SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22184
FIRST INDEPENDENCE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 36-3899950
- ------------------------------ -----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification or
organization) number)
Myrtle & Sixth Streets, Independence, Kansas 67301
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(316) 331-1660
- --------------------------------------------------------------------------------
(issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 day Yes [X] No [ ]
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
State the number of Shares outstanding of each of the issuer's classes of
common equity, as of the latest date:
As of May 12, 2000, there were 1,015,543 shares of the Registrant's common
stock outstanding.
<PAGE>
FIRST INDEPENDENCE CORPORATION
INDEX
PART I. FINANCIAL INFORMATION (unaudited) PAGE NO.
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of
March 31, 2000 and September 30, 1999 3
Consolidated Condensed Statements of Earnings
for the Three and Six Months Ended March 31,
2000 and 1999 4
Consolidated Condensed Statements of Comprehensive
Income for the Three and Six Months Ended
March 31, 2000 and 1999 5
Consolidated Condensed Statement of Stockholders'
Equity for the Year Ended September 30, 1999 and
Six Months Ended March 31, 2000 6
Consolidated Condensed Statements of Cash
Flows for the Six Months Ended March 31,
2000 and 1999 7
Notes to Consolidated Condensed Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
PART II. OTHER INFORMATION 17
Signature Page 18
2
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<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, September 30,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 647,239 $ 1,064,794
Federal funds sold 600,000 ---
Other interest-earning deposits 1,087,467 375,201
------------- -------------
Cash and cash equivalents 2,334,706 1,439,995
Investment securities held to maturity (fair value:
March 31, 2000 - $6,778,115;
September 30, 1999 - $6,957,733) 6,905,661 7,005,279
Investment securities available for sale 1,981,600 1,999,800
Mortgage-backed securities held to maturity (fair value:
March 31, 2000 - $9,762,739;
September 30, 1999 - $10,852,983) 9,858,438 10,912,279
Loans receivable, net 119,342,128 112,893,406
Real estate acquired through foreclosure 451,536 109,579
Premises and equipment, net 1,396,607 1,322,128
Federal Home Loan Bank Stock, at cost 1,770,000 1,441,600
Accrued interest receivable 923,959 887,465
Other assets 78,165 119,809
------------- -------------
Total assets $ 145,042,800 $ 138,131,340
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 94,450,788 $ 95,452,864
Advances from borrowers for taxes and insurance 906,467 825,330
Advances from Federal Home Loan Bank 35,400,000 27,500,000
Income taxes payable 11,288 71,277
Other accrued expenses and liabilities 1,138,329 1,175,261
------------- -------------
Total liabilities 131,906,872 125,024,732
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 8,160,733 8,132,391
Retained earnings - substantially restricted 11,333,053 10,876,339
Accumulated other comprehensive income (loss) (10,099) 2,316
Treasury stock at cost, 633,745 shares at March 31, 2000
and 587,458 shares at September 30, 1999 (6,211,096) (5,721,251)
Required contributions for shares acquired by ESOP (153,156) (199,680)
------------- -------------
Total stockholders' equity 13,135,928 13,106,608
------------- -------------
Total liabilities and stockholders' equity $ 145,042,800 $ 138,131,340
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- ------------------------
2000 1999 2000 1999
---------- ---------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans receivable $2,397,169 $2,161,234 $4,715,793 $4,101,871
Mortgage-backed securities 166,033 210,410 328,437 462,399
Investment securities 142,819 74,759 286,799 194,564
Other 46,948 134,146 89,829 187,618
---------- ---------- ---------- ----------
Total interest income 2,752,969 2,580,549 5,420,858 4,946,452
---------- ---------- ---------- ----------
Interest expense
Deposits 1,118,265 1,114,225 2,244,906 2,125,962
Borrowed funds 476,226 406,883 901,284 832,969
---------- ---------- ---------- ----------
Total interest expense 1,594,491 1,521,108 3,146,190 2,958,931
---------- ---------- ---------- ----------
Net interest income 1,158,478 1,059,441 2,274,668 1,987,521
Provision for loan losses 21,000 15,000 42,000 30,000
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 1,137,478 1,044,441 2,232,668 1,957,521
Noninterest income
Income (loss) from real estate operations (30,222) 7,566 (39,856) 2,681
Other 117,219 105,056 235,923 149,387
---------- ---------- ---------- ----------
Total noninterest income 86,997 112,622 196,067 152,068
---------- ---------- ---------- ----------
Noninterest expense
Employee compensation and benefits 401,122 393,801 807,680 687,814
Occupancy and equipment 78,421 70,996 162,422 134,576
Federal deposit insurance premiums 5,105 14,035 19,170 25,874
Data processing fees 67,080 66,306 129,886 127,224
Other 149,277 166,162 289,573 282,931
---------- ---------- ---------- ----------
Total noninterest expenses 701,005 711,300 1,408,731 1,258,419
---------- ---------- ---------- ----------
Earnings before income taxes 523,470 445,763 1,020,004 851,170
Income tax expense 187,580 167,485 373,495 325,228
---------- ---------- ---------- ----------
Net earnings $ 335,890 $ 278,278 $ 646,509 $ 525,942
========== ========== ========== ==========
Earnings per common share
Basic $ .33 $ .26 $ .63 $ .53
========== ========== ========== ==========
Diluted $ .32 $ .25 $ .61 $ .50
========== ========== ========== ==========
Dividends per share $ .10 $ .0875 $ .1875 $ .1625
========== ========== ========== ==========
Weighted average shares outstanding
Basic 1,010,241 1,061,724 1,024,317 997,749
========== ========== ========== ==========
Diluted 1,042,051 1,113,919 1,056,128 1,049,943
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- ------------------------
2000 1999 2000 1999
---------- ---------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net earnings $ 335,890 $ 278,278 $ 646,509 $ 525,942
Other comprehensive income
Unrealized losses on securities
available for sale arising during the
period, net of tax benefit (2,925) (16,080) (12,415) (32,427)
--------- --------- --------- ---------
Comprehensive income $ 332,965 $ 262,198 $ 634,094 $ 493,515
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
<TABLE>
<CAPTION>
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For The Three Months Ended March 31, 2000
and Year Ended September 30, 1999
(Unaudited)
Required
Contribu-
Accumulated tion for
Additional Other Shares
Common Paid-in Retained Comprehensive Treasury Acquired Total
Stock Capital Earnings Income (Loss) Stock by ESOP Equity
----- ------- -------- ------------- ----- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1998 $14,984 $7,239,207 $10,077,091 $52,497 $(5,139,263) $(145,475) $12,099,041
Net earnings --- --- 1,143,088 --- --- --- 1,143,088
Cash dividends of $.3375 per --- --- (343,840) --- --- --- (343,840)
share
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, net of)
income tax --- --- --- (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, 16,493 8,132,391 10,876,339 2,316 (5,721,251) (199,680) 13,106,608
1999
Net earnings --- --- 646,509 --- --- --- (189,795)
share
Common stock options --- (7,187) --- --- 42,025 --- 34,838
exercised
Depreciation of securities
available for sale, net of
income tax --- --- --- (12,415) --- --- (12,415)
Required ESOP loan repayments --- --- --- --- --- 46,524 46,524
Purchase of 53,187 shares of
treasury stock --- --- --- --- (531,870) --- (531,870)
Fair value adjustment on
ESOP shares committed for --- 35,529 --- --- --- --- 35,529
------- ---------- ----------- -------- ----------- --------- -----------
Balance at March 31, 2000 $16,493 $8,160,733 $11,333,053 $(10,099) $(6,211,096) $(153,156) $13,135,928
======= ========== =========== ======== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended March 31,
-------------------------------
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 646,509 $ 525,942
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for loan losses 42,000 30,000
Depreciation 61,575 56,013
Amortization of premiums and discounts on investments
and mortgage-backed securities 23,574 31,535
Amortization of deferred loan origination fees (99,941) (104,374)
Amortization of expense related to employee benefit plans 82,054 79,961
Amortization of negative goodwill (47,029) (23,515)
Net gain on sale of real estate acquired through foreclosure (18,469) (13,057)
Increase (decrease) in cash due to changes in
Accrued interest receivable (36,494) 20,962
Other assets 34,732 17,594
Accrued expenses and other liabilities (9,329) (291,005)
Income taxes payable (22,601) (50,669)
----------- ----------
Net cash provided by operating activities 656,581 279,387
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 1,128,059 9,869,379
Purchase of securities
Available for sale --- (8,452)
Held to maturity --- (1,000,000)
Net increase in loans (6,871,304) (5,044,065)
Purchase of Federal Home Loan Bank stock (328,400) (207,400)
Capital expenditures (139,494) (43,632)
Proceeds from sale of real estate acquired through foreclosure 157,035 58,825
Cash acquired in acquisition --- 2,114,968
----------- -----------
Net cash provided by (used in) investing activities (6,054,104) 7,094,676
Cash flows from financing activities
Net increase (decrease) in deposits (1,002,076) 1,800,602
Net increase in advances from borrowers
for taxes and insurance 81,137 36,740
Advances from Federal Home Loan Bank 29,900,000 6,700,000
Repayment of Federal Home Loan Bank advances (22,000,000) (6,400,000)
Cash dividends paid (189,795) (164,019)
Purchase of treasury stock (531,870) (140,375)
Net proceeds from sale of stock --- 1,279,264
Stock issuance costs --- (327,338)
Stock options exercised 34,838 42,844
----------- -----------
Net cash provided by financing activities 6,292,234 2,827,718
----------- -----------
Net increase in cash and cash equivalents 894,711 10,201,781
Cash and cash equivalents at beginning of period 1,439,995 913,580
----------- -----------
Cash and cash equivalents at end of period $ 2,334,706 $11,115,361
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
7
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FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited Consolidated Condensed Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the Consolidated Condensed Financial
Statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the consolidated financial condition of
First Independence Corporation as of March 31, 2000, and the results of
operations and cash flows for all interim periods presented.
Operating results for the three and six months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 2000.
(2) Earnings Per Share of Common Stock
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net earnings by the weighted average
number of common shares and common share equivalents outstanding. Stock options
are considered common share equivalents. Common shares outstanding exclude
unallocated and uncommitted shares held by the ESOP trust.
(3) Merger Conversion with The Neodesha Savings and Loan Association
On January 6, 1999 the Board of Directors of First Independence
Corporation, parent of First Federal Savings and Loan Association of
Independence, and The Neodesha Savings and Loan Association, FSA, announced the
completion of Neodesha Savings' conversion from a federally-chartered mutual
savings and loan association to a federally-chartered stock savings and loan
association and its simultaneous merger with First Federal. In connection with
the merger conversion of Neodesha Savings, First Independence sold 150,896
shares of its Common Stock at $9.42 per share. Total assets of Neodesha Savings
were $13.7 million at December 31, 1998. The financial statements include
results of operations of Neodesha Savings beginning January 6, 1999. The
transaction was accounted for under the purchase method of accounting for
business combinations.
8
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(4) Regulatory Capital Requirements
Pursuant to the Financial Institution Reform, Recovery, and Enforcement Act
of 1989, as implemented by rules promulgated by the Office of Thrift
Supervision, savings institutions must meet the following separate minimum
capital-to-asset requirements. The table below summarizes, as of March 31, 2000,
the capital requirements applicable to First Federal and its actual capital
ratios. For purposes of calculating regulatory capital, adjustments required by
Statement of Financial Accounting Standards No. 115 are not taken into account.
As of March 31, 2000, First Federal exceeded all regulatory capital standards.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
----------------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- -------- ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital $13,549 19.15% $5,661 >8.0% $7,076 >10.0%
- -
Tier 1 risk-based capital 12,769 18.04 2,831 >4.0 4,246 > 6.0
- -
Tier 1 (core) capital 12,769 8.80 4,353 >3.0 7,256 > 5.0
- -
Tangible capital 12,769 8.80 2,177 >1.5 --- ---
</TABLE>
(5) Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
Six months ended March 31,
----------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash paid for:
Interest $3,097,303 $2,954,008
Income taxes 404,096 375,897
Noncash investing and financing activities:
Transfer from loans to real estate
acquired through foreclosure 586,473 119,888
Issuance of loans receivable in connection
with the sale of real estate acquired
through foreclosure 105,950 24,800
Liabilities assumed in conjunction
with acquisition --- 13,700,846
</TABLE>
9
<PAGE>
PART II
FIRST INDEPENDENCE CORPORATION
Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL
The accompanying Consolidated Financial Statements include the accounts of
First Independence Corporation and its wholly-owned subsidiary, First Federal
Savings and Loan Association of Independence. All significant inter-company
transactions and balances are eliminated in consolidation. Our results of
operations are primarily dependent on First Federal's net interest margin, which
is the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities. First Independence's net
earnings are also affected by the level of its non-interest expenses, such as
employee compensation and benefits, occupancy expenses, and other expenses.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB and in future filings by us with the
Securities and Exchange Commission, in our press releases or other public or
shareholder communications, and in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including changes in
economic conditions in our market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in our market area
and competition that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. We caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. We advise readers that the factors listed
above could affect our financial performance and could cause actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
We do not undertake--and specifically disclaim any obligation--to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
FINANCIAL CONDITION
Total assets increased $6.9 million, or 5.00%, from $138.1 million at
September 30, 1999 to $145.0 million at March 31, 2000. This increase was
primarily comprised of increases in net loans receivable of $6.4 million, cash
and cash equivalents of $895,000,
10
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real estate acquired through foreclosure of $342,000, Federal Home Loan Bank
stock of $328,000 and accrued interest receivable of $37,000. These increases in
assets, along with a reduction in savings deposits of $1.0 million, were funded
by increases in advances from the Federal Home Loan Bank of Topeka of $7.9
million and advances from borrowers for taxes and insurance of $81,000 and the
redeployment of funds received from mortgage-backed securities maturing of $1.0
million and investment securities maturing of $117,000.
Loans receivable increased $6.4 million from $112.9 million at September
30, 1999, to $119.3 million at March 31, 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 terms 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
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, to a lesser extent, one-year
adjustable rate mortgages.
Total deposits decreased $1.0 million from $95.5 million at September 30,
1999, to $94.5 million at March 31, 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 $7.9 million from $27.5 million at September
30, 1999 to $35.4 million at March 31, 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 $29,000 from $13,107,000 at September
30, 1999 to $13,136,000 at March 31, 2000. The increase was primarily due to net
earnings from operations of $647,000, repayment of employee stock ownership debt
of $46,000, fair value adjustment of $36,000 on ESOP shares committed for
release and common stock options exercised of $35,000. These increases were
partially offset by our use of $532,000 to repurchase 53,187 shares of common
stock, dividends of $190,000 paid to stockholders and a decrease in the
unrealized gains on securities available for sale of $12,000.
NON-PERFORMING ASSETS
The ratio of non-performing assets to total assets is one indicator of our
exposure to credit risk. 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 March 31, 2000, non-performing assets were
11
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approximately $2.4 million, which represents a decrease of $121,000, or 4.8%, as
compared to September 30, 1999. The ratio of non-performing assets to total
assets at March 31, 2000 was 1.67% compared to 1.84% at September 30, 1999. A
summary of non-performing assets by category is set forth in the following
table:
March 31, September 30,
2000 1999
--------- -------------
(Dollars In Thousands)
Non-Accruing Loans $1,649 $1,311
Accruing Loans Delinquent 90 Days or More 293 1,118
Troubled Debt Restructurings 24 ---
Foreclosed Assets 452 110
------- ------
Total Non-Performing Assets $2,418 $2,539
====== ======
Total Non-Performing Assets as a
Percentage of Total Assets 1.67% 1.84%
==== ====
Included in non-accruing loans at March 31, 2000, were 15 loans totaling
$463,000 secured by one- to four-family real estate, 11 construction loans
totaling $1,010,000 secured by one- to four-family real estate, 2 loans totaling
$104,000 secured by non-residential real estate and 20 consumer loans totaling
$72,000. All non-accruing loans at March 31, 2000, were located in our primary
market area, except for 1 loan totaling $51,000 secured by a single family
residence located in Texas. At March 31, 2000, accruing loans delinquent 90 days
or more included 9 loans totaling $190,000 secured by one- to four-family real
estate, 1 construction loan totaling $84,000 secured by one- to four-family real
estate and 1 loan totaling $19,000 secured by non-residential real estate. At
March 31, 2000, all of our accruing loans delinquent 90 days or more were
secured by real estate located in our primary market area, except for 1 loan
totaling $48,000 secured by a single family residence located in Texas. At March
31, 2000, real estate acquired through foreclosure consisted of 14 single family
residences located in our primary market area. The properties have a carrying
value of $452,000 and are currently offered for sale.
We have taken into account our non-performing assets and the composition of
the loan portfolio in establishing the allowance for loan losses. The allowance
for loan losses totaled $780,000 at March 31, 2000, which represented a $27,000
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 .65% at March 31, 2000, primarily due to the increase in
total loans receivable at March 31, 2000. The allowance for loan losses as a
percent of non-performing loans increased from 31.0% at September 30, 1999 to
39.7% at March 31, 2000, due to the decrease in non-performing loans at March
31, 2000.
The allowance for loan losses is determined based upon an evaluation of
pertinent factors underlying the types and qualities 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.
12
<PAGE>
RESULTS OF OPERATIONS - COMPARISON OF THREE AND SIX MONTHS ENDED MARCH
31, 2000 AND MARCH 31, 1999
General. Net earnings for the six months ended March 31, 2000 were $647,000
as compared to $526,000 for the six months ended March 31, 1999, an increase of
$121,000, or 22.9%. The increase in net earnings was primarily due to increases
in net interest income of $287,000 and non-interest income of $44,000. These
increases were partially offset by increases in non-interest expense of
$151,000, income tax expense of $48,000 and the provision for loan losses of
$12,000.
Net earnings for the three months ended March 31, 2000 were $336,000 as
compared to $278,000 for the three months ended March 31, 1999, an increase of
$58,000, or 20.7%. The increase in net earnings was primarily due to an increase
in net interest income of $99,000 and a decrease in non-interest expense of
$10,000. These increases to net earnings were partially offset by a decrease in
non-interest income of $26,000 and increases in income tax expense of $21,000
and provision for loan losses of $6,000.
Net Interest Income. Net interest income increased $287,000, or 14.4%, for
the six months ended March 31, 2000 as compared to the six months ended March
31, 1999. This increase was due primarily to an increase in interest income of
$475,000, or 9.6%, offset partially by an increase in interest expense of
$187,000, or 6.3%. Interest income increased primarily due to a $9.5 million
increase in the average balance of interest-earning assets and, to a lesser
extent, a 16 basis point increase in the average yield on interest-earning
assets. Interest expense increased primarily due to an $8.6 million increase in
the average balance of interest-bearing liabilities, offset partially by a 4
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 merger conversion. The variance
between the increase in yield and the decrease in average rate paid was due to
interest-earning assets and interest-bearing liabilities acquired in the
Neodesha Savings merger conversion having a greater spread than interest-earning
assets and interest-bearing liabilities on our balance sheet.
Net interest income increased $99,000, or 9.3%, for the three months ended
March 31, 2000, as compared to the three months ended March 31, 1999. This
increase was due primarily to an increase in interest income of $172,000, or
6.7%, offset partially by an increase in interest expense of $73,000 or 4.8%.
Interest income increased primarily due to a $4.5 million increase in the
average balance of interest-earning assets and, to a lesser extent, a 25 basis
point increase in the average yield on interest-earning assets. Interest expense
increased primarily due to a $4.3 million increase in the average balance of
interest-bearing liabilities and, to a lesser extent, a 7 basis point increase
in the average rate paid on interest-bearing liabilities. The average rate
earned on interest-earning assets and paid on interest-bearing liabilities
increased primarily due to an increase in market interest rates. The ratio of
average interest-earning assets to average interest-bearing liabilities
13
<PAGE>
decreased from 109.5% for the three months ended March 31, 1999 to 109.3% for
the three months ended March 31, 2000.
Interest Income. Interest income for the six months ended March 31, 2000,
increased to $5.4 million from $4.9 million for the six months ended March 31,
1999. This increase resulted primarily from a $9.5 million increase in the
average outstanding amount of interest-earning assets during the six months
ended March 31, 2000, as compared to the six months ended March 31, 1999 due to
assets acquired in the Neodesha Savings merger conversion. 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 16 basis
points to 7.76% during the first six months of fiscal 2000, from 7.60% during
the first six months of fiscal 1999. This increase was caused primarily by a
change in the mix of interest-earning assets to a higher percentage of loans
receivable, even though the average yield on loans receivable decreased from
8.06% during the first half of fiscal 1999, to 8.01% during the first half of
fiscal 2000.
Interest income for the quarter ended March 31, 2000, increased to $2.8
million from $2.6 million for the quarter ended March 31, 1999. This increase
was caused primarily by a $4.5 million increase in the average outstanding
amount of interest-earning assets during the three months ended March 31, 2000,
as compared to the three months ended March 31, 1999. This increase was due to
an increase in the average balance of loans receivable financed by advances
obtained from the Federal Home Loan Bank of Topeka and Federal Home Loan Bank
overnight deposits. To a lesser extent, the increase was due to an increase in
the average yield on interest-earning assets. The average yield on
interest-earning assets increased by 25 basis points to 7.80% during the first
quarter of fiscal 2000, from 7.55% during the first quarter of fiscal 1999. This
increase was due to the same reasons as stated above.
Interest Expense. Interest expense for the six months ended March 31, 2000,
increased by $187,000 to $3.1 million as compared to $3.0 million for the six
months ended March 31, 1999. This increase in interest expense was due primarily
to an $8.6 million increase in the average outstanding amount of
interest-bearing liabilities during the six months ended March 31, 2000 as
compared to the six months ended March 31, 1999. This increase was partially
offset by a 4 basis point decrease in average interest rates paid on
interest-bearing liabilities, caused by a decrease in interest rates on savings
deposits. The increase in interest-bearing liabilities was primarily due to a
$6.5 million increase in the average outstanding balance of deposits due
primarily to savings deposits acquired in the Neodesha Savings merger conversion
and, to a lesser extent, a $2.1 million increase in advances obtained from the
Federal Home Loan Bank of Topeka.
Interest expense for the quarter ended March 31, 2000, increased by $73,000
to $1.6 million as compared to $1.5 million for the quarter ended March 31,
1999. This increase in interest expense was due primarily to a $4.3 million
increase in the average outstanding amount of interest-bearing liabilities
during the three months ended March 31, 2000, as compared to the three months
ended March 31, 1999. This increase in interest-bearing liabilities was due
primarily to an increase in advances obtained from the Federal Home Loan Bank of
Topeka used to finance loans receivable. To a lesser extent, the
14
<PAGE>
increase in interest expense was due to a 7 basis point increase in average
interest rates paid on interest-bearing liabilities, caused by an increase in
rates on demand and Now deposits and Federal Home Loan Bank advances.
Provision for Loan Losses. The provision for loan losses represents a
charge to earnings to maintain the allowance for loan losses at a level we
believe is adequate to absorb probable losses in the loan portfolio. The
provision for loan losses amounted to $21,000 and $42,000 for the three and six
months ended March 31, 2000 as compared to $15,000 and $30,000 for the same
periods 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 March 31, 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.
Non-interest Income. Non-interest income increased $44,000 to $196,000
during the six months ended March 31, 2000 as compared to $152,000 for the six
months ended March 31, 1999. The increase was primarily due to the amortization
of $47,000 related to negative goodwill acquired in the Neodesha Savings merger
conversion. To a lesser extent, the increase was due to increased checking and
deposit account fees as a result of accounts acquired in the Neodesha Savings
merger conversion and increased late charges and other fees associated with
mortgage loans. These increases were partially offset by a $40,000 net loss from
real estate operations for the six months ended March 31, 2000 compared to
$3,000 net earnings for the six months ended March 31, 1999.
Non-interest income decreased $26,000 to $87,000 during the three months
ended March 31, 2000 as compared to $113,000 for the three months ended March
31, 1999. The decrease was primarily a result of net losses on real estate
operations of $30,000 for the period ended March 31, 2000 compared to net
earnings of $8,000 for the period ended March 31, 1999. Recurring non-interest
income generally consists of servicing fees as well as deposit and other types
of fees.
Non-interest Expense. Total non-interest expense increased to $1.4 million
for the six months ended March 31, 2000 from $1.3 million for the six months
ended March 31, 1999, an increase of $151,000, or 11.9%. The increase was
primarily due to increases in employee compensation and employee benefits of
$120,000, occupancy and equipment of $27,000, other expense of $7,000 and data
processing fees of $3,000. These increases were partially offset by a decrease
in federal deposit insurance premiums of $7,000 due to a decrease in the
insurance premium percentage. The increases were primarily due to the
acquisition of Neodesha Savings, 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.
Total non-interest expense decreased by $10,000 for the three months ended
March 31, 2000, as compared to the three months ended March 31, 1999. The
decrease was due primarily to decreases in other
15
<PAGE>
expense of $17,000 and federal deposit insurance premiums of $9,000. These
decreases were partially offset by increases in compensation and employee
benefits of $7,000 and occupancy and equipment of $7,000.
Income Tax Expense. Income tax expense was $373,000 for the six months
ended March 31, 2000 compared to $325,000 for the six months ended March 31,
1999, an increase of $48,000. 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 36.6% and 38.2% for the six months ended March 31, 2000
and March 31, 1999, respectively.
Income tax expense was $188,000 for the quarter ended March 31, 2000
compared to $167,000 for the quarter ended March 31, 1999, an increase of
$21,000. 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 35.8% and 37.6% for the three months ended March 31, 2000 and March 31,
1999, respectively.
Liquidity and Capital Resources. Our primary sources of funds are deposits,
principal and interest payments on loans and mortgage-backed securities, Federal
Home Loan Bank of Topeka advances and funds provided by operations. While
scheduled loan and mortgage-backed security repayments and maturity of
short-term investments are a relatively predictable source of funds, deposit
flows are greatly influenced by general interest rates, economic conditions and
competition. Current Office of Thrift Supervision regulations require First
Federal to maintain cash and eligible investments in an amount equal to at least
4% of the sum of its average daily balance of net withdrawable deposit accounts
and borrowings payable in one year or less. Such requirements may be changed
from time to time by the 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. As of March 31, 2000,
First Federal's liquidity ratio was 7.83% as compared to 9.66% at September 30,
1999. These ratios exceeded the minimum regulatory liquidity requirements on
both dates.
We use our capital resources principally to meet our ongoing commitments,
to fund maturing certificates of deposit and deposit withdrawals, to invest, to
fund existing and future loan commitments, to maintain liquidity, and to meet
operating expenses. At March 31, 2000 we had commitments to originate loans
totaling $2,585,000. We consider our liquidity and capital resources to be
adequate to meet foreseeable short- and long-term needs. We expect to be able to
fund or refinance, on a timely basis, our material commitments and long-term
liabilities.
Regulatory standards impose the following capital requirements on First
Federal: a risk-based capital standard expressed as a percent of risk-adjusted
assets, a leverage ratio of core capital to total adjusted assets, and a
tangible capital ratio expressed as a percent of total adjusted assets. As of
March 31, 2000, we exceeded all regulatory capital standards.
16
<PAGE>
At March 31, 2000, First Federal's tangible capital was $12.8 million, or
8.80% of adjusted total assets, which is in excess of the 1.5% requirement by
$10.6 million. In addition, at March 31, 2000, we had core capital of $12.8
million, or 8.80% of adjusted total assets, which exceeds the 3% requirement by
$8.4 million. Risk-based capital was $13.5 million at March 31, 2000, or 19.15%
of risk-adjusted assets, which exceeds the 8.0% risk-based capital requirement
by $7.9 million.
Part II - Other Information
Item 1 - Legal Proceedings
Not applicable.
Item 2 - Changes in Securities
Not applicable.
Item 3 - Defaults upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - none
17
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST INDEPENDENCE CORPORATION
Registrant
Date: May 12, 2000 /s/Larry G. Spencer
-------------------------------------
Larry G. Spencer
President and Chief Executive
Officer
Date: May 12, 2000 /s/James B. Mitchell
------------------------------------
James B. Mitchell
Vice President and Chief Financial
Accounting Officer
26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the quarterly
report on Form 10-QSB for the fiscal quarter ended March 31, 2000 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 647,239
<INT-BEARING-DEPOSITS> 1,087,467
<FED-FUNDS-SOLD> 600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,981,600
<INVESTMENTS-CARRYING> 16,764,099
<INVESTMENTS-MARKET> 16,540,854
<LOANS> 120,122,368
<ALLOWANCE> 780,240
<TOTAL-ASSETS> 145,042,800
<DEPOSITS> 94,450,788
<SHORT-TERM> 4,400,000
<LIABILITIES-OTHER> 2,056,084
<LONG-TERM> 31,000,000
16,493
0
<COMMON> 0
<OTHER-SE> 13,119,435
<TOTAL-LIABILITIES-AND-EQUITY> 145,042,800
<INTEREST-LOAN> 4,715,793
<INTEREST-INVEST> 615,236
<INTEREST-OTHER> 89,829
<INTEREST-TOTAL> 5,420,858
<INTEREST-DEPOSIT> 2,244,906
<INTEREST-EXPENSE> 3,146,190
<INTEREST-INCOME-NET> 2,274,668
<LOAN-LOSSES> 42,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,408,731
<INCOME-PRETAX> 1,020,004
<INCOME-PRE-EXTRAORDINARY> 646,509
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 646,509
<EPS-BASIC> .63
<EPS-DILUTED> .61
<YIELD-ACTUAL> 7.76
<LOANS-NON> 1,648,899
<LOANS-PAST> 292,628
<LOANS-TROUBLED> 24,216
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 752,650
<CHARGE-OFFS> 14,410
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 780,240
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 780,240
</TABLE>
