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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 September 30, 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 1,992,994 shares of common stock outstanding at
October 29, 2007.
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1st INDEPENDENCE FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarter Ended September 30, 2007
INDEX
Part I - Financial Information
Item 1. Financial Statements Page Number
-----------
Condensed Consolidated Balance Sheets as of September 30, 2007
(unaudited) and December 31, 2006 3
Condensed Consolidated Statements of Income for the three
months and nine months ended September 30, 2007 and 2006 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income for the
three months and nine months ended September 30, 2007 and 2006
(unaudited) 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2007 and 2006 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7-9
Item 2. Management's Discussion and Analysis of Financial Condition 9-13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
Part II - Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits 14
Signatures 15
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
September 30, December 31,
2007 2006
--------------- --------------
Assets
Cash and and due from banks $ 11,733 $ 16,678
Interest-bearing demand deposits 8,160 6,370
Federal funds sold 8,235 531
--------------- --------------
Cash and cash equivalents 28,128 23,579
Inerest-bearing deposits 100 100
Available-for-sale securities at fair value 14,514 16,421
Held-to-maturity securities, fair value of $1,757 and
$1,930 at September 30, 2007 and December 31, 2006, respectively 1,746 1,900
Loans held for sale 976 1,227
Loans, net of allowance for loan losses of $2,966 and
$3,745 at September 30, 2007 and December 31, 2006, respectively 263,963 270,478
Premises and equipment, net 8,188 8,322
Federal Home Loan Bank (FHLB) stock 2,313 2,313
Bank owned life insurance 3,593 3,435
Goodwill 11,142 11,142
Other real estate owned 2,825 433
Interest receivable and other assets 3,341 3,456
--------------- --------------
Total assets $340,829 $342,806
=============== ==============
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand $ 18,319 $ 18,261
Savings, NOW and money market 116,252 78,083
Time 127,081 157,733
--------------- --------------
Total deposits 261,652 254,077
Short-term borrowings 16,291 36,526
Long-term debt 20,279 10,279
Interest payable and other liabilities 2,119 1,621
--------------- --------------
Total liabilities 300,341 302,503
--------------- --------------
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,
1,992,994 shares and 1,995,594 shares outstanding at
September 30, 2007 and December 31, 2006, respectively 296 296
Additional paid-in capital 39,874 39,775
Retained earnings 15,161 15,169
Unearned ESOP compensation (197) (291)
Accumulated other comprehensive (loss) (71) (71)
Treasury stock, at cost, common,
969,835 shares and 969,835 shares at September 30, 2007 and
December 31, 2006, respectively (14,575) (14,575)
--------------- --------------
Total stockholders' equity 40,488 40,303
--------------- --------------
Total liabilities and stockholders' equity $340,829 $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) (Unaudited)
Three months ended Nine months ended
September 30 September 30,
------------------------- --------------------------
2007 2006 2007 2006
---------- --------- --------- ---------
Interest and dividend income
Interest and fees on loans $ 5,078 $ 5,373 $15,404 $15,461
Interest on securities
Taxable 163 164 491 478
Tax exempt 43 46 133 137
Interest on federal funds sold 166 101 343 251
Dividends 52 38 148 119
Interest on deposits with financial institutions 73 75 227 209
---------- --------- --------- ---------
Total interest and dividend income 5,575 5,797 16,746 16,655
---------- --------- --------- ---------
Interest expense
Deposits 2,711 2,614 8,034 7,348
FHLB advances 284 301 923 711
Other 181 192 539 544
---------- --------- --------- ---------
Total interest expense 3,176 3,107 9,496 8,603
---------- --------- --------- ---------
Net interest income 2,399 2,690 7,250 8,052
Provision for loan losses 66 543 261 655
---------- --------- --------- ---------
Net interest income after provision for loan losses 2,333 2,147 6,989 7,397
---------- --------- --------- ---------
Noninterest income
Service charges 158 134 427 380
Gain on loan sales 239 277 691 703
Gain (loss) on sale of premises amd equipment - (32) - (32)
Increase in cash value of life insurance 54 51 158 149
Other 86 83 247 232
---------- --------- --------- ---------
Total noninterest income 537 513 1,523 1,432
---------- --------- --------- ---------
Noninterest expense
Salaries and employee benefits 1,320 1,004 3,758 3,274
Net occupancy 412 384 1,235 1,183
Data processing fees 204 190 614 567
Professional fees 71 219 358 521
Marketing 5 32 86 88
Other 461 371 1,800 1,110
---------- --------- --------- ---------
Total noninterest expense 2,473 2,200 7,851 6,743
---------- --------- --------- ---------
Income before income taxes 397 460 661 2,086
Income tax expense 168 111 197 616
---------- --------- --------- ---------
Net income $ 229 $ 349 $ 464 $ 1,470
========== ========= ========= =========
Net income per share
Basic $0.12 $0.18 $0.24 $0.76
Diluted 0.12 0.18 0.23 0.75
Weighted average shares outstanding
Basic 1,971 1,949 1,969 1,935
Diluted 1,982 1,963 1,980 1,954
Cash dividends declared per share $0.08 $0.08 $0.24 $0.24
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited) (Unaudited)
Three months ended Nine months ended
September 30 September 30,
-------------------------- ---------------------------
2007 2006 2007 2006
----------- ------------ ------------ ----------
Net income $ 229 $ 349 $ 464 $ 1,470
Other comprehensive income, net of tax
Change in unrealized gains and losses on
available-for-sale securities 132 206 - 35
Less reclassification adjustment for realized gains
included in net income - - - -
----------- ------------ ------------ ----------
Other comprehensive income 132 206 - 35
----------- ------------ ------------ ----------
Comprehensive income $ 361 $ 555 $ 464 $ 1,505
=========== ============ ============ ==========
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine months ended September 30,
-------------------------------
2007 2006
------------- ------------
Cash Flows from Operating Activities:
Net income $ 464 $ 1,470
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation 533 539
Provision for loan losses 261 655
Gain on loan sales (691) (703)
Origination of loans held for sale (37,578) (38,113)
Proceeds from loans held for sale 38,520 39,506
Compensation expense on stock options 52 34
ESOP compensation 157 83
Amortization of unearned compensation on restricted stock 22 12
Amortization of premiums and discounts on securities 17 25
Deferred income taxes 63 (235)
FHLB stock dividend - (90)
Amortization of loan fees (160) (278)
Amortization of intangibles, net 196 195
Loss on sale of premises and equipment - 32
Increase in cash value of life insurance (158) (148)
Changes in:
(Increase) in interest receivable and other assets (104) (536)
Increase in interest payable and other liabilities 499 149
------------- ------------
Net cash provided by operating activities 2,093 2,597
------------- ------------
Cash Flows from Investing Activities:
Purchase of interest-bearing deposits - (100)
Proceeds from maturities of interest-bearing deposits - 100
Purchases of available-for-sale securities (1,995) (1,491)
Proceeds from maturities of available-for-sale securities 3,884 1,532
Proceeds from sales of available-for-sale securities - 211
Proceeds from maturities of held-to-maturity securities 152 68
Net decrease (increase) in loans 3,984 (5,200)
Purchases of premises and equipment (399) (461)
Proceeds from sale of FHLB stock - 476
------------- ------------
Net cash provided by (used in) investing activities 5,626 (4,865)
------------- ------------
Cash Flows from Financing Activities:
Net increase in deposits 7,574 1,210
Net (decrease) increase in short-term borrowings (20,235) 2,172
Proceeds from issuance of long-term debt 10,000 -
Repayment of long-term debt - (3,000)
Repurchase and retirement of common stock (37) -
Proceeds from exercise of stock options - 412
Cash dividends paid (472) (463)
------------- ------------
Net cash (used in) provided by financing activities (3,170) 331
------------- ------------
Net increase (decrease) in cash and cash equivalents 4,549 (1,937)
Cash and cash equivalents at beginning of period 23,579 21,563
------------- ------------
Cash and cash equivalents at end of period $ 28,128 $ 19,626
============= ============
Supplemental Cash Flow Information:
Interest paid $ 9,384 $ 8,453
Income taxes paid 35 985
Real estate acquired in settlement of loans 2,271 181
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 and nine months ended September 30, 2007 and September 30,
2006, the Company recorded $9,000 and $52,000, respectively, and $8,000 and
$34,000, respectively, in employee stock-based compensation expense, which is
included in salaries and employee benefits. As of September 30, 2007 and
September 30, 2006, there was $36,000 and $31,000, respectively, of unrecognized
stock-compensation expense for previously granted unvested options that will be
recognized over a weighted-average period of 1.4 and 1.5 years, respectively.
3. Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses for the nine months
ended September 30 follows (in thousands):
2007 2006
---- ----
Beginning balance $3,745 $2,911
Provision for loan losses 261 655
Loans charged off (1,049) (1)
Recoveries 9 4
------ ------
Ending balance $2,966 $3,569
====== ======
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
September 30,
2007 2006
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Net income $229 $349
==== ====
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 1,971 1,949
===== =====
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 1,971 1,949
Plus: dilutive effect of stock options 11 14
----- -----
Adjusted weighted average shares 1,982 1,963
===== =====
Net income per share data:
Basic $0.12 $0.18
===== =====
Diluted $0.12 $0.18
===== =====
Nine months ended
September 30,
2007 2006
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Net income $464 $1,470
==== ======
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 1,969 1,935
===== =====
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 1,969 1,935
Plus: dilutive effect of stock options 11 19
----- -----
Adjusted weighted average shares 1,980 1,954
===== =====
Net income per share data:
Basic $0.24 $0.76
===== =====
Diluted $0.23 $0.75
===== =====
Options to purchase 30,500 common shares for the three months ended September
30, 2007 and 17,500 common shares for the nine months ended September 30, 2007
and 17,000 common shares for both the three months and nine months ended
September 30, 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 and Subsequent Event
On July 18, 2007 a jury in the case of Larry Sutherland, et.al., v. Harrodsburg
First Financial Bancorp, Inc., in the Circuit Court of Anderson County in the
Commonwealth of Kentucky returned a verdict awarding damages to the plaintiffs
of $403,620. The lawsuit originated 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 alleged that
the Company made certain material misrepresentations in connection with certain
statements made in the tender offer. Management, after discussion with legal
counsel, decided to record an accrual of $403,620 as of June 30, 2007 relating
to the lawsuit. Notwithstanding the accrual, the Company believes that it has
strong basis for appeal and thus filed an appeal in the Kentucky Court of
Appeals in October 2007. 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 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 2003. 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
nine months of 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 November 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 September 30, 2007, the
Company had total assets, deposits and stockholders' equity of $340.8 million,
$261.7 million, and $40.5 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.
On July 18, 2007 a jury in the case of Larry Sutherland, et.al., v. Harrodsburg
First Financial Bancorp, Inc., in the Circuit Court of Anderson County in the
Commonwealth of Kentucky returned a verdict awarding damages to the plaintiffs
of $403,620. The lawsuit originated 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 alleged that
the Company made certain material misrepresentations in connection with certain
statements made in the tender offer. Management, after discussion with legal
counsel, decided to record an accrual of $403,620 as of June 30, 2007 relating
to the lawsuit. Notwithstanding the accrual, the Company believes that it has
strong basis for appeal and thus filed an appeal in the Kentucky Court of
Appeals in October 2007.
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 September 30, 2007 was $229,000 or $0.12 per
diluted share compared to $349,000 or $0.18 per diluted share for the comparable
period in 2006. Net income for the nine months ended September 30, 2007 was
$464,000 or $0.23 per diluted share compared to $1,470,000 or $0.75 per diluted
share for the comparable period in 2006. The decrease in net income and net
income per diluted share for the nine-month period was primarily due to a
decrease in net interest income after taxes of $529,000, an increase in
noninterest expenses after taxes of $731,000 (which includes $259,000 after
taxes relating to the litigation accrual made in the second quarter of 2007
previously discussed) and an increase in tax expense due to an adjustment
relating to the tax deduction for employee benefit plans which increased income
tax expense approximately $41,000. Partially offsetting these factors was a
decrease of $260,000 after taxes in the provision for loan losses and an
increase in noninterest income after taxes of $60,000. The decrease in net
income and net income per diluted share for the quarter was primarily due to a
decrease in net interest income after taxes of $192,000 and an increase in
noninterest expenses after taxes of $180,000 and the increase of $41,000 in
income tax expense discussed above. Partially offsetting these factors was a
decrease of $315,000 after taxes in the provision for loan losses and an
increase in noninterest income after taxes of $16,000.
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 and $7.3 million, respectively, for the
three months and nine months ended September 30, 2007, a decrease of $0.3
million or 11% and $0.8 million or 10%, respectively, from $2.7 million and $8.1
million, respectively, for the comparable periods of 2006. On an annualized
basis, the net interest spread and net interest margin were 2.67% and 3.08%,
respectively, for the current quarter, compared to 2.94% and 3.39% for the same
period of 2006. For the nine months ended September 30, 2007 the net interest
spread and net interest margin were 2.73% and 3.16%, respectively, compared to
3.03% and 3.45% for the first nine months of 2006. The decrease in the net
interest margin was primarily due to a faster increase in interest rates on
interest-bearing liabilities compared to the rates on interest-earning assets, a
decrease in the volume of net earning assets and the reversal of $96,000 of
interest income on certain loans which were placed on nonaccrual in the third
quarter of 2007. Changes in volume resulted in a decrease in net interest income
of $0.1 million and $0.3 million, respectively, for the third quarter and first
nine months of 2007 compared to the same periods in 2006, and changes in
interest rates and the mix resulted in a decrease in net interest income of $0.2
million and $0.5 million, respectively, for the third quarter and first nine
months of 2007 versus the comparable periods 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 September
30, 2007, if interest rates increased 200 basis points and decreased 200 points,
respectively, the Bank's net interest income would increase by 1.4% and increase
by 0.4%, respectively.
Provision for Loan Losses
The provision for loan losses was $66,000 and $261,000 for the three months and
nine months ended September 30, 2007, compared to $543,000 and $655,000 for the
same periods in 2006. Nonperforming loans were $5.0 million at September 30,
2007 and $3.7 million at December 31, 2006, or 1.89% and 1.36%, respectively, of
total loans. The increase in nonperforming loans is primarily due to an increase
in nonperforming real estate construction and development loans, primarily in
the 1-4 family markets. The allowance for loan losses was $3.0 million and $3.7
million at September 30, 2007 and December 31, 2006, or 1.11% and 1.37%,
respectively, of total loans. Net charge-offs were $1,040,000 in the first nine
months of 2007 compared to a net recovery of $3,000 in the same period in 2006.
The increase in net charge-offs in 2007 was primarily due to three large
borrowers in the real estate construction and commercial and industrial
portfolios. These charge-offs taken in the first quarter of 2007 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 $0.5 million for the three months ended September 30,
2007, compared to $0.5 million for the same period in 2006 and $1.5 million for
the nine months ended September 30, 2007, compared to $1.4 million for the first
nine months of 2006. The gain on loan sales was down for the third quarter and
first nine months of 2007 versus the same periods of 2006 due to a decrease in
volume in the third quarter that reversed an increase in volume in the first
half of 2007 versus a softened housing market leading to a slow down in
secondary market mortgage activity and lower margins in 2006. The gain on loan
sales was $239,000 for the three months ended September 30, 2007, compared to
$277,000 for the comparable period in 2006 and $691,000 for the first nine
months of 2007 compared to $703,000 for the first nine months of 2006. Service
charge income was $158,000 for the three months ended September 30, 2007,
compared to $134,000 for the comparable period in 2006 and $427,000 for the
first nine months of 2007 compared to $380,000 for the first nine months of
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. Currently, the Company is pursuing a strategy to increase its core
deposit base by expanding the Company's offering of remote deposit capture
products for current and prospective business depositors.
Noninterest Expense
Noninterest expense was $2.5 million for the quarter ended September 30, 2007
compared to $2.2 million the same period in 2006 and $7.9 million for the nine
months ended September 30, 2007 compared to $6.7 million for the first nine
months of 2006. Contributing to the increases were an increase in salaries and
employee benefits due to merit and promotional salary increases and management
additions including the hiring of an experienced commercial lending team in the
second quarter of 2007, 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 amount of
expense necessary to cover the Company's 401(k) match as the match is now
covered by released ESOP shares. 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 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 and as previously discussed
the litigation accrual made in the second quarter of 2007 of $404,000. Other
factors were an increase in net occupancy expenses relating to the Bank's branch
expansion plans and certain equipment upgrades. Partially offsetting these
increases was a decrease in professional fees due to a reduced amount of
services required nothwithstanding an increased amount of services required
regarding preparation work for compliance with certain of the upcoming
requirements of the Sarbanes-Oxley Act of 2002 and a decrease in marketing
expense for the third quarter of 2007 versus the third quarter of 2006.
Income Tax Expense (Benefit)
The effective income tax rate on income before income taxes was 42.3% for the
three months ended September 30, 2007 compared to 24.1% for the same period in
2006 and 29.8% for the first nine months of 2007 compared to 29.5% for the first
nine months of 2006. The increase in the effective tax rate for the third
quarter of 2007 was primarily due to an adjustment relating to the tax deduction
for employee benefit plans which increased income tax expense approximately
$41,000. The effective tax rate for the nine-month period of 2007 was flat
compared to the same period in 2006 primarily due to an increase in the
percentage of tax exempt interest income compared to income before income taxes
which offset the adjustment discussed above.
Financial Condition
The Company's total assets were $340.8 million at September 30, 2007 compared to
$342.8 million at December 31, 2006, a decrease of 2.0 million or 0.6%. Net
loans decreased $6.5 million, investments decreased $2.1 million, loans held for
sale decreased $0.3 million, while other real estate owned went up $2.4 million,
cash and cash equivalents increased $4.5 million, and bank owned life insurance
went up $0.2 million.
Net loans were $264.0 million at September 30, 2007, compared to $270.5 million
at December 31, 2006, a decrease of $6.5 million or 2.4%. The decrease in loans
was primarily due to a decrease in residential real estate loans which decreased
$13.8 million or 11.4%. The decrease in total loans was partially offset by
increases in real estate construction and real estate commercial loan
portfolios, which increased $3.7 million or 5.8% and $5.6 million or 11.2%,
respectively. 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 41% of total loans and home equity loans which decreased
from 5% to 4%. The decrease in residential real estate loans as a percentage of
total loans is partly 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 $7.6 million or 3.0% to $261.7 million at September 30, 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 $38.2 million which
more than offset a decrease in time deposits of $30.7 million while demand
deposits remained flat. 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 $20.2 million to $16.3 million at September 30,
2007, compared to $36.5 million at December 31, 2006 while long-term debt
increased $10.0 million to $20.3 million at September 30, 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 September 30, 2007, unused loan commitments and
performance letters of credit were $43,219,000 and $4,456,000, 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 September 30, 2007 and December 31, 2006, brokered deposits were $17.1
million and $23.7 million, respectively. The weighted average cost and maturity
of brokered deposits were 4.85% and six months at September 30, 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 or rates
within the Company's local markets.
At September 30, 2007 and December 31, 2006, the Bank had total FHLB advances
outstanding of $26.0 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 $55.0 million of unused
commitments under its line of credit with the FHLB and sufficient collateral to
borrow an additional $53.8 million.
The Company's liquidity depends primarily on dividends paid to it as sole
stockholder of the Bank. At September 30, 2007, the Bank may pay up to $9.2
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 (March 26, June 26, September 26 and
December 26) and are tied to the three-month London Interbank Offering Rate
("LIBOR") plus 3.15%. The weighted average rate on the variable rate obligations
was 8.50% for both the third quarter and first nine months of 2007,
respectively, compared to 8.61% and 8.15% for the same periods in 2006. At
September 30, 2007 the rate on the variable rate obligations was 8.35% compared
to 8.52% at September 30, 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 increased $0.2 million from $40.3 million at December 31,
2006 to $40.5 million at September 30, 2007. The individual items within
stockholders' equity that changed were net income of $0.5 million, cash
dividends declared of $0.5 million ($0.24 per share) and an increase of $0.2
million relating to stock option and 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 September 30, 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
September 30, 2007 December 31, 2006 Capitalized
------------------ ----------------- -----------
Total risk-based capital to risk-weighted assets
Consolidated company 15.6% 15.9% N/A%
Bank 14.9 14.7 10.0
Tier 1 capital to risk-weighted assets
Consolidated company 14.5 14.6 N/A
Bank 13.8 13.5 6.0
Tier 1 capital to average assets
Consolidated company 11.5 11.6 N/A
Bank 11.0 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" under
the caption "Results of Operations - Net Interest Income."
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 September 30, 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 September 30, 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 September 30, 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. In the lawsuit, the plaintiffs sought to recover compensatory and
punitive damages in connection with the shares they 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. On July 18, 2007 a jury in the Circuit Court of Anderson County
in the Commonwealth of Kentucky returned a verdict awarding damages to the
plaintiffs of $403,620. Management, after discussion with legal counsel, decided
to record an accrual of $403,620 as of June 30, 2007 relating to the lawsuit.
Notwithstanding the accrual, the Company believes that it has strong basis for
appeal and thus filed an appeal in the Kentucky Court of Appeals in
October 2007.
Item 6. Exhibits
(a) Exhibits
3.1 Certificate of Incorporation (incorporated by reference
from the Exhibits to the Company's Form S-1 Registration
Statement, initially filed on June 14, 1995,
Registration No. 33-93458).
3.2 Amended Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-KSB filed
on December 29, 2004).
3.3 Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Form 8-K filed on August 21, 2007).
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: November 6, 2007 By: /s/ R. Michael Wilbourn
---------------------------
R. Michael Wilbourn
Executive Vice President
and Chief Financial Officer
Exhibit Index
Exhibit
Number Description
3.1 Certificate of Incorporation (incorporated by reference
from the Exhibits to the Company's Form S-1 Registration
Statement, initially filed on June 14, 1995,
Registration No. 33-93458).
3.2 Amended Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-KSB filed
on December 29, 2004).
3.3 Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Form 8-K filed on August 21, 2007).
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").