================================================================================
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, 2006
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)
104 South Chiles Street
Harrodsburg, Kentucky 40330-1620
(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 1,965,658 shares of common stock outstanding at
April 28, 2006.
================================================================================
1st INDEPENDENCE FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarter Ended March 31, 2006
INDEX
Part I - Financial Information
Item 1. Financial Statements Page Number
-----------
Condensed Consolidated Balance Sheets as of March 31, 2006
(unaudited) and December 31, 2005 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2006 and 2005 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three months ended March 31, 2006 and 2005 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 and 2005 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
Part II - Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits 16
Signatures 17
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,
2006 2005
--------------- --------------
Assets
Cash and and due from banks $ 2,857 $ 4,327
Interest-bearing demand deposits 6,899 5,886
Federal funds sold 5,677 11,350
--------------- --------------
Cash and cash equivalents 15,433 21,563
Inerest-bearing deposits - 100
Available-for-sale securities at fair value 15,509 16,140
Held-to-maturity securities, fair value of $1,976 and
$1,974 at March 31, 2006 and December 31, 2005, respectively 1,967 1,975
Loans held for sale 1,041 1,278
Loans, net of allowance for loan losses of $2,991 and
$2,911 at March 31, 2006 and December 31, 2005, respectively 273,336 266,978
Premises and equipment, net 8,324 8,215
Federal Home Loan Bank (FHLB) stock 2,242 2,688
Bank owned life insurance 3,284 3,235
Goodwill 11,142 11,142
Interest receivable and other assets 2,882 2,873
--------------- --------------
Total assets $ 335,160 $ 336,187
=============== ==============
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand $ 17,603 $ 15,570
Savings, NOW and money market 54,806 51,167
Time 190,256 197,586
--------------- --------------
Total deposits 262,665 264,323
Short-term borrowings 18,996 18,747
Long-term debt 13,279 13,279
Interest payable and other liabilities 1,423 1,577
--------------- --------------
Total liabilities 296,363 297,926
--------------- --------------
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,
1,965,158 shares and 1,951,408 shares outstanding at
March 31, 2006 and December 31, 2005, respectively 293 292
Additional paid-in capital 39,414 39,236
Retained earnings 14,190 13,849
Unearned ESOP compensation (349) (380)
Unearned compensation on restricted stock - (24)
Accumulated other comprehensive income (loss) (176) (137)
Treasury stock, at cost, common,
969,835 shares and 969,835 shares at March 31, 2006 and
December 31, 2005, respectively (14,575) (14,575)
--------------- --------------
Total stockholders' equity 38,797 38,261
--------------- --------------
Total liabilities and stockholders' equity $ 335,160 $ 336,187
=============== ==============
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Operations
(in thousands except per share data)
(Unaudited)
Three months ended March 31,
----------------------------
2006 2005
---------- ----------
Interest and dividend income
Interest and fees on loans $4,859 $3,753
Interest on securities
Taxable 154 191
Tax exempt 45 26
Interest on federal funds sold 62 59
Dividends 41 32
Interest on deposits with financial institutions 60 24
---------- ----------
Total interest and dividend income 5,221 4,085
---------- ----------
Interest expense
Deposits 2,203 1,410
FHLB advances 234 164
Other 173 146
---------- ----------
Total interest expense 2,610 1,720
---------- ----------
Net interest income 2,611 2,365
Provision for loan losses 81 202
---------- ----------
Net interest income after provision for loan losses 2,530 2,163
---------- ----------
Noninterest income
Service charges 102 61
Gain on loan sales 208 209
Increase in cash surrender value of life insurance 49 46
Net realized gains on sales of available-for-sale
securities - 5,012
Other 81 161
---------- ----------
Total noninterest income 440 5,489
---------- ----------
Noninterest expense
Salaries and employee benefits 1,148 1,475
Net occupancy 394 349
Data processing fees 186 133
Professional fees 116 255
Marketing 32 33
Other 379 614
---------- ----------
Total noninterest expense 2,255 2,859
---------- ----------
Income from continuing operations before income
taxes and minority interest 715 4,793
Income tax expense from continuing operations 221 1,686
---------- ----------
Income from continuing operations before minority
interest and discontinued operations 494 3,107
Income from subsidiary held for disposal - 6
Income tax expense from subsidiary held for disposal - 2
---------- ----------
Income before minority interest 494 3,111
Minority interest in (income) of consolidated subsidiary
and subsidiary held for disposal - (2)
---------- ----------
Net income $ 494 $3,109
========== ==========
Income per share from continuing operations
Basic $0.26 $1.66
Diluted 0.25 1.62
Income per share from subsidiary held for disposal
Basic $0.00 $0.00
Diluted 0.00 0.00
Net income per share
Basic $0.26 $1.66
Diluted 0.25 1.62
Weighted average shares outstanding
Basic 1,921 1,869
Diluted 1,945 1,920
Cash dividends declared per share $0.08 $0.16
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statement of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
Three months ended March 31,
----------------------------
2006 2005
---------- -----------
Net income $494 $3,109
Other comprehensive income, net of tax
Change in unrealized gains and losses on
available-for-sale securities (39) (588)
Less reclassification adjustment for realized gains
included in net income - 3,308
---------- -----------
Other comprehensive (loss) (39) (3,896)
---------- -----------
Comprehensive income (loss) $455 $ (787)
========== ===========
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statement of Cash Flows
(in thousands)
(Unaudited)
Three months ended March 31,
-------------------------------
2006 2005
------------- ------------
Cash Flows from Operating Activities:
Net income $ 494 $ 3,109
Adjustments to reconcile net income to net cash (used in) provided by
operations:
Depreciation 184 162
Provision for loan losses 81 202
Gain on loan sales (208) (209)
Origination of loans held for sale (10,622) (13,027)
Proceeds from loans held for sale 11,067 12,790
Compensation expense on stock options 18 -
ESOP compensation 45 50
Amortization of unearned compensation on restricted stock 2 1
Amortization of premiums and discounts on securities 11 39
Deferred income taxes - 419
FHLB stock dividend (29) (22)
Increase in equity investment of subsidiary - 1
Amortization of loan fees (87) (97)
Amortization of intangibles, net 65 113
Net realized (gains) on available-for-sale securities - (5,012)
Minority interest in income from subsidiary held for disposal - 2
Increase in cash value of life insurance (49) (46)
(Income) from subsidiary held for disposal - (6)
Changes in:
(Increase) in interest receivable and other assets (132) (303)
(Decrease) increase in interest payable and other liabilities (24) 1,399
------------- ------------
Net cash provided by (used in) operating activities 816 (435)
------------- ------------
Cash Flows from Investing Activities:
Proceeds from maturities of interest-bearing deposits 100 -
Proceeds from maturities of available-for-sale securities 560 1,498
Proceeds from the sales of available-for-sale securities - 5,088
Proceeds from maturities of held-to-maturity securities 5 110
Net (increase) in loans (6,402) (7,953)
Purchases of premises and equipment (293) (2,889)
Proceeds from sale of FHLB stock 476 -
Proceeds from sale of subsidiary - 2,300
------------- ------------
Net cash (used in) investing activities (5,554) (1,846)
------------- ------------
Cash Flows from Financing Activities:
Net (decrease) increase in deposits (1,657) 7,559
Net increase (decrease) in short-term borrowings 249 (6,529)
Proceeds from exercise of stock options 169 172
Cash dividends paid (153) (150)
------------- ------------
Net cash (used in) provided by financing activities (1,392) 1,052
------------- ------------
Net (decrease) in cash and cash equivalents (6,130) (1,229)
Cash and cash equivalents at beginning of period 21,563 9,946
------------- ------------
Cash and cash equivalents at end of period $15,433 $ 8,717
============= ============
Supplemental Cash Flow Information:
Interest paid $ 2,544 $ 1,665
Income taxes paid (refunds) 175 (39)
Net increase in cash and cash equivalents of discontinued operations
(revised - see note 8)
Net cash (used in) operating activities - (5)
Net cash provided by investing ativities - 1,647
Net cash (used in) financing activities - (361)
------------- ------------
Net increase in cash and cash equivalents of discontinued operations - 1,281
------------- ------------
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 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-KSB annual report for the year ended December 31, 2005 filed with the
United States Securities and Exchange Commission. 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, 2005 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"), 1st
Independence Mortgage, 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
reclassified to consistently present the discontinued operations.
2. Stock-Based Compensation
At March 31, 2006, the Company had two stock-based compensation plans. Prior to
the first quarter of 2006, as permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
the Company followed 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 was recognized for the three
months ended March 31, 2005 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
------------------
Net income as reported $3,109
Less total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects 2
------
Pro forma net income $3,107
======
Basic net income per share
As reported $1.66
Pro forma 1.66
Diluted net income per share
As reported $1.62
Pro forma 1.62
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.123R, "Share-Based Payment"
("SFAS 123R"). This Statement requires expensing of stock options and other
share-based payments over the related vesting period 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. SFAS 123R
permits companies to adopt its requirements using either a "modified
prospective" method, or a "modified retrospective" method. Under the "modified
prospective" method, compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of SFAS 123R for
all share-based payments granted after that date, and based on the requirements
of SFAS 123 for all unvested awards granted prior to the effective date of SFAS
123R. Under the "modified retrospective" method, the requirements are the same
as under the "modified prospective" method but this method also permits entities
to restate financial statements of previous periods based on proforma
disclosures made in accordance with SFAS 123. Beginning in January 2006, the
Company adopted the Statement as required and elected the "modified prospective"
method and thus has not restated prior financial statements. For the three
months ended March 31, 2006, the Company recorded $18,000 in employee
stock-based compensation expense, which is included in salaries and employee
benefits. As of March 31, 2006, there was $47,000 of unrecognized
stock-compensation expense for previously granted unvested options that will be
recognized over a weighted-average period of 1.8 years.
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):
2006 2005
---- ----
Beginning balance $2,911 $2,549
Provision for loan losses 81 202
Loans charged off (1) (6)
Recoveries - 2
------ ------
Ending balance $2,991 $2,747
====== ======
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,
2006 2005
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income from continuing operations $494 $3,107
==== ======
Income from discontinued operations $ - $ 4
==== ======
Net income $494 $3,109
==== ======
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 1,921 1,869
===== =====
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 1,921 1,869
Plus: dilutive effect of stock options 24 51
----- -----
Adjusted weighted average shares 1,945 1,920
===== =====
Basic net income per share data:
Income from continuing operations $0.26 $1.66
===== =====
Income from discontinued operations $ - $ -
===== =====
Net income $0.26 $1.66
===== =====
Diluted net income per share data:
Income from continuing operations $0.25 $1.62
===== =====
Income from discontinued operations $ - $ -
===== =====
Net income $0.25 $1.62
===== =====
Options to purchase 7,500 and 10,000 common shares for the three months ended
March 31, 2006 and March 31, 2005, 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 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-Q for additional information.
6. Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.123R, "Share-Based Payment"
("SFAS 123R"). This Statement required expensing of stock options and other
share-based payments over the related vesting period beginning in 2005, and
superseded 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 apply SFAS 123R as
of the first interim or annual reporting period that began after June 15, 2005.
However, in April 2005 the Untied States Securities and Exchange Commission
issued a rule that revised the required date of adoption under SFAS 123R. The
new rule allowed for public entities to adopt the provisions of SFAS 123R at the
beginning of the first fiscal year beginning after June 15, 2005. The Company
adopted the Statement in the first quarter of 2006 as required and the effects
of initial adoption were immaterial. See note 2, "Stock-Based Compensation" to
this report for additional information.
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, "Completion of Subsidiary Disposal" to the
consolidated financial statements included in the Company's Form 10-KSB for the
year ended December 31, 2005 for additional information.
8. Revised Cash Flows of Discontinued Operations
In 2005 the Company has separately disclosed the operating, investing and
financing portions of the cash flows attributable to its discontinued
operations, which in prior periods were reported on a combined basis as a single
amount.
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-KSB for the year ended
December 31, 2005, 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, 2006, the
Company had total assets, deposits and stockholders' equity of $335.2 million,
$262.7 million, and $38.8 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.
The Company is 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. 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.
In January 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 reflected 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.
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-KSB for the year ended December 31, 2005 for additional
information.
Overview
Net income for the quarter ended March 31, 2006 was $494,000 or $0.25 per
diluted share compared to $3,109,000 or $1.62 per diluted share for the
comparable period in 2005. The decrease in net income and net income per diluted
share for the three-month period were primarily due to after tax securities
gains of $3,308,000 taken in the first quarter of 2005. Partially offsetting
this factor was an after tax charge of $235,000 recorded in the first quarter
2005 for severance expenses related to the retirement of the Company's former
Chairman and Chief Executive Officer and the decrease of $80,000 after taxes in
the provision for loan losses in the first quarter of 2006 compared to the first
quarter of 2005. Other factors were decreased professional fees and other
noninterest expense items.
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 $2.6 million for the three months ended March 31, 2006,
an increase of $0.2 million or 10% from $2.4 million for the comparable period
in 2005. On an annualized basis, the net interest spread and net interest margin
were 3.07% and 3.45% for the current quarter, compared to 3.35% and 3.51% for
the same period of 2005. The decrease in the net interest margin was primarily
due a rising interest rate environment with the effects on the Company of the
rates on interest-bearing liabilities rising at a faster pace than the rates on
interest-earning assets. Changes in volume resulted in an increase in net
interest income of $0.4 million for the first quarter of 2006 compared to the
same period in 2005, and changes in interest rates and the mix resulted in a
decrease in net interest income of $0.2 million for the three months ended March
31, 2006 versus the comparable period in 2005.
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,
2006, if interest rates increased 200 basis points and decreased 200 points,
respectively, the Bank's net interest income would increase by 3.9% and decrease
by 2.8%, respectively.
Provision for Loan Losses
The provision for loan losses was $81,000 for the three months ended March 31,
2006, compared to $202,000 for the same period in 2005. Nonperforming loans were
$1.2 million at March 31, 2006 and $1.3 million at December 31, 2005, or 0.45%
and 0.47%, respectively, of total loans. The allowance for loan losses was $3.0
million and $2.9 million at March 31, 2006 and December 31, 2005, or 1.08% 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.
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 $0.4 million for the three months ended March 31, 2006
compared to $5.5 million for the same period in 2005. The significant decrease
in noninterest income for the three-month period in 2006 compared to the same
period in 2005 resulted primarily from a $5.0 million gain on sale of Federal
Home Loan Mortgage Corporation ("FHLMC") preferred stock recorded in the first
quarter of 2005. The gain on loan sales was basically flat from quarter to
quarter, while service charge income was $102,000 for the three months ended
March 31, 2006, compared to $61,000 for the comparable period in 2005. The
Company continues to evaluate its deposit product offerings with the intention
of expanding its offerings to the consumer and business depositor. During March
2005, the Bank began offering products which include overdraft privileges on
certain individual deposit products and cash management services for business
depositors. Both of these products are fee-based and should result in further
increases in service charge income. The Bank also introduced a new deposit
product known as "ATM Advantage" during September 2005. This new product offers
unlimited use of competitor's ATM networks with reimbursement of all foreign and
surcharge fees. The product does not pay interest but requires a minimum balance
to avoid a monthly service charge. This product could reduce service charge
income but the effect would be offset by more noninterest bearing deposits which
should contribute to additional net interest income. Factors contributing to the
decrease in other noninterest income was the Company's decision to exit the
title insurance business at the end of November 2005 and a one time gain of
$32,000 on long-term portfolio loans sold in the first quarter of 2005. The
Company's title insurance company had approximately $50,000 of title insurance
revenue for the three months ended March 31, 2005.
Noninterest Expense
Noninterest expense was $2.3 million for the quarter ended March 31, 2006
compared to $2.9 million in the same period in 2005. Contributing to the
decrease was a decrease in salaries and employee benefits due to the $356,000
which the Company accrued during the first quarter of 2005 for the severance
expense relating to the retirement of the Company's former Chairman and Chief
Executive Officer and a reduction in professional fees in the first quarter of
2006 due to a reduced amount of services required. Other factors included a
higher level of other noninterest expenses in the first quarter of 2005
primarily related to integration items associated with the merger with
Independence Bancorp and the Citizens disposal in January 2005 which was
previously mentioned. Partially offsetting those factors was an increase in net
occupancy expenses due to the Bank's purchase of a building, located in
Louisville, Kentucky to accommodate expansion. In April 2005, the Bank moved its
finance and accounting, loan and deposit operations, and mortgage banking
operations into the building and in November 2005 established a full service
branch at this location. An additional factor offsetting the overall decrease in
noninterest expenses was an increase in data processing expenses which was
primarily due to the growth of the Bank's services and it's commitment to
upgrade systems productivity and the effects of a refund received in the first
quarter of 2005 from a previous third party data processing company of the Bank.
Income Tax Expense (Benefit)
The effective income tax rate on income from continuing operations was 30.9% for
the three months ended March 31, 2006 compared to 35.2% for the same period in
2005. The decrease in the effective tax rate is primarily due to an increase in
the percentage of tax exempt interest income.
Financial Condition
The Company's total assets were $335.2 million at March 31, 2006 compared to
$336.2 million at December 31, 2005, a decrease $1.0 million or 0.3%. Net loans
increased $6.3 million while cash and cash equivalents decreased $6.1 million,
available-for-sale securities decreased $0.6 million and Federal Home Loan Bank
("FHLB") stock went down $0.5 million.
Net loans were $273.3 million at March 31, 2006, compared to $267.0 million at
December 31, 2005, an increase of $6.3 million or 2.4%. The increases in loans
were in the real estate construction and real estate commercial loan portfolios,
which increased $7.7 million or 15% and $5.8 million or 12%, respectively. The
increases were primarily a result of lending activity in the Louisville,
Kentucky metro market. All loan categories increased or remained the same as a
percentage of total loans, except residential real estate loans, which decreased
from approximately 48% to 45% of total loans and commercial loans which
decreased from 9% to 7% 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 decreased $1.6 million or 0.6% to $262.7 million at March 31, 2006
compared to December 31, 2005. This decrease was largely attributable to a $7.3
million decrease in time deposits which more than offset increases in savings,
NOW and money market deposits of $3.7 million and demand deposits of $2.0
million. The increase in savings, NOW and money market deposits resulted
primarily from the effects of a general marketing campaign during the first nine
months of 2005 focusing on existing products and print advertisements only. As
previously mentioned, during September 2005 the Company introduced a new deposit
product known as "ATM Advantage" as part of its efforts to continue to grow core
deposits. This new product offers unlimited use of competitor's ATM networks
with reimbursement of all foreign and surcharge fees. The product does not pay
interest but requires a minimum balance to avoid a monthly service charge.
Short-term borrowings increased $0.3 million or 1.3% to $19.0 million at March
31, 2006, compared to $18.7 million at December 31, 2005. 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, 2006, unused loan commitments and performance
letters of credit were $55,883,000 and $2,444,000, 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, 2006 and December 31, 2005, brokered deposits were $47.4 million
and $59.6 million, respectively. The weighted average cost and maturity of
brokered deposits were 4.20% and five months at March 31, 2006 compared to 3.90%
and nine months at December 31, 2005. 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 both March 31, 2006 and December 31, 2005, the Bank had total FHLB advances
outstanding of $22.0 million with $4.0 million 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 $22.0 million of
unused commitments under its line of credit with the FHLB and sufficient
collateral to borrow an additional $60.5 million.
The Company's liquidity depends primarily on dividends paid to it as sole
shareholder of the Bank. At March 31, 2006, the Bank may pay up to $5.9 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, 2006 the rate on the
variable rate obligations was 8.11%. 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 increased $0.5 million from $38.3 million at December 31,
2005 to $38.8 million at March 31, 2006. The significant drivers of the change
were net income of $0.5 million, cash dividends declared of $0.2 million ($0.08
per share) and an increase of $0.2 million relating to stock option and ESOP
plan 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, 2006 and
December 31, 2005 for the Consolidated Company and the Bank along with the
regulator's minimum ratio to be considered well capitalized.
To Be Well
March 31, 2006 December 31, 2005 Capitalized
-------------- ----------------- -----------
Total risk-based capital to risk-weighted assets
Consolidated company 15.4% 15.1% 10.0%
Bank 14.0 13.6 10.0
Tier 1 capital to risk-weighted assets
Consolidated company 14.3 13.1 6.0
Bank 12.8 12.5 6.0
Tier 1 capital to average assets
Consolidated company 11.4 10.2 5.0
Bank 10.3 9.7 5.0
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, 2006. 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, 2006 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, 2006.
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. 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. 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.
By: /s/ N. William White
----------------
N. William White
President and Chief Executive Officer
Date: May 9, 2006
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").