2000 ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
Page
<S> <C>
President's Message to Stockholders 1
Selected Consolidated Financial Information 2
Management's Discussion and Analysis 4
Report of Independent Certified Public Accountants 15
Consolidated Balance Sheets 16
Consolidated Statements of Earnings 18
Consolidated Statements of Comprehensive Income 19
Consolidated Statements of Stockholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 23
Stockholder Information 40
Directors and Executive Officers Inside Back
Cover
</TABLE>
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at our main office located at
Myrtle and Sixth Streets, Independence, Kansas at 10:30 a.m. Independence,
Central Standard time, on January 31, 2001.
<PAGE>
[FIRST INDEPENDENCE CORPORATION LETTERHEAD]
To Our Stockholders, Depositors and Friends:
The Board of Directors, Officers, and Staff of First Independence
Corporation and its wholly owned subsidiary, First Federal Savings and Loan
Association, are pleased to provide you with the Company's 2000 Annual Report.
As you will see by reading the accompanying financial statements, First
Independence had another excellent year with $1,376,000 in net earnings; 2000
was our second best year in earnings, a 20% increase over 1999. Diluted earnings
per share for the 2000 fiscal year were $1.30, compared to diluted earnings per
share of $1.07 for the 1999 fiscal year, an increase of 21%. One other key
number worth noting is our Operating Expense to Average Assets; it is 1.92%,
well below our peer group. Our recent growth has not been at the expense of
higher overhead.
Since the conversion, the Company has been focusing on ways to enhance
stockholder value, including the payment of cash dividends and the continuation
of a stock repurchase program. In 2000, the Company repurchased 5% (53,187
shares) of its outstanding stock at an average price of $10.00 per share. We
believe the repurchase of our shares continues to represent an attractive
investment opportunity which will benefit the Company and our stockholders.
In 2000, we completed the installation of ATM's at our Coffeyville and
Neodesha facilities. Since that time, we have seen a 65% increase in our debit
card base. The cost of a banking transaction nationwide at an ATM runs
approximately $ .27 versus a teller transaction that runs approximately $ 1.07.
We would prefer to see our customers face to face for cross-sell opportunities,
but they want the convenience of 24 hour banking. The customer is always right.
Our Lawrence loan production office continues to be very successful and a
big contributor to the bottom line. In fiscal year 2000, it earned approximately
25% of the gross income of the Company. Douglas County continues to be one of
the fastest growing areas in Kansas.
I invite you to review our Annual Report. We are very proud of our
accomplishments and look forward to the coming year. On behalf of the directors,
management and employees, I would like to express our appreciation to our
stockholders and valued customers for your continued support.
Sincerely,
/s/ Larry G. Spencer
Larry G. Spencer
President and Chief
Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
September 30,
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- -------------- -------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $149,130 $138,131 $124,337 $112,523 $108,539
Cash, cash equivalents and interest-
bearing deposits 1,921 1,440 914 3,151 1,763
Loans receivable 125,119 112,893 93,684 74,559 67,683
Mortgage-backed securities - at cost 8,747 10,912 17,274 23,528 28,039
Investment securities - at cost 6,496 7,005 5,000 3,000 2,000
Securities available for sale 1,992 2,000 3,418 4,783 5,894
Real estate acquired through foreclosure 423 109 72 12 12
Deposits 94,128 95,453 80,573 76,229 69,356
Borrowings 39,100 27,500 30,100 23,700 24,300
Stockholders' equity 13,764 13,107 12,099 11,529 13,003
</TABLE>
<TABLE>
Year Ended September 30,
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- -------------- -------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income $11,186 $10,101 $ 9,075 $ 8,069 $ 7,773
Total interest expense 6,562 5,989 5,556 5,059 4,669
------- ------- ------- ------- -------
Net interest income 4,624 4,112 3,519 3,010 3,104
Provision for losses on loans 99 66 --- --- ---
------- ------- ------- ------- -------
Net interest income after provision for
losses on loans 4,525 4,046 3,519 3,010 3,104
Non-interest income 451 389 192 159 214
Gain on sale of investments --- --- --- --- 251
Non-interest expense (2,813) (2,604) (2,161) (1,989) (2,267)
------- ------- ------- ------- -------
Earnings before income tax expense 2,163 1,831 1,550 1,180 1,302
Income tax expense 787 688 649 468 487
------- ------- ------- ------- -------
Net earnings $ 1,376 $ 1,143 $ 901 $ 712 $ 815
======= ======= ======= ======= =======
Basic earnings per share $ 1.36 $ 1.13 $ .98 $ .73 $ .72
======= ======= ======= ======= =======
</TABLE>
<PAGE>
FINANCIAL RATIOS
--------------------------------------------------------------------------------
<TABLE>
September 30,
----------- --------------------------------------
2000 1999 1998 1997 1996
----- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net earnings to
average total assets) 0.95% 0.84% 0.75% 0.65% 0.78%
Interest rate spread information:
Average during period 2.83 2.69 2.52 2.31 2.36
End of period 2.59 2.58 2.29 2.19 2.17
Net interest margin (1) 3.26 3.11 2.99 2.81 3.02
Ratio of operating expense to average total assets 1.92 1.89 1.80 1.81 2.17
Return on equity (ratio of net earnings to
average equity) 10.30 8.95 7.72 6.09 6.21
Quality Ratios:
Non-performing assets to total assets, at end of period (2) 1.16 1.84 1.07 1.25 0.57
Allowance for loan losses to non-performing assets, at end of period (2) 43.74 29.65 49.48 47.64 112.36
Allowance for loan losses to non-performing loans at end of period 57.86 30.99 52.30 48.05 114.62
Capital Ratios:
Equity to total assets, at end of period 9.23 9.49 9.73 10.25 11.98
Average equity to average assets 9.21 9.38 9.70 10.62 12.57
Ratio of average interest-earning assets to average interest-bearing 109.47 109.26 109.98 110.64 114.50
liabilities
Dividend payout ratio (3) 29.81 31.54 31.25 34.93 27.37
Number of full service offices 3 3 2 2 1
</TABLE>
(1) Net interest income divided by average interest-earning assets.
(2) Includes non-accuring loans, deliquent 90 days or more and assets acquired
through foreclosure.
(3) Dividends paid per share divided by earnings per share.
<TABLE>
[OMITTED EARNINGS PER SHARE GRAPH [OMITTED DIVIDENDS PAID PER SHARE GRAPH
Basic Diluted
----- -------
<S> <C> <C> <C> <C> <C> <C>
1996 - $.072 $0.69 1996 - $0.1875
1997 - $0.73 $0.68 1997 - $0.2375
1998 - $0.98 $0.92 1998 - $0.2875
1999 - $1.13 $1.07 1999 - $0.3375
2000 - $1.36 $1.30] 2000 - $0.3875]
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
--------------------------------------------------------------------------
General
On October 5, 1993, First Federal Savings and Loan Association of
Independence, Kansas converted from a federally chartered mutual savings
association to a federally chartered stock savings association and concurrently
became a wholly-owned subsidiary of First Independence Corporation. First
Independence earnings are primarily dependent on the operations of First
Federal. Currently, First Independence has no business activity other than
acting as the holding company for First Federal. As a result, the following
discussion relates primarily to the activities of First Federal. This discussion
should be read in conjunction with the consolidated financial statements and
accompanying notes included elsewhere in this report.
Our business consists of attracting deposits from the general public and
using these deposits primarily to make residential mortgage and other loans. Our
revenues are derived principally from interest charges on mortgage loans and
mortgage-backed securities and, to a lesser extent, from interest earned on
investment securities and interest-bearing deposits. In addition, we receive
fees from loan originations, late payments and for various services related to
transaction and other deposit accounts, and dividends on our Federal Home Loan
Bank stock. Operating expenses consist primarily of employee compensation and
benefits, occupancy and equipment expenses, data processing fees and other
general and administrative expenses.
Our operations, and the operations of savings institutions and their
holding companies in general, are significantly affected by general economic
conditions and the related monetary and fiscal policies of regulatory agencies.
Deposit flows and cost of funds are influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
affected by the demand for financing of real estate and other types of assets,
which in turn is affected by the interest rates at which such financing may be
offered and other factors including the availability of funds. The primary
sources of funds for lending activities include deposits, loan repayments,
borrowings, sales and maturities of securities available for sale and funds
provided from operations.
Forward-Looking Statements
Certain statements in this report that relate to our plans, objectives or
future performance may be deemed to be forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on our current expectations. Actual strategies and results
in future periods may differ materially from those currently expected because of
various risks and uncertainties. Additional discussion of factors affecting our
business and prospects is contained in our periodic filings with the Securities
and Exchange Commission.
Asset/Liability Management and Market Risk
Qualitative Aspects of Market Risk. We derive our income primarily from the
excess of interest collected over interest paid. The rates of interest we earn
on assets and pay on liabilities generally are established contractually for a
period of time. Market interest rates change over time. Accordingly, our results
of operations, like those of many financial institutions, are impacted by
changes in interest rates. Our ability to adapt to changes in interest rates is
known as interest rate risk, and is our most significant market risk.
4
<PAGE>
Quantitative Aspects of Market Risk. In an attempt to manage our exposure
to changes in interest rates and comply with applicable regulations, we monitor
our interest rate risk. In monitoring interest rate risk, we continually analyze
and manage our assets and liabilities based on their payment streams and
interest rates, the timing of their maturities, and their sensitivity to actual
or potential changes in market interest rates.
The matching of assets and liabilities may be analyzed by examining the
extent to which they are "interest rate sensitive" and by monitoring an
institution's interest rate sensitivity "gap." An asset or liability is said to
be interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period and
the amount of interest-bearing liabilities anticipated, based upon certain
assumptions, to mature or reprice within that same time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect operations while a positive gap
would tend to benefit operations. During a period of falling interest rates, the
opposite would be expected to occur.
Since the early 1980's, we have emphasized, subject to market conditions,
the origination and holding of adjustable-rate mortgage loans and loans with
shorter terms to maturity than traditional 30-year, fixed-rate loans. Our
strategy has been to increase the percentage of assets in our portfolio with
more frequent repricing or shorter maturities. In response to customer demand,
however, we continue to originate for our loan portfolio fixed-rate mortgages
with terms not greater than 30 years. In recent periods, we have also purchased
adjustable-rate mortgage-backed securities. At September 30, 2000, approximately
$25.4 million, or 19.8% of the total loans secured by real estate, were
adjustable-rate mortgage loans. On the same date, we also had $6.3 million in
adjustable-rate mortgage-backed securities.
Our adjustable-rate mortgage loans and mortgage-backed securities adjust to
various indices. We monitor the mix of indices on our adjustable rate assets and
seek, consistent with market conditions, to achieve a close match in the
repricing characteristics of our assets and liabilities.
To increase the interest rate sensitivity of our assets, we have also
maintained short and intermediate-term investment securities and other assets.
At September 30, 2000, we had $4.8 million of investment securities and
interest-bearing deposits maturing or repricing within three years. Finally, we
have undertaken various marketing programs from time to time over the last
decade in order to extend the term of our deposit liabilities. We offer a longer
term certificate of deposit program in an attempt to reduce deposit outflows
which were being lost as a result of the general decline in market rates of
interest. This program offers two certificate products which have 4- and 5-year
terms. At September 30, 2000, we had approximately $8.2 million in these two
certificates.
<PAGE>
In the future, in managing our interest rate sensitivity, we intend to
continue to stress the origination of adjustable-rate mortgage loans, subject to
market conditions, the purchase of adjustable-rate mortgage-backed securities
and the maintenance of a relatively high level of short-term securities and
other assets.
As part of our effort to monitor and manage interest rate risk, we use the
"net portfolio value" methodology adopted by the Office of Thrift Supervision.
This approach calculates the difference between the present value of expected
cash flows from assets and liabilities, as well as cash flows from off balance
sheet contracts, arising from an assumed 200 basis point increase or decrease in
interest rates. Under Office of Thrift Supervision regulations, an institution's
"normal" level of interest rate risk for this assumed change in interest rates
is a decrease in the institution's net portfolio value not exceeding 2% of
assets.
Presented below, as of September 30, 2000, is an analysis of First
Federal's interest rate risk as measured by changes in net portfolio value for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 200 basis points and compared to Board policy
limits. The table was prepared and furnished to us by the Office of Thrift
Supervision. Assumptions used in calculating the amounts in this table were
determined by the Office of Thrift Supervision (dollars in thousands):
<TABLE>
Net Portfolio Value
Change in At September 30, 2000
interest rate Board Limit ----------------------------------------
(Basis Points) % Change $ Amount $ Change % Change
-------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
+200 -40% $ 8,835 $ (5,796) -40%
+100 -25 11,833 (2,798) -19
0 --- 14,631 --- ---
-100 -25 16,658 2,027 +14
-200 -40 17,806 3,175 +22
</TABLE>
As illustrated in the table, we have structured our assets and liabilities
to minimize our exposure to interest rate risk. In the event of a 200 basis
point change in interest rates, we would experience a 22% increase in net
portfolio value in a declining rate environment and a 40% decrease in a rising
rate environment. During periods of rising interest rates, the value of monetary
assets and liabilities generally decline. Conversely, during periods of falling
interest rates, the value of monetary assets and liabilities generally increase.
However, the amount of change in value of specific assets and liabilities due to
changes in interest rates is not the same in a rising interest rate environment
as in a falling interest rate environment (i.e., as indicated above, the amount
of value increase under a specific rate decline may not equal the amount of
value decrease under an identical upward rate movement).
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase. As a result, the actual effect of changing interest rates may
differ from that presented in the foregoing table.
<PAGE>
Asset Quality
The ratio of non-performing assets to total assets is one indicator of our
exposure to credit risk. Our non-performing assets 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 September 30, 2000, non-performing assets were
approximately $1,734,000, which represents a decrease of $805,000, or 31.7% as
compared to September 30, 1999. The ratio of non-performing assets to total
assets at September 30, 2000 was 1.16% compared to 1.84% at September 30, 1999.
Included in non-accruing loans at September 30, 2000, were four construction
loans totaling $373,000 secured by one- to four-family real estate, one
construction loan totaling $35,000 secured by non-residential real estate,
fourteen loans totaling $587,000 secured by one- to four-family real estate, one
loan totaling $50,000 secured by non-residential real estate and nineteen
consumer loans totaling $56,000. All non-accruing loans at September 30, 2000,
were located in our primary market area. At September 30, 2000, accruing loans
delinquent 90 days or more included eight loans totaling $169,000 secured by
one- to four-family real estate and one loan totaling $18,000 secured by
non-residential real estate. All of our accruing loans delinquent 90 days or
more were secured by real estate located in our primary market. All of the
non-performing construction loans were originated at our loan production office
in Lawrence, Kansas. At September 30, 2000, real estate acquired through
foreclosure consisted of eleven single family residences located in our primary
market area. The properties have a total carrying value of $423,000 and are
currently offered for sale.
[OMITTED NON-PERFORMING ASSETS TO TOTAL ASSETS GRAPH
1996-0.57%; 1997-1.25%; 1998-1.07%; 1999-1.84%; 2000-1.16%]
We have taken into account our non-performing assets and the composition of
the loan portfolio in establishing our allowance for loan losses. The allowance
for loan losses totaled $758,000 at September 30, 2000, which represented a
$5,000 increase from the allowance for loan losses at September 30, 1999. The
ratio of the allowance for loan losses as a percent of total loans decreased
from .67% at September 30, 1999 to .61% at September 30, 2000, primarily due to
the increase in total loans receivable at September 30, 2000. The allowance for
loan losses as a percent of non-performing loans increased from 30.99% at
September 30, 1999 to 57.86% at September 30, 2000, due to the decrease in
non-performing loans at September 30, 2000. At September 30, 2000, 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 quality of our loans. We consider
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 our past statistical history concerning
charge-offs.
<PAGE>
Results of Operations
Average Balances, Interest Rates and Yields. The following table presents
for the periods indicated the total dollar amount of interest income from
average interest-earning assets and related yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made. All average balances are monthly
average balances. The use of monthly averages rather than daily averages does
not have a significant effect upon our results. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
Year Ended September 30,
--------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------- ----------------------------- ---------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------------- -------- -------- ----------- -------- -------- ----------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $120,198 $ 9,776 8.13% $106,176 $ 8,551 8.05% $ 85,966 $7,032 8.18%
Mortgage-backed securities 9,709 646 6.65 13,188 779 5.90 20,596 1,354 6.57
Investment securities 8,813 568 6.44 6,170 393 6.37 7,315 462 6.32
Federal Home Loan Bank stock 1,758 134 7.64 1,808 125 6.94 1,443 110 7.60
Federal funds sold 325 17 5.29 4,050 199 4.91 1,679 90 5.37
Other 848 45 5.26 1,025 54 5.28 435 27 6.23
-------- ------- -------- ------- -------- ------
Total interest-earning assets 141,651 11,186 7.90 132,417 10,101 7.63 117,434 9,075 7.72
-------- ------- -------- ------- -------- ------
Interest-bearing liabilities:
Demand and NOW deposits 32,490 1,333 4.10 30,524 1,162 3.81 26,079 1,083 4.15
Savings deposits
and certificates 61,931 3,219 5.20 61,451 3,227 5.25 54,209 2,928 5.40
Federal Home Loan Bank advances 34,975 2,010 5.75 29,217 1,600 5.48 26,492 1,545 5.83
-------- ------- -------- ------- -------- ------
Total interest-bearing
liabilities 129,396 6,562 5.07 121,192 5,989 4.94 106,780 5,556 5.20
-------- ------- -------- ------- -------- ------
Net interest income $ 4,624 $ 4,112 $3,519
======= ======= ======
Net interest rate spread 2.83% 2.69% 2.52%
==== ==== ====
Net earning assets $12,255 $ 11,225 $10,654
======= ======== =======
Net yield on average
interest-earning assets 3.26% 3.11% 2.99%
==== ==== ====
Average interest-earning
assets to average interest-
bearing liabilities 109.47% 109.26% 109.98%
====== ====== ======
</TABLE>
-----------------------
(1) Calculated net of deferred loan fees, loan doscounts, loans in process
and loss reserves.
<PAGE>
Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
Year Ended September 30,
------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
--------------------------------- -------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
--------------------------------- -------------------------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
--------- ------- ------------- --------- ---------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $1,140 $ 85 $1,225 $1,629 $ (110) $1,519
Mortgage-backed securities (223) 90 (133) (448) (127) (575)
Investment securities 171 4 175 (73) 4 (69)
Federal Home Loan Bank stock (4) 13 9 25 (10) 15
Federal funds sold (196) 14 (182) 117 (8) 109
Other (9) 0 (9) 32 (5) 27
------ ---- ------ ------ ------- ------
Total interest-earning assets 879 206 1,085 1,282 (256) 1,026
------ ---- ------ ------ ------- ------
Interest-bearing liabilities:
Demand and NOW deposits 78 93 171 173 (94) 79
Savings deposits and certificates 24 (32) (8) 382 (83) 299
Federal Home Loan Bank advances 328 82 410 152 (97) 55
------ ---- ------ ------ ------- ------
Total interest-bearing liabilities $ 430 $143 573 $ 707 $ (274) 433
====== ==== ------ ====== ======= ------
Net interest income $ 512 $ 593
====== ======
</TABLE>
The following table sets forth the weighted average yields on our
interest-earning assets, the weighted average interest rates on interest-bearing
liabilities and the interest rate spread between the weighted average yields and
rates at the dates indicated. Non-accruing loans have been included in the table
as carrying a zero yield.
<TABLE>
At September 30,
-------------------------------
--------- ------- ----------
2000 1999 1998
--------- ------- ----------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable 8.00% 7.68% 7.80%
Mortgage-backed securities 7.08 6.14 6.34
Investment securities 6.62 6.48 6.38
Federal funds sold 6.38 5.04 5.36
Other interest-earning assets ---- 4.82 5.51
Combined weighted average yield on interest-earning assets 7.83 7.45 7.48
Weighted average rate paid on:
Savings deposits and certificates 5.35 5.12 5.44
Demand and NOW deposits 4.05 3.86 4.04
Federal Home Loan Bank advances 6.12 5.58 5.74
Combined weighted average rate paid on interest-bearing liabilities 5.24 4.87 5.19
Spread 2.59 2.58 2.29
</TABLE>
<PAGE>
FINANCIAL CONDITION
Total assets increased $11.0 million, or 8.0%, from $138.1 million at
September 30, 1999 to $149.1 million at September 30, 2000. This increase
consisted primarily of increases in net loans receivable of $12.2 million, cash
and cash equivalents of $500,000, Federal Home Bank stock of $500,000, real
estate acquired through foreclosure of $300,000, premises and equipment of
$100,000 and accrued interest receivable of $100,000. These increases in assets,
along with reductions in savings deposits of $1.4 million, were funded by
increases in advances from the Federal Home Loan Bank of Topeka of $11.6, and
the redeployment of funds received from mortgage-backed securities maturing of
$2.2 million and investment securities maturing of $500,000.
[OMITTED TOTAL ASSETS GRAPH
(in thousands)
1996-$108,539; 1997-$112,523; 1998-$124,337; 1999-$138,131; 2000-$149,130]
Total loans receivable increased $12.2 million from $112.9 million at
September 30, 1999, to $125.1 million at September 30, 2000. The increase was
primarily due to construction loan originations at our 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. Construction
loans reduce interest rate risk and improve earnings due to their shorter term
and higher rate when compared to permanent one- to four-family loans. However,
construction loans also increase credit quality risk. To a lesser extent, the
increase was also due to originations in our market area consisting primarily of
15- and 30-year fixed-rate loans, mortgage loans with a fixed rate for the first
five years of the loan term that automatically convert to one-year adjustable
rate loans during the sixth year of the loan term and 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.
[OMITTED LOANS GRAPH
One-to Four-family-66.90%; Multi-family-0.25%; Non-residential-8.15%;
Construction-20.72%; Home Equity-0.68%; Other Consumer-3.30%]
Total deposits decreased $1.4 million from $95.5 million at September 30,
1999, to $94.1 million at September 30, 2000. The outflow of deposits was a
result of competition from local financial institutions which are aggressively
seeking public unit deposits by offering relatively high interest rates; and
competition from other investment products that offer the potential of a higher
rate of return, but also represent a higher risk to the investor.
Total borrowed funds increased $11.6 million from $27.5 million at
September 30, 1999 to $39.1 million at September 30, 2000. The increase was from
advances obtained from the Federal Home Loan Bank of Topeka. The advances
allowed us to invest the funds borrowed in loans receivable at a positive
spread.
Total stockholders' equity increased $657,000 from $13.1 million at
September 30, 1999 to $13.8 million at September 30, 2000. The increase was
primarily due to net earnings from operations of $1.4 million, repayment of
employee stock ownership debt of $93,000, fair value adjustment of $68,000 on
ESOP shares committed for release and common stock options exercised of $49,000.
These increases were partially offset by the use of $532,000 to repurchase
53,187 shares of common stock, dividends of $390,000 paid to stockholders, and a
decrease in the unrealized gains on securities available for sale of $7,000.
[OMITTED STOCKHOLDERS' EQUITY to TOTAL ASSETS GRAPH
1996-11.98%; 1997-10.25%; 1998-9.73%; 1999-9.49%; 2000-9.23%]
<PAGE>
Comparison of Fiscal Years Ended September 30, 2000 and September 30, 1999
General. Net earnings for the fiscal year ended September 30, 2000 were
$1,376,000 as compared to $1,143,000 for the fiscal year ended September 30,
1999, an increase of $233,000, or 20.4%. The increase in net earnings was
primarily due to increases in net interest income of $512,000 and non-interest
income of $62,000. These increases were partially offset by increases in
non-interest expense of $210,000, income tax expense of $98,000 and provision
for loan losses of $33,000.
[OMITTED NET EARNINGS GRAPH
(in thousands)
1996-$815; 1997-$712; 1998-$901; 1999-$1,143; 2000-$1,376]
Net Interest Income. Net interest income increased $512,000, or 12.5%, for
the fiscal year ended September 30, 2000 as compared to the fiscal year ended
September 30, 1999. This increase was due primarily to an increase in interest
income of $1.1 million, or 10.7%; offset partially by an increase in interest
expense of $573,000, or 9.6%. Interest income increased primarily due to a $9.2
million increase in the average balance of interest-earning assets and, to a
lesser extent, a 27 basis point increase in the average yield on
interest-earning assets. Interest expense increased primarily due to an $8.2
million increase in the average balance of interest-bearing liabilities and, to
a lesser extent, a 13 basis point increase in the average rate paid on
interest-bearing liabilities. The average yield on interest-earning assets
increased primarily due to construction loan originations at the Lawrence loan
production office and an increase in market interest rates. These construction
loans generally have terms of nine months or less and carry higher rates of
interest than loans originated for the purchase of single-family residences. The
average yield on interest-bearing liabilities increased primarily due to an
increase in market interest rates.
Interest Income. Interest income for the fiscal year ended September 30,
2000, increased to $11.2 million from $10.1 million for the fiscal year ended
September 30, 1999. This increase was caused primarily by a $9.2 million
increase in the average outstanding amount of interest-earning assets during the
fiscal year ended September 30, 2000, as compared to the fiscal year ended
September 30, 1999 due to assets acquired in The Neodesha Savings and Loan
merger conversion in January 1999. To a lesser extent, the increase was due to
an increase in the average yield on interest-earning assets. The average yield
on interest-earning assets increased by 27 basis points to 7.90% during fiscal
2000, from 7.63% during fiscal 1999. This increase was caused primarily by a
change in the mix of interest-earning assets to a higher percentage of loans
receivable due to an increase in the construction loan portfolio. These
construction loans carry a higher rate of interest than other loans, therefore,
the average yield of loans receivable increased from 8.05% during fiscal 1999,
to 8.13% during fiscal 2000. To a lesser extent, the increase in the average
yield on interest-earning assets was due to an increase in market interest
rates.
Interest Expense. Interest expense for the fiscal year ended September 30,
2000, increased by $573,000 to $6.6 million as compared to $6.0 million for the
fiscal year ended September 30, 1999. This increase in interest expense was due
primarily to an $8.2 million increase in the average outstanding amount of
interest-bearing liabilities during the fiscal year ended September 30, 2000 as
compared to the fiscal year ended September 30, 1999. To a lesser extent, the
increase was due to an increase in the average interest rates paid on
interest-bearing liabilities. The average rates paid on interest-bearing
liabilities increased by 13 basis points. The increase in interest-bearing
liabilities was primarily due to a $5.8 million increase in average advances
obtained from the Federal Home Loan Bank of Topeka and, to a lesser extent, a
$2.4 million increase in the average outstanding balance of deposits due
primarily to savings deposits acquired in the Neodesha Savings merger
conversion.
Provision for Loan Losses. The provision for loan losses represents a
charge to earnings to maintain the allowance for loan losses at a level we
believe is adequate to absorb potential losses in the loan portfolio. The
provision for loan losses amounted to $99,000 for the fiscal year ended
September 30, 2000 as compared to $66,000 for the same period in 1999. This
increase in provision for loan losses was in recognition of the increased
balance of construction loans in our loan portfolio. We believe we use the best
information available in providing for probable loan losses and we believe that
the allowance is adequate at September 30, 2000. Future adjustments to the
allowance could be necessary, however, and net earnings could be affected if
circumstances and/or economic conditions differ substantially from the
assumptions used in making the initial determinations.
<PAGE>
Non-interest Income. Non-interest income increased $62,000 to $451,000
during the fiscal year ended September 30, 2000 as compared to $389,000 for the
fiscal year ended September 30, 1999. The increase was primarily due to
increased checking and deposit account fees as a result of accounts acquired in
the Neodesha Savings merger conversion. To a lesser extent, the increase was due
to a $24,000 increase in amortization related to negative goodwill acquired in
the Neodesha Savings merger conversion and increased late charges and other fees
associated with mortgage loans.
Non-interest Expense. Total non-interest expense increased to $2.8 million
for the fiscal year ended September 30, 2000 from $2.6 million for the fiscal
year ended September 30, 1999, an increase of $210,000, or 8.1%. The increase
was primarily due to increases in compensation and employee benefits of
$198,000, occupancy and equipment of $38,000 and other operating expense of
$17,000. These increases were partially offset by a decrease in data processing
fees of $32,000. The increases were primarily due to the acquisition of Neodesha
Savings in January 1999, resulting in additional staff, occupancy and equipment,
stationery, printing and office supplies expense. The current year includes
twelve months of Neodesha operations compared to nine months in 1999. 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 ESOP due to the decrease in
our stock price.
Income Tax Expense. Income tax expense was $787,000 for the fiscal year
ended September 30, 2000 compared to $688,000 for the fiscal year ended
September 30, 1999, an increase of $99,000. This increase was primarily due to
an increase in pre-tax earnings during the 2000 period as compared to the 1999
period. Our effective tax rates were 36.4% and 37.6% for the fiscal years ended
September 30, 2000 and September 30, 1999, respectively.
Comparison of Fiscal Years Ended September 30, 1999 and September 30, 1998
General. Net earnings for the fiscal year ended September 30, 1999 were
$1,143,000 as compared to $901,000 for the fiscal year ended September 30, 1998,
an increase of $242,000, or 26.8%. The increase in net earnings was primarily
due to increases in net interest income of $593,000 and non-interest income of
$197,000. These increases were partially offset by increases in non-interest
expense of $443,000, provision for loan losses of $66,000 and income tax expense
of $39,000.
Net Interest Income. Net interest income increased $593,000, or 16.9%, for
the fiscal year ended September 30, 1999 as compared to the fiscal year ended
September 30, 1998. This increase was due primarily to an increase in interest
income of $1.0 million, or 11.3%; offset partially by an increase in interest
expense of $433,000, or 7.8%. Interest income increased primarily due to a $15.0
million increase in the average balance of interest-earning assets, offset
partially by a 9 basis point decrease in the average yield on interest-earning
assets. Interest expense increased primarily due to a $14.4 million increase in
the average balance of interest-bearing liabilities, offset partially by a 26
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 Savings and Loan 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 primarily to interest-earning assets and
interest-bearing liabilities acquired in The Neodesha Savings and Loan merger
conversion having a greater spread than interest-earning assets and
interest-bearing liabilities on First Federal's balance sheet.
<PAGE>
Interest Income. Interest income for the fiscal year ended September 30,
1999, increased to $10.1 million from $9.1 million for the fiscal year ended
September 30, 1998. This increase was caused primarily by a $15.0 million
increase in the average outstanding amount of interest-earning assets during the
fiscal year ended September 30, 1999, as compared to the fiscal year ended
September 30, 1998 due to assets acquired in The Neodesha Savings and Loan
merger conversion. To a lesser extent, the increase in interest-earning assets
was due to an increase in the average balance of loans receivable from increased
construction loan originations at our Lawrence, Kansas loan production office.
This increase was partially offset by a decrease in the average yield on
interest-earning assets. The average yield on interest-earning assets decreased
9 basis points to 7.63% for the fiscal year ended September 30, 1999, from 7.72%
for the fiscal year ended September 30, 1998. This decrease was caused primarily
by the general decline in interest rates resulting in a reduction in yield on
our loan portfolio from 8.18% to 8.05%. The average rate on interest-earning
assets went down less than it would have if there had been no increase in the
average balance of loans, since they have a higher rate earned than other
assets. Therefore, the change in mix of interest-earning assets to more higher
earning assets, reduced the decrease due to market rates of interest going down.
To a lesser extent, the decrease in yield was due to a decrease in yield on our
mortgage-backed securities portfolio from 6.57% to 5.90% for the fiscal year
ended September 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 Expense. Interest expense for the fiscal year ended September 30,
1999, increased by $433,000 to $6.0 million as compared to $5.6 million for the
fiscal year ended September 30, 1998. This increase in interest expense was due
primarily to a $14.4 million increase in the average outstanding amount of
interest-bearing liabilities during the fiscal year ended September 30, 1999 as
compared to the fiscal year ended September 30, 1998. This increase was
partially offset by a 26 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 Savings and Loan merger conversion at
a lower average interest rate than First Federal's deposits. The increase in
interest-bearing liabilities was primarily due to an $11.7 million increase in
the average outstanding balance of deposits due primarily to savings deposits
acquired in The Neodesha Savings and Loan merger conversion and, to a lesser
extent, an increase in average advances obtained from the Federal Home Loan Bank
of Topeka.
Provision for Loan Losses. The provision for loan losses represents a
charge to earnings to maintain the allowance for loan losses at a level we
believe is adequate to absorb potential losses in the loan portfolio. The
provision for loan losses amounted to $66,000 for the fiscal year ended
September 30, 1999 as compared to no provision for the same period in 1998. This
increase in provision for loan losses was in recognition of the increased
balance of construction loans in our loan portfolio and the increase in
non-performing loans. It is also reflective of the loan loss allowance obtained
in the merger conversion with Neodesha Savings and Loan. Although we believe
that we use the best information available in providing for possible loan losses
and we believe that the allowance is adequate at September 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 $197,000 to $389,000
during the fiscal year ended September 30, 1999 as compared to $192,000 for the
fiscal year ended September 30, 1998. The increase was primarily due to
increased checking and deposit account fees as a result of accounts acquired in
The Neodesha Savings and Loan merger conversion. To a lesser extent, the
increase was due to amortization of $71,000 related to negative goodwill
acquired in The Neodesha Savings and Loan merger conversion and increased late
charges and other fees associated with mortgage loans.
<PAGE>
Non-interest Expense. Total non-interest expense increased to $2.6 million
for the fiscal year ended September 30, 1999 from $2.2 million for the fiscal
year ended September 30, 1998, an increase of $443,000, or 20.5%. The increase
was primarily due to increases in compensation and employee benefits of
$186,000, other expense of $103,000, data processing fees of $68,000, and
occupancy and equipment of $52,000. 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 ESOP due to the decrease in
our stock price.
Income Tax Expense. Income tax expense was $688,000 for the fiscal year
ended September 30, 1999 compared to $649,000 for the fiscal year ended
September 30, 1998, an increase of $39,000. This increase was primarily due to
an increase in pre-tax earnings during the 1999 period as compared to the 1998
period. Our effective tax rates were 37.6% and 41.9% for the fiscal years ended
September 30, 1999 and September 30, 1998, respectively. Rates exceeded expected
rates for the September 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 September
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.
Liquidity and Capital Resources
The Office of Thrift Supervision requires First Federal to maintain minimum
levels of liquid assets. At September 30, 2000, Office of Thrift Supervision
regulations required First Federal to maintain an average daily balance of
investments in an amount equal to at least 4.0% of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. These requirements may be changed from time to time by the Office of
Thrift Supervision to reflect changing economic conditions. Such investments are
intended to provide a source of relatively liquid funds upon which First Federal
may rely if necessary to fund deposit withdrawals and other short-term funding
needs. First Federal's regulatory liquidity at September 30, 2000 was 7.89%, as
compared to 9.66% at September 30, 1999. This decrease in liquidity was
primarily due to liquid investments acquired in the Neodesha Savings merger
conversion being invested in higher yielding mortgage loan originations which
reduced our liquidity ratio to a more normal level. First Federal normally
attempts to maintain liquidity between 7% and 9%.
Our primary sources of funds are loan and mortgage-backed securities
repayments, borrowings from the Federal Home Loan Bank of Topeka and deposits.
We use our liquid resources principally to meet 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. We believe that our existing sources of funds will be
adequate to meet our foreseeable liquidity needs.
<PAGE>
Our primary investing activity is the origination of mortgage loans and the
purchase of mortgage-backed and other securities. At September 30, 2000,
mortgage loans and mortgage-backed securities accounted for 89.8% of total
assets. We have been able to generate sufficient cash through the retail deposit
market, our traditional funding source, and through short-term borrowings, to
provide the cash utilized in investing activities. A line of credit has also
been in place with the Federal Home Loan Bank of Topeka since 1995. Line of
credit draws, as with all other credit transactions, are subject to the maximum
amount of credit available under the Federal Home Loan Bank of Topeka's credit
policy. The line of credit is scheduled to mature on February 2, 2001, and will
be renewed for another one-year term at that time. The line of credit is subject
to various conditions, including the pledge of acceptable collateral. The
primary purpose of the line of credit is to serve as a back-up liquidity
facility, however, we also utilize the line of credit to purchase investment
securities and fund other commitments.
Liquidity management is both a daily and long-term responsibility of
management. We adjust our investments in liquid assets based upon our assessment
of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available
on interest-bearing deposits, and (iv) the objectives of its asset/liability
management program. Excess liquidity is invested generally in interest-bearing
overnight deposits and other short-term government and agency obligations. If we
require additional funds, beyond our internal ability to generate, we have
additional borrowing capacity with the Federal Home Loan Bank of Topeka.
We anticipate that we will have sufficient funds available to meet current
loan commitments. At September 30, 2000, we had outstanding commitments to
extend credit which amounted to $2.2 million, including commitments on
construction loans. We are not aware of any trends, events or uncertainties
which will have or that are reasonably likely to have a material effect on our
liquidity, capital resources or operations.
Certificates of deposit scheduled to mature in one year or less at
September 30, 2000 totaled approximately $34.6 million. We believe that a
significant portion of these deposits will remain with First Federal. There can
be no assurance, however, that we can retain all of these deposits. At September
30, 2000, we had $39.1 million in advances from the Federal Home Loan Bank of
Topeka with $11.1 million maturing in one year or less.
First Federal has minimum capital standards which generally require the
maintenance of regulatory capital sufficient to meet each of three tests: the
tangible capital requirement, the core capital requirement, and the risk-based
capital requirement. The tangible capital requirement provides for minimum
tangible capital (defined as retained earnings less all intangible assets) equal
to 1.5% of adjusted total assets. The core capital requirement provides for
minimum core capital (tangible capital plus supervisory goodwill) equal to 3.0%
of assets. The risk-based capital requirement provides for the maintenance of
core capital plus general loss allowances (less a specified percentage of
certain equity investments) equal to 8.0% of risk-weighted assets. In computing
risk-weighted assets, we multiply the book value of each asset on our balance
sheet by a defined risk-weighting factor (e.g., one- to four-family residential
loans carry a risk-weighted factor of 50%). We have reviewed these capital
standards and determined that we are in compliance with each of the three
requirements. As of September 30, 2000, our tangible capital, core capital, and
risk-based capital of $12.5 million, $12.5 million, and $13.3 million exceeded
the applicable minimum requirements by $10.3 million, $8.0 million, and $7.4
million, respectively.
<PAGE>
The following table sets forth our compliance with such requirements at
September 30, 2000.
<TABLE>
Office of Thrift First Federal's capital level
Supervision requirement at September 30, 2000
----------------------- ------------------------------------------
% of % of Amount
Capital standard Assets Amount Assets Amount of Excess
------ ------ ------ ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital 1.50% $2,238 8.39% $12,522 $10,284
Core capital (1) 3.00 4,476 8.39 12,522 8,046
Risk-based capital 8.00 5,846 18.17 13,280 7,434
</TABLE>
-----------------------
(1) Based on current core capital requirement of 3%.
See Note L of Notes to Consolidated Financial Statements for additional
information.
We have reviewed our regulatory restrictions relating to loans to one
borrower, qualification as a qualified thrift lender, and other restrictions on
lending and investment, and have determined that, based on our capital position
and lending and investment policies, these restrictions have not had a material
impact on our operations.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and results of operations in terms
of historical dollars without considering changes in the relative purchasing
power of money over time because of inflation. As a result, interest rates have
a more significant impact on our performance than the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services.
Effect of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Statement of Financial Accounting Standards No. 133
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The key criterion
for hedge accounting is that the hedging relationship must be highly effective
in achieving offsetting changes in fair value or cash flows. Statement of
Financial Accounting Standards No. 133 does not allow hedging of a security
which is classified as held to maturity. Accordingly, upon adoption of Statement
of Financial Accounting Standards No. 133, companies may reclassify any security
from held to maturity to available for sale if they wish to be able to hedge the
security in the future. This Statement, as amended by Statement of Financial
Accounting Standards No. 137, is effective for fiscal years beginning after June
15, 2000 with early adoption encouraged for any fiscal quarter beginning July 1,
1998 or later, with no retroactive application. The Company adopted Statement of
Financial Accounting Standards No. 133 as of October 1, 2000, as required,
without material effect on financial condition or results of operations.
<PAGE>
[GRANT THORNTON LLP LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Independence Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of First
Independence Corporation and Subsidiary as of September 30, 2000 and 1999, and
the related consolidated statements of earnings, comprehensive income,
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Independence
Corporation and Subsidiary as of September 30, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.
/s/ Grant Thornton LLP
Wichita, Kansas
October 20, 2000
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED BALANCE SHEETS
September 30,
<TABLE>
ASSETS
2000 1999
---- ----
<S> <C> <C>
Cash and due from banks $ 449,960 $ 1,064,794
Federal funds sold 700,000 ---
Other interest-bearing deposits 771,082 375,201
--------- ----------
Cash and cash equivalents 1,921,042 1,439,995
Investment securities held to maturity (estimated
fair value of $6,416,450 in 2000 and $6,957,733
in 1999) 6,496,147 7,005,279
Investment securities available for sale 1,992,200 1,999,800
Mortgage-backed securities held to maturity
(estimated fair value of $8,671,665 in 2000
and $10,852,983 in 1999) 8,746,988 10,912,279
Loans receivable 125,118,716 112,893,406
Premises and equipment 1,449,403 1,322,128
Federal Home Loan Bank stock, at cost 1,955,000 1,441,600
Accrued interest receivable 959,973 887,465
Real estate acquired through foreclosure 423,360 109,579
Other 67,537 119,809
------------ ------------
Total assets $149,130,366 $138,131,340
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
---- ----
<S> <C> <C>
Deposits $ 94,127,537 $ 95,452,864
Advances from borrowers for taxes and
insurance 887,080 825,330
Deferred income taxes 10,773 -
Advances from Federal Home Loan Bank 39,100,000 27,500,000
Accrued expenses and other 1,240,631 1,246,538
------------ ------------
Total liabilities 135,366,021 125,024,732
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 16,493 16,493
Additional paid-in capital 8,190,682 8,132,391
Retained earnings - substantially restricted 11,863,034 10,876,339
Accumulated other comprehensive income (loss),
net of related taxes (4,692) 2,316
Required contributions for shares acquired by
Employee Stock Ownership Plan (ESOP) (106,632) (199,680)
Treasury stock, 630,927 shares in 2000 and
587,458 shares in 1999 - at cost (6,194,540) (5,721,251)
------------ ------------
Total stockholders' equity 13,764,345 13,106,608
------------ ------------
Total liabilities and stockholders' equity $149,130,366 $138,131,340
============ ============
</TABLE>
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
<TABLE>
2000 1999
---- ----
<S> <C> <C>
Interest income
Loans $ 9,776,440 $ 8,550,856
Mortgage-backed securities 645,802 778,763
Investment securities 567,588 393,202
Interest-bearing deposits and other 196,139 378,469
----------- -----------
Total interest income 11,185,969 10,101,290
Interest expense
Deposits 4,551,694 4,389,547
Borrowed funds 2,009,857 1,599,633
----------- -----------
Total interest expense 6,561,551 5,989,180
----------- -----------
Net interest income 4,624,418 4,112,110
Provision for loan losses 99,000 66,000
----------- -----------
Net interest income after provision for loan losses 4,525,418 4,046,110
Noninterest income
Service charges 228,087 202,057
Other 223,080 186,885
----------- -----------
451,167 388,942
Noninterest expense
Employee compensation and benefits 1,619,315 1,421,077
Occupancy and equipment 324,598 286,758
Data processing fees 232,943 264,800
Foreclosed assets, net 22,676 34,725
Other operating 614,051 596,297
----------- -----------
2,813,583 2,603,657
----------- -----------
Earnings before income taxes 2,163,002 1,831,395
Income tax expense 786,639 688,307
----------- -----------
NET EARNINGS $ 1,376,363 $ 1,143,088
=========== ===========
Earnings per share
Basic $1.36 $1.13
Diluted $1.30 $1.07
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
<TABLE>
2000 1999
---- ----
<S> <C> <C>
Net earnings $1,376,363 $1,143,088
Other comprehensive loss, net of tax
Unrealized losses on securities available
for sale arising during the period, net
of tax benefit of $4,295 in 2000 and
$30,757 in 1999 (7,008) (50,181)
---------- ----------
Comprehensive income $1,369,355 $1,092,907
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 2000 and 1999
<TABLE>
Required
Accumulated contri-
other butions
Additional comprehensive for shares
Common paid-in Retained income (loss), acquired Treasury
stock capital earnings net by ESOP stock Total
------ ------- -------- ------------- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1998 $14,984 $7,239,207 $10,077,091 $52,497 $(145,475) $(5,139,263 $12,099,041
Net earnings for the year --- --- 1,143,088 --- --- --- 1,143,088
Cash dividends of $.3375 per share --- --- (343,840) --- --- --- (343,840)
Issuance of 150,896 shares of common stock 1,509 817,968 --- --- (142,176) --- 677,301
Common stock options exercised --- (3,987) --- --- --- 46,831 42,844
Depreciation of securities available
for sale --- --- --- (50,181) --- --- (50,181)
ESOP loan repayments --- --- --- --- 87,971 --- 87,971
Fair value adjustment on ESOP
shares committed for release --- 79,203 --- --- --- --- 79,203
Purchase of 55,885 shares of
treasury stock --- --- --- --- --- (628,819) (628,819)
------- ---------- ----------- ------- --------- ----------- -----------
Balance at September 30, 1999 16,493 8,132,391 10,876,339 2,316 (199,680) (5,721,251) 13,106,608
Net earnings for the year --- --- 1,376,363 --- --- --- 1,376,363
Cash dividends of $.3875 per share --- --- (389,668) --- --- --- (389,668)
Common stock options exercised --- (9,653) --- --- --- 58,581 48,928
Depreciation of securities available
for sale --- --- --- (7,008) --- --- (7,008)
ESOP loan repayments --- --- --- --- 93,048 --- 93,048
Fair value adjustment on ESOP
shares committed for release --- 67,944 --- --- --- --- 67,944
Purchase of 53,187 shares of
treasury stock --- --- --- --- --- (531,870) (531,870)
------- ---------- ----------- ------- --------- ----------- -----------
Balance at September 30, 2000 $16,493 $8,190,682 $11,863,034 $(4,692) $(106,632) $(6,194,540) $13,764,346
======= ========== =========== ======= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
<TABLE>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 1,376,363 $ 1,143,088
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 99,000 66,000
Depreciation 125,705 112,234
Amortization of premiums and discounts on
investments and mortgage-backed securities 42,360 104,186
Amortization of deferred loan origination fees (232,290) (238,920)
Amortization of expense related to employee
benefit plans 160,992 167,174
Amortization of negative goodwill (94,058) (70,544)
Gain on sale of real estate acquired
through foreclosure, net (58,539) (23,834)
Deferred income taxes 6,558 47,614
Increase (decrease) in cash due to changes, net of
effects of acquisition
Accrued interest receivable (72,508) (36,996)
Other assets 29,097 (19,608)
Accrued expenses and other liabilities 118,821 (304,948)
Income taxes payable 4,456 (57,256)
------------ ------------
Net cash provided by operating activities 1,505,957 888,190
Cash flows from investing activities
Proceeds from sale of investment security --- 355,053
Proceeds from maturities and repayment of securities
Available for sale --- 1,000,000
Held to maturity 2,628,359 2,463,166
Purchase of securities
Available for sale --- (8,452)
Held to maturity --- (6,000,000)
Net increase in loans (12,660,937) (10,156,916)
Purchase of Federal Home Loan Bank stock (513,400) (271,300)
Proceeds from redemption of Federal Home Loan Bank stock --- 507,300
Capital expenditures (284,550) (124,729)
Proceeds from sale of real estate acquired through
foreclosure 341,805 70,074
Cash acquired in acquisition --- 2,114,968
------------ ------------
Net cash used in investing activities (10,488,723) (50,836)
</TABLE>
<PAGE>
<TABLE>
First Independence Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from financing activities
Net increase (decrease) in deposits $ (1,325,327) $ 2,208,774
Net increase in advances from borrowers
for taxes and insurance 61,750 58,176
Advances from Federal Home Loan Bank 49,300,000 27,700,000
Repayment of Federal Home Loan Bank advances (37,700,000) (30,300,000)
Cash dividends paid (389,668) (343,840)
Purchase of treasury stock (531,870) (628,819)
Stock issuance costs --- (327,338)
Stock options exercised 48,928 42,844
Net proceeds from sale of stock --- 1,279,264
------------ ---------------
Net cash provided by (used in) financing activities 9,463,813 (310,939)
------------ ---------------
Net increase in cash and cash equivalents 481,047 526,415
Cash and cash equivalents at beginning of year 1,439,995 913,580
------------ ---------------
Cash and cash equivalents at end of year $ 1,921,042 $ 1,439,995
============ ===============
Supplemental disclosures of cash flow information
Cash paid during the year for
Income taxes $ 789,239 $ 697,949
Interest 6,436,004 6,032,114
Noncash investing and financing activities
Transfer from loans to real estate acquired
through foreclosure 873,038 186,283
Issuance of loans receivable in connection with
the sale of real estate acquired through
foreclosure 227,000 111,250
Liabilities assumed in conjunction with acquisition --- 13,700,846
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
NOTE A - SUMMARY OF ACCOUNTING POLICIES
FirstIndependence Corporation (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock
of First Federal Savings and Loan Association of Independence (the
"Association"). Future references to the Corporation or the Association are
utilized herein as the context requires. The Association conducts a general
banking business in southeastern Kansas which consists of attracting
deposits from the general public and applying those funds to the
origination of loans for residential, consumer and nonresidential purposes
and the purchase of investment and mortgage-backed securities. The
Association's profitability is significantly dependent on net interest
income, which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e., customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Association can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are
outside of management's control.
The consolidated financial information presented herein has been prepared
in accordance with accounting principles generally accepted in the United
States of America (" US GAAP") and general accounting practices within the
financial services industry. In preparing consolidated financial statements
in accordance with US GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of consolidation
The consolidated financial statements include the accounts of First
Independence Corporation and its wholly-owned subsidiary, First Federal
Savings and Loan Association of Independence. All significant intercompany
balances and transactions have been eliminated.
2. Cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks, federal funds sold and other overnight deposits.
3. Investment securities and mortgage-backed securities
Investment securities and mortgage-backed securities are classified in
three categories and accounted for as follows: (a) debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and reported at amortized cost,
(b) debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings and (c) debt and equity securities not classified as
either held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as the sole component
of accumulated other comprehensive income in stockholders' equity.
Premiums and discounts on investment securities are amortized to operations
over the term of the security using the level yield method. Premiums and
discounts on mortgage-backed securities are amortized and accreted to
operations using the level yield method over the estimated life of the
underlying loans collateralizing the securities. Gains and losses on the
sale of securities designated as available for sale are recorded using the
specific identification method.
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
4. Loans receivable
Loans receivable that management has the intent and ability to hold until
maturity or pay-off are reported at their outstanding principal balance,
adjusted for any charge-offs, the allowance for loan losses, unearned
discounts and net deferred loan origination fees.
The allowance for loan losses is increased by charges to operations and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Association's
past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and current economic
conditions.
Specific reserves are established for any impaired nonresidential loan for
which the recorded investment in the loan exceeds the measured value of the
loan. Loans subject to impairment valuation are defined as nonaccrual loans
or any other loan where it is probable that all amounts due according to
the contractual terms will not be collected, exclusive of smaller balance
homogenous loans such as home equity, consumer and 1-4 family residential
real estate loans. The values of loans subject to impairment valuation are
determined based on the present value of expected future cash flows, the
market price of the loans, or the fair values of the underlying collateral
if the loan is collateral dependent.
Uncollectible interest on loans that are contractually past due is charged
off or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued. Income is subsequently recognized
only to the extent cash payments are received until, in management's
judgment, the borrower's ability to make periodic interest and principal
payments is back to normal, in which case the loan is returned to accrual
status. If the collection of principal in whole or in part is in doubt, all
payments received on nonaccrual loans are credited to principal until such
doubt is eliminated.
5. Loan origination fees and related costs
Loan origination fees received, net of certain direct origination costs are
deferred on a loan-by-loan basis and amortized to interest income over the
contractual life of the loan using the interest method, giving effect to
actual loan prepayments. Loan origination costs are considered to be direct
costs attributable to originating a loan.
6. Real estate acquired through foreclosure
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation allowance
are included in real estate operations.
7. Premises and equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is included in occupancy and equipment expense and is provided
by the straight-line method over the following estimated useful lives:
<TABLE>
Years
-------
<S> <C>
Building 8-50
Furniture, fixtures and equipment 5-20
Automobiles 5
</TABLE>
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
The costs of maintenance and repairs are charged to operations as incurred.
The costs of significant additions, renewals and betterments to depreciable
properties are capitalized and depreciated over the remaining or extended
estimated useful lives of the properties. Gains and losses on disposition
of property and equipment are included in operations.
8. Employee stock ownership plan
The Corporation sponsors a leveraged employee stock ownership plan (ESOP).
The ESOP holds company stock which serves as collateral for the ESOP debt.
As shares are released from collateral, the Corporation reports
compensation expense equal to the current market price of the shares, and
the shares become outstanding for earnings-per-share ("EPS") computations.
Dividends on released and allocated ESOP shares are recorded as a reduction
of retained earnings; dividends on unallocated ESOP shares are recorded as
compensation cost.
9. Stock-based compensation
The Company uses the intrinsic value based method of accounting for stock
options. Under the intrinsic method, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock over the exercise price at the measurement date.
10. Income taxes
First Independence Corporation and its subsidiary file a consolidated
federal income tax return. Deferred tax assets and liabilities are
determined based on the differences between the financial accounting and
tax basis of assets and liabilities. Deferred tax assets or liabilities at
the end of each period are determined using the currently enacted tax rate
expected to apply to taxable income in the periods in which the deferred
tax asset or liability is expected to be settled or realized.
11. Earnings per share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the year.
Diluted earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the year plus
the common share equivalents related to outstanding stock options. Weighted
average common shares outstanding and diluted shares deemed outstanding
were as follows:
<TABLE>
Year ended
September 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
Weighted average common shares outstanding 1,013,315 1,015,212
Common share equivalents related to outstanding stock options 43,633 51,003
--------- ---------
Adjusted weighted average common shares
deemed to be outstanding 1,056,948 1,066,215
========= =========
</TABLE>
Common shares outstanding exclude unallocated and committed shares held by
the ESOP trust.
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE B - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of investment securities are as follows:
<TABLE>
September 30, 2000
--------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government and agency obligations $6,300,076 $ --- $(77,406) $6,222,670
Municipal securities 196,071 --- (2,291) 193,780
---------- ------- -------- ----------
$6,496,147 $ --- $(79,697) $6,416,450
========== ======= ======== ==========
Available for sale
------------------
U.S. Government agency obligations $1,999,767 $ --- $ (7,567) $1,992,200
========== ======= ======== ==========
</TABLE>
<TABLE>
September 30, 1999
-------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
----------------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government and agency obligations $6,400,258 $ 1,352 $(45,570) $6,356,040
Municipal securities 605,021 676 (4,004) 601,693
---------- ------- -------- ----------
$7,005,279 $ 2,028 $(49,574) $6,957,733
========== ======= ======== ==========
Available for sale
--------------------
U.S. Government agency obligations $1,996,064 $ 6,521 $ (2,785) $1,999,800
========== ======= ======== ==========
</TABLE>
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE B - INVESTMENT SECURITIES - Continued
The amortized cost and estimated fair value of investment securities at
September 30, 2000, by term to maturity are as follows:
<TABLE>
Estimated
Amortized fair
Held to maturity cost value
---------------- -------- ---------
<S> <C> <C>
Due in less than one year $ 300,076 $ 299,770
Due in two to five years 6,000,000 5,922,900
Due in five to ten years 196,071 193,780
---------- ----------
$6,496,147 $6,416,450
========== ==========
Available for sale
------------------
Due in less than one year $ 998,008 $ 995,000
Due in one to two years 1,001,759 997,200
---------- ----------
$1,999,767 $1,992,200
========== ==========
</TABLE>
Investment securities with an estimated fair value of $4,257,857 and
$3,384,340 at September 30, 2000 and 1999, respectively, are pledged to
secure government deposits.
NOTE C - MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of mortgage-backed securities are summarized as
follows:
<TABLE>
September 30, 2000
----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
GNMA certificates $ 28,460 $ 1,451 $ --- $ 29,911
FHLMC certificates 3,137,732 19,573 (10,263) 3,147,042
FNMA certificates 2,328,466 26,730 (20,644) 2,334,552
Collateralized mortgage obligations
FHLMC 1,076,514 --- (56,278) 1,020,236
FNMA 2,175,816 --- (35,892) 2,139,924
---------- ------- --------- ----------
$8,746,988 $47,754 $(123,077) $8,671,665
========== ======= ========= ==========
</TABLE>
<TABLE>
September 30, 1999
------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
Held to maturity cost gains losses value
---------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
GNMA certificates $ 28,952 $ 2,280 $ --- $ 31,232
FHLMC certificates 4,109,413 40,753 (16,725) 4,133,441
FNMA certificates 2,920,861 28,257 (33,324) 2,915,794
Collateralized mortgage obligations
FHLMC 1,120,538 --- (44,898) 1,075,640
FNMA 2,732,515 --- (35,639) 2,696,876
----------- ------- --------- -----------
$10,912,279 $71,290 $(130,586) $10,852,983
=========== ======= ========= ===========
</TABLE>
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE C - MORTGAGE-BACKED SECURITIES - Continued
Mortgage-backed securities generally mature ratably over the 30-year term of
the underlying loans collateralizing the securities. Expected maturities on
mortgage-backed securities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Mortgage-backed securities with an estimated fair value of $8,271,606 and
$10,384,130 at September 30, 2000 and 1999, respectively, are pledged to
secure government and other deposits.
NOTE D - LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
<TABLE>
2000 1999
---- ----
<S> <C> <C>
First mortgage loans
One-to-four family residences $ 90,927,666 $ 84,052,872
Multi-family residences 339,161 914,016
Nonresidential 11,080,483 9,075,464
Construction 28,151,825 25,051,558
------------ ------------
Total first mortgage loans 130,499,135 119,093,910
Consumer and other loans
Savings 980,159 373,042
Automobile 2,577,640 2,866,956
Home equity and second mortgages 927,317 911,015
Unsecured home improvement 122,722 217,005
Other 806,080 967,753
------------ ------------
Total consumer and other loans 5,413,918 5,335,771
Less
Allowance for loan losses (758,333) (752,650)
Loans in process (9,664,974) (10,429,123)
Unearned discounts (1,793) (3,041)
Deferred loan origination fees (369,237) (351,461)
------------ ------------
(10,794,337) (11,536,275)
------------ ------------
Net loans receivable $125,118,716 $112,893,406
============ ============
</TABLE>
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE D - LOANS RECEIVABLE - Continued
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
2000 1999
---- ----
Balance at beginning of year $752,650 $655,745
Acquisition transfer --- 83,834
Provision 99,000 66,000
Loans charged off (93,317) (52,929)
-------- --------
Balance at end of year $758,333 $752,650
======== ========
The Association's lending efforts have historically focused on one-to-four
family residential real estate loans, which comprise approximately 67%
(2000) and 68% (1999) of the total loan portfolio. Approximately 2% (2000)
and 3% (1999) of the Association's one-to-four family residential real
estate loans are collateralized by properties located outside of the
primary lending area of Montgomery and surrounding Kansas counties.
Generally, such loans have been underwritten on the basis of 80% to 90%
loan-to-value ratio or mortgage insurance was required. The Association, as
with any lending institution, is subject to the risk that real estate
values could deteriorate in its primary lending area thereby impairing
collateral values. Management believes, however, that real estate values in
the Association's primary lending area are currently stable or increasing.
During the year ended September 30, 1998 the Association began originating
construction loans at its new loan production office in Lawrence, Kansas.
These construction loans generally are to builders and individuals for the
construction of residences and have terms of nine months or less with
permanent financing provided by other lenders. Construction loans comprise
approximately 21% (2000) and 20% (1999) of the Association's total loan
portfolio.
Approximately 8% (2000 and 1999) of the loan portfolio is comprised of
nonresidential and multi-family real estate loans with approximately 5%
(2000) and 9% (1999) of this total collateralized by properties located
outside the Association's primary lending area.
Serviced loans, primarily under a County Mortgage Revenue Bond, were
$1,272,803 and $1,551,660 at September 30, 2000 and 1999, respectively.
In the normal course of business, the Association makes loans to directors,
executive officers and related entities. An analysis of aggregate loan
activity with this group is as follows:
<TABLE>
<S> <C>
Loans outstanding at October 1, 1999 $ 478,699
New loans 202,700
Repayments (157,001)
---------
Loans outstanding at September 30, 2000 $ 524,398
=========
</TABLE>
Loan impairment is measured by estimating the expected future cash flows
and discounting them at the respective effective interest rate or by
valuing the underlying collateral. The recorded investment in these loans
and the valuation allowance for losses related to loan impairment at
September 30 are as follows:
<TABLE>
2000 1999
---- ----
<S> <C> <C>
Principal amount of impaired loans $187,059 $330,129
Less valuation allowance (3,741) (21,302)
-------- --------
$183,318 $308,827
======== ========
Average investment in impaired loans $258,594 $232,426
======== ========
</TABLE>
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE D - LOANS RECEIVABLE - Continued
The Association has provided an allowance for loan losses on all impaired
loans. Interest income of $7,577 and $20,345 was recognized and collected
on impaired loans during the years ended September 30, 2000 and 1999,
respectively. The Association is not committed to make additional loans to
borrowers whose loans have been modified.
NOTE E - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as follows:
<TABLE>
2000 1999
---- ----
<S> <C> <C>
Loans receivable $785,212 $696,175
Investment securities 111,259 116,983
Mortgage-backed securities 63,502 74,307
-------- --------
$959,973 $887,465
======== ========
</TABLE>
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment at September 30 are summarized as follows:
<TABLE>
2000 1999
---- ----
<S> <C> <C>
Land $ 74,958 $ 74,958
Building 1,430,708 1,362,870
Furniture, fixtures and equipment 635,649 539,804
Automobiles 50,168 43,579
---------- ----------
2,191,483 2,021,211
Less accumulated depreciation 742,080 699,083
---------- ----------
$1,449,403 $1,322,128
========== ==========
</TABLE>
NOTE G - FORECLOSED ASSETS
A summary of expenses applicable to foreclosed assets is as follows for the
years ended September 30:
<TABLE>
2000 1999
---- ----
<S> <C> <C>
Gain on sale of real estate acquired
through foreclosure, net $ 58,539 $ 23,834
Operating expenses (81,215) (58,559)
-------- --------
Foreclosed asset expense, net $(22,676) $(34,725)
======== ========
</TABLE>
Operating expenses on foreclosed assets consist primarily of property taxes
and general maintenance expenses on the properties held.
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE H - DEPOSITS
Deposits at September 30 are summarized as follows:
<TABLE>
Weighted
average rate at
September 30, 2000 1999
-------------------- ------------------------ -----------------------
2000 1999 Amount Percent Amount Percent
----- ---- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
NOW accounts 2.05% 2.05% $ 4,915,842 5.22% $ 4,341,228 4.55%
First Super NOW
accounts 2.30 2.30 2,265,758 2.41 2,161,533 2.26
First Money Fund
accounts 4.91 4.47 24,729,145 26.27 26,541,536 27.81
----------- ----- ----------- -----
Total demand
deposits 4.38 4.05 31,910,745 33.90 33,044,297 34.62
Passbook savings
accounts 2.89 2.89 4,527,159 4.81 4,582,574 4.80
Certificates of
deposit
3.00% to
3.99% --- 3.90 --- --- 212,257 .22
4.00% to
4.99% 4.93 4.82 2,518,517 2.68 15,802,592 16.56
5.00% to
5.99% 5.55 5.49 44,596,340 47.38 36,767,612 38.52
6.00% to
6.99% 6.34 6.28 10,574,776 11.23 5,029,865 5.27
7.00% to
7.99% --- 7.00 --- --- 13,667 .01
----------- ------ ----------- -----
Total certificates
of deposit 5.67 5.37 57,689,633 61.29 57,825,993 60.58
----------- ------ ----------- -----
Total savings 5.47 5.19 62,216,792 66.10 62,408,567 65.38
---------- ------ ----------- -----
Total deposits 5.10 4.79 $94,127,537 100.00% $95,452,864 100.00%
=========== ====== =========== ======
</TABLE>
The aggregate amount of certificates of deposit and savings with a minimum
denomination of $100,000 was $6,211,979 and $5,532,226 at September 30,
2000 and 1999, respectively.
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE H - DEPOSITS - Continued
Scheduled maturities of certificates of deposit are as follows:
<TABLE>
September 30, 2000
------------------
Less than One to Three to
one year three years five years Total
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
4.00% to 4.99% $ 2,518,517 $ - $ - $ 2,518,517
5.00% to 5.99% 28,627,293 13,028,707 2,940,340 44,596,340
6.00% to 6.99% 3,452,327 5,540,247 1,582,202 10,574,776
-------------- ------------- ------------ --------------
$ 34,598,137 $ 18,568,954 $ 4,522,542 $ 57,689,633
============== ============= ============ ==============
</TABLE>
September 30, 1999
------------------
<TABLE>
Less than One to Three to
one year three years five years Total
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
3.00% to 3.99% $ 212,257 $ - $ - $ 212,257
4.00% to 4.99% 13,258,844 2,543,748 - 15,802,592
5.00% to 5.99% 13,478,106 20,179,839 3,109,667 36,767,612
6.00% to 6.99% 2,267,548 2,151,544 610,773 5,029,865
7.00% to 7.99% 13,667 - - 13,667
-------------- ------------- ------------ --------------
$ 29,230,422 $ 24,875,131 $ 3,720,440 $ 57,825,993
============== ============= ============ ==============
</TABLE>
Interest expense on deposits for the years ended September 30 is summarized
as follows:
<TABLE>
2000 1999
---- ----
<S> <C> <C>
NOW accounts $ 80,631 $ 89,392
First Super NOW and First Money Fund accounts 1,252,637 1,072,719
Certificates of deposit and passbook savings accounts 3,218,426 3,227,436
------------ ------------
$ 4,551,694 $ 4,389,547
============ ============
</TABLE>
NOTE I - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank at September 30 consist of the
following:
<TABLE>
2000 1999
-------------------------------- --------------------------------
Rates Amount Rates Amount
----- ----- ----- ------
<S> <C> <C> <C> <C>
Variable rates 6.90% $ 8,100,000 -% $ -
Fixed rates 5.65 - 7.06 9,000,000 5.65 - 7.06 9,000,000
Fixed rate convertible* 4.63 - 6.34 22,000,000 4.63 - 5.08 18,500,000
------------- --------------
$ 39,100,000 $ 27,500,000
============= ==============
</TABLE>
*The Federal Home Loan Bank has the option to convert $15,000,000 in the year
ending 2001 and $7,000,000 in the year ending 2003 to its variable
short-term rate. These advances are due in 2008 through 2010 unless
converted, at which time the Corporation has the option to prepay the
advances.
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE I - ADVANCES FROM FEDERAL HOME LOAN BANK - Continued
The Association can borrow a maximum of approximately $59,000,000 from the
Federal Home Loan Bank at September 30, 2000.
Assets of the Association are subject to a blanket pledge agreement to
collateralize the advances.
Aggregate maturities for the years following September 30, 2000 are as
follows:
2001 $ 11,100,000
2002 5,000,000
2003 1,000,000
2008 1,000,000
2009 6,000,000
2010 15,000,000
-------------
$ 39,100,000
=============
NOTE J - EMPLOYEE BENEFITS
The Corporation sponsors a leveraged employee stock ownership plan ("ESOP")
that covers all full-time employees. All employees of the Corporation are
eligible to participate in the ESOP after they attain age 21 and complete
one year of service during which they work at least 1,000 hours. The
Corporation makes annual contributions to the ESOP equal to the ESOP's debt
service. All dividends received by the ESOP are credited to the employee's
stock ownership account. The unallocated ESOP shares are pledged as
collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to active employees, based on the proportion of
debt service paid in the year. Accordingly, unpaid ESOP debt is reflected
as a deduction from stockholders' equity. ESOP compensation expense was
$169,346 and $178,905 for the years ended September 30, 2000 and 1999,
respectively.
The ESOP shares as of September 30, 2000 were as follows:
<TABLE>
<S> <C>
Allocated shares 102,290
Unreleased shares 11,320
-------
Total ESOP shares 113,610
=======
Fair value of unreleased shares at September 30, 2000 $114,615
========
</TABLE>
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE J - EMPLOYEE BENEFITS - Continued
The Corporation has adopted a Stock Option and Incentive Plan (SOP) for
designated participants. The SOP provides for up to 145,474 shares of
common stock to be issued to participants. The option price of any options
granted may not be less than the market value of the common stock on the
date of the grant and unless otherwise specified, the options expire ten
years from the date of the grant. All options outstanding are exercisable
except 3,909 options which vest equally over five years from the date of
the grant. A summary of the Corporation's stock option plan as of September
30, 2000 and 1999 and changes during the years ended as of those dates is
presented below:
<TABLE>
Weighted
average
exercise
Shares price
---------- ----------
<S> <C> <C>
Outstanding at October 1, 1998 106,538 $ 5.25
Issued 13,409 10.06
Exercised (7,500) 5.71
Forfeited (3,000) 10.06
---------
Outstanding at September 30, 1999 109,447 5.68
Exercised (9,718) 5.03
---------
Outstanding at September 30, 2000 99,729 5.74
=========
Exercisable
September 30, 1999 105,538 $ 5.52
September 30, 2000 96,602 5.60
</TABLE>
Options outstanding at September 30, 2000 are summarized as follows:
<TABLE>
Exercise Remaining
Shares price life
-------- --------- -------------
<S> <C> <C> <C>
79,384 $ 5.00 3 years
7,136 6.19 3 years 4 months
1,800 6.69 3 years 10 months
1,000 14.63 7 years 1 month
10,409 10.06 8 years 4 months
--------
99,729
========
</TABLE>
The stock option plan is accounted for under APB Opinion 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
the plan. Had compensation cost for the plan been determined based on the
fair value of the options at the grant dates consistent with the fair value
method of Statement of Financial Accounting Standards 123, Accounting for
Stock-Based Compensation (SFAS 123), the Company's net earnings and earnings
per share for the years ended September 30 would have been reduced to the pro
forma amounts indicated below.
<TABLE>
2000 1999
---- ----
<S> <C> <C>
Net earnings - as reported $ 1,376,363 $ 1,143,088
Net earnings - pro forma 1,373,212 1,104,803
Earnings per share
Basic - as reported $1.36 $1.13
Basic - pro forma 1.36 1.09
Diluted - as reported 1.30 1.07
Diluted - pro forma 1.30 1.04
</TABLE>
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE J - EMPLOYEE BENEFITS - Continued
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for the year ended September 30, 1999:
<TABLE>
<S> <C>
Dividend yield 3.48%
Expected volatility 37%
Risk-free interest rate 5.1%
Expected life 10 years
</TABLE>
The Association participates in a defined benefit multi-employer pension
plan. Substantially all employees are eligible and benefits are based on
the employee's salary and years of service. No contribution was made or
required to be made by the Association for the years ended September 30,
2000 and 1999 due to the plan's overfunded status. Separate actuarial
disclosure information is not available due to the plan being a
multi-employer pension plan.
NOTE K - INCOME TAXES
Income tax expense for the years ended September 30 consists of the
following:
<TABLE>
2000 1999
---- ----
<S> <C> <C>
Current $780,081 $640,693
Deferred 6,558 47,614
-------- --------
$786,639 $688,307
======== ========
</TABLE>
Reconciliation of income tax expense computed at the federal statutory rate
of 34% and income tax expense for the years ended September 30 is as
follows:
<TABLE>
2000 1999
---- ----
<S> <C> <C>
Income tax expense at statutory rate $735,421 $622,674
Kansas privilege tax, net of federal tax benefit 60,642 50,747
Nondeductible ESOP fair value adjustment 24,599 28,675
Other (34,023) (13,789)
-------- --------
$786,639 $688,307
======== ========
</TABLE>
The tax effects of temporary differences that give rise to deferred
tax assets and liabilities at September 30 are as follows:
<TABLE>
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $275,274 $285,601
Accrued bonuses 15,540 11,100
Depreciation of property and equipment 88,280 95,389
Securities available for sale 2,800 ---
-------- --------
Total deferred tax assets 381,894 392,090
-------- --------
Deferred tax liabilities
Securities available for sale --- 1,420
Federal Home Loan Bank stock dividends 348,318 337,588
Other 44,349 53,082
-------- --------
Total deferred tax liabilities 392,667 392,090
-------- --------
Net deferred tax liability $ 10,773 $ ---
======== ========
</TABLE>
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE K - INCOME TAXES - Continued
Prior to 1997 the Association was allowed a special bad debt deduction,
generally limited to 8% of otherwise taxable income subject to certain
limitations based on aggregate loans and deposit account balances at the
end of the year. If the amounts that qualified as deductions for federal
income taxes are later used for purposes other than for bad debt losses,
including distributions in liquidation, such distributions will be subject
to federal income taxes at the then current corporate income tax rate.
Retained earnings at September 30, 2000, includes approximately $2.9
million for which federal income taxes have not been provided. The amount
of unrecognized deferred tax liability relating to the cumulative bad debt
deduction at September 30, 2000, is approximately $1,000,000.
NOTE L - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
The Association is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision (OTS). Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Association's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets, liabilities
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Association's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital to risk-weighted assets and
of Tier 1 (core) capital and tangible capital to adjusted total assets.
Management believes, as of September 30, 2000, that the Association meets
all capital adequacy requirements to which it is subject.
As of September 30, 2000, the most recent notification from the OTS
categorized the Association as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events
since that notification that management believes have changed the
Association's category. To be categorized as well capitalized the
Association must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 (core) ratios as set forth in the table below.
<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>
As of September 30, 2000
Total risk-based capital $ 13,280 18.17% $ 5,846 >8.0% $ 7,308 >10.0%
- -
Tier 1 risk-based capital 12,522 17.13 2,923 >4.0 4,385 >6.0
- -
Core capital 12,522 8.39 4,476 >3.0 7,459 >5.0
- -
Tangible capital 12,522 8.39 2,238 >1.5 N/A N/A
-
As of September 30, 1999
Total risk-based capital $ 12,845 19.2% $ 5,354 >8.0% $ 6,693 >10.0%
- -
Tier 1 risk-based capital 12,092 18.1 2,677 >4.0 4,016 >6.0
- -
Core capital 12,092 8.8 4,142 >3.0 6,904 >5.0
- -
Tangible capital 12,092 8.8 2,071 >1.5 N/A N/A
-
</TABLE>
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE L - STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL - Continued
Regulations of the OTS impose limitations on the payment of dividends and
other capital distributions by savings associations. Under such regulations
a savings association that immediately prior to and on a pro forma basis,
after giving effect to a proposed capital distribution, has total capital
(as defined by OTS regulation) that is equal to or greater than the amount
of its fully phased-in capital requirement is generally permitted without
OTS approval (but subsequent to 30 days prior notice to the OTS of the
planned dividend) to make capital distributions during a calendar year in
the amount of up to the greater of (1) 100% of its net earnings to date
during the year plus an amount equal to one-half of the amount by which its
total capital to assets ratio exceeded its fully phased-in capital to
assets ratio at the beginning of the year or (2) 75% of its net income for
the most recent four quarters. Pursuant to such OTS dividend regulations,
the Association had the ability to pay dividends of approximately
$4,200,000 to First Independence Corporation at September 30, 2000.
NOTE M - COMMITMENTS
The Association is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated balance sheets. The contract or
notional amounts of the commitments reflect the extent of the Association's
involvement in such financial instruments.
The Association's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Association uses the same credit policies in making
commitments and conditional obligations as those utilized for on-balance
sheet instruments. The Association's commitments to extend credit at
September 30, 2000 include loans in process as disclosed in Note D and
first mortgage loans with fixed rates ranging from 8.00% to 10.50%
aggregating $2,115,950 and $51,551 of variable rate loans at 7.25%.
Collateral for loans in process and commitments are the same as for other
Association loans. The commitment period is generally for forty-five days.
NOTE N - ACQUISITION
On January 6, 1999, the Corporation and The Neodesha Savings and Loan
Association, FSA (Neodesha) completed the conversion of Neodesha from a
federally-chartered mutual savings and loan association to a
federally-chartered stock savings and loan association and its simultaneous
merger with the Association. Neodesha conducts a general banking business
in southeastern Kansas. In connection with this merger conversion, the
Corporation sold 150,896 shares of its common stock at $9.42 per share. The
transaction was accounted for under the purchase method of accounting for
business combinations. Accordingly, the acquired assets and liabilities
have been recorded at their fair value at acquisition date and the
operating results of the acquisition are included in the Corporation's
consolidated statement of earnings from the date of acquisition. The fair
value of the net assets acquired in excess of the purchase price was
determined to be $1,172,848. In accordance with purchase accounting rules,
$232,264 of the excess value has been used to reduce to zero the carrying
value of the acquired property and equipment with the remaining $940,583 of
excess value recognized as negative goodwill. The negative goodwill is
being amortized to income on a ten-year straight-line basis. The
amortization period approximates the average life of the acquired long-term
interest-bearing assets. Amortization of negative goodwill of $94,058 and
$70,544 was recorded in the years ended September 30, 2000 and 1999,
repsectively. The net unamortized balance of negative goodwill of $775,981
and $870,039 is included in other liabilities at September 30, 2000 and
1999, respectively.
At the date of conversion, the merged association established a liquidation
account equal to the amount of Neodesha's retained earnings contained in
the offering circular. The liquidation account is maintained for the
benefit of Neodesha eligible savings account holders existing at the date
of conversion who maintain deposit accounts in the Association after
conversion.
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE N - ACQUISITION - Continued
The following summarized unaudited pro forma financial information assumes
the acquisition had occurred on October 1 of the acquisition year:
<TABLE>
1999
----------------
<S> <C>
Total interest income $10,341,414
Net earnings 1,195,162
Earnings per share
Basic $ 1.18
Diluted 1.12
</TABLE>
In the event of a complete liquidation (and only in such event), each
eligible savings account holder will be entitled to receive a pro rata
liquidation distribution from the liquidation account in the amount of the
then current adjusted balance of deposit accounts held, before any
liquidation distribution may be made with respect to common stock. Except
for the repurchase of stock and payment of dividends, the existence of the
liquidation account will not restrict the use or application of such
retained earnings by the Association.
Subsequent to consummation of the transaction, the Association may not
declare or pay a cash dividend on or repurchase any of its common stock, if
the effect thereof would cause stockholders' equity to be reduced below
either the amount required for the combined liquidation accounts or the
regulatory capital requirements for insured institutions.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments at September 30, 2000 and 1999.
Cash and cash equivalents: The balance sheet carrying amounts for cash and
short-term instruments approximate the estimated fair values of such
assets.
Investment securities and mortgage-backed securities: Fair values for
investment securities and mortgage-backed securities are based on quoted
market prices, if available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments.
Loans receivable: For variable rate loans that reprice frequently and which
entail no significant change in credit risk, fair values are based on the
carrying values. The estimated fair values of fixed rate loans are
estimated based on discounted cash flow analyses using prepayment
assumptions and interest rates currently offered for loans with similar
terms to borrowers of similar credit quality. Nonperforming loans have not
been discounted. The carrying amount of accrued interest receivable
approximates its fair value.
Commitments to extend credit: No premium or discount was ascribed to loan
commitments because when funded virtually all funding will be at current
market rates.
Federal Home Loan Bank stock: The balance sheet carrying amount
approximates the stock's fair value.
<PAGE>
First Independence Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 2000 and 1999
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
Deposit liabilities: The fair values estimated for demand deposits, NOW
accounts, savings and certain types of money market accounts are, by
definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). The carrying amounts of variable rate,
fixed-term money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values of fixed rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered to a
schedule of aggregated expected monthly time deposit maturities. The
carrying amount of accrued interest payable approximates its fair value.
Advances from Federal Home Loan Bank: For variable rate advances fair
values are considered equal to their carrying values. The estimated fair
value of fixed rate advances are estimated based on discounted cash flow
analysis using interest rates currently offered for advances with similar
terms.
The following table provides summary information on the fair value of
financial instruments. Such information does not purport to represent the
aggregate net fair value of the Corporation. Further, the fair value
estimates are based on various assumptions, methodologies and subjective
considerations, which vary widely among different financial institutions
and which are subject to change. The carrying amounts are the amounts at
which the financial instruments are reported in the consolidated financial
statements.
<TABLE>
2000
----------------------------------
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
-------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 1,921,042 $ 1,921,042
Investment securities held to maturity 6,496,147 6,416,450
Investment securities available for sale 1,992,200 1,992,200
Mortgage-backed securities held to maturity 8,746,988 8,671,665
Loans 125,877,049 124,240,049
Federal Home Loan Bank stock 1,955,000 1,955,000
Deposits (94,127,537) (93,713,537)
Advances from Federal Home Loan Bank (39,100,000) (38,656,000)
</TABLE>
<TABLE>
1999
----------------------------------
Carrying Estimated
amount of fair value
assets and of assets and
(liabilities) (liabilities)
-------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 1,439,995 $ 1,439,995
Investment securities available for sale 1,999,800 1,999,800
Investment securities held to maturity 7,005,279 6,957,733
Mortgage-backed securities held to maturity 10,912,279 10,852,983
Loans 113,646,056 113,489,056
Federal Home Loan Bank stock 1,441,600 1,441,600
Deposits (95,452,864) (95,463,864)
Advances from Federal Home Loan Bank (27,500,000) (26,986,000)
</TABLE>
<PAGE>
STOCKHOLDER INFORMATION
Stock Listing Information
First Federal Savings and Loan Association of Independence converted from a
mutual to a stock savings and loan association effective October 5, 1993, and
formed First Independence Corporation (the "Company") to act as its holding
company. The Company's Common Stock (the "Common Stock") is traded on the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
Small-Cap Market under the symbol "FFSL."
Stock Price Information and Dividends
As of December 4, 2000, there were approximately 213 shareholders of record of
the Company's Common Stock, not including those shares held in nominee or street
name through various brokerage firms or banks.
The following table sets forth the high and low bid prices of the Common Stock
and dividends declared for each fiscal quarter since October 1, 1998. The stock
price information was provided by the NASD, Inc.
Dividends
Quarter Ended High Low Declared
------------- -------- ------ --------
December 31, 1998 $ 11.000 $9.500 $0.0750
March 31, 1999 11.000 9.000 0.0875
June 30, 1999 11.000 9.625 0.0875
September 30, 1999 10.750 10.125 0.0875
December 31, 1999 10.563 9.625 0.0875
March 31, 2000 9.875 7.625 0.1000
June 30, 2000 10.000 8.000 0.1000
September 30, 2000 10.250 9.250 0.1000
The Company has paid a cash dividend on its Common Stock for each quarter since
the Association's conversion to stock form. Future dividends, if any, will be
dependent upon the results of operations and financial condition of the Company,
tax considerations, industry standards, economic conditions, general business
practices and other factors. The Company's ability to pay dividends is dependent
on the dividend payments it receives from the Association, which are subject to
regulations and the Association's continued compliance with all regulatory
capital requirements. See Note L of the Notes to Consolidated Financial
Statements for a discussion of regulations governing the Association's ability
to pay dividends.
<PAGE>
Annual Report on Form 10-KSB and Investor Information
A copy of the Company's annual report on Form 10-KSB, filed with the Securities
and Exchange Commission, is available without charge by writing:
Gary L. Overfield
Senior Vice President and Secretary
First Independence Corporation
Myrtle and Sixth
Independence, Kansas 67301
Stock Transfer Agent
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the stock transfer agent and registrar
by writing:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
Investor Information
Stockholders, investors, and analysts interested in additional information may
contact:
James B. Mitchell,
Vice President and Chief Financial Officer
Corporate Office
First Independence Corporation
Myrtle and Sixth
Independence, Kansas 67301
(316) 331-1660
Special Counsel
Silver, Freedman & Taff, L.L.P.
7th Floor - East Tower
1100 New York Avenue, NW
Washington, DC 20005
Independent Auditor
Grant Thornton, LLP
8300 Thorn Drive, Suite 300
Wichita, Kansas 67226
First Federal Savings and Loan Association of Independence
Myrtle and Sixth
Independence, Kansas 67301
(316) 331-1660
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
FIRST INDEPENDENCE CORPORATION
OFFICERS
Lavern W. Strecker
Chairman of the Board
Larry G. Spencer
President and Chief Executive Officer
Gary L. Overfield
Senior Vice President and Secretary
James B. Mitchell
Vice President and Chief Financial Officer
BOARD OF DIRECTORS
Lavern W. Strecker
Chairman of the Board
First Independence Corporation and
First Federal Savings and Loan Association of Independence
Retired - Former Manager of Accounting and Control
Arco Pipe Line Company
Larry G. Spencer
President and Chief Executive Officer
First Independence Corporation
President and Chief Executive Officer
First Federal Savings and Loan Association of Independence
William T. Newkirk II
Agent
Newkirk, Dennis & Buckles Insurance Co.
Robert A. Johnson
Human Resource Manger
Cobalt Boats
Harold L. Swearingen
Retired - Former Telecommunications Manager
Arco Pipe Line Company
Joseph M. Smith
Retired - Former County Extension Agent
Agriculture and Coordinator
Montgomery County Extension Council
E. JoVonnah Boecker
City Clerk
Neodesha, Kansas
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF INDEPENDENCE
OFFICERS
Lavern W. Strecker
Chairman of the Board
Larry G. Spencer
President and Chief Executive Officer
Gary L. Overfield
Senior Vice President and Secretary
James B. Mitchell
Vice President and Chief Financial Officer
Jim L. Clubine
Vice President and Asset Manager
Gregg S. Webster
Vice President
C. Alan Hoggatt
Vice President
Lori L. Kelley
Vice President of Operations and Technology
Phyllis A. Johnson
Assistant Vice President
Diane K. Holmquist
Assistant Vice President
BOARD OF DIRECTORS
Lavern W. Strecker
Larry G. Spencer
William T. Newkirk II
Harold L. Swearingen
Joseph M. Smith
Robert A. Johnson
E. JoVonnah Boecker
