 7.78% at June 30, 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 8.18% to 8.04%. To a lesser extent, the
decrease in yield was due to a decrease in yield on the Company's
mortgage-backed securities portfolio from 6.57% to 5.63% for the quarter ended
June 30, 1999, as compared to the same period in fiscal 1998. The decrease in
yield on the mortgage-backed securities portfolio was due to the same reason as
stated above.
Interest Expense. Interest expense for the nine months ended June 30,
1999, increased by $362,000 to $4,469,000 as compared to $4,107,000 for the nine
months ended June 30, 1998. This increase in interest expense was due primarily
to a $15.0 million increase in the average outstanding amount of
interest-bearing liabilities during the nine months ended June 30, 1999 as
compared to the nine months ended June 30, 1998. This increase was partially
offset by a 24 basis point decrease in average interest rates paid on
interest-bearing liabilities, caused by decreases in market interest rates and
the addition of deposits from the Neodesha merger conversion at a lower average
interest rate than the Company's deposits. The increase in interest-bearing
liabilities was primarily due to a $10.8 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.
<PAGE>
Interest expense for the quarter ended June 30, 1999, increased by
$83,000 to $1,510,000 as compared to $1,427,000 for the quarter ended June 30,
1998. This increase in interest expense was due primarily to a $13.4 million
increase in the average outstanding amount of interest-bearing liabilities
during the three months ended June 30, 1999, as compared to the three months
ended June 30, 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 29 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 $45,000 for the
three and nine months ended June 30, 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 and the increase in non-performing loans. Although management believes
that it uses the best information available in providing for possible loan
losses and believes that the allowance is adequate at June 30, 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 $122,000 to $253,000
during the nine months ended June 30, 1999 as compared to $131,000 for the nine
months ended June 30, 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 amortization of $47,000
related to negative goodwill acquired in the Neodesha merger conversion and
increased late charges and other fees associated with mortgage loans.
Non-interest income increased $55,000 to $101,000 during the three
months ended June 30, 1999 as compared to $46,000 for the three months ended
June 30, 1998. The increase was due to the same reasons as stated above for the
nine months ended June 30, 1999, as compared to the nine months ended June 30,
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
$1,927,000 for the nine months ended June 30, 1999 from $1,634,000 for the nine
months ended June 30, 1998, an increase of $293,000, or 17.93%. The increase was
primarily due to increases in data processing fees of $64,000, compensation and
employee benefits of $112,000, other expense of $75,000, occupancy and equipment
of $36,000, and federal deposit insurance premiums of $4,000. 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 due to the decrease in the Company's stock price.
<PAGE>
Total non-interest expense increased by $153,000 for the three months
ended June 30, 1999, as compared to the three months ended June 30, 1998. The
increase was due primarily to increases in compensation and employee benefits of
$57,000, other expense of $48,000, data processing fees of $27,000, occupancy
and equipment of $20,000, and federal deposit insurance premiums of $2,000. The
increase in non-interest expense for the three months ended June 30, 1999 was
due to the same reasons as stated above.
Income Tax Expense. Income tax expense was $496,000 for the nine months
ended June 30, 1999 compared to $472,000 for the nine months ended June 30,
1998, an increase of $24,000. 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 37.7% and 42.3% for the nine months ended
June 30, 1999 and June 30, 1998, respectively. Rates exceeded expected rates for
the June 30, 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 June 30, 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 $171,000 for the quarter ended June 30, 1999
compared to $184,000 for the quarter ended June 30, 1998, a decrease of $13,000.
This decrease was primarily due to a decrease in the effective tax rate during
the 1999 period as compared to the 1998 period. The Company's effective tax
rates were 36.8% and 40.6% for the three months ended June 30, 1999 and June 30,
1998, respectively. The effective tax rate decreased for the three months ended
June 30, 1999 due to the same reasons as stated above.
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 June 30, 1999, the
Association's liquidity ratio was 8.07% as compared to 7.01% at September 30,
1998. These ratios exceeded the minimum regulatory liquidity requirements on
both dates.
<PAGE>
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 June 30, 1999, the Company had commitments to
originate loans totaling $2,367,000. 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 June 30, 1999, the Association exceeded all fully phased-in regulatory
capital standards.
At June 30, 1999, the Association's tangible capital was $11.8 million,
or 8.62% of adjusted total assets, which is in excess of the 1.5% requirement by
$9.7 million. In addition, at June 30, 1999, the Association had core capital of
$11.8 million, or 8.62% of adjusted total assets, which exceeds the 3%
requirement by $7.7 million. The Association had total risk-based capital of
$12.5 million at June 30, 1999, or 18.89% of risk-adjusted assets, which exceeds
the 8.0% risk-based capital requirements by $7.2 million.
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.
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 $101,000 were incurred and
expensed by the Company through June 30, 1999. Management will review our budget
monthly to help ensure that sufficient resources have been allocated to this
project. Any deviations to the preliminary budget will be reported to the Board
of Directors.
During the assessment phase, the Company developed 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. For some systems, contingency
plans consist of using spreadsheet software or reverting to manual systems until
system problems can be corrected. Responses from third party vendors indicate
that the significant providers are currently Y2K compliant. Specifically, the
Corporation's core data processing is provided by an outside vendor, which has
certified their software is Year 2000 compliant.
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: August 6, 1999 /s/Larry G. Spencer
-------------- -------------------
Larry G. Spencer
President and Chief Executive
Officer
Date: August 6, 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 June 30, 1999 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,141,904
<INT-BEARING-DEPOSITS> 1,397,746
<FED-FUNDS-SOLD> 3,900,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,003,500
<INVESTMENTS-CARRYING> 13,753,072
<INVESTMENTS-MARKET> 13,656,106
<LOANS> 111,541,194
<ALLOWANCE> 759,764
<TOTAL-ASSETS> 137,382,972
<DEPOSITS> 95,402,059
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,648,889
<LONG-TERM> 27,500,000
16,493
0
<COMMON> 0
<OTHER-SE> 12,815,531
<TOTAL-LIABILITIES-AND-EQUITY> 137,382,972
<INTEREST-LOAN> 6,304,310
<INTEREST-INVEST> 887,638
<INTEREST-OTHER> 311,289
<INTEREST-TOTAL> 7,503,237
<INTEREST-DEPOSIT> 3,252,956
<INTEREST-EXPENSE> 4,468,547
<INTEREST-INCOME-NET> 3,034,690
<LOAN-LOSSES> 45,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,926,746
<INCOME-PRETAX> 1,316,013
<INCOME-PRE-EXTRAORDINARY> 819,591
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 819,591
<EPS-BASIC> .81
<EPS-DILUTED> .77
<YIELD-ACTUAL> 7.61
<LOANS-NON> 1,441,777
<LOANS-PAST> 639,845
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 655,745
<CHARGE-OFFS> 24,815
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<ALLOWANCE-CLOSE> 759,764
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<ALLOWANCE-UNALLOCATED> 759,764
</TABLE>
