-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GIGwEaotws+nrqYF252IQgXE0AvXHnE7hv9j5DBaI4hhAi64ATJmCGQaITsxtWRm sKahQhGjLyrJGDkvQj4Ogw== 0000927089-99-000066.txt : 19990217 0000927089-99-000066.hdr.sgml : 19990217 ACCESSION NUMBER: 0000927089-99-000066 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST INDEPENDENCE CORP /DE/ CENTRAL INDEX KEY: 0000908486 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 363899950 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-22184 FILM NUMBER: 99538531 BUSINESS ADDRESS: STREET 1: MYRTLE & 6TH STS CITY: INDEPENDENCE STATE: KS ZIP: 67301 BUSINESS PHONE: 3163311660 MAIL ADDRESS: STREET 2: P O DRAWER 947 CITY: INDEPENDENCE STATE: KS ZIP: 67301 10QSB 1 10QSB 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 December 31, 1998 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 February 12, 1999, there were 1,117,715 shares of the Registrant's common stock outstanding. FIRST INDEPENDENCE CORPORATION INDEX PART I. FINANCIAL INFORMATION (unaudited) PAGE NO. Item 1. Consolidated Condensed Financial Statements Consolidated Condensed Balance Sheets as of December 31, 1998 and September 30, 1998 3 Consolidated Condensed Statements of Earnings for the Three Months Ended December 31, 1998 and 1997 4 Consolidated Condensed Statements of Comprehensive Income for the Three Months Ended December 31, 1998 and 1997 5 Consolidated Condensed Statement of Stockholders' Equity for the Year Ended September 30, 1998 and Three Months Ended December 31, 1998 6 Consolidated Condensed Statements of Cash Flows for the Three Months Ended December 31, 1998 and 1997 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 December 31, September 30, 1998 1998 ------------------ ----------------- (Unaudited) ASSETS Cash and due from banks $ 1,220,896 $ 474,406 Federal funds sold 5,000,000 --- Other interest-earning deposits 582,502 439,174 ------------- ------------- Cash and cash equivalents 6,803,398 913,580 Investment securities held to maturity (fair value: September 30, 1998 - $5,004,700) --- 5,000,000 Investment securities available for sale 3,401,590 3,418,311 Mortgage-backed securities held to maturity (fair value: December 31, 1998 - $15,104,513; September 30, 1998 - $17,403,143) 15,084,442 17,274,238 Loans receivable, net 97,161,631 93,684,258 Real estate acquired through foreclosure 77,973 71,596 Premises and equipment, net 1,315,246 1,309,633 Federal Home Loan Bank Stock, at cost 1,749,500 1,574,000 Accrued interest receivable 717,512 753,970 Other assets 383,881 337,008 ------------- ------------- Total assets $ 126,695,173 $ 124,336,594 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $ 81,907,067 $ 80,573,077 Advances from borrowers for taxes and insurance 404,627 745,520 Advances from Federal Home Loan Bank 30,400,000 30,100,000 Income taxes payable 254,768 128,473 Other accrued expenses and liabilities 1,403,139 690,483 ------------- ------------- Total liabilities 114,369,601 112,237,553 Stockholders' equity Preferred stock, $.01 par value, 500,000 shares authorized, none issued --- --- Common stock, $.01 par value, 2,500,000 shares authorized, 1,498,392 shares issued 14,984 14,984 Additional paid-in capital 7,257,736 7,239,207 Retained earnings - substantially restricted 10,254,988 10,077,091 Unrealized gain on securities available for sale, net 36,150 52,497 Treasury stock at cost, 534,573 shares at December 31, 1998 and 539,073 shares at September 30, 1998 (5,110,995) (5,139,263) Required contributions for shares acquired by ESOP (127,291) (145,475) ------------- ------------- Total stockholders' equity 12,325,572 12,099,041 ------------- ------------- Total liabilities and stockholders' equity $ 126,695,173 $124,336,594 ============= =============
- --------------------------------- 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 December 31, ------------------------------- 1998 1997 -------------- -------------- Interest income (Unaudited) Loans receivable $1,940,637 $1,618,651 Mortgage-backed securities 251,989 376,628 Investment securities 119,805 100,673 Other 53,472 49,321 --------- ---------- Total interest income 2,365,903 2,145,273 --------- ---------- Interest expense Deposits 1,011,737 956,688 Borrowed funds 426,086 364,831 --------- ----------- Total interest expense 1,437,823 1,321,519 --------- ----------- Net interest income 928,080 823,754 Provision for loan losses 15,000 --- --------- ---------- Net interest income after provision for loan losses 913,080 823,754 Noninterest income Income (loss) from real estate operations (4,885) 698 Other 44,331 42,790 -------- ---------- Total noninterest income 39,446 43,488 -------- ---------- Noninterest expense Employee compensation and benefits 294,013 313,223 Occupancy and equipment 3,580 56,702 Federal deposit insurance premiums 11,839 11,797 Data processing fees 60,918 41,606 Other 116,769 127,016 -------- ---------- Total noninterest expenses 547,119 550,344 -------- ---------- Earnings before income taxes 405,407 316,898 Income tax expense 157,743 137,108 -------- ---------- Net earnings $ 247,664 $ 179,790 ========= ========== Earnings per common share Basic $ .27 $ .19 ====== ====== Diluted $ .25 $ .18 ====== ====== Dividend per share $ .0750 $ .0625 ======= =======
- --------------------------------- 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 December 31, ----------------------------- 1998 1997 ------------ -------------- (Unaudited) Net Earnings $ 247,664 $ 179,790 Other Comprehensive Income Unrealized gains (losses) on securities available for sale arising during the period, net of tax (16,347) 9,606 --------- -------- Comprehensive income $ 231,317 $ 189,396 ========= =========
FIRST INDEPENDENCE CORPORATION CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY For The Three Months Ended December 31, 1998 and Year Ended September 30, 1998 (Unaudited) Required Unrealized Contribu- Gain (Loss) tion for Unearned Additional on Securities Shares Stock Common Paid-in Retained Available for Treasury Acquired Compen- Total Stock Capital Earnings Sale, Net Stock by ESOP sation-RRP Equity Balance at October 1, 1997 $14,984 $7,122,744 $9,441,054 $15,112 $(4,802,767) $(218,212) $(43,634) $11,529,281 Net earnings --- --- 901,420 --- --- --- --- 901,420 Cash dividends of $.2875 per --- --- (265,383) --- --- --- --- (265,383) share Common stock options exercised --- (8,641) --- --- 40,061 --- --- 31,420 Appreciation of securities available for sale --- --- --- 37,385 --- --- --- 37,385 ESOP loan repayments --- --- --- --- --- 72,737 --- 72,737 Fair value adjustment on ESOP shares committed for release --- 125,104 --- --- --- --- --- 125,104 Amortization of unearned stock compensation --- --- --- --- --- --- 43,634 43,634 Purchase of 25,298 shares of treasury stock --- --- --- --- (376,557) --- --- (376,557) --------- --------- ------- -------- ---------- ------- -------- Balance at September 30, 1998 14,984 7,239,207 10,077,091 52,497 (5,139,263) (145,475) --- 12,099,041 Net earnings --- --- 247,664 --- --- --- --- 247,664 Cash dividends of $.075 per --- --- (69,767) --- --- --- --- (69,767) share Common stock options exercised --- (424) --- --- 28,268 --- --- 27,844 Decrease in unrealized gain on securities available for sale --- --- --- (16,347) --- --- --- (16,347) ESOP loan repayments --- --- --- --- --- 18,184 --- 18,184 Fair value adjustment on ESOP shares committed for release --- 18,953 --- --- --- 18,953 ----- -------- -------- ----- --------- --------- -------- -------- Balance at December 31, 1998 $14,984 $7,257,736 $10,254,988 $36,150$(5,110,995)$(127,291) --- $12,325,572 ======= ========== =========== ======= ========= ========= ======== =========== - --------------------------------- The accompanying notes are an integral part of these statements.
PART I: FINANCIAL INFORMATION FIRST INDEPENDENCE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS Three Months Ended December 31, ----------------------------------------- 1998 1997 --------------- --------------- Cash flows from operating activities (Unaudited) Net Earnings 247,664 179,790 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation 28,235 26,876 Amortization of premiums and discounts on investments and mortgage-backed securities 14,496 19,360 Amortization of deferred loan origination fees (59,690) (14,886) Amortization of expense related to employee benefit plans 37,138 62,946 Provision for losses on loans 15,000 --- Net gain on sale of real estate acquired through foreclosure --- (916) Increase (decrease) in cash due to changes in Accrued interest receivable 36,458 (33,795) Other assets (62,270) 26,454 Accrued expenses and other liabilities 711,465 1,008,162 Income taxes payable 152,901 127,878 ----------- ----------- Net cash provided by operating activities 1,121,397 1,401,869 Cash flows from investing activities Proceeds from maturities and repayment of securities Available for sale --- 203,642 Held to maturity 7,170,573 4,383,085 Purchase of securities Available for sale (180,419) (33,044) Net increase in loans (3,445,259) (6,876,980) Capital expenditures (33,848) (62,761) Proceeds from sale of real estate acquired through foreclosure 6,200 853 ----------- ----------- Net cash provided by (used in) investing activities 3,517,247 (2,385,205) Cash flows from financing activities Net increase (decrease) in deposits 1,333,990 (109,806) Net decrease in advances from borrowers for taxes and insurance (340,893) (292,371) Advances from Federal Home Loan Bank 6,700,000 5,500,000 Repayment of Federal Home Loan Bank advances (6,400,000) (4,900,000) Cash dividends paid (69,767) (58,418) Purchase of treasury stock --- (364,437) Stock options exercised 27,844 800 ----------- ----------- Net cash provided by (used in) financing activities 1,251,174 (224,232) ----------- ------------ Net increase (decrease) in cash and cash equivalents 5,889,818 (1,207,568) Cash and cash equivalents at beginning of period 913,580 3,151,227 ----------- ----------- Cash and cash equivalents at end of period $ 6,803,398 $ 1,943,659 =========== =========== - --------------------------------- The accompanying notes are an integral part of these statements.
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 December 31, 1998, and the results of operations and cash flows for all interim periods presented. Operating results for the three months ended December 31, 1998 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 1999. (2) Earnings Per Share of Common Stock Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of common shares and common share equivalents outstanding. Stock options are considered common share equivalents. Common shares outstanding exclude unallocated and uncommitted shares held by the ESOP trust. (3) Merger Conversion with Neodesha Savings and Loan Association On January 6, 1999 the Board of Directors of First Independence Corporation, parent of First Federal Savings and Loan Association of Independence ("First Federal"), and The Neodesha Savings and Loan Association, FSA ("Neodesha"), announced the completion of Neodesha's conversion from a federally-chartered mutual savings and loan association to a federally-chartered stock savings and loan association and its simultaneous merger with First Independence's subsidiary, First Federal Savings and Loan Association of Independence. Total assets of Neodesha approximated $14.0 million at December 31, 1998. In connection with the Merger Conversion, First Independence sold 150,896 shares of its Common Stock at the discounted price of $9.42 per share. The transaction will be accounted for under the purchase method of accounting for business combinations. (4) Regulatory Capital Requirements Pursuant to the Financial Institution Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), as implemented by rules promulgated by the Office of Thrift Supervision, savings institutions must meet the following separate minimum capital-to-asset requirements. The table below summarizes, as of December 31, 1998, the capital requirements applicable to First Federal Savings and Loan Association of Independence ("the Association") 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 December 31, 1998, the Association exceeded all current regulatory capital standards.
To be well capitalized under For capital prompt corrective Actual adequacy purposes action provisions ------------------------ ------------------------- ------------------------- Amount Ratio Amount Ratio Amount Ratio ------------ -------- ------------ --------- ------------ --------- (Dollars in Thousands) Total risk-based capital $11,423 19.16% $4,769 >8.0% $5,962 >10.0% - - Tier 1 risk-based capital 10,753 18.04 2,385 >4.0 3,577 > 6.0 - - Tier 1 (core) capital 10,753 8.58 3,761 >3.0 6,268 > 5.0 - - Tangible capital 10,753 8.58 1,880 >1.5 --- --- -
(5) Supplemental Disclosure of Cash Flow Information
Three months ended December 31, 1998 1997 Cash paid for: Interest $1,436,941 $1,347,815 Income taxes 4,842 9,230 Noncash investing and financing activities: Transfer from loans to real estate acquired through foreclosure 38,405 56,574 Issuance of loans receivable in connection with the sale of real estate acquired through foreclosure 24,800 ---
PART II FIRST INDEPENDENCE CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations General The accompanying Consolidated Financial Statements include the accounts of First Independence Corporation (the "Company") and its wholly-owned subsidiary, First Federal Savings and Loan Association of Independence (the "Association"). All significant inter-company transactions and balances are eliminated in consolidation. The Company's results of operations are primarily dependent on the Association's net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Company's net earnings are also affected by the level of its non-interest expenses, such as employee compensation and benefits, occupancy expenses, and other expenses. Forward-Looking Statements When used in this Form 10-QSB and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake--and specifically disclaims any obligation--to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Financial Condition The Company's total assets increased $2.4 million, or 1.90%, from $124.3 million at September 30, 1998 to $126.7 million at December 31, 1998. This increase was primarily due to increases in cash and cash equivalents of $5.9 million, net loans receivable of $3.5 million and Federal Home Loan Bank Stock of $200,000. These increases in assets, along with a reduction in advanced payments by borrowers' for taxes and insurance of $300,000, were funded by increases in savings deposits of $1.3 million, other accrued expenses and liabilities of $700,000, advances from the Federal Home Loan Bank of Topeka of $300,000, and the redeployment of funds received from decreases in investment securities of $5.0 million and mortgage-backed securities of $2.2 million. Loans receivable increased $3.5 million from $93.7 million at September 30, 1998, to $97.2 million at December 31, 1998. The increase was primarily due to construction loan originations at the Company's loan production office in Lawrence, Kansas. These construction loans generally have terms of nine months or less and interest rates tied to the prime rate plus a margin. To a lesser extent, the increase was due to originations in the Company's market area consisting primarily of 15- and 30-year fixed-rate loans, mortgage loans with a fixed rate for the first three years of the loan term that automatically convert to one-year adjustable rate loans during the fourth year of the loan term, and, to a lesser extent, one-year adjustable rate mortgages. Total deposits increased $1.3 million from $80.6 million at September 30, 1998, to $81.9 million at December 31, 1998. Deposits increased primarily as a result of public units depositing short-term funds into the "Platinum" money fund account and new accounts 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 money market accounts. Total borrowed funds increased $300,000 from $30.1 million at September 30, 1998 to $30.4 million at December 31, 1998. The increase was from advances obtained from the Federal Home Loan Bank of Topeka. The FHLB advances allowed the Association to invest the funds borrowed in loans receivable at a positive spread. Total stockholders' equity increased $227,000 from $12.1 million at September 30, 1998 to $12.3 million at December 31, 1998. The increase was primarily due to the Company's net earnings from operations of $248,000, common stock options exercised of $28,000, fair value adjustment of $19,000 on ESOP shares committed for release, and the repayment of employee stock ownership debt of $18,000. These increases were partially offset by dividends of $70,000 paid to stockholders and a decrease in the unrealized gains on securities available for sale of $16,000. Non-performing Assets
The ratio of non-performing assets to total assets is one indicator of the Company's exposure to credit risk. Non-performing assets of the Company consist of non-accruing loans, accruing loans delinquent 90 days or more, troubled debt restructurings, and foreclosed assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. At December 31, 1998, non-performing assets were approximately $1,525,000, which represents an increase of $200,000, or 15.1%, as compared to September 30, 1998. The ratio of non-performing assets to total assets at December 31, 1998 was 1.20% compared to 1.07% at September 30, 1998. A summary of non-performing assets by category is set forth in the following table: December 31, September 30, 1998 1998 ------------------ ----------------- (Dollars In Thousands) Non-Accruing Loans $1,292 $335 Accruing Loans Delinquent 90 Days or More 155 918 Foreclosed Assets 78 72 ------ ------ Total Non-Performing Assets $1,525 $1,325 ====== ====== Total Non-Performing Assets as a Percentage of Total Assets 1.20% 1.07% ==== ====
Included in non-accruing loans at December 31, 1998, were twenty loans totaling $1,104,000 secured by one- to four-family real estate, two loans totaling $143,000 secured by non-residential real estate and five consumer loans totaling $45,000. All non-accruing loans at December 31, 1998, were located in the Company's primary market area. At December 31, 1998, accruing loans delinquent 90 days or more included three loans totaling $155,000 secured by one- to four-family real estate. At December 31, 1998, all of the Company's accruing loans delinquent 90 days or more were secured by real estate located in the Company's primary market area. At December 31, 1998, the Company's real estate acquired through foreclosure consisted of three single family residences located in the Company's primary market area. The properties have a carrying value of $78,000 and are currently offered for sale. Management has taken into account its non-performing assets and the composition of the loan portfolio in establishing its allowance for loan losses. The allowance for loan losses totaled $670,000 at December 31, 1998, which represented a $14,000 increase from the allowance for loan losses at September 30, 1998. The ratio of the allowance for loan losses as a percent of total loans decreased from .70% at September 30, 1998 to .69% at December 31, 1998, primarily due to the increase in total loans receivable at December 31, 1998. The allowance for loan losses as a percent of non-performing loans decreased from 52.3% at September 30, 1998 to 46.3% at December 31, 1998, due to the increase in non-performing loans at December 31, 1998. At December 31, 1998, the Company's non-performing loans were comprised primarily of one- to four-family residential loans. The allowance for loan losses is determined based upon an evaluation of pertinent factors underlying the types and qualities of the Company's loans. Management considers such factors as the repayment status of a loan, the estimated net realizable value of the underlying collateral, the borrower's ability to repay the loan, current and anticipated economic conditions which might affect the borrower's ability to repay the loan and the Company's past statistical history concerning charge-offs. Results of Operations - Comparison of Three Months Ended December 31, 1998 and December 31, 1997 General. Net earnings for the three months ended December 31, 1998 were $248,000 as compared to $180,000 for the three months ended December 31, 1997, resulting in an increase of $68,000, or 37.8%. The increase in net earnings was primarily due to an increase of $104,000 in net interest income. This increase was partially offset by a $21,000 increase in income tax expense and a $15,000 increase in provision for loan losses. Net Interest Income. Net interest income increased $105,000, or 12.7%, for the three months ended December 31, 1998 as compared to the three months ended December 31, 1997. This increase was due primarily to an increase in interest income of $221,000, or 10.3%, offset partially by an increase in interest expense of $116,000, or 8.8%. Interest income increased primarily due to a $13.4 million increase in average interest-earning assets, partially offset by a 13 basis point decrease in yield on interest-earning assets. Interest expense increased primarily due to a $13.6 million increase in average interest-bearing liabilities, partially offset by a 22 basis point decrease in the average rate paid on interest-bearing liabilities. Interest Income. Interest income for the quarter ended December 31, 1998, increased to $2.4 million from $2.1 million for the quarter ended December 31, 1997. This increase resulted primarily from a $13.4 million increase in the average outstanding balance of interest-earning assets (due to the increase in the average balance of loans receivable and investment securities financed with borrowings from the Federal Home Loan Bank of Topeka, a decrease in mortgage-backed securities and increased savings deposits) during the three months ended December 31, 1998, as compared to the three months ended December 31, 1997. These increases were partially offset by a decrease in the average yield on interest-earning assets. The average yield on interest-earning assets decreased by 13 basis points to 7.65% during the first quarter of fiscal 1999, from 7.78% during the first quarter of fiscal 1998. This decrease was caused primarily by a decrease in yield on the Company's loans receivable from 8.20% to 8.07% due to new loans being originated at lower, current rates than those adjusting in the loan portfolio. Interest Expense. Interest expense for the quarter ended December 31, 1998, increased by $116,000 to $1.4 million as compared to $1.3 million for the quarter ended December 31, 1997. This increase was primarily the result of a $13.6 million increase in the average outstanding balance of interest-bearing liabilities during the three months ended December 31, 1998 as compared to the three months ended December 31, 1997. This increase was partially offset by a 22 basis point decrease in the average interest rate paid on interest-bearing liabilities, caused by a decrease in interest rates on Federal Home Loan Bank advances and demand and NOW deposits. The increase in interest-bearing liabilities was primarily due to a $7.7 million increase in the average outstanding amount of advances obtained from the Federal Home Loan Bank of Topeka and a $5.8 million increase in the average outstanding amount of deposits. The advances were used by the Company to invest in loans receivable at a positive spread over the term of the 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 management believes is adequate to absorb potential losses in the loan portfolio. The provision for loan losses amounted to $15,000 for the three months ended December 31, 1998 as compared to no provision for the same period in 1997. Although management believes that it uses the best information available in providing for possible loan losses and believes that the allowance is adequate at December 31, 1998, future adjustments to the allowance could be necessary and net earnings could be affected if circumstances and/or economic conditions differ substantially from the assumptions used in making the initial determinations. Non-interest Income. Non-interest income decreased $4,000 to $39,000 during the three months ended December 31, 1998 as compared to $43,000 for the three months ended December 31, 1997. The decrease was primarily due to a decrease of $6,000 in income from real estate operations for the three months ended December 31, 1998 as compared to the three months ended December 31, 1997. Recurring non-interest income generally consists of servicing fees as well as deposit and other types of fees. Non-interest income levels are anticipated to remain stable in the future due to the small number of checking accounts held by the Company. Non-interest Expense. Total non-interest expense decreased to $547,000 for the three months ended December 31, 1998 from $550,000 for the three months ended December 31, 1997, a decrease of $3,000, or 0.6%. The decrease was due primarily to decreases in compensation and employee benefits of $19,000 and other expenses of $10,000. These decreases were partially offset by increases in data processing fees of $19,000 and occupancy and equipment of $7,000. The decrease in compensation expense was primarily due to the decrease in the Company's stock price and its impact on the Company's ESOP expense. Data processing expenses increased due to increased account volumes at the Coffeyville branch and processing price increases. Income Tax Expense. Income tax expense was $158,000 for the quarter ended December 31, 1998 compared to $137,000 for the quarter ended December 31, 1997, an increase of $21,000. This increase was primarily due to an increase in pre-tax earnings during the 1998 period as compared to the 1997 period. The Company's effective tax rates were 38.9% and 43.3% for the three months ended December 31, 1998 and December 31, 1997, respectively. Rates exceed effective combined federal and state statutory rates of 38% due primarily to compensation expense associated with the ESOP, of which a portion is not deductible for income tax purposes. The amount of compensation expense associated with the ESOP was greater during the 1997 period than the 1998 period, accounting for the higher effective tax rate during the 1997 period. Liquidity and Capital Resources. The Company's primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, Federal Home Loan Bank of Topeka advances and funds provided by operations. While scheduled loan and mortgage-backed security repayments and maturity of short-term investments are a relatively predictable source of funds, deposit flows are greatly influenced by general interest rates, economic conditions and competition. Current Office of Thrift Supervision ("OTS") regulations require the Association to maintain cash and eligible investments in an amount equal to at least 4% of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. Such requirements may be changed from time to time by the OTS to reflect changing economic conditions. Such investments are intended to provide a source of relatively liquid funds upon which the Association may rely if necessary to fund deposit withdrawals and other short-term funding needs. As of December 31, 1998, the Association's liquidity ratio was 6.83% as compared to 7.01% at September 30, 1998. These ratios exceeded the minimum regulatory liquidity requirements on both dates. The Company uses its capital resources principally to meet its ongoing commitments, to fund maturing certificates of deposit and deposit withdrawals, to invest, to fund existing and future loan commitments, to maintain liquidity, and to meet operating expenses. At December 31, 1998, the Company had commitments to originate loans totaling $1,066,000. The Company considers its liquidity and capital resources to be adequate to meet its foreseeable short- and long-term needs. The Company expects to be able to fund or refinance, on a timely basis, its material commitments and long-term liabilities. Regulatory standards impose the following capital requirements on the Association: a risk-based capital standard expressed as a percent of risk-adjusted assets, a leverage ratio of core capital to total adjusted assets, and a tangible capital ratio expressed as a percent of total adjusted assets. As of December 31, 1998, the Association exceeded all fully phased-in regulatory capital standards. At December 31, 1998, the Association's tangible capital was $10.8 million, or 8.58% of adjusted total assets, which is in excess of the 1.5% requirement by $8.9 million. In addition, at December 31, 1998, the Association had core capital of $10.8 million, or 8.58% of adjusted total assets, which exceeds the 3% requirement by $7.0 million. The Association had risk-based capital of $11.4 million at December 31, 1998, or 19.16% of risk-adjusted assets, which exceeds the 8.0% risk-based capital requirements by $6.7 million. Under the requirements of federal law, all the federal banking agencies, including the OTS, must revise their risk-based capital requirements to ensure that such requirements account for interest rate risk, concentration of credit risk and the risks of non-traditional activities, and that they reflect the actual performance of and expected loss on multi-family loans. The OTS has adopted a final rule that generally requires a savings association with more than normal interest rate risk to deduct from its total capital, for purposes of determining compliance with such requirement, an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The rule provides for a two-quarter lag between calculating interest rate risk and recognizing any deductions from capital. The OTS has announced that it will delay the effectiveness of the rule until it adopts the process by which savings associations may appeal an interest rate risk deduction determination. The OTS has instructed all savings associations not to take any capital deductions for interest rate risk exposure until notified to do so by the OTS. In addition, any savings association with less than $300 million in assets and a total risk-based capital ratio in excess of 12%, such as the Association, is exempt from this requirement unless the OTS determines otherwise. Year 2000 Compliance Issues The year 2000 ("Y2K") issue confronting the Company and its suppliers, customers' suppliers and competitors centers on the inability of computer systems to recognize the year 2000. Many existing computer programs and systems originally were programmed with six digit dates that provided only two digits to identify the calendar year in the date field. With the impending new millennium, these programs and computers will recognize "00" as the year 1900 rather than the year 2000. The Board of Directors and management view the year 2000-date (Y2K) issue as a potentially serious interruption to the conduct of our day to day operations. To alleviate this potential interruption, the Company has established a year 2000 Committee to assess the risk of potential problems that might arise from the failures of computer programming to recognize the year 2000 and to develop a plan to mitigate any such risk. This committee reports to the Board at least quarterly about the status and progress of our Y2K plan. Our Y2K action plan covers five areas; awareness of the problem, inventory & assessment of hardware and software for Y2K problems, renovation of necessary systems, validation of testing plans and implementation of system changes. At the time of this report we have completed the first three steps of the plan and are working on the last two steps. We anticipate that we will be through the testing phase by the first quarter of 1999 and will have implementation completed by the middle of 1999. Our major Y2K system critical function lies with our third party data processing service bureau, Fi-Serv. Fi-Serv is working closely with their clients and they have advised us that they will be Y2K compliant before the middle of the 1999 deadline. The Company is expensing all costs associated with training and software as those costs are incurred, and such costs are being funded through operating cash flows. Hardware cost will be capitalized and expensed under our fixed asset guidelines. The total cost of the Y2K conversion project for the Company is estimated to be $110,000. Expenses of approximately $70,000 were incurred and expensed by the Company through December 31, 1998. The Company does not expect significant increases in future data processing costs relating to Y2K compliance. While we believe this amount will be sufficient to complete the requirements of becoming Y2K compliant, it is an estimate. As such, we will review our budget monthly to help ensure that we have allocated sufficient resources to this project. Any deviations to the preliminary budget will be reported to the Board of Directors. During the assessment phase, the Company began to develop back-up or contingency plans for each of its mission critical systems. Virtually all of the Company's mission critical systems are dependent upon third party vendors or service providers, therefore, contingency plans include selecting a new vendor or service provider and converting to their system. In the event a current vendor's system fails during the validation phase and it is determined that the vendor is unable or unwilling to correct the failure, the Company will convert to a new system from a pre-selected list of prospective vendors. In each case, realistic trigger dates have been established to allow for orderly and successful conversions. For some systems, contingency plans consist of using spreadsheet software or reverting to manual systems until system problems can be corrected. The impact on the Company for Y2K risk are many and include, but are not limited to, the risk of insufficient liquidity, communication loss, power loss and the inability to process customer data. The potential impact to the profitability of the Company related to these risks and those not yet identified cannot be measured or known at this time. 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 The Annual Meeting of Shareholders (the "Meeting") of First Independence Corporation was held on January 27, 1999. The matters approved by shareholders at the Meeting and the number of votes cast for, against or withheld (as well as the number of abstentions and broker non-votes) as to each matter are set forth below:
PROPOSAL NUMBER OF VOTES Broker For Withheld Non-Votes ----------------- ------------------ ------------------ ----------------- ------------------ ------------------ Election of the following directors for the terms indicated: Lavern W. Strecker (three years) 900,156 --- --- Robert A. Johnson (three years) 899,156 1,000 --- Broker For Against Abstain Non-Votes ------------- ------------- -------------- -------------- ------------- ------------- -------------- -------------- Ratification of Grant Thornton LLP as auditors for the fiscal year ending September 30, 1999 881,156 19,000 --- ---
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 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: February 12, 1999 /s/Larry G. Spencer ---------------------------------- Larry G. Spencer President and Chief Executive Officer Date: February 12, 1999 /s/James B. Mitchell ---------------------------------- James B. Mitchell Vice President and Chief Financial Accounting Officer EX-27 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27, "Financial Data Schedule" The schedule contains summary financial information extracted from the quarterly report on Form 10-QSB for the fiscal quarter ended December 31, 1998 and is qualified in its entirety by reference to such financial statements.
9 3-MOS Sep-30-1999 Dec-31-1998 1,220,896 582,502 5,000,000 0 3,401,590 15,084,442 15,104,513 97,831,348 669,717 126,695,173 81,907,067 2,900,000 2,062,534 27,500,000 0 0 14,984 12,310,588 126,695,173 1,940,637 371,794 53,472 2,365,903 1,011,737 1,437,823 928,080 15,000 0 547,119 405,407 247,664 0 0 247,664 .27 .25 7.65 1,292,077 154,797 0 0 655,745 1,028 0 669,717 0 0 669,717
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