================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2005
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 No. 0-26570
1ST INDEPENDENCE FINANCIAL GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 61-1284899
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
104 South Chiles Street
Harrodsburg, Kentucky 40330-1620
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (859)734-5452
----------
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 days. Yes |X| No |_|
The registrant had 1,928,368 shares of common stock outstanding at May
2, 2005.
================================================================================
1st INDEPENDENCE FINANCIAL GROUP, INC.
FORM 10-QSB
For the Quarter Ended March 31, 2005
INDEX
Part I - Financial Information
Item 1. Financial Statements Page Number
-----------
Condensed Consolidated Balance Sheets as of March 31, 2005
(unaudited) and December 31, 2004 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three months ended March 31, 2005 and 2004 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 and 2004 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition 10-15
and Results of Operations
Item 3. Controls and Procedures 16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits 17
Signatures 18
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
March 31, December 31,
2005 2004
-------------- --------------
Assets
Cash and and due from banks $ 2,196 $ 4,131
Interest-bearing demand deposits 4,332 4,749
Federal funds sold 2,189 1,066
-------------- --------------
Cash and cash equivalents 8,717 9,946
-------------- --------------
Inerest-bearing deposits 100 100
Available-for-sale securities at fair value 19,205 26,723
Held-to-maturity securities, fair value of $2,030 and
$2,165 at March 31, 2005 and December 31, 2004, respectively 2,038 2,150
Loans held for sale 2,790 2,344
Loans, net of allowance for loan losses of $2,747 and
$2,549 at March 31, 2005 and December 31, 2004, respectively 241,415 233,648
Premises and equipment, net 8,112 5,385
Federal Home Loan Bank (FHLB) stock 2,610 2,588
Cash surrender value of life insurance 3,094 3,047
Goodwill 11,142 11,142
Interest receivable and other assets 2,235 1,972
Assets of subsidiary held for disposal - 38,146
-------------- --------------
292,741 327,245
-------------- --------------
Total assets $ 301,458 $ 337,191
============== ==============
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand $ 12,984 $ 16,474
Savings, NOW and money market 56,431 45,866
Time 161,487 160,968
-------------- --------------
Total deposits 230,902 223,308
-------------- --------------
Short-term borrowings 16,704 23,233
Long-term debt 14,261 14,247
Deferred income taxes 36 1,625
Interest payable and other liabilities 2,711 1,161
Liabilities of subsidiary held for disposal - 34,129
-------------- --------------
33,712 74,395
-------------- --------------
Total liabilities 264,614 297,703
-------------- --------------
Commitments and contingencies - -
-------------- --------------
Minority interest 5 1,782
-------------- --------------
Stockholders' equity
Common stock, $0.10 par value, 5,000,000 shares authorized,
1,928,368 and 1,916,368 shares outstanding at
March 31, 2005 and December 31, 2004, respectively 290 289
Additional paid-in capital 38,821 38,588
Retained earnings 12,927 10,122
Unearned ESOP compensation (463) (490)
Unearned compensation on restricted stock (37) -
Accumulated other comprehensive income (loss) (124) 3,772
Treasury stock, at cost
Common; March 31, 2005 - 969,835 shares, December
31, 2004 - 969,835 shares (14,575) (14,575)
-------------- --------------
Total stockholders' equity 36,839 37,706
-------------- --------------
Total liabilities and stockholders' equity $ 301,458 $ 337,191
============== ==============
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Operations
(in thousands except share and per share data)
(Unaudited)
Three months ended March 31,
------------------------------
2005 2004
---------- -----------
Interest and dividend income
Interest and fees on loans $ 3,753 $ 1,336
Interest on securities
Taxable 191 235
Tax exempt 26 20
Interest on federal funds sold 59 -
Dividends 32 42
Interest on deposits with financial institutions 24 6
---------- -----------
Total interest and dividend income 4,085 1,639
---------- -----------
Interest expense
Deposits 1,410 649
FHLB advances 164 18
Other 146 89
---------- -----------
Total interest expense 1,720 756
---------- -----------
Net interest income 2,365 883
Provision for loan losses 202 5
---------- -----------
Net interest income after provision for loan losses 2,163 878
---------- -----------
Noninterest income
Service charges 61 20
Earnings of equity method investee - 5
Gain on loan sales 209 -
Increase in cash surrender value of life insurance 46 42
Net realized gains on sales of available-for-sale
securities 5,012 -
Other 161 5
---------- -----------
Total noninterest income 5,489 72
---------- -----------
Noninterest expense
Salaries and employee benefits 1,475 440
Net occupancy 349 75
Data processing fees 133 57
Professional fees 255 94
Marketing 33 12
Other 614 130
---------- -----------
Total noninterest expense 2,859 808
---------- -----------
Income from continuing operations before income
taxes and minority interest 4,793 142
Income tax expense from continuing operations 1,686 2
---------- -----------
Income from continuing operations before minority
interest and discontinued operations 3,107 140
Income from subsidiary held for disposal 6 2
Income tax expense from subsidiary held for disposal 2 13
---------- -----------
Income before minority interest 3,111 129
Minority interest in (income) loss from subsidiary
held for disposal (2) 5
---------- -----------
Net income $ 3,109 $ 134
========== ===========
Income per share from continuing operations
Basic $1.66 $0.12
Diluted $1.62 $0.11
Income (loss) per share from subsidiary held for disposal
Basic $0.00 ($0.01)
Diluted $0.00 ($0.01)
Net income per share
Basic $1.66 $0.11
Diluted $1.62 $0.11
Weighted average shares outstanding
Basic 1,869,413 1,167,407
Diluted 1,919,809 1,223,467
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
Three months ended March 31,
------------------------------
2005 2004
---------- -----------
Net income (loss) $ 3,109 $ 134
Other comprehensive income, net of tax
Change in unrealized gains and losses on available-for-sale securities (588) 161
Less reclassification adjustment for realized gains included in net income 3,308 -
---------- -----------
Other comprehensive income (loss) (3,896) 161
---------- -----------
Comprehensive income (loss) $ (787) $ 295
========== ===========
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three months ended March 31,
----------------------------
2005 2004
------- ------
Cash Flows from Operating Activities:
Net income $ 3,109 $ 134
Adjustments to reconcile net income to net cash (used in) provided by
operations:
Depreciation 162 33
Provision for loan losses 202 5
Gain on loan sales (209) -
Origination of loans held for sale (13,027) -
Proceeds from loans held for sale 12,790 -
ESOP compensation 50 63
Amortization of unearned compensation on restricted stock 1 -
Amortization of premiums and discounts on securities 39 56
Deferred income taxes 419 20
FHLB stock dividend (22) (19)
Compensation expense associated with stock options exercised - 40
Increase in equity investment of subsidiary 1 (6)
Amortization of loan fees (97) (20)
Amortization of purchase accounting adjustments, net 113 10
Net realized gains on available-for-sale securities (5,012) -
Minority interest in income (loss) from subsidiary held for disposal 2 (5)
Increase in cash value of life insurance (46) (42)
(Income) loss from subsidiary held for disposal (6) 11
Changes in:
(Increase) decrease in interest receivable and other assets (303) 20
Increase in interest payable and other liabilities 1,399 332
-------- --------
Net cash (used in) provided by operating activities (435) 632
-------- --------
Cash Flows from Investing Activities:
Purchases of available-for-sale securities - (946)
Proceeds from maturities of available-for-sale securities 1,498 966
Proceeds from the sales of available-for-sale securities 5,088 500
Proceeds from maturities of held-to-maturity securities 110 2,000
Net (increase) in loans (7,953) (3,854)
Purchases of premises and equipment (2,889) (412)
Proceeds from sale of subsidiary 2,300 -
Prepaid merger expenses - (222)
-------- --------
Net cash (used in) investing activities (1,846) (1,968)
-------- --------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits 7,559 (45)
Net (decrease) increase in short-term borrowings (6,529) 3,000
Purchase of treasury stock - (123)
Proceeds from exercise of stock options 172 83
Cash dividends paid (150) (347)
-------- --------
Net cash provided by financing activities 1,052 2,568
-------- --------
Net (decrease) increase in cash and cash equivalents (1,229) 1,232
Cash and cash equivalents at beginning of period 9,946 5,822
-------- --------
Cash and cash equivalents at end of period $ 8,717 $ 7,054
======== ========
Supplemental Cash Flow Information:
Interest paid $ 1,665 $ 754
Income taxes paid (refunds) (39) 70
Net (decrease) increase in cash and cash equivalents of discontinued operations (1,795) 569
Real estate acquired in settlement of loans 34 -
See notes to condensed consolidated financial statements.
1st INDEPENDENCE FINANCIAL GROUP, INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-QSB and consequently do not include
all the disclosures normally required by accounting principles generally
accepted in the United States of America. These condensed consolidated financial
statements and notes thereto included in this report should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-KSB annual report for the year ended December
31, 2004 filed with the Securities and Exchange Commission. The condensed
consolidated financial statements have been prepared in accordance with the
customary accounting practices of 1st Independence Financial Group, Inc. (the
"Company") and have not been audited. In the opinion of management, all
adjustments necessary to fairly present the results of operations for the
reporting interim periods have been made and were of a normal recurring nature.
The results of operations for the period are not necessarily indicative of the
results to be expected for the full year. The condensed consolidated balance
sheet of the Company as of December 31, 2004 has been derived from the audited
consolidated balance sheet of the Company as of that date.
The unaudited condensed financial statements include the accounts of the
Company and its wholly-owned subsidiary, 1st Independence Bank, Inc. (the
"Bank"), Foundation Title Company, LLC, a majority-owned subsidiary of the Bank,
1st Independence Mortgage Group, a division of the Bank and for periods prior to
its sale on January 28, 2005, the Company's majority-owned subsidiary Citizens
Financial Bank, Inc. ("Citizens"). As a result of the Company's sale of
Citizens, the assets, liabilities, results of operations and cash flows of
Citizens have been reported separately as discontinued operations in the
Company's condensed consolidated financial statements and previously reported
amounts have been restated to consistently present the discontinued operations.
2. Stock-Based Compensation
At March 31, 2005, the Company had two stock-based compensation plans. As
permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), the Company follows the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for its stock
option plans under the intrinsic value based method. Accordingly, no stock-based
compensation expense has been recognized for stock options issued under the
plans as all stock options granted under the plans had an exercise price equal
to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and basic and diluted net
income per share had compensation expense been determined based on the fair
value of the stock options at the grant date consistent with the provisions of
SFAS No. 123 (in thousands except per share data):
Three months ended
March 31,
2005 2004
---- ----
Net income as reported $3,109 $134
Less total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects 2 1
------ ------
Pro forma net income $3,107 $133
====== ======
Basic net income per share
As reported $1.66 $0.11
Pro forma 1.66 0.11
Diluted net income per share
As reported $1.62 $0.11
Pro forma 1.62 0.11
3. Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses for the three months
ended March 31 follows (in thousands):
2005 2004
---- ----
Beginning balance $2,549 $ 391
Provision for loan losses 202 5
Loans charged off (6) -
Recoveries 2 -
------ ------
Ending balance $2,747 $ 396
====== ======
4. Net Income Per Share Computations
The following is a reconciliation of the numerator and denominator of the basic
and diluted per share computations (in thousands except per share data):
Three months ended
March 31,
2005 2004
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income from continuing operations $3,107 $140
====== ====
Income (loss) from discontinued operations $ 4 ($11)
====== ====
Net income $3,109 $134
====== ====
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 1,869 1,167
===== =====
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 1,869 1,167
Plus: dilutive effect of stock options 51 56
----- -----
Adjusted weighted average shares 1,920 1,223
===== =====
Basic net income (loss) per share data:
Income from continuing operations $1.66 $0.12
===== =====
Income (loss) from discontinued operations $ - ($0.01)
===== =====
Net income $1.66 $0.11
===== =====
Diluted net income (loss) per share data:
Income from continuing operations $1.62 $0.11
===== =====
Income (loss) from discontinued operations $ - ($0.01)
===== =====
Net income $1.62 $0.11
===== =====
Options to purchase 10,000 common shares for the three months ended March 31,
2005 were excluded from the diluted calculations above because the exercise
prices on the options were greater than the average market price for the period.
5. Contingencies
The Company is a defendant in a lawsuit that asserts that the Company made
certain material misrepresentations in connection with certain statements made
in connection with its offer to purchase up to 300,000 shares of stock in a
tender offer in May 2003. The plaintiffs are seeking to recover damages in
connection with the shares they sold in the tender offer and attorneys fees.
Based upon the advice of counsel, management records an estimate of the amount
of ultimate expected loss for litigation, if any. Management has not recorded a
loss provision for this litigation as, after discussion with legal counsel,
management believes the ultimate results of this litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows. Events could occur that could cause the estimate of
ultimate loss to differ materially in the near term. Reference is made to Part
II, Item 1 of this report on Form 10-QSB for additional information.
6. Recently Issued Accounting Standards
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.123 (revised 2004), " Share-Based
Payment" ("SFAS 123R"). This Statement requires expensing of stock options and
other share-based payments beginning in 2005, and supersedes FASB's earlier rule
(the original SFAS 123) that had allowed companies to choose between expensing
stock options and showing pro forma disclosure only. The Statement required that
public entities (other than those filing as small business issuers) apply SFAS
123R as of the first interim or annual reporting period that begins after June
15, 2005. However, on April 14, 2005 the Securities and Exchange Commission
issued a rule that revises the required date of adoption under SFAS 123R. The
new rule allows for public entities to adopt the provisions of SFAS 123R at the
beginning of the first fiscal year beginning after June 15, 2005. Public
entities that file as small business issuers will continue to be required to
apply SFAS 123R in the first interim or annual reporting period that begins
after December 15, 2005. The Company, which will adopt the Statement in the
first quarter of 2006 as required, is currently evaluating the effect of the
adoption of this Statement.
7. Completion of Subsidiary Disposal
On January 28, 2005 the Company completed the sale of its entire interest in
its majority owned subsidiary, Citizens Financial Bank, Inc., to Porter Bancorp,
Inc. for $2.3 million, pursuant to a Stock Purchase Agreement, dated as of
October 22, 2004, between Porter Bancorp, Inc. and the Company. In a related
transaction, on January 28, 2005, the Company's subsidiary bank, 1st
Independence Bank, Inc., purchased a commercial building located in Louisville,
Kentucky, for $2.3 million from Ascencia Bank, Inc., an affiliate of Porter
Bancorp, Inc. See note 4, "Subsidiary Held for Disposal" to the consolidated
financial statements included in the Company's Form 10-KSB for the year ended
December 31, 2004 for additional information.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in item 1 of this report in
addition to the consolidated financial statements of the Company and the notes
thereto included in the Company's Form 10-KSB annual report for the year ended
December 31, 2004, including note 1 which describes the Company's significant
accounting policies including its use of estimates. See the caption entitled
"Application of Critical Accounting Policies" in this section for further
information.
Forward-Looking Statements
The following discussion contains statements which are forward-looking rather
than historical fact. These forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and involve known and unknown risks, uncertainties and other factors, which may
cause the Company's actual results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such statements are subject to certain risks and
uncertainties including changes in economic conditions in the market areas the
Company conducts business, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the market areas the Company
conducts business, competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or projected
and other risks as detailed in the Company's various filings with the Securities
and Exchange Commission. 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.
General
On July 9, 2004, the Company changed its name to 1st Independence Financial
Group, Inc. and acquired the remaining 77.5% interest of Independence Bancorp,
New Albany, Indiana ("Independence") in a purchase transaction calling for the
exchange of one share of its common stock for each share of Independence common
stock held by Independence shareholders (the "Merger"). The Company initially
acquired 22.5% of Independence on December 31, 2002. Upon completion of the
Merger, the Company issued approximately 696,000 shares to the Independence
shareholders and exchanged approximately 60,000 stock options held by directors,
executive officers, and employees of Independence.
In connection with the Merger, the Company's, wholly owned subsidiary, First
Financial Bank and Independence's wholly owned subsidiary, 1st Independence Bank
merged their operations (the "Bank Merger"). The Bank Merger occurred at the
same time as the Merger and the resulting institution became a Kentucky
state-chartered bank known as 1st Independence Bank, Inc. (the "Bank").
The Company provides commercial and retail banking services, with an emphasis
on commercial real estate loans, one-to-four family residential mortgage loans
via 1st Independence Mortgage, home equity loans and lines of credit and
consumer loans as well as certificates of deposit, checking accounts,
money-market accounts and savings accounts within its market area. At March 31,
2005, the Company had total assets, deposits and stockholders' equity of $301.5
million, $230.9 million, and $36.8 million, respectively. The Company's business
is conducted principally through the Bank. Unless otherwise indicated, all
references to the Company refer collectively to the Company and the Bank.
As a result of completing the acquisition of Independence, the Company gained
access to customers in the Louisville, Kentucky metro area. Accordingly, the
Company expects a significantly different mix of loan growth going forward. The
Company historically provided primarily residential real estate loan products in
its markets in central Kentucky.
The Company is a defendant in a lawsuit that asserts that the Company made
certain material misrepresentations in connection with certain statements made
in connection with its offer to purchase up to 300,000 shares of stock in a
tender offer in May 2003. The plaintiffs are seeking to recover damages in
connection with the shares they sold in the tender offer and attorneys fees.
Based upon the advice of counsel, management records an estimate of the amount
of ultimate expected loss for litigation, if any. Management has not recorded a
loss provision for this litigation as, after discussion with legal counsel,
management believes the ultimate result of this litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows. Events could occur that could cause the estimate of
ultimate loss to differ materially in the near term.
Recent Developments
On January 28, 2005, the Company sold its 55.8% interest in Citizens Financial
Bank, Inc., Glasgow, Kentucky ("Citizens") to Porter Bancorp, Inc.,
Shepherdsville, Kentucky ("Porter Bancorp") for $2.3 million. The sale of
Citizens reflects the Company's revised strategic plan to exit the south central
Kentucky market and to focus on the growing markets of southern Indiana, central
Kentucky, and greater Louisville, Kentucky.
The Bank also purchased property and a building, located in Louisville,
Kentucky, that was previously used as an operations center and retail branch of
Ascencia Bank, an affiliate of Porter Bancorp. The purchase price of the
building and property was equal to $2.3 million. The Bank moved its finance and
accounting, loan and deposit operations, and mortgage group into the building in
April 2005.
Application of Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of
operation is based upon the Company's condensed consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's most critical accounting policies require the use of
estimates relating to other than temporary impairment of securities, the
allowance for loan losses and the valuation of goodwill. See the caption
entitled "Critical Accounting Policies" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section of the
Company's Form 10-KSB for the period ended December 31, 2004 for additional
information.
Overview
Net income for the three months ended March 31, 2005 was $3,109,000 compared to
$134,000 for the comparable 2004 period. Basic net income per share was $1.66
compared to $0.11. Net income per share on a diluted basis was $1.62 compared to
$0.11. The increases in net income and income per share were due to securities
gains of $3,308,000 (net of income tax effect), and the significance of the
Merger to the Company's operations. Also included in first quarter 2005 net
income was $356,000 of severance expenses related to the retirement of the
Company's Chairman and CEO.
Results of Operations
Net Interest Income
Net interest income is the most significant component of the Company's revenues.
Net interest income is the difference between interest income on
interest-earning assets (primarily loans and investment securities) and interest
expense on interest-bearing liabilities (deposits and borrowed funds). Net
interest income depends on the volume and rate earned on interest-earning assets
and the volume and rate paid on interest-bearing liabilities.
Net interest income was $2.4 million for the three months ended March 31, 2005,
an increase of $1.5 million or 168% from $883,000 for the comparable period of
2004. The net interest spread and net yield on earning assets were 3.34% and
3.51%, respectively, for the current quarter, compared to 2.73% and 2.95% for
the same period of 2004. The increase was primarily due to an increase in the
volume of net interest bearing assets, primarily resulting from the Merger.
Changes in volume resulted in an increase in net interest income of $1.4
million, and changes in interest rates resulted in an increase in net interest
income of $78,000. The favorable change in net interest income due to changes in
interest rates is largely a result of increases in loan yields and decreases in
rates on the Company's borrowings. Previously, the Company relied substantially
on time deposits as its funding source. Subsequent to the Merger, the Company
began using short-term borrowings and short-term time deposits, including
brokered certificates of deposit with terms generally ranging from one to two
years as primary funding sources. New loan originations for the Bank's loan
portfolio are now predominately shorter-term commercial real estate loans as
opposed to 1-4 family residential loans.
The Bank, like many other financial institutions, is vulnerable to an increase
in interest rates to the extent that interest-bearing liabilities mature or
reprice more rapidly than interest-earning assets. Historically, the lending
activities of commercial banks, such as the Bank, emphasized the origination of
short to intermediate term variable rate loans that are more closely matched
with the deposit maturities and repricing of interest-bearing liabilities which
occur closer to the same general time period. While having interest-bearing
liabilities that reprice more frequently than interest-earning assets is
generally beneficial to net interest income during periods of declining interest
rates, it is generally detrimental during periods of rising interest rates.
To reduce the effect of interest rate changes on net interest income, the Bank
has adopted various strategies to improve matching interest-earning asset
maturities to interest-bearing liability maturities. The principal elements of
these strategies include; originating variable rate commercial loans that
include interest rate floors; originating one-to-four family residential
mortgage loans with adjustable rate features, or fixed rate loans with short
maturities; maintaining interest-bearing demand deposits, federal funds sold,
and U.S. government securities with short to intermediate term maturities;
maintaining an investment portfolio that provides stable cash flows, thereby
providing investable funds in varying interest rate cycles; lengthening the
maturities of our time deposits and borrowings when it would be cost effective;
and attracting low cost checking and transaction accounts, which tend to be less
interest rate sensitive when interest rates increase.
The Bank measures its exposure to changes in interest rates using an overnight
upward and downward shift (shock) in the Treasury yield curve. As of March 31,
2005, if interest rates increased 200 basis points and decreased 200 points,
respectively, the Bank's net interest margin would increase by 4.2% and decrease
by 0.3%, respectively.
Provision for Loan Losses
The provision for loan losses was $202,000 for the three months ended March 31,
2005, compared to $5,000 for the same period of 2004. Nonperforming loans were
approximately $1.3 and $1.2 million at March 31, 2005 and December 31, 2004, or
0.52% and 0.52%, respectively, of total loans. The allowance for loan losses was
approximately $2.7 million and $2.5 million at March 31, 2005 and December 31,
2004, or 1.13% and 1.08%, respectively, of total loans.
The Company maintains the allowance for loan losses at a level that it considers
to be adequate to provide for credit losses inherent in its loan portfolio.
Management determines the level of the allowance by performing a quarterly
analysis that considers concentrations of credit, past loss experience, current
economic conditions, the amount and composition of the loan portfolio (including
nonperforming and potential problem loans), estimated fair value of underlying
collateral, loan commitments outstanding, and other information relevant to
assessing the risk of loss inherent in the loan portfolio. As a result of
management's analysis, a range of the potential amount of the allowance for loan
losses is determined. Management consistently adjusts the allowance to the
mid-point of the range.
Prior to the acquisition of Independence, the Company operated as a thrift and
provided primarily residential real estate loan products in its markets in
central Kentucky. As a result of the Merger and the bank's conversion to a
state-chartered commercial bank, management no longer intends to originate
long-term residential real estate loans for its loan portfolio. The Company's
future loan growth is expected to primarily consist of shorter-term construction
loans, commercial real estate loans, other commercial loans and other loan types
traditional to the banking industry. The Company therefore expects different
risk characteristics including higher individual loan amounts and increased
exposure to economic conditions and other risk factors.
The Company will continue to monitor the adequacy of the allowance for loan
losses and make additions to the allowance in accordance with the analysis
referred to above. Because of uncertainties inherent in estimating the
appropriate level of the allowance for loan losses, actual results may differ
from management's estimate of credit losses and the related allowance.
Non-Interest Income
Non-interest income was $5.5 million for the three months ended March 31, 2005,
an increase of $5.4 million from $72,000 for the comparable period in 2004.
Significant increases in non-interest income resulted from a $5.0 million gain
on sale of Federal Home Loan Mortgage Corporation (FHLMC) preferred stock and
$209,000 gains on loan sales. The gains on loan sales represents a new source of
non-interest income to the Company, as the Company did not previously engage in
significant secondary market sales prior to the Merger. Service charge income
was $61,000 for the three months ended March 31, 2005, compared to $20,000 for
the comparable period in 2004. The $41,000 increase is primarily attributable to
the Merger. Traditionally, the Company did not have significant service charge
income since the vast majority of their deposit accounts were consumer accounts.
The Company continues to evaluate its deposit product offerings with the
intention of expanding its offerings to the consumer and business depositor.
These products currently include overdraft privileges on certain individual
deposit products and cash management services for business depositors which the
Bank began offering in March 2005. Both of the new products are fee-based and
should result in further increases in service charge income. Contributing to the
increase in other non-interest income were the effects of the Merger and
approximately $50,000 of title insurance revenue from the Company's recently
organized tile insurance company.
Non-Interest Expense
Non-interest expense was $2.9 million for the three months ended March 31, 2005,
an increase of $2.1 million from the $808,000 for the comparable period in 2004.
All categories of non-interest expense increased significantly as a result of
Merger. In addition, contributing to the increase in salaries and employee
benefits was $356,000 which the Company accrued during the first quarter of 2005
for the severance expense relating to the retirement of the Company's Chairman
and CEO.
Income Tax Expense (Benefit)
The effective income tax rates on income from continuing operations were 35.2%
and 1.4%, respectively, for the three months ended March 31, 2005 compared to
2004. The effective rate for the three months ended March 31, 2005 differs from
the federal statutory rate due primarily to state income taxes, net of federal
benefit. The effective rate for the three months ended March 31, 2004 differs
from the federal statutory rate due primarily to tax exempt income, the increase
in cash surrender value of life insurance, and the effect of lower rates due to
the level of taxable income.
Financial Condition
The Company's total assets were $301.5 million at March 31, 2005 compared to
$337.2 million at December 31, 2004, a decrease of $35.7 million or 10.6%. The
decrease in total assets was primarily due to the sale of Citizens, which
accounted for $38.1 million of the decrease, offset by a $2.7 million increase
in premises and equipment. The increase in premises and equipment resulted from
the purchase of property and a building to be used for the Company's finance and
accounting, loan and deposit operations, and mortgage group, and the purchase of
a branch that was previously leased.
Securities available for sale decreased $7.5 million during the three months
ended March 31, 2005. The decrease was primarily due to the sale of FHLMC
preferred stock for $5.1 million and proceeds from maturities of securities
amounting to $1.5 million. The Company owned the FHLMC preferred stock for a
number of years, and its cost basis was $75,000. Given the significant amount of
unrealized appreciation on the FHLMC preferred stock, management determined that
it was appropriate to sell the FHLMC preferred stock. The aggregate proceeds on
the sale were $5.1 million; therefore a gain of $5.0 million was realized. Other
changes in securities available for sale included an $893,000 decrease in
unrealized gains on the available for sale portfolio.
Net loans were $241.4 million at March 31, 2005, compared to $233.6 million at
December 31, 2004, an increase of $7.8 million or 3%. The significant increases
in loans were in the real estate construction and commercial loan portfolios,
which increased $6.3 million or 19% and $3.0 million or 14%, respectively. The
increases were primarily a result of lending activity in the Louisville,
Kentucky metro market. All loan categories increased as a percentage of total
loans, except residential real estate loans, which decreased from approximately
53% to 50% of total loans. The decrease in residential real estate loans as a
percentage of total loans is primarily due to those loans now being sold in the
secondary market through 1st Independence Mortgage Group, a division of the
Bank, rather than being retained for the Company's loan portfolio. The Company
continues to identify opportunities to cross sell its other products, including
home equity and consumer loans for its loan portfolio resulting from customer
relationships established through the origination of loans by 1st Independence
Mortgage Group.
Deposits increased $7.6 million or 3% to $230.9 million at March 31, 2005
compared to December 31, 2004. This increase was largely attributable to a $10.6
million increase in savings, NOW and money market deposits, as demand deposits
decreased $3.5 million and time deposit growth was not significant. The increase
in savings, NOW and money market deposits resulted primarily from the effects of
a marketing campaign during the first quarter of 2005.
Short-term borrowings decreased $6.5 million or 28% to $16.7 million at March
31, 2005, compared to $23.2 million at December 31, 2004. The Company uses
short-term borrowings, primarily short-term Federal Home Loan Bank (FHLB)
advances, to fund short-term liquidity needs and manage net interest margin. The
decrease in short-term borrowings was related to payoffs of borrowings due to
the Bank's excess liquidity.
Deferred income taxes decreased $1.6 million to $36,000 at March 31, 2005, and
interest payable and other liabilities, increased $1.6 million to $2.7 million.
These changes primarily result from the $1.7 million income tax effect from the
sale of FHLMC preferred stock.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in financial
transactions that contain credit, interest rate, and liquidity risk that are not
recorded in the financial statements such as loan commitments and performance
letters of credit. As of March 31, 2005, unused loan commitments and performance
letters of credit were $44,748,000 and $3,135,000, respectively.
Since many of the unused loan commitments are expected to expire or be only
partially used, the total amount of commitments does not necessarily represent
future cash requirements.
Liquidity and Capital Resources
Liquidity to meet borrowers' credit and depositors' withdrawal demands is
provided by maturing assets, short-term liquid assets that can be converted to
cash and the ability to attract funds from depositors. Additional sources of
liquidity include brokered deposits, advances from the FHLB and other short-term
borrowings, such as federal funds purchased and securities sold under repurchase
agreements.
During 2004, the Bank assumed liabilities for brokered deposits as a result of
the Merger. At March 31, 2005 and December 31, 2004, brokered deposits were
$61.1 million and $35.5 million, respectively. The weighted average cost and
maturity of brokered deposits were 3.29% and ten months at March 31, 2005
compared to 2.77% and nine months at December 31, 2004. The Company plans to
continue using brokered deposits for the foreseeable future to support expected
loan demand in its new market area when pricing for brokered deposits is more
favorable than short-term borrowings.
At March 31, 2005 and December 31, 2004, the Bank had total FHLB advances
outstanding of approximately $21.0 million and $27.5 million, respectively.
Additionally, the Bank had $14.0 million of unused commitments under its line of
credit with the FHLB and sufficient collateral to borrow an additional $59.9
million.
The Company's liquidity depends primarily on dividends paid to it as sole
shareholder of the Bank. At March 31, 2005, the Bank may pay up to $4.2 million
in dividends to the Company without regulatory approval, subject to the ongoing
capital requirements of the Bank.
The Company has $9.3 million of subordinated debentures outstanding, which are
included in long-term debt in the accompanying condensed consolidated balance
sheet. Approximately $4.1 million of the debentures are variable rate
obligations with interest rates that reprice quarterly, and are tied to the
three-month LIBOR plus 3.5%. The remaining $5.2 million of debentures carry a
fixed interest rate of 6.4%. The Company also had a $2.5 million unused line of
credit with an unaffiliated bank at March 31, 2005.
Stockholders' equity decreased $867,000 from $37.7 million at December 31, 2004
to $36.8 million at March 31, 2005. The significant drivers of the change were
net income of $3.1 million, cash dividends declared of $304,000 ($0.16 per
share), and a decrease in accumulated other comprehensive income of $3.9
million. The decrease in accumulated other comprehensive income was primarily
due to a $3.3 million (net of income tax) reclassification adjustment associated
with the sale of the FHLMC preferred stock previously discussed and a $587,000
(net of income tax) decrease related to unrealized losses on securities
available for sale arising during the period. The reclassification adjustment is
necessitated due to the realized gain on the sale being included in net income
for the period.
Bank holding companies and their subsidiary banks are required by regulators to
meet risk based capital standards. These standards, or ratios, measure the
relationship of capital to a combination of balance sheet and off-balance sheet
risks.
At March 31, 2005, the Company's tier 1 capital to average assets, tier 1
capital to risk-weighted assets and total capital to risk-weighted assets were
11.6%, 14.8% and 16.0%, respectively, compared to 9.6%, 13.3% and 15.6%,
respectively, at December 31, 2004. The same ratios for the Bank at March 31,
2005 were 10.1%, 12.9% and 14.0%, respectively, compared to 9.5%, 12.7% and
15.1%, respectively, at December 31, 2004.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company's management carried out an evaluation, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures as of the end of the quarter ended March 31, 2005. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in its reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in Internal Control over Financial Reporting
There have not been any changes in the Company's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act) during the quarter ended March 31, 2005 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company, from time to time, is a party to ordinary routine litigation,
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Company holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to its business. Except as discussed below, there were no
potentially material lawsuits pending or known to be contemplated against the
Company at March 31, 2005.
On or about May 28, 2004, a complaint was filed in the Circuit Court of
Anderson County in the Commonwealth of Kentucky by Larry Sutherland, Judy
Sutherland, John Henry Disponett, Brenda Disponett, Todd Hyatt, Lois Ann
Disponett, Sue Saufley, and Hugh Coomer. Soon thereafter, an amended complaint
was filed which added Lois Hawkins and Norma K. Barnett as plaintiffs. The
lawsuit arises from offers to purchase securities made by the Company in
connection with an offer to purchase up to 300,000 shares of its stock in a
tender offer on or about May 28, 2003. The Plaintiffs allege that the Company
made certain material misrepresentations in connection with certain statements
made in the tender offer. The Plaintiffs are seeking to recover compensatory and
punitive damages in connection with the shares it sold in the tender offer and
their attorneys' fees. Discovery in the matter is currently underway and a trial
date has not been set. Based upon the advice of counsel, management records an
estimate of the amount of ultimate expected loss for litigation, if any.
Management, after discussion with legal counsel, believes the ultimate result of
this litigation will not have a material adverse effect on the Company's
financial position, results of operations or cash flows. However, events could
occur that could cause any estimate of ultimate loss to differ materially in the
near term.
Item 6. Exhibits
(a) Exhibits
10.1 Form of Severance and Release Agreement (incorporated
by reference to Exhibit 10.13 to Form 8-K filed on
April 1, 2005).
31.1 Rule 13a-14 (a) / 15d-14 (a) Certification of Chief
Executive Officer ("Section 302 Certifications").
31.2 Rule 13a-14 (a) / 15d-14 (a) Certification of Chief
Financial Officer ("Section 302 Certifications").
32.1 Section 1350 Certifications ("Section 906
Certifications").
SIGNATURES
Pursuant to the requirements 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.
1st INDEPENDENCE FINANCIAL GROUP, INC.
By: /s/ N. William White
------------------
N. William White
President and Chief Executive Officer
Date: May 3, 2005
Exhibit Index
Exhibit
Number Description
10.1 Form of Severance and Release Agreement (incorporated
by reference to Exhibit 10.13 to Form 8-K filed on
April 1, 2005).
31.1 Rule 13a-14 (a) / 15d-14 (a) Certification of Chief
Executive Officer ("Section 302 Certifications").
31.2 Rule 13a-14 (a) / 15d-14 (a) Certification of Chief
Financial Officer ("Section 302 Certifications").
32.1 Section 1350 Certifications ("Section 906
Certifications").