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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
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 0-26570
1ST INDEPENDENCE FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1284899
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8620 Biggin Hill Lane
Louisville, Kentucky 40220-4117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502)753-0500
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 |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes|_| No |X|
The registrant had 1,993,394 shares of common stock outstanding at
April 27, 2007.
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1st INDEPENDENCE FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarter Ended March 31, 2007
INDEX
Part I - Financial Information
Item 1. Financial Statements Page Number
-----------
Condensed Consolidated Balance Sheets as of March 31, 2007
(unaudited) and December 31, 2006 3
Condensed Consolidated Statements of Income for the three
months ended March 31, 2007 and 2006 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 2007 and 2006 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2007 and 2006 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7-9
Item 2. Management's Discussion and Analysis of Financial Condition 10-13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
Part II - Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits 15
Signatures 16
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
March 31, December 31,
2007 2006
-------------- --------------
Assets
Cash and and due from banks $ 7,020 $ 16,678
Interest-bearing demand deposits 5,842 6,370
Federal funds sold 4,382 531
-------------- --------------
Cash and cash equivalents 17,244 23,579
Inerest-bearing deposits 100 100
Available-for-sale securities at fair value 16,878 16,421
Held-to-maturity securities, fair value of $1,834 and
$1,930 at March 31, 2007 and December 31, 2006, respectively 1,809 1,900
Loans held for sale 1,150 1,227
Loans, net of allowance for loan losses of $2,938 and
$3,745 at March 31, 2007 and December 31, 2006, respectively 271,551 270,478
Premises and equipment, net 8,393 8,322
Federal Home Loan Bank (FHLB) stock 2,313 2,313
Bank owned life insurance 3,487 3,435
Goodwill 11,142 11,142
Interest receivable and other assets 3,786 3,889
-------------- --------------
Total assets $ 337,853 $ 342,806
============== ==============
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand $ 15,014 $ 18,261
Savings, NOW and money market 86,036 78,083
Time 154,113 157,733
-------------- --------------
Total depositsotal deposits 255,163 254,077
Short-term borrowings 20,658 36,526
Long-term debt 20,279 10,279
Interest payable and other liabilities 1,422 1,621
-------------- --------------
Total liabilities 297,522 302,503
-------------- --------------
Commitments and contingencies - -
Stockholders' equity
Preferred stock, $0.10 par value, 500,000 shares authorized, no
shares issued or outstanding - -
Common stock, $0.10 par value, 5,000,000 shares authorized,
1,993,394 shares and 1,995,594 shares outstanding at
March 31, 2007 and December 31, 2006, respectively 296 296
Additional paid-in capital 39,798 39,775
Retained earnings 15,122 15,169
Unearned ESOP compensation (260) (291)
Accumulated other comprehensive (loss) (50) (71)
Treasury stock, at cost, common,
969,835 shares and 969,835 shares at March 31, 2007 and
December 31, 2006, respectively (14,575) (14,575)
-------------- --------------
Total stockholders' equity 40,331 40,303
-------------- --------------
Total liabilities and stockholders' equity $ 337,853 $ 342,806
============== ==============
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Income
(in thousands except per share data)
(Unaudited)
Three months ended March 31,
------------------------------------
2007 2006
-------------- --------------
Interest and dividend income
Interest and fees on loans $5,125 $4,859
Interest on securities
Taxable 166 154
Tax exempt 45 45
Interest on federal funds sold 76 62
Dividends 43 41
Interest on deposits with financial institutions 78 60
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Total interest and dividend income 5,533 5,221
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Interest expense
Deposits 2,591 2,203
FHLB advances 359 234
Other 177 173
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Total interest expense 3,127 2,610
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Net interest income 2,406 2,611
Provision for loan losses 175 81
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Net interest income after provision for loan losses 2,231 2,530
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Noninterest income
Service charges 120 102
Gain on loan sales 201 208
Increase in cash value of life insurance 52 49
Other 79 81
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Total noninterest income 452 440
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Noninterest expense
Salaries and employee benefits 1,228 1,148
Net occupancy 425 394
Data processing fees 208 186
Professional fees 170 116
Marketing 65 32
Other 460 379
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Total noninterest expense 2,556 2,255
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Income before income taxes 127 715
Income tax expense 17 221
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Net income $ 110 $ 494
============== ==============
Net income per share
Basic $0.06 $0.26
Diluted 0.06 0.25
Weighted average shares outstanding
Basic 1,967 1,921
Diluted 1,978 1,945
Cash dividends declared per share $0.08 $0.08
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)
Three months ended March 31,
------------------------------------
2007 2006
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Net income $ 110 $ 494
Other comprehensive income, net of tax
Change in unrealized gains and losses on available-for-sale securities 21 (39)
Less reclassification adjustment for realized gains (losses) included in net income - -
-------------- -----------------
Other comprehensive income (loss) 21 (39)
-------------- -----------------
Comprehensive income $ 131 $ 455
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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,
-------------------------------
2007 2006
------------- ------------
Cash Flows from Operating Activities:
Net income $ 110 $ 494
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation 175 184
Provision for loan losses 175 81
Gain on loan sales (201) (208)
Origination of loans held for sale (11,343) (10,622)
Proceeds from loans held for sale 11,622 11,067
Compensation expense on stock options 31 18
ESOP compensation 53 45
Amortization of unearned compensation on restricted stock 8 2
Amortization of premiums and discounts on securities 6 11
Deferred income tax expense (benefit) 251 (55)
FHLB stock dividend - (29)
Amortization of loan fees (58) (87)
Amortization of intangibles, net 65 65
Increase in cash value of life insurance (52) (49)
Changes in:
(Increase) in interest receivable and other assets (158) (77)
(Decrease) in interest payable and other liabilities (210) (24)
------------- ------------
Net cash provided by operating activities 474 816
------------- ------------
Cash Flows from Investing Activities:
Proceeds from maturities of interest-bearing deposits - 100
Purchases of available-for-sale securities (1,000) -
Proceeds from maturities of available-for-sale securities 568 560
Proceeds from maturities of held-to-maturity securities 90 5
Net (increase) in loans (1,243) (6,402)
Purchases of premises and equipment (246) (293)
Proceeds from sale of FHLB stock - 476
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Net cash (used in) investing activities (1,831) (5,554)
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Cash Flows from Financing Activities:
Net increase (decrease) in deposits 1,084 (1,657)
Net (decrease) increase in short-term borrowings (15,868) 249
Proceeds from issuance of long-term debt 10,000 -
Repurchase and retirement of common stock (37) -
Proceeds from exercise of stock options - 169
Cash dividends paid (157) (153)
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Net cash (used in) financing activities (4,978) (1,392)
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Net (decrease) in cash and cash equivalents (6,335) (6,130)
Cash and cash equivalents at beginning of period 23,579 21,563
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Cash and cash equivalents at end of period $ 17,244 $ 15,433
============= ============
Supplemental Cash Flow Information:
Interest paid $ 3,153 $ 2,544
Income taxes paid 25 175
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 unaudited condensed consolidated financial statements of 1st
Independence Financial Group, Inc. (the "Company") are presented in accordance
with the requirements of Form 10-Q and accounting principles generally accepted
in the United States of America for interim financial information. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. 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-K annual report for the year ended December 31, 2006 filed with the
United States Securities and Exchange Commission ("SEC'). In the opinion of
management, all adjustments necessary to make the financial statements not
misleading and to fairly present the financial position, results of operations
and cash flows 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, 2006 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") and
1st Independence Mortgage, a division of the Bank.
2. Stock-Based Compensation
For the three months ended March 31, 2007 and March 31, 2006, the Company
recorded $31,000 and $18,000, respectively, in employee stock-based compensation
expense, which is included in salaries and employee benefits. As of March 31,
2007 and March 31, 2006, there was $60,000 and $45,000, respectively, of
unrecognized stock-compensation expense for previously granted unvested options
that will be recognized over a weighted-average period of 1.7 and 1.8 years,
respectively.
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):
2007 2006
---- ----
Beginning balance $3,745 $2,911
Provision for loan losses 175 81
Loans charged off (983) (1)
Recoveries 1 -
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Ending balance $2,938 $2,991
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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,
2007 2006
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Net income $110 $494
==== ====
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 1,967 1,921
===== =====
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 1,967 1,921
Plus: dilutive effect of stock options 11 24
----- -----
Adjusted weighted average shares 1,978 1,945
===== =====
Net income per share data:
Basic $0.06 $0.26
Diluted $0.06 $0.25
Options to purchase 17,000 and 7,500 common shares for the three months ended
March 31, 2007 and March 31, 2006, respectively, 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 currently 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.
This matter is currently scheduled for trial in July 2007. 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-Q for additional information.
6. Recently Issued Accounting Standards
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"), which
clarifies the accounting and disclosure for uncertainty in tax positions, as
defined. FIN 48 seeks to reduce the diversity in practice associated with
certain aspects of the recognition and measurement related to accounting for
income taxes. FIN 48 is effective for fiscal years beginning after December 15,
2006 and the cumulative effect of applying the provisions of this Interpretation
are recognized as an adjustment to the beginning balance of retained earnings.
The Company adopted the Interpretation on January 1, 2007 as required. The
Company and its subsidiaries file a consolidated U.S. Corporation income tax
return, a combined unitary return in the state of Indiana and a corporate income
tax return in the state of Kentucky. The only periods subject to examination for
the Company's federal return are the 2003, 2005 and 2006 tax years. A federal
examination audit of the tax year 2004 was completed in 2006 with no material
adjustments. The periods subject to examination for the Company's state returns
in Kentucky and Indiana are all years after 2002. The Company has no
unrecognized tax benefits and does not anticipate any increase in unrecognized
benefits during 2007 relative to any tax positions taken prior to January 1,
2007. The Company believes that its income tax filing positions and deductions
would be sustained on audit and does not anticipate any adjustments that would
result in a material change to its financial position. Therefore, no reserves
for uncertain income tax positions have been recorded pursuant to FIN 48. In
addition, the Company did not record a cumulative effect adjustment related to
the adoption of FIN 48.
The Company chose to continue its policy for recording interest related to
unrecognized tax benefits in other interest expense and penalties in other
noninterest expense. No penalties or interest were recorded during the first
quarter 2007 and no such accruals existed as of January 1, 2007.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("SFAS 157"), which provides guidance on how
to measure assets and liabilities that use fair value. SFAS 157 will apply
whenever another US GAAP standard requires (or permits) assets or liabilities to
be measured at fair value but does not expand the use of fair value to any new
circumstances. This Statement also will require additional disclosures in both
annual and quarterly reports. SFAS 157 will be effective for financial
statements issued for fiscal years beginning after November 15, 2007, and will
be adopted by the Company beginning in the first quarter of 2008. The Company is
currently evaluating the potential impact this Statement may have on the
Company's financial position and results of operations, but does not believe the
impact of the adoption will be material.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
("SFAS 159"), which permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities using different measurement techniques. SFAS 159 requires additional
disclosures related to the fair value measurements included in the entity's
financial statements. This Statement is effective for financial statements
issued for fiscal years beginning after Nov. 15, 2007. Accordingly, the Company
will adopt SFAS 159 in the first quarter of 2008. The Company is currently
evaluating the potential impact this Statement may have on the Company's
financial position and results of operations, but does not believe the impact of
the adoption will be material.
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 Part I of this
report in addition to the consolidated financial statements of the Company and
the notes thereto included in the Company's Form 10-K for the year ended
December 31, 2006, 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 among other things, 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 United States 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
The Company provides commercial and retail banking services, including
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, 2007, the
Company had total assets, deposits and stockholders' equity of $337.9 million,
$255.2 million, and $40.3 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.
The Company is currently a defendant in a lawsuit that asserts that the Company
made certain material misrepresentations 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. This matter is currently scheduled
for trial in July 2007. 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.
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 unaudited condensed consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions for Form 10-Q. 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-K for the year ended December 31, 2006 for additional
information.
Overview
Net income for the quarter ended March 31, 2007 was $110,000 or $0.06 per
diluted share compared to $494,000 or $0.25 per diluted share for the comparable
period in 2006. The decrease in net income and net income per diluted share for
the three-month period was primarily due to a decrease in net interest income
after taxes of $135,000, an increase in noninterest expenses after taxes of
$199,000 and an increase of $62,000 after taxes in the provision for loan losses
in the first three months of 2007 compared to the first three months of 2006.
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, 2007 a
decrease of $0.2 million or 8% from $2.6 million for the comparable period of
2006. On an annualized basis, the net interest spread and net interest margin
were 2.75% and 3.19% for the current quarter, compared to 3.07% and 3.45% for
the same period of 2006. The decrease in the net interest margin was primarily
due to a faster increase in interest rates on interest-bearing liabilities,
including the effect of the increasing rate on the $4.1 million of variable rate
subordinated debentures, compared to the rates on interest-earning assets.
Contributing to these factors were decreases in the volume of net earning
assets. Changes in volume resulted in a decrease in net interest income of
$36,000 for the first quarter of 2007 compared to the same period in 2006, and
changes in interest rates and the mix resulted in a decrease in net interest
income of $169,000 for the first quarter of 2007 versus the comparable period in
2006.
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 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,
2007, if interest rates increased 200 basis points and decreased 200 points,
respectively, the Bank's net interest income would increase by 2.8% and decrease
by 5.5%, respectively.
Provision for Loan Losses
The provision for loan losses was $175,000 for the three months ended March 31,
2007, compared to $81,000 for the same period in 2006. Nonperforming loans were
$3.4 million at March 31, 2007 and $3.7 million at December 31, 2006, or 1.24%
and 1.36%, respectively, of total loans. The allowance for loan losses was $2.9
million and $3.7 million at March 31, 2007 and December 31, 2006, or 1.07% and
1.37%, respectively, of total loans. Net charge-offs were $982,000 in the first
quarter of 2007 compared to $1,000 in the same period in 2006. The increase in
net charge-offs in 2007 was primarily due to three large borrowers in the
residential construction and commercial and industrial portfolios. These
charge-offs had been adequately reserved for in previous periods.
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.
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.
Noninterest Income
Noninterest income was $452,000 for the three months ended March 31, 2007,
compared to $440,000 for the same period in 2006. The gain on loan sales was
down slightly for the first quarter of 2007 versus the first quarter of 2006 due
to a softened housing market leading to a slow down in secondary market mortgage
activity and lower margins in 2007. The gain on loan sales was $201,000 for the
three months ended March 31, 2007, compared to $208,000 for the comparable
period in 2006. Service charge income was $120,000 for the three months ended
March 31, 2007, compared to $102,000 for the comparable period in 2006. The
Company continues to evaluate its deposit product offerings with the intention
of continuing to expand its offerings to the consumer and business depositor.
Noninterest Expense
Noninterest expense was $2.6 million for the quarter ended March 31, 2007
compared to $2.3 million for the same period in 2006. Contributing to the
increase was an increase in salaries and employee benefits due to merit and
promotional salary increases and management additions, increased health care
costs, increased stock option expense and increased restricted stock expense.
Partially offsetting these increases in salaries and employee benefits was a
reduction in the commissions related to reduced activity in mortgage loan sales
and a reduction in the amount of expense necessary to cover the Company's 401(k)
match as the match is now covered by released ESOP shares. Other factors
contributing to the increase in noninterest expenses was an increase in
professional fees due to an increased amount of services required including
preparation work for compliance with certain of the upcoming requirements of the
Sarbanes-Oxley Act of 2002 and an increase in net occupancy expenses relating to
the Bank's branch expansion plans and certain equipment upgrades. Additional
factors contributing to the overall increase in noninterest expenses were an
increase in data processing expenses which was primarily due to the growth of
the Bank's services and its commitment to upgrade systems productivity, an
increase in marketing expense and various increases in other noninterest
expenses including an increase in expenses relating to other real estate owned
due to the higher levels of other real estate owned.
Income Tax Expense (Benefit)
The effective income tax rate on income before income taxes was 13.3% for the
three months ended March 31, 2007 compared to 30.9% for the same period in 2006.
The decrease in the effective tax rate for the quarter is primarily due to an
increase in the percentage of tax exempt interest income compared to income
before income taxes.
Financial Condition
The Company's total assets were $337.9 million at March 31, 2007 compared to
$342.8 million at December 31, 2006, a decrease of 4.9 million or 1.4%. Net
loans increased $1.1 million, investments increased $0.4 million, while cash and
cash equivalents decreased $6.3 million and loans held for sale went down $0.1
million.
Net loans were $271.6 million at March 31, 2007, compared to $270.5 million at
December 31, 2006, an increase of $1.1 million or 0.4%. The increases in loans
were in the real estate construction and real estate commercial loan portfolios,
which increased $1.5 million or 2.4% and $1.5 million or 3.1%, respectively. The
increases were primarily a result of lending activity in the Kentucky markets.
All loan categories increased or remained the same as a percentage of total
loans, except residential real estate loans, which decreased from approximately
45% to 43% 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, 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.
Deposits increased $1.1 million or 0.4% to $255.2 million at March 31, 2007
compared to $254.1 million at December 31, 2006. This increase was attributable
to an increase in savings, NOW and money market deposits of $8.0 million which
more than offset decreases in demand deposits of $3.3 million and in time
deposits of $3.6 million. The increase in savings, NOW and money market deposits
resulted primarily from the effects of a general marketing campaign promoting a
more competitively priced NOW account product in an effort to reduce the
Company's dependency on higher costing time deposits.
Short-term borrowings decreased $15.9 million or 43.4% to $20.7 million at March
31, 2007, compared to $36.5 million at December 31, 2006 while long-term debt
increased $10.0 million to $20.3 million at March 31, 2007, compared to $10.3
million at December 31, 2006. The increase in long-term debt was due to the
Company deciding to utilize a long-term FHLB fixed rate advance and thus
reducing the level of short-term FHLB advances. The Company uses short-term
borrowings, primarily short-term FHLB advances, to fund short-term liquidity
needs and manage net interest margin.
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, 2007, unused loan commitments and performance
letters of credit were $43,811,000 and $2,519,000, 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.
At March 31, 2007 and December 31, 2006, brokered deposits were $19.4 million
and $23.7 million, respectively. The weighted average cost and maturity of
brokered deposits were 4.98% and six months at March 31, 2007 compared to 4.86%
and six months at December 31, 2006. The Company plans to continue using
brokered deposits for the foreseeable future to support loan demand when pricing
for brokered deposits is more favorable than short-term borrowings.
At March 31, 2007 and December 31, 2006, the Bank had total FHLB advances
outstanding of $31.0 million and $36.0 million, respectively, with $11.0 million
and $1.0 million, respectively, included in long-term debt in the accompanying
condensed consolidated balance sheet and the remaining amount included in
short-term borrowings. Additionally, the Bank had $50.0 million of unused
commitments under its line of credit with the FHLB and sufficient collateral to
borrow an additional $52.6 million.
The Company's liquidity depends primarily on dividends paid to it as sole
shareholder of the Bank. At March 31, 2007, the Bank may pay up to $8.2 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 with $4.1 million of the debentures being variable rate obligations with
interest rates that reprice quarterly, and are tied to the three-month London
Interbank Offering Rate ("LIBOR") plus 3.15%. At March 31, 2007 the rate on the
variable rate obligations was 8.50% compared to 8.11% at March 31, 2006. The
remaining $5.2 million of debentures carry a fixed interest rate of 6.4% until
March 26, 2008 when the debentures become variable rate obligations that reprice
quarterly at the three-month LIBOR rate plus 3.15%.
Stockholders' equity was basically flat at $40.3 million at March 31, 2007 and
December 31, 2006. The individual items within stockholders' equity that changed
were net income of $110,000, cash dividends declared of $157,000 ($0.08 per
share) and an increase of $75,000 relating to stock option, ESOP plan
transactions and other miscellaneous equity transactions.
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. The following table presents these ratios as of March 31, 2007 and
December 31, 2006 for the Consolidated Company and the Bank along with the
regulator's minimum ratio to be considered well capitalized.
To Be Well
March 31, 2007 December 31, 2006 Capitalized
-------------- ----------------- -----------
Total risk-based capital to risk-weighted assets
Consolidated company 15.8% 15.9% N/A%
Bank 14.8 14.7 10.0
Tier 1 capital to risk-weighted assets
Consolidated company 14.6 14.6 N/A
Bank 13.6 13.5 6.0
Tier 1 capital to average assets
Consolidated company 11.7 11.6 N/A
Bank 10.9 10.7 5.0
Regulatory Matters
On July 20, 2006, the Bank received its most recent Community Reinvestment Act
("CRA") Performance Evaluation prepared as of May 15, 2006. The Bank was
assigned a "Needs to Improve" rating due in part to the Bank's low level of
residential lending to low and moderate income borrowers within the Louisville,
Kentucky Metropolitan Statistical Area. Management has taken appropriate steps
to improve the residential lending issues cited by the Federal Deposit Insurance
Corporation ("FDIC") during the CRA Performance Evaluation. By statute, a bank
with a "less than satisfactory" CRA rating has limitations on certain future
business activities until the CRA rating improves. Management does not believe
these limitations will have any material affect on the Bank's current business
plan.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is included in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Item 4. 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, 2007. 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 United States 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, 2007 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 or other legal proceedings pending or known to be
contemplated against the Company at March 31, 2007.
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. On April 14, 2006 a partial summary judgment was entered against the
plaintiffs. In the partial summary judgment, the Circuit Court held that the
only remedy available to the plaintiffs is the return of the stock upon the
tender of the consideration received by the plaintiffs in exchange for the
stock. Subsequent to the partial summary judgment, the plaintiffs amended their
complaint to allege certain additional material misrepresentations had been made
by the Company. This matter is currently scheduled for trial in July 2007. 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
31.1 Rule 13a-14(a) / 15d-14(a) Certification of Principal
Executive Officer ("Section 302 Certifications").
31.2 Rule 13a-14(a) / 15d-14(a) Certification of Principal
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.
Date: May 7, 2007 By: /s/ R. Michael Wilbourn
-------------------------
R. Michael Wilbourn
Executive Vice President
and Chief Financial Officer
Exhibit Index
Exhibit
Number Description
31.1 Rule 13a-14(a) / 15d-14(a) Certification of Principal
Executive Officer ("Section 302 Certifications").
31.2 Rule 13a-14(a) / 15d-14(a) Certification of Principal
Financial Officer ("Section 302 Certifications").
32.1 Section 1350 Certifications ("Section 906
Certifications").