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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Delaware |
36-3899950 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
State the number of Shares outstanding of each of the issuer's classes of common equity, as of the latest date:
As of August 10, 2001, there were 986,637 shares of the Registrant's common stock, par value $.01 per share, outstanding.
FIRST INDEPENDENCE CORPORATION
INDEX
PART I. | FINANCIAL INFORMATION | PAGE NO. |
Item 1. | Consolidated Condensed Financial Statements | |
Consolidated Condensed Balance Sheets as of June 30, 2001 and September 30, 2000 |
3 | |
Consolidated Condensed Statements of Earnings for the Three and Nine Months Ended June 30, 2001 and 2000 |
4 | |
Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2001 and 2000 |
5 | |
Consolidated Condensed Statement of Stockholders' Equity for the Year Ended September 30, 2000 and Nine Months Ended June 30, 2001 |
6 | |
Consolidated Condensed Statements of Cash Flows for the Nine Months Ended June 30, 2001 and 2000 |
7 | |
Notes to Consolidated Condensed Financial Statements |
8 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
10 |
PART II. | OTHER INFORMATION | 18 |
Signature Page | 19 |
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 2001 |
September 30, 2000 | |
ASSETS | ||
Cash and due from banks | $ 364,564 | $ 449,960 |
Federal funds sold | 400,000 | 700,000 |
Other interest-earning deposits | 1,300,145 |
771,082 |
Cash and cash equivalents | 2,064,709 | 1,921,042 |
Investment securities held to maturity (fair value: June 30, 2001 - $7,226,708; September 30, 2000 - $6,416,450) |
7,194,139 | 6,496,147 |
Investment securities available for sale | 1,016,000 | 1,992,200 |
Mortgage-backed securities held to maturity (fair value: June 30, 2001 - $7,825,607; September 30, 2000 - $8,671,665) |
7,798,458 | 8,746,988 |
Loans receivable | 132,047,254 | 125,118,716 |
Premises and equipment | 1,487,187 | 1,449,403 |
Federal Home Loan Bank Stock, at cost | 2,265,000 | 1,955,000 |
Accrued interest receivable | 1,099,805 | 959,973 |
Real estate acquired through foreclosure | 236,237 | 423,360 |
Other | 71,711 |
67,537 |
Total assets | $155,280,500 |
$149,130,366 |
LIABILITIES AND STOCKHOLDERS' EQUITY | ||
Liabilities | ||
Deposits | $ 99,192,765 | $ 94,127,537 |
Advances from borrowers for taxes and insurance | 509,249 | 887,080 |
Advances from Federal Home Loan Bank | 40,600,000 | 39,100,000 |
Income taxes payable | 23,723 | 40,640 |
Accrued expenses and other | 959,216 |
1,210,764 |
Total liabilities | 141,284,953 | 135,366,021 |
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 | 8,175,074 | 8,190,682 |
Retained earnings - substantially restricted | 12,664,881 | 11,863,034 |
Accumulated other comprehensive income (loss), net of related taxes |
9,428 | (4,692) |
Treasury stock at cost, 663,251 shares at June 30, 2001 and 630,927 shares at September 30, 2000 |
(6,778,930) | (6,194,540) |
Required contributions for shares acquired by ESOP | (91,399) |
(106,632) |
Total stockholders' equity | 13,995,547 |
13,764,345 |
Total liabilities and stockholders' equity | $155,280,500 |
$149,130,366 |
___________________
The accompanying notes are an integral part of these statements.
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
Three Months Ended June 30, |
Nine Months Ended June 30, | |||
2001 |
2000 |
2001 |
2000 | |
Interest income | ||||
Loans | $2,740,632 | $2,473,778 | $8,053,969 | $7,189,571 |
Mortgage-backed securities | 126,033 | 161,705 | 424,605 | 490,142 |
Investment securities | 86,448 | 141,626 | 321,535 | 428,425 |
Interest-bearing deposits and other | 51,918 |
48,866 |
177,815 |
138,695 |
Total interest income | 3,005,031 | 2,825,975 | 8,977,924 | 8,246,833 |
Interest expense | ||||
Deposits | 1,179,367 | 1,132,168 | 3,513,795 | 3,377,074 |
Borrowed funds | 541,944 |
530,083 |
1,757,486 |
1,431,367 |
Total interest expense | 1,721,311 |
1,662,251 |
5,271,281 |
4,808,441 |
Net interest income | 1,283,720 | 1,163,724 | 3,706,643 | 3,438,392 |
Provision for loan losses | 42,000 |
21,000 |
132,000 |
63,000 |
Net interest income after provision for loan losses |
1,241,720 | 1,142,724 | 3,574,643 | 3,375,392 |
Noninterest income | ||||
Service charges | 76,939 | 57,771 | 212,630 | 167,763 |
Other | 45,103 |
49,862 |
144,833 |
175,793 |
Total noninterest income | 122,042 | 107,633 | 357,463 | 343,556 |
Noninterest expense | ||||
Employee compensation and benefits | 382,466 | 395,943 | 1,219,867 | 1,203,623 |
Occupancy and equipment | 90,296 | 79,454 | 270,507 | 241,876 |
Foreclosed assets, net | 10,833 | (2,280) | (4,056) | 37,576 |
Data processing fees | 52,333 | 51,556 | 173,811 | 181,442 |
Other operating | 170,489 |
145,519 |
550,354 |
454,262 |
Total noninterest expenses | 706,417 |
670,192 |
2,210,483 |
2,118,779 |
Earnings before income taxes | 657,345 | 580,165 | 1,721,623 | 1,600,169 |
Income tax expense | 226,844 |
208,731 |
593,570 |
582,226 |
Net earnings | $ 430,501 |
$ 371,434 |
$1,128,053 |
$1,017,943 |
Earnings per common share | ||||
Basic | $ .44 |
$ .37 |
$ 1.13 |
$ 1.00 |
Diluted | $ .42 |
$ .36 |
$ 1.09 |
$ .96 |
Dividends per share | $ .1125 |
$ .10 |
$ .3250 |
$ .2875 |
Weighted average shares outstanding | ||||
Basic | 977,635 |
998,827 |
997,705 |
1,016,033 |
Diluted | 1,018,515 |
1,039,451 |
1,038,585 |
1,056,657 |
____________________
The accompanying notes are an integral part of these statements.
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended June 30, |
Nine Months Ended June 30, | |||
2001 |
2000 |
2001 |
2000 | |
Net earnings | $ 430,501 | $ 371,434 | $1,128,053 | $1,017,943 |
Other comprehensive income | ||||
Unrealized gains (losses) on securities available for sale arising during the period, net of income tax |
518 |
41 |
14,120 |
(12,374) |
Comprehensive income | $ 431,019 |
$ 371,475 |
$1,142,173 |
$1,005,569 |
__________________
The accompanying notes are an integral part of these statements.
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the Year Ended September 30, 2000
and Nine Months Ended June 30, 2001
Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Treasury Stock |
Required Contributions for Shares Acquired by ESOP |
Total Equity | |
Balance at October 1, 1999 | $16,493 | $8,132,391 | $10,876,339 | $2,316 | $(5,721,251) | $(199,680) | $13,106,608 |
Net earnings | --- | --- | 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, net of income tax |
--- | --- | --- | (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) | (6,194,540) | (106,632) | 13,764,345 |
Net earnings | --- | --- | 1,128,053 | --- | --- | --- | 1,128,053 |
Cash dividends of $.325 per share | --- | --- | (326,206) | --- | --- | --- | (326,206) |
Common stock options exercised | --- | (19,445) | --- | --- | 89,036 | --- | 69,591 |
Appreciation of securities available for sale, net of income tax |
--- | --- | --- | 14,120 | --- | --- | 14,120 |
ESOP loan repayments | --- | --- | --- | --- | --- | 15,233 | 15,233 |
Fair value adjustment on ESOP shares committed for release |
--- | 3,837 | --- | --- | --- | --- | 3,837 |
Purchase of 51,802 shares of treasury stock |
--- |
--- |
--- |
--- |
(673,426) |
--- |
(673,426) |
Balance at June 30, 2001 | $16,493 |
$8,175,074 |
$12,664,881 |
$ 9,428 |
$(6,778,930) |
$ (91,399) |
$13,995,547 |
______________________
The accompanying notes are an integral part of these statements.
PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, | ||
2001 |
2000 | |
Cash flows from operating activities | ||
Net earnings | $ 1,128,053 | $ 1,017,943 |
Adjustments to reconcile net earnings to net cash provided by operating activities |
||
Provision for loan losses | 132,000 | 63,000 |
Depreciation | 106,968 | 93,392 |
Amortization of premiums and discounts on investments and mortgage-backed securities |
17,779 | 33,323 |
Amortization of deferred loan origination fees | (184,501) | (167,747) |
Amortization of expense related to employee benefit plans | 19,070 | 119,897 |
Amortization of negative goodwill | (70,544) | (70,544) |
Gain on sale of real estate acquired through foreclosure |
(23,347) | (35,993) |
Increase (decrease) in cash due to changes in | ||
Accrued interest receivable | (139,832) | (178,399) |
Other assets | 5,213 | 28,027 |
Accrued expenses and other liabilities | (188,969) | 23,227 |
Income taxes payable | (16,917) |
5,425 |
Net cash provided by operating activities | 784,973 | 931,551 |
Cash flows from investing activities | ||
Proceeds from maturities and repayment of securities | ||
Available for sale | 1,000,000 | --- |
Held to maturity | 6,228,920 | 2,019,278 |
Purchase of securities | ||
Held to maturity | (5,997,187) | --- |
Purchase of loans | (608,583) | --- |
Net increase in loans | (6,356,164) | (10,210,922) |
Purchase of Federal Home Loan Bank stock | (310,000) | (398,400) |
Capital expenditures | (180,806) | (200,542) |
Proceeds from sale of real estate acquired through foreclosure |
325,158 |
281,143 |
Net cash used in investing activities | (5,898,662) | (8,509,443) |
Cash flows from financing activities | ||
Net increase (decrease) in deposits | 5,065,228 | (1,205,534) |
Net increase in advances from borrowers for taxes and insurance |
(377,831) | (325,366) |
Advances from Federal Home Loan Bank | 23,200,000 | 43,300,000 |
Repayment of Federal Home Loan Bank advances | (21,700,000) | (34,000,000) |
Cash dividends paid | (326,206) | (289,381) |
Purchase of treasury stock | (673,426) | (531,870) |
Stock options exercised | 69,591 |
48,928 |
Net cash provided by financing activities | 5,257,356 |
6,996,777 |
Net increase (decrease) in cash and cash equivalents | 143,667 | (581,115) |
Cash and cash equivalents at beginning of period | 1,921,042 |
1,439,995 |
Cash and cash equivalents at end of period | $ 2,064,709 |
$ 858,880 |
_________________
The accompanying notes are an integral part of these statements.
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") 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 U.S. GAAP for complete financial statements.
In the opinion of management, the Consolidated Condensed Financial Statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial condition of First Independence Corporation as of June 30, 2001, and the results of operations and cash flows for all interim periods presented.
Operating results for the nine months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2001.
(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) 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 following table summarizes, as of June 30, 2001, 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 June 30, 2001, First Federal exceeded all regulatory capital standards.
Actual |
For Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio | |
(Dollars in Thousands) | ||||||
Total risk-based capital | $14,491 | 19.00% | $6,101 | >8.0% | $7,626 | >10.0% |
Tier 1 risk-based capital | 13,703 | 17.97 | 3,050 | >4.0 | 4,575 | > 6.0 |
Tier 1 (core) capital | 13,703 | 8.81 | 4,664 | >3.0 | 7,773 | > 5.0 |
Tangible capital | 13,703 | 8.81 | 2,332 | >1.5 | --- | --- |
Nine Months ended June 30, | |||
2001 |
2000 | ||
Cash paid for: | |||
Interest | $5,300,794 | $4,725,632 | |
Income taxes | 611,177 | 590,801 | |
Noncash investing and financing activities: | |||
Transfer from loans to real estate acquired through foreclosure |
282,515 | 748,569 | |
Issuance of loans receivable in connection with the sale of real estate acquired through foreclosure |
167,700 | 190,450 |
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 $6.2 million, or 4.12%, from $149.1 million at September 30, 2000 to $155.3 million at June 30, 2001. This increase consisted primarily of increases in net loans receivable of $6.9 million, Federal Home Loan Bank stock of $310,000 and cash and cash equivalents of $144,000. These increases in assets, along with decreases in advances from borrowers for taxes and insurance of $378,000 and accrued expenses and other of $252,000, were funded by increases in savings deposits of $5.1 million, advances from the Federal Home Loan Bank of Topeka of $1.5 million, the redeployment of funds received from repayments of mortgage-backed securities of $949,000 and investment securities maturing of $278,000.
Loans receivable increased $6.9 million from $125.1 million at September 30, 2000, to $132.0 million at June 30, 2001. The increase was primarily due to a $4.9 million increase in construction loans originated 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 a $2.0 million increase in loans originated 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.
Total deposits increased $5.1 million from $94.1 million at September 30, 2000, to $99.2 million at June 30, 2001. Deposits increased primarily due to public units depositing short-term funds into the "Platinum" money fund account and new accounts being opened at the Coffeyville, Kansas branch office. The "Platinum" money fund account offers tiered rates on a limited transaction account with the highest rate paid on balances of $50,000 and above. Management feels the "Platinum" money fund provides a lower risk, insured alternative for deposit customers considering higher risk investments in order to get higher yields than standard money market accounts.
Advances from Federal Home Loan Bank increased $1.5 million from $39.1 million at September 30, 2000 to $40.6 million at June 30, 2001. Most of the advances obtained from the Federal Home Loan Bank of Topeka were used by the Company to fund loans originated at a positive spread over the term of the advances.
Total stockholders' equity increased $232,000 from $13,764,000 at September 30, 2000 to $13,996,000 at June 30, 2001. The increase was primarily due to net earnings from operations of $1,128,000, common stock options exercised of $70,000, an increase in the unrealized gains on securities available for sale of $14,000, repayment of employee stock ownership debt of $15,000 and fair value adjustment of $4,000 on ESOP shares committed for release. These increases were partially offset by our use of $673,000 to repurchase 51,802 shares of common stock and by dividends of $326,000 paid to stockholders.
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 June 30, 2001, non-performing assets were approximately $2,209,000, which represents an increase of $475,000, or 27.4%, as compared to September 30, 2000. The ratio of non-performing assets to total assets at June 30, 2001 was 1.42% compared to 1.16% at September 30, 2000. A summary of non-performing assets by category is set forth in the following table:
June 30 2001 |
September 30, 2000 | |
(Dollars in Thousands) | ||
Non-Accruing Loans | $1,318 | $1,101 |
Accruing Loans Delinquent 90 Days or More | 642 | 187 |
Trouble Debt Restructurings | 13 | 23 |
Foreclosed Assets | 236 |
423 |
Total Non-Performing Assets | $2,209 |
$1,734 |
Total Non-Performing Assets as a Percentage of Total Assets |
1.42% |
1.16% |
Included in non-accruing loans at June 30, 2001, were 19 loans totaling $603,000 secured by one- to four-family real estate, 7 construction loans totaling $601,000 secured by one- to four-family real estate and 19 consumer loans totaling $114,000. All non-accruing loans at June 30, 2001, were located in our primary market area. At June 30, 2001, accruing loans delinquent 90 days or more included 14 loans totaling $477,000 secured by one- to four-family real estate, 2 construction loans totaling $162,000 secured by one- to four-family real estate and 1 consumer loan totaling $3,000. At June 30, 2001, all of our accruing loans delinquent 90 days or more were secured by real estate located in our primary market area. At June 30, 2001, foreclosed assets consisted of 7 single family residences located in our primary market area. The properties have a carrying value of $236,000 and are currently offered for sale. The increase in non-performing assets was due to growth in our construction loan portfolio which tends to have a higher degree of risk than traditional one- to four-family lending.
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 $788,000 at June 30, 2001, which represented a $30,000 increase from the allowance for loan losses at September 30, 2000. The increase was primarily due to an addition of $132,000 to the allowance through the provision for loan losses. This increase was partially offset by charge-offs of $102,000 during the period. The ratio of the allowance for loan losses as a percent of total loans decreased from .61% at September 30, 2000 to .59% at June 30, 2001, primarily due to charge-offs and the increase in total loans receivable at June 30, 2001. The allowance for loan losses as a percent of non-performing loans decreased from 57.86% at September 30, 2000 to 39.94% at June 30, 2001, due to the higher than normal charge-offs during the period and the increase in non-performing loans at June 30, 2001.
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.
Results of Operations - Comparison of Three and Nine Months Ended June 30, 2001 and June 30, 2000
General. Net earnings for the three months ended June 30, 2001 were $431,000 as compared to $371,000 for the three months ended June 30, 2000, an increase of $60,000, or 15.9%. The increase in net earnings was primarily due to increases in net interest income of $120,000 and non-interest income of $14,000. These increases to net earnings were partially offset by increases in non-interest expense of $36,000, the provision for loan losses of $21,000 and income tax expense of $18,000.
Net earnings for the nine months ended June 30, 2001 were $1,128,000 as compared to $1,018,000 for the nine months ended June 30, 2000, an increase of $110,000, or 10.8%. The increase in net earnings was primarily due to an increase in net interest income of $269,000 and non-interest income of $13,000. These increases were partially offset by increases in non-interest expense of $91,000, the provision for loan losses of $69,000 and income tax expense of $12,000.
Net Interest Income. Net interest income increased $120,000, or 10.3%, for the three months ended June 30, 2001, as compared to the three months ended June 30, 2000. This increase was due primarily to an increase in interest income of $179,000, or 6.3%, offset partially by an increase in interest expense of $59,000 or 3.6%. Interest income increased primarily due to a $7.7 million increase in the average balance of interest-earning assets and, to a lesser extent, a 6 basis point increase in the average yield on interest-earning assets. Interest expense increased primarily due to a $7.1 million increase in the average balance of interest-bearing liabilities, offset partially by a 9 basis point decrease in the average rate paid on interest-bearing liabilities. The ratio of average interest-earning assets to average interest-bearing liabilities decreased from 109.44% for the three months ended June 30, 2000 to 109.42% for the three months ended June 30, 2001.
Net interest income increased $268,000, or 7.8%, for the nine months ended June 30, 2001 as compared to the nine months ended June 30, 2000. This increase was due primarily to an increase in interest income of $731,000, or 8.9%, offset partially by an increase in interest expense of $463,000, or 9.6%. Interest income increased primarily due to a $7.7 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 $6.9 million increase in the average balance of interest-bearing liabilities and, to a lesser extent, a 20 basis point increase in the average rate paid on interest-bearing liabilities. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 109.43% for the nine months ended June 30, 2000 to 109.54% for the nine months ended June 30, 2001.
Interest Income. Interest income for the quarter ended June 30, 2001, increased to $3,005,000 from $2,826,000 for the quarter ended June 30, 2000. This increase was caused primarily by a $7.7 million increase in the average outstanding amount of interest-earning assets during the three months ended June 30, 2001, as compared to the three months ended June 30, 2000 due to increased loan originations in our local markets and our Lawrence, Kansas construction loan production office. Due to our recent decision to tighten loan underwriting standards on construction loans and to increase rates charged, we anticipate our volume of loan originations to be reduced in the near term. 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 6 basis points to 8.01% during the third quarter of fiscal 2001, from 7.95% during the third quarter of fiscal 2000. 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 and decreases in the investment and mortgage-backed securities portfolios. These construction loans carry a higher rate of interest than other loans, therefore, the average yield on loans receivable increased from 8.18% during the three months ended June 30, 2000, to 8.32% during the three months ended June 30, 2001.
Interest income for the nine months ended June 30, 2001, increased to $8,978,000 from $8,247,000 for the nine months ended June 30, 2000. This increase resulted primarily from a $7.7 million increase in the average outstanding amount of interest-earning assets during the nine months ended June 30, 2001, as compared to the nine months ended June 30, 2000. 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 8.07% during the first nine months of fiscal 2001, from 7.82% during the first nine months of fiscal 2000. This increase was due to the same reasons as stated above.
Interest Expense. Interest expense for the quarter ended June 30, 2001, increased by $59,000 to $1,721,000 as compared to $1,662,000 for the quarter ended June 30, 2000. This increase in interest expense was due primarily to a $7.1 million increase in the average outstanding amount of interest-bearing liabilities during the three months ended June 30, 2001, as compared to the three months ended June 30, 2000. The increase in interest expense was partially offset by a 9 basis point decrease in average interest rates paid on interest-bearing liabilities, caused by a decrease in market rates on savings deposits and Federal Home Loan Bank advances. The increase in interest-bearing liabilities was due primarily to $3.9 million increase in the average outstanding balance of deposits and, to a lesser extent, a $3.2 million increase in the average outstanding balance of advances obtained from the Federal Home Loan Bank of Topeka.
Interest expense for the nine months ended June 30, 2001, increased by $463,000 to $5,271,000 as compared to $4,808,000 for the nine months ended June 30, 2000. This increase was primarily the result of a $6.9 million increase in the average outstanding amount of interest-bearing liabilities during the nine months ended June 30, 2001 as compared to the nine months ended June 30, 2000. To a lesser extent, the increase in interest expense was due to a 20 basis point increase in average interest rates paid on interest-bearing liabilities caused by a change in mix of interest-bearing liabilities to a higher percentage of Federal Home Loan Bank advances, which carry a higher average rate than savings deposits. The increase in interest-bearing liabilities was primarily due to a $5.9 million increase in the average outstanding balance of 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 probable losses in the loan portfolio. The provision for loan losses amounted to $42,000 and $132,000 for the three and nine months ended June 30, 2001, respectively, as compared to $21,000 and $63,000 for the same respective periods in 2000. 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 the balance of non-performing assets. We believe we use the best information available in providing for probable loan losses and we believe that the allowance is adequate at June 30, 2001. 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.
Noninterest Income. Noninterest income increased $14,000 to $122,000 during the three months ended June 30, 2001 as compared to $108,000 for the three months ended June 30, 2000. The increase was primarily a result of increases in checking and deposit account fees and increased late charges and other fees associated with mortgage loans.
Noninterest income increased $13,000 to $357,000 during the nine months ended June 30, 2001 as compared to $344,000 for the nine months ended June 30, 2000. The increase was primarily due to the same reasons as stated above. Recurring non-interest income generally consists of loan servicing fees as well as deposit and other types of fees.
Noninterest Expense. Total noninterest expense increased by $36,000 for the three months ended June 30, 2001, as compared to the three months ended June 30, 2000. The increase was due primarily to increases in other operating expense of $24,000, foreclosed assets, net expense of $13,000 and occupancy and equipment of $11,000. These increases were partially offset by a decrease in employee compensation and benefits of $14,000.
Total noninterest expense increased to $2,210,000 for the nine months ended June 30, 2001 from $2,119,000 for the nine months ended June 30, 2000, an increase of $91,000, or 4.3%. The increase was primarily due to increases in other operating expense of $96,000, occupancy and equipment of $29,000 and employee compensation and benefits of $16,000. These increases were partially offset by decreases in foreclosed assets, net expense of $42,000 and data processing fees of $7,000. The increase in other operating expense was primarily due to a $48,000 increase in legal expense related to administrative, loan workout and foreclosure issues and an $11,000 increase in charitable contributions. The increase in compensation and benefits expense was the result of normal, annual cost of living increases in salaries and bonuses.
Income Tax Expense. Income tax expense was $227,000 for the quarter ended June 30, 2001 compared to $209,000 for the quarter ended June 30, 2000, an increase of $18,000. Our effective tax rates were 34.5% and 36.0% for the three months ended June 30, 2001 and June 30, 2000, respectively. Rates were lower during the June 30, 2001 period due to a decrease in nondeductible compensation expense related to one ESOP loan being paid off.
Income tax expense was $594,000 for the nine months ended June 30, 2001 compared to $582,000 for the nine months ended June 30, 2000, an increase of $12,000. Our effective tax rates were 34.5% and 36.4% for the nine months ended June 30, 2001 and June 30, 2000, respectively. Rates were lower during the June 30, 2001 period due to the same reason as stated above.
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 adequate cash and eligible investments in order to meet our liquidity needs deemed necessary to fund deposit withdrawals and other short-term funding needs. Management believes that we have and will continue to have adequate liquidity for the foreseeable future. As of June 30, 2001, First Federal's liquidity ratio was 5.95% as compared to 7.89% at September 30, 2000.
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 June 30, 2001, we had outstanding commitments to extend credit which amounted to $3.1 million, including commitments on construction loans. 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 tangible capital ratio expressed as a percent of total adjusted assets, a leverage ratio of core capital to total adjusted assets, and a risk-based capital standard expressed as a percent of risk-adjusted assets. As of June 30, 2001, we exceeded all regulatory capital standards.
At June 30, 2001, First Federal's tangible capital was $13.7 million, or 8.81% of adjusted total assets, which is in excess of the 1.5% requirement by $11.4 million. In addition, at June 30, 2001, we had core capital of $13.7 million, or 8.81% of adjusted total assets, which exceeds the 3% requirement by $9.0 million. Risk-based capital was $14.5 million at June 30, 2001, or 19.00% of risk-adjusted assets, which exceeds the 8.0% risk-based capital requirement by $8.4 million.
Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Earlier adoption of the SFAS is permitted, and First Independence Corporation has elected to adopt the provisions of SFAS 142 as of October 1, 2001. Major provisions of these Statements and their effective dates for First Independence Corporation are as follows:
First Independence Corporation recognized negative goodwill with its acquisition of The Neodesha Savings and Loan Association, FSA during 1999. The negative goodwill will continue to be amortized under the current method until October 1, 2001, at which time the remaining balance will be recorded in earnings and recognized as the effect of a change in accounting principle. Subsequent to that date, annual and quarterly amortization of negative goodwill of $94,058 and $23,515 will no longer be recognized. At June 30, 2001, net unamortized negative goodwill of $705,437 is included in other liabilities.
On July 2, 2001, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. SAB 102 expresses the SEC's views on the development, documentation and application of a systematic methodology for determining the allowance for loan losses in accordance with accounting principles generally accepted in the United States of America. Due to the recent issuance of this SAB, management is not able to comment in the June 30, 2001 Form 10-Q regarding the effect of this SAB.
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 - None
(b) Reports on Form 8-K - None
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST INDEPENDENCE CORPORATION Registrant | |
Date: August 10, 2001 | /s/ Larry G. Spencer Larry G. Spencer President and Chief Executive Officer |
Date: August 10, 2001 | /s/ James B. Mitchell James B. Mitchell Vice President and Chief Financial Officer |