10QSB 1 fi331q.htm

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, 2002

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 of
incorporation or organization)		 (I.R.S. Employer
Identification No.)

Myrtle & Sixth Streets, Independence, Kansas 67301
(Address of principal executive offices)

(620) 331-1660
(issuer's telephone number)

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 9, 2002, there were 960,597 shares of the Registrant's common stock, par value $.01 per share, outstanding.

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FIRST INDEPENDENCE CORPORATION


INDEX


PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Condensed Financial Statements

Consolidated Condensed Balance Sheets as of
March 31, 2002 and September 30, 2001		 3

Consolidated Condensed Statements of Earnings
for the Three and Six Months Ended March 31,
2002 and 2001		 4

Consolidated Condensed Statements of Comprehensive
Income for the Three and Six Months Ended
March 31, 2002 and 2001		 5

Consolidated Condensed Statement of Stockholders'
Equity for the Year Ended September 30, 2001 and
Six Months Ended March 31, 2002		 6

Consolidated Condensed Statements of Cash
Flows for the Six Months Ended March 31,
2002 and 2001		 7

Notes to Consolidated Condensed Financial
Statements		 8

Item 2.


 Management's Discussion and Analysis of
Financial Condition and Results of
Operations		 11

PART II. OTHER INFORMATION 19

Signature Page 20



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PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS

March 31,
2002
 September 30,
2001
ASSETS
Cash and due from banks $    521,860  $    388,664 
Federal funds sold 10,300,000  700,000 
Other interest-bearing deposits 1,239,611 
 1,204,563 
  Cash and cash equivalents 12,061,471  2,293,227 
Investment securities held to maturity (fair value:
  March 31, 2002 - $4,162,240;
  September 30, 2001 - $4,238,780)		 4,197,862  4,194,513 
Investment securities available for sale ---  1,013,700 
Mortgage-backed securities held to maturity (fair value:
  March 31, 2002 - $6,224,956;
  September 30, 2001 - $7,307,557)		 6,170,448  7,280,822 
Loans receivable 125,654,637  132,838,231 
Premises and equipment 1,425,048  1,472,029 
Federal Home Loan Bank Stock, at cost 1,996,800  2,265,000 
Accrued interest receivable 837,236  944,606 
Real estate acquired through foreclosure 773,278  356,325 
Other  109,949 
 71,177 
  Total assets $ 153,226,729 
 $ 152,729,630 

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
  Deposits $109,248,368  $103,569,165 
  Advances from borrowers for taxes and insurance 837,084  890,795 
  Advances from Federal Home Loan Bank 28,000,000  33,000,000 
  Income taxes payable 3,393  17,465 
  Accrued expenses and other 313,589 
 1,077,121 
         Total liabilities 138,402,434  138,554,546 
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 8,157,129  8,179,514 
  Retained earnings - substantially restricted 14,098,636  12,968,146 
  Accumulated other comprehensive income, net of
     related taxes		 ---  8,207
  Treasury stock at cost, 690,009 shares at March 31, 2002
     and 672,651 shares at September 30, 2001		 (7,371,797) (6,910,955)
  Required contributions for shares acquired by ESOP (76,166)
 (86,321)
       Total stockholders' equity 14,824,295 
 14,175,084 
       Total liabilities and stockholders' equity $153,226,729 
 $152,729,630 

___________________
The accompanying notes are an integral part of these statements.




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PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

Three Months Ended
March 31,
 Six Months Ended
March 31,
2002
 2001
 2002
 2001
Interest income
  Loans $2,504,029  $2,662,269  $5,167,263  $5,313,337 
  Mortgage-backed securities 78,924  144,660  174,155  298,572 
  Investment securities 52,137  97,860  118,434  235,087 
  Interest-bearing deposits and other 55,530 
 64,927 
 97,672 
 125,897 
    Total interest income 2,690,620  2,969,716  5,557,524  5,972,893 
Interest expense
  Deposits 987,182  1,154,852  2,080,947  2,334,428 
  Borrowed funds 397,175 
 594,501 
 849,919 
 1,215,542 
    Total interest expense 1,384,357 
 1,749,353 
 2,930,866 
 3,549,970 
Net interest income 1,306,263  1,220,363  2,626,658  2,422,923 
Provision for loan losses 69,000 
 45,000 
 132,000 
 90,000 
Net interest income after provision
  for loan losses		 1,237,263  1,175,363  2,494,658  2,332,923 
Noninterest income
  Service charges 61,263  66,411  125,857  135,691 
  Other 23,886 
 55,657 
 45,134 
 99,730 
    Total noninterest income 85,149  122,068  170,991  235,421 
Noninterest expense
  Employee compensation and benefits 450,589  415,329  878,945  837,401 
  Occupancy and equipment 94,065  91,707 188,085  180,211
  Foreclosed assets, net 11,181  (1,057) 41,910  (14,889)
  Data processing fees 57,144  68,535  112,451  121,478 
  Other operating 207,116 
 204,796 
 386,079 
 379,865 
    Total noninterest expenses 820,095 
 779,310 
 1,607,470 
 1,504,066 
Earnings before income taxes and cumulative
 effect of change in accounting principle		 502,317  518,121  1,058,179  1,064,278 
Income tax expense 177,279 
 172,699 
 384,668 
 366,726 
Earnings before cumulative effect of change
 in accounting principle		 325,038  345,422  673,511  697,552 
Cumulative effect of change in accounting principle --- 
 --- 
 681,922 
 --- 
Net earnings $   325,038 
 $   345,422 
 $1,355,433 
 $   697,552 
Earnings per common share
  Basic
    Earnings before cumulative effect of
     change in accounting principle		 $           .34  $           .34  $           .71  $           .69 
    Cumulative effect of change in
     accounting principle		 $            --- 
 $            --- 
 $           .72 
 $            --- 
  Net earnings per share $           .34 
 $           .34 
 $         1.43 
 $           .69 
  Diluted
    Earnings before cumulative effect of
     change in accounting principle		 $           .33  $           .33  $           .69  $           .67 
    Cumulative effect of change in
     accounting principle		 $            --- 
 $            --- 
 $           .70 
 $            --- 
  Net earnings per share $           .33 
 $           .33 
 $         1.39 
 $           .67 
Dividends per share $       .1250 
 $       .1125 
 $       .2375 
 $       .2125 
Weighted average shares outstanding
  Basic 943,176 
 1,005,304 
 942,947 
 1,007,739 
  Diluted 972,002 
 1,045,709 
 971,773 
 1,048,145 

____________________
The accompanying notes are an integral part of these statements.




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PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME


Three Months Ended
March 31,
 Six Months Ended
March 31,
2002
 2001
 2002
 2001
Net earnings $ 325,038  $ 345,422  $1,355,433  $ 697,552 
Other comprehensive income
  Unrealized gains (losses) on securities
     available for sale arising during the
     period, net of income tax		 (3,394)
 6,322 
 (8,207)
 13,602 
Comprehensive income $ 321,644 
 $ 351,744 
 $1,347,226 
 $ 711,154 

__________________
The accompanying notes are an integral part of these statements.




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FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the Year Ended September 30, 2001
and Six Months Ended March 31, 2002


Common
 Stock
 Additional
 Paid-in
Capital
 Retained
 Earnings
 Accumulated
 Other
 Comprehensive
 Income (Loss)
 Treasury
 Stock
 Required
 Contribu-
 tions for
 Shares
 Acquired
 by ESOP
 Total
 Equity
Balance at October 1, 2000 $16,493 $8,190,682  $11,863,034  $(4,692)  $(6,194,540) $(106,632) $13,764,345 
Net earnings for the year --- ---  1,541,223  ---  ---  ---  1,541,223 
Cash dividends of $.4375 per share --- ---  (436,111) ---  ---  ---  (436,111)
Common stock options exercised --- (17,008) ---  ---  147,898  ---  130,890 
Appreciation of securities available for sale --- ---  ---  12,899 ---  ---  12,899
ESOP loan repayments --- ---  ---  ---  ---  20,311  20,311 
Fair value adjustment on ESOP
  shares committed for release		 --- 5,840  ---  ---  ---  ---  5,840 
Purchase of 66,687 shares of
  treasury stock		 --- ---  ---  ---  (864,313) ---  (864,313)
Balance at September 30, 2001 16,493 8,179,514  12,968,146  8,207  (6,910,955) (86,321) 14,175,084 
Net earnings --- ---  1,355,433  ---  ---  ---  1,355,433 
Cash dividends of $.2375 per share --- ---  (224,943) ---  ---  ---  (224,943)
Common stock options exercised --- (27,317) ---  ---  169,128  ---  141,811 
Depreciation of securities available for sale --- ---  ---  (8,207) ---  ---  (8,207)
ESOP loan repayments --- ---  ---  ---  ---  10,155  10,155 
Fair value adjustment on ESOP
  shares committed for release		 --- 4,932  ---  ---  ---  ---  4,932 
Purchase of 39,332 shares of
  treasury stock		 ---
 --- 
 --- 
 --- 
 (629,970)
 --- 
 (629,970)
Balance at March 31, 2002 $16,493
 $8,157,129 
 $14,098,636 
 $   --- 
 $(7,371,797)
 $ (76,166)
 $14,824,295 

______________________
The accompanying notes are an integral part of these statements.




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PART I: FINANCIAL INFORMATION
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Six Months Ended March 31,
2002
 2001
Cash flows from operating activities
  Net earnings $  1,355,433  $   697,552 
  Adjustments to reconcile net earnings to net cash
     provided by operating activities
       Provision for loan losses 132,000  90,000 
       Depreciation 76,511  70,396 
       Amortization of premiums and discounts on investments
         and mortgage-backed securities		 17,171  11,730 
       Amortization of deferred loan origination fees (123,601) (108,448)
       Amortization of expense related to employee
         benefit plans		 15,088  12,094 
       Negative goodwill (681,922) (47,029)
       Gain on sale of real estate acquired
         through foreclosure, net		 (35,392) (25,613)
       Increase (decrease) in cash due to changes in
         Accrued interest receivable 107,370  18,899 
         Other assets (39,317) 2,786 
         Accrued expenses and other liabilities (75,621) (18,088)
         Income taxes payable (14,072)
 (36,685)
           Net cash provided by operating activities 733,648  667,594 
Cash flows from investing activities
     Proceeds from maturities and repayment of securities
       Available for sale 1,000,000  1,000,000 
       Held to maturity 4,097,816  5,748,342 
     Purchase of securities
       Held to maturity (3,007,500) (3,000,000)
     Net (increase) decrease in loans receivable 6,579,674  (5,496,510)
     Purchase of Federal Home Loan Bank stock --- (310,000)
     Proceeds from redemption of Federal Home Loan Bank stock 268,200  --- 
     Capital expenditures (129,414) (134,456)
     Proceeds from sale of real estate acquired through
       foreclosure		 313,430 
 214,224 
          Net cash provided by (used in) investing activities 9,122,206  (1,978,400)
Cash flows from financing activities
     Net increase in deposits 5,679,203  2,399,178 
     Net increase (decrease) in advances from borrowers
       for taxes and insurance		 (53,711) 49,893 
     Advances from Federal Home Loan Bank 3,200,000  17,000,000 
     Repayment of Federal Home Loan Bank advances (8,200,000) (17,300,000)
     Cash dividends paid (224,943) (216,046)
     Purchase of treasury stock (629,970) (573,300)
     Stock options exercised 141,811 
 69,591 
       Net cash provided by (used in) financing activities (87,610)
 1,429,316 
Net increase in cash and cash equivalents 9,768,244  118,510 
Cash and cash equivalents at beginning of period 2,293,227 
 1,921,042 
Cash and cash equivalents at end of period $12,061,471 
 $2,039,552 

_________________
The accompanying notes are an integral part of these statements.




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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 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, 2002, and the results of operations and cash flows for all interim periods presented.

        Operating results for the three and six months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2002.

(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 March 31, 2002, 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, 2002, First Federal exceeded all current regulatory capital standards.



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Actual
 Minimum capital
requirement
 Minimum to be well
capitalized under
prompt corrective
action provisions
Amount
 Ratio
 Amount
 Ratio
 Amount
 Ratio
(Dollars in Thousands)

Total risk-based capital $15,292 17.79% $6,877 8.0% $8,596 10.0%
Tier 1 risk-based capital 14,531 16.90     N/A N/A     5,158 6.0    
Tier 1 (core) capital 14,531 9.48     6,129 4.0     7,661 5.0    
Tangible capital 14,531 9.48     2,298 1.5     N/A N/A    

(4)    Supplemental Disclosure of Cash Flow Information

Six months ended March 31,
2002
 2001
Cash paid for:
  Interest $2,982,040 $3,552,036
  Income taxes 415,166 400,578
Noncash investing and financing activities:
  Transfer from loans to real estate
   acquired through foreclosure		 851,073 212,942
  Issuance of loans receivable in
   connection with the sale of real
   estate acquired through foreclosure		 97,800 167,700
  Common stock received in payment of
   stock options exercised		 60,690 55,262

(5)    Change in accounting principle

        The Company elected to adopt Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141) and 142, Goodwill and Other Intangible Assets (SFAS 142) effective October 1, 2001. SFAS 141 requires that the amount of any unamortized deferred credit related to an excess of fair value of acquired net assets over cost (negative goodwill) arising from a business combination for which the acquisition date was before July 1, 2001, be written off and recognized as the effect of a change in accounting principle.

        The cumulative effect of this change in accounting for negative goodwill of $682,000 is determined as of October 1, 2001 and is reported separately in the consolidated statement of earnings for the six months ended March 31, 2002. There is no income tax effect as a result of this change. Prior years' financial statements have not been restated to apply the provisions of SFAS 141.

        The effect of adopting SFAS 141 on net earnings was to decrease net earnings $23,515 and basic earnings per share $.02 for the three months ended March 31, 2002 and increase net earnings $634,892 and basic earnings per share $.67 for the six months ended March 31, 2002.



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        Pro forma net earnings and earnings per share amounts, assuming the new accounting principle is applied retroactively, are as follows:

Three months
ended
March 31,
2001
 Six months
ended
March 31,
2001
Net earnings - as reported $345,422 $697,552
Net earnings - pro forma 321,907 650,522
Basic earnings per share - as reported $.34 $.69
Basic earnings per share - pro forma .32 .65
Diluted earnings per share - as reported .33 .67
Diluted earnings per share - pro forma .31 .62



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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.




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Financial Condition

        Total assets increased $500,000, or .33%, from $152.7 million at September 30, 2001 to $153.2 million at March 31, 2002. This increase consisted primarily of increases in cash and cash equivalents of $9.8 million and real estate acquired through foreclosure of $417,000 offset partially by decreases in loans receivable of $7.1 million, mortgage-backed securities of $1.1 million and investment securities of $1.0 million. The redeployment of funds received from the decreases in loans receivable, mortgage-backed securities and investment securities, along with an increase in savings deposits of $5.6 million, were used to fund principal repayments of $5.0 million on advances obtained from the Federal Home Loan Bank of Topeka and payments for borrowers' taxes and insurance of $54,000.

        Loans receivable decreased $7.1 million from $132.8 million at September 30, 2001, to $125.7 million at March 31, 2002, due to loan repayments (primarily due to refinancings), exceeding new loan originations. In accordance with the Company's asset/liability management strategy, we have chosen to limit the origination of 15- and 30-year fixed-rate loans by pricing our loan products above current market rates. Consequently, our loan portfolio has decreased during this period of declining interest rates as customers seek to lock in long-term lower fixed rates.

        Total deposits increased $5.6 million from $103.6 million at September 30, 2001, to $109.2 million at March 31, 2002. The increase was primarily the result of a $4.3 million increase in certificate of deposit accounts due to customers depositing funds into the "Millennium" twelve month certificate account. To a lesser extent, the increase was due to new account growth at the Coffeyville, Kansas branch office. The "Millennium" twelve month certificate provides customers with a fixed interest rate throughout the term of the certificate along with the option to make minimum additions of $1,000 or more during the certificate's term.

        Advances from the Federal Home Loan Bank decreased $5.0 million from $33.0 million at September 30, 2001 to $28.0 million at March 31, 2002. The decrease was primarily due to the repayment of scheduled principal payments using deposit funds obtained at an average rate less than the average rate currently being paid on advances. 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.




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        Total stockholders' equity increased $649,000 from $14.2 million at September 30, 2001 to $14.8 million at March 31, 2002. The increase was primarily due to net earnings of $1,355,000, common stock option exercises of $142,000, repayment of employee stock ownership debt of $10,000 and fair value adjustment of $5,000 on ESOP shares committed for release. These increases were partially offset by the use of $630,000 to repurchase 39,332 shares of common stock, dividends paid to stockholders totaling $225,000 and a decrease in the unrealized gains on securities available for sale of $8,000.

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, 2002, non-performing assets were approximately $2,630,000, which represents a decrease of $128,000, or 4.64% as compared to September 30, 2001. The ratio of non-performing assets to total assets at March 31, 2002 was 1.72% compared to 1.81% at September 30, 2001. A summary of non-performing assets by category is set forth in the following table:

March 31,
2002
 September 30,
2001
(Dollars In Thousands)

Non-Accruing Loans $1,761     $1,795    
Accruing Loans Delinquent 90 Days or More 96     607    
Trouble Debt Restructurings ---     ---    
Foreclosed Assets 773    
 356    
Total Non-Performing Assets $2,630    
 $2,758    
Total Non-Performing Assets as a
  Percentage of Total Assets		  
1.72%
  
1.81%

        Included in non-accruing loans at March 31, 2002, were 22 loans totaling $1,192,000 secured by one- to four-family real estate, 5 construction loans totaling $424,000 secured by one- to four-family real estate, 1 loan totaling $60,000 secured by land development and acquisition and 16 consumer loans totaling $85,000. All non-accruing loans at March 31, 2002, were located in our primary market area except for two loans totaling $49,000 secured by single family residences located in Wichita, Kansas and one loan totaling $308,000 secured by a single family residence located in Texas. All of the non-performing construction loans were originated at our loan production office in Lawrence, Kansas. In an effort to reduce non-performing loans in the future, since the second quarter of fiscal 2001, management has tightened its underwriting criteria for construction loans of manufactured homes. As a result, our non-performing construction loans of manufactured homes decreased $500,000, or 44.3%, from $1.2 million at March 31, 2001 to $700,000 at March 31, 2002. At March 31, 2002, accruing loans delinquent 90 days or more consisted of 1 construction loan totaling $96,000 secured by a single family residence located in our primary market area. At March 31, 2002, foreclosed assets consisted of 17 single family residences located in our primary market area totaling $763,000 and 1 automobile totaling $10,000. The foreclosed assets have a carrying value of $773,000 and are currently offered for sale.




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        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 $761,000 at March 31, 2002, which represented a $38,000 increase from the allowance for loan losses at September 30, 2001. The ratio of the allowance for loan losses as a percent of total loans increased from .54% at September 30, 2001 to ..60% at March 31, 2002. The allowance for loan losses as a percent of non-performing loans increased from 30.09% at September 30, 2001 to 41.00% at March 31, 2002, primarily due to the increase in the allowance for loan losses at March 31, 2002.

        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 Six Months Ended March 31, 2002 and March 31, 2001

        General. Net earnings for the three months ended March 31, 2002 were $325,000 as compared to $345,000 for the three months ended March 31, 2001, a decrease of $20,000, or 5.9%. The decrease in net earnings was primarily due to increases in non-interest expense of $41,000, the provision for loan losses of $24,000 and income tax expense of $4,000, and a decrease in non-interest income of $37,000. These decreases to net earnings were partially offset by an increase in net interest income of $86,000.

        Net earnings for the six months ended March 31, 2002 were $1,355,000 as compared to $698,000 for the six months ended March 31, 2001, an increase of $657,000, or 94.1%. The increase in net earnings was primarily due to the recognition of a $682,000 gain resulting from the cumulative effect of a change in accounting principle and, to a lesser extent, an increase in net interest income of $204,000. These increases were partially offset by increases in non-interest expense of $103,000, the provision for loan losses of $42,000 and income tax expense of $18,000, and a decrease in non-interest income of $64,000. Excluding the cumulative effect of a change in accounting principle, net earnings for the six months ended March 31, 2002, would have been $674,000 or a decrease of $24,000 from the six months ended March 31, 2001.




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        Net Interest Income. Net interest income increased $86,000, or 7.0%, for the three months ended March 31, 2002 as compared to the three months ended March 31, 2001. This increase was due primarily to a decrease in interest expense of $365,000, or 20.9%, offset partially by a decrease in interest income of $279,000, or 9.4%. Interest expense decreased primarily due to a 115 basis point decrease in the average rate paid on interest-bearing liabilities offset partially by a $2.1 million increase in the average balance of interest-bearing liabilities. Interest income decreased primarily due to an 83 basis point decrease in the average yield on interest-earning assets offset partially by a $1.5 million increase in the average balance of interest-earning assets.

        Net interest income increased $204,000, or 8.4%, for the six months ended March 31, 2002 as compared to the six months ended March 31, 2001. This increase was due primarily to a decrease in interest expense of $619,000, or 17.4%, offset partially by a decrease in interest income of $415,000, or 6.9%. Interest expense decreased primarily due to a 98 basis point decrease in the average rate paid on interest-bearing liabilities offset partially by a $1.7 million increase in the average balance of interest-bearing liabilities. Interest income decreased primarily due to a 62 basis point decrease in the average yield on interest-earning assets offset partially by a $1.2 million increase in the average balance of interest-earning assets. The ratio of average interest-earning assets to average interest-bearing liabilities decreased from 109.61% for the six months ended March 31, 2001 to 109.11% for the six months ended March 31, 2002.

        Interest Income. Interest income for the quarter ended March 31, 2002, decreased to $2.7 million from $3.0 million for the quarter ended March 31, 2001. This decrease resulted primarily from a decrease in the average yield on interest-earning assets. The average yield on interest-earning assets decreased by 83 basis points to 7.23% during the second quarter of fiscal 2002, from 8.06% during the second quarter of fiscal 2001. This decrease was caused primarily by the general decline in interest rates resulting in a reduction in yield on the Company's loan portfolio from 8.20% to 7.88%, mortgage-backed securities from 7.01% to 4.95%, investment securities from 6.95% to 4.60% and Federal Home Loan Bank stock from 7.38% to 5.07%. The decrease in the average yields was partially offset by a $1.5 million increase in the average outstanding balance of interest-earning assets during the three months ended March 31, 2002 as compared to the three months ended March 31, 2001.

        Interest income for the six months ended March 31, 2002, decreased to $5.6 million from $6.0 million for the six months ended March 31, 2001. This decrease resulted primarily from a decrease in the average yield on interest-earning assets. The average yield on interest-earning assets decreased by 62 basis points to 7.48% during the first half of fiscal 2002, from 8.10% during the first half of fiscal 2001. This decrease was caused primarily by the general decline in interest rates resulting in a reduction in yield on the Company's loan portfolio from 8.28% to 7.98%, mortgage-backed securities from 7.12% to 5.23%, investment securities from 6.72% to 4.86% and Federal Home Loan Bank stock from 8.01% to 5.32%. The decrease in the average yields was partially offset by a $1.2 million increase in the average outstanding balance of interest-earning assets during the six months ended March 31, 2002 as compared to the six months ended March 31, 2001.




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        Interest Expense. Interest expense for the quarter ended March 31,2002, decreased by $365,000 to $1.4 million as compared to $1.8 million for the quarter ended March 31, 2001. This decrease was primarily the result of a 115 basis point decrease in the average interest rates paid on interest-bearing liabilities, caused by a decrease in interest rates on savings deposits and Federal Home Loan Bank advances. The decrease in the average interest rates paid was partially offset by a $2.1 million increase in the average outstanding balance of interest-bearing liabilities during the three months ended March 31, 2002 as compared to the three months ended March 31, 2001. The increase in interest-bearing liabilities was primarily due to a $13.8 million increase in the average balance of savings deposits offset partially by an $11.7 million decrease in the average balance of advances outstanding from the Federal Home Loan Bank of Topeka.

        Interest expense for the six months ended March 31,2002, decreased by $619,000 to $2.9 million as compared to $3.5 million for the six months ended March 31, 2001. This decrease was primarily the result of a 98 basis point decrease in the average interest rates paid on interest-bearing liabilities, caused by a decrease in interest rates on savings deposits and Federal Home Loan Bank advances. The decrease in the average interest rates paid was partially offset by a $1.7 million increase in the average outstanding balance of interest-bearing liabilities during the six months ended March 31, 2002 as compared to the six months ended March 31, 2001. The increase in interest-bearing liabilities was primarily due to a $12.3 million increase in the average balance of savings deposits offset partially by a $10.6 million decrease in the average balance of advances outstanding 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 $69,000 and $132,000 for the three and six months ended March 31, 2002 as compared to $45,000 and $90,000 for the same periods in 2001. This increase in provision for loan losses was in recognition of the $1.5 million increase in balance of construction loans in our loan portfolio and the level of non-performing assets on our balance sheet. Non-performing assets increased $300,000, or 13.1%, from $2.3 million at March 31, 2001 to $2.6 million at March 31, 2002. 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, 2002. 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 decreased $37,000 to $85,000 during the three months ended March 31, 2002 as compared to $122,000 for the three months ended March 31, 2001. The decrease was primarily due to a $24,000 reduction in negative goodwill amortization during the period ended March 31, 2002 as compared to the period ended March 31, 2001. The reduction in negative goodwill amortization was a result of the adoption of Statement of Financial Accounting Standards 141 and 142 as of October 1, 2001.




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        Noninterest income decreased $64,000 to $171,000 during the six months ended March 31, 2002 as compared to $235,000 for the six months ended March 31, 2001. The decrease was primarily due to the same reason as stated above. Recurring non-interest income generally consists of late charges and other fees associated with mortgage loans and checking and deposit account fees.

        Noninterest Expense. Total noninterest expense increased to $820,000 for the three months ended March 31, 2002 from $779,000 for the three months ended March 31, 2001, an increase of $41,000, or 5.3%. The increase was due primarily to increases in employee compensation and benefits of $36,000, foreclosed assets expense of $12,000, occupancy and equipment of $2,000 and other operating expense of $2,000. These increases were partially offset by a decrease in data processing fees of $12,000. The increase in foreclosed assets expense was a result of an increase in the number of foreclosed assets, which contributed to an increase in real estate owned repairs and maintenance, taxes and insurance.

        Total noninterest expense increased to $1.6 million for the six months ended March 31, 2002 from $1.5 million for the six months ended March 31, 2001, an increase of $103,000, or 6.8%. The increase was primarily due to increases in foreclosed assets expense of $57,000, employee compensation and benefits of $42,000, occupancy and equipment of $8,000 and other operating expense of $6,000. These increases were partially offset by a decrease in data processing fees of $9,000. The increase in foreclosed assets expense was due to the same reason as stated above while 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 $177,000 for the quarter ended March 31, 2002 compared to $173,000 for the quarter ended March 31, 2001, an increase of $4,000. The increase was primarily due to an increase in the effective tax rate during the 2002 period as compared to the 2001 period. Our effective tax rates were 35.3% and 33.3% for the three months ended March 31, 2002 and March 31, 2001, respectively, based on earnings before the cumulative effect of the change in accounting for negative goodwill. There is no income tax effect as a result of this change. However, rates were lower for the March 31, 2001 period due primarily to negative goodwill amortization which is not included in income for income tax calculation purposes, resulting in a lower effective tax rate.




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        Income tax expense was $385,000 for the six months ended March 31, 2002 compared to $367,000 for the six months ended March 31, 2001, an increase of $18,000. Our effective tax rates were 36.4% and 34.5% for the six months ended March 31, 2002 and March 31, 2001, respectively. Rates were lower during the March 31, 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 March 31, 2002, First Federal's liquidity ratio was 6.84% as compared to 1.96% at September 30, 2001.

        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, 2002, we had outstanding commitments to extend credit which amounted to $1.3 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 March 31, 2002, we exceeded all regulatory capital standards.

        At March 31, 2002, First Federal's tangible capital was $14.5 million, or 9.48% of adjusted total assets, which is in excess of the 1.5% requirement by $12.2 million. In addition, at March 31, 2002, we had core capital of $14.5 million, or 9.48% of adjusted total assets, which exceeds the 4% requirement by $8.4 million. Risk-based capital was $15.3 million at March 31, 2002, or 17.79% of risk-adjusted assets, which exceeds the 8.0% risk-based capital requirement by $8.4 million.




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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




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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 13, 2002
 /s/ Larry G. Spencer
Larry G. Spencer
President and Chief Executive
Officer
Date: May 13, 2002
 /s/ James B. Mitchell
James B. Mitchell
Vice President and Chief Financial
Officer



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