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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
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Commission File No. 0-26570
1ST INDEPENDENCE FINANCIAL GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 61-1284899
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
104 South Chiles Street
Harrodsburg, Kentucky 40330-1620
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (859)734-5452
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The registrant had 1,940,161 shares of common stock outstanding at
July 29, 2005.
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1st INDEPENDENCE FINANCIAL GROUP, INC.
FORM 10-QSB
For the Quarter Ended June 30, 2005
INDEX
Part I - Financial Information
Item 1. Financial Statements Page Number
-----------
Condensed Consolidated Balance Sheets as of June 30, 2005
(unaudited) and December 31, 2004 3
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three months and six months ended June 30, 2005 and 2004
(unaudited) 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2005 and 2004 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition 11-17
and Results of Operations
Item 3. Controls and Procedures 17
Part II - Other Information
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits 18
Signatures 20
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
June 30, December 31,
2005 2004
-------------- --------------
Assets
Cash and and due from banks $ 3,258 $ 4,131
Interest-bearing demand deposits 5,066 4,749
Federal funds sold 929 1,066
-------------- --------------
Cash and cash equivalents 9,253 9,946
Inerest-bearing deposits 100 100
Available-for-sale securities at fair value 18,252 26,723
Held-to-maturity securities, fair value of $1,999 and
$2,165 at June 30, 2005 and December 31, 2004, respectively 1,979 2,150
Loans held for sale 2,975 2,344
Loans, net of allowance for loan losses of $2,757 and
$2,549 at June 30, 2005 and December 31, 2004, respectively 257,947 233,648
Premises and equipment, net 8,155 5,385
Federal Home Loan Bank (FHLB) stock 2,634 2,588
Cash surrender value of life insurance 3,140 3,047
Goodwill 11,142 11,142
Interest receivable and other assets 2,329 1,972
Assets of subsidiary held for disposal - 38,146
-------------- --------------
Total assets $ 317,906 $ 337,191
============== ==============
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand $ 15,136 $ 16,474
Savings, NOW and money market 66,605 45,866
Time 164,419 160,968
-------------- --------------
Total deposits 246,160 223,308
Short-term borrowings 18,547 23,233
Long-term debt 14,274 14,247
Deferred income taxes 10 1,625
Interest payable and other liabilities 1,463 1,161
Liabilities of subsidiary held for disposal - 34,129
-------------- --------------
Total liabilities 280,454 297,703
-------------- --------------
Commitments and contingencies - -
Minority interest 7 1,782
Stockholders' equity
Common stock, $0.10 par value, 5,000,000 shares authorized,
1,937,661 and 1,916,368 shares outstanding at
June 30, 2005 and December 31, 2004, respectively 291 289
Additional paid-in capital 38,955 38,588
Retained earnings 13,264 10,122
Unearned ESOP compensation (437) (490)
Unearned compensation on restricted stock (27) -
Accumulated other comprehensive income (loss) (26) 3,772
Treasury stock, at cost
Common; June 30, 2005 - 969,835 shares, December
31, 2004 - 969,835 shares (14,575) (14,575)
-------------- --------------
Total stockholders' equity 37,445 37,706
-------------- --------------
Total liabilities and stockholders' equity $ 317,906 $ 337,191
============== ==============
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Operations
(in thousands except per share data)
(Unaudited) (Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2005 2004 2005 2004
-------- -------- -------- ---------
Interest and dividend income
Interest and fees on loans $ 4,044 $ 1,370 $ 7,797 $ 2,706
Interest on securities
Taxable 180 205 371 440
Tax exempt 26 19 52 39
Interest on federal funds sold 84 - 143 -
Dividends 35 42 67 84
Interest on deposits with financial institutions 29 4 53 10
-------- ------- ------- -------
Total interest and dividend income 4,398 1,640 8,483 3,279
-------- ------- ------- -------
Interest expense
Deposits 1,620 618 3,030 1,267
FHLB advances 133 26 297 44
Other 149 80 295 169
-------- ------- ------- -------
Total interest expense 1,902 724 3,622 1,480
-------- ------- ------- -------
Net interest income 2,496 916 4,861 1,799
Provision for loan losses - 21 202 26
-------- ------- ------- -------
Net interest income after provision for loan losses 2,496 895 4,659 1,773
-------- ------- ------- -------
Non-interest income
Service charges 99 32 160 52
Earnings of equity method investee - - - 5
Gain on loan sales 328 - 537 -
(Loss) on sale of premises and equipment - (90) - (90)
Increase in cash surrender value of life insurance 47 44 93 86
Net realized gains on sales of available-for-sale
securities - - 5,012 -
Other 168 5 329 10
-------- ------- ------- -------
Total non-interest income 642 (9) 6,131 63
-------- ------- ------- -------
Non-interest expense
Salaries and employee benefits 1,247 596 2,722 1,036
Net occupancy 352 68 701 143
Data processing fees 151 44 284 101
Professional fees 225 28 480 122
Marketing 25 8 58 20
Data processing termination charges - 797 - 797
Other 436 361 1,050 491
-------- ------- ------- -------
Total non-interest expense 2,436 1,902 5,295 2,710
-------- ------- ------- -------
Income (loss) from continuing operations before income
taxes and minority interest 702 (1,016) 5,495 (874)
Income tax expense (benefit) from continuing operations 216 (359) 1,902 (357)
-------- ------- ------- -------
Income (loss) from continuing operations before minority
interest and discontinued operations 486 (657) 3,593 (517)
Income from subsidiary held for disposal - 3 6 5
Income tax expense from subsidiary held for disposal - 1 2 14
-------- ------- ------- -------
Income (loss) before minority interest 486 (655) 3,597 (526)
Minority interest in (income) loss of consolidated
subsidiary and subsidiary held for disposal (3) (1) (5) 4
-------- ------- ------- -------
Net income (loss) $ 483 $ (656) $ 3,592 $ (522)
======== ======= ======= =======
Income (loss) per share from continuing operations
Basic $0.26 ($0.56) $1.92 ($0.44)
Diluted $0.25 ($0.56) $1.87 ($0.44)
Income (loss) per share from subsidiary held for disposal
Basic $0.00 $0.00 $0.00 ($0.01)
Diluted $0.00 $0.00 $0.00 ($0.01)
Net income (loss) per share
Basic $0.26 ($0.56) $1.91 ($0.45)
Diluted $0.25 ($0.56) $1.87 ($0.45)
Weighted average shares outstanding
Basic 1,883 1,171 1,876 1,168
Diluted 1,917 1,171 1,919 1,168
Cash dividends declared per share $0.08 $0.00 $0.24 $0.30
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited) (Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net income (loss) $ 483 $ (656) $ 3,592 $ (522)
Other comprehensive income, net of tax
Change in unrealized gains and losses on
available-for-sale securities 98 (220) (490) (59)
Less reclassification adjustment for realized
gains included in net income - - 3,308 -
-------- -------- -------- --------
Other comprehensive income (loss) 98 (220) (3,798) (59)
-------- -------- -------- --------
Comprehensive income (loss) $ 581 $ (876) $ (206) $ (581)
======== ======== ======== ========
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six months ended June 30,
---------------------------
2005 2004
--------- -------
Cash flows from operating activities:
Net income (loss) $ 3,592 $ (522)
Adjustments to reconcile net income to net cash (used in)
operations:
Depreciation 313 72
Provision for loan losses 202 26
Gain on loan sales (537) -
Origination of loans held for sale (31,612) -
Proceeds from loans held for sale 31,519 -
ESOP compensation 101 150
Amortization of unearned compensation on restricted stock 2 -
Amortization of premiums and discounts on securities 71 109
Deferred income taxes 342 (32)
FHLB stock dividend (46) (38)
Amortization of loan fees (162) (47)
Amortization of intangibles, net 203 20
Net realized gains on available-for-sale securities (5,012) -
Loss on sale of premises and equipment 18 90
Minority interest in income (loss) of consolidated subsidiary and
subsidiary held for disposal 5 (4)
Increase in cash value of life insurance (93) (86)
(Income) loss from subsidiary held for disposal (4) 9
Changes in:
(Increase) decrease in interest receivable and other assets (413) 158
Increase (decrease) in interest payable and other liabilities 303 (77)
--------- --------
Net cash (used in) operating activities (1,208) (172)
--------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities - (946)
Proceeds from maturities of available-for-sale securities 2,568 2,625
Proceeds from the sales of available-for-sale securities 5,088 500
Proceeds from maturities of held-to-maturity securities 165 2,092
Net (increase) in loans (24,466) (7,909)
Purchases of premises and equipment (3,101) (913)
Proceeds from sale of subsidiary 2,300 -
Prepaid merger expenses - (390)
--------- --------
Net cash (used in) investing activities (17,446) (4,941)
--------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits 22,805 (1,347)
Net (decrease) increase in short-term borrowings (4,686) 6,500
Purchase of treasury stock - (83)
Proceeds from exercise of stock options 292 83
Cash dividends paid (450) (347)
--------- --------
Net cash provided by financing activities 17,961 4,806
--------- --------
Net (decrease) in cash and cash equivalents (693) (307)
Cash and cash equivalents at beginning of period 9,946 5,822
--------- --------
Cash and cash equivalents at end of period $ 9,253 $ 5,515
========= ========
Supplemental cash flow information:
Interest paid $ 3,503 $ 1,483
Income taxes paid 980 115
Net (decrease) increase in cash and cash equivalents of discontinued
operations (1,795) 71
Supplemental non-cash activity:
Real estate acquired in settlement of loans 33 -
See notes to condensed consolidated financial statements.
1st INDEPENDENCE FINANCIAL GROUP, INC
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-QSB and consequently do not include
all the disclosures normally required by accounting principles generally
accepted in the United States of America. These condensed consolidated financial
statements and notes thereto included in this report should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-KSB annual report for the three months ended
December 31, 2004 filed with the Securities and Exchange Commission. The
condensed consolidated financial statements have been prepared in accordance
with the customary accounting practices of 1st Independence Financial Group,
Inc. (the "Company") and have not been audited. In the opinion of management,
all adjustments necessary to make the financial statements not misleading and to
fairly present the 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, 2004 has been derived from the audited
consolidated balance sheet of the Company as of that date.
The unaudited condensed financial statements include the accounts of the
Company and its wholly-owned subsidiary, 1st Independence Bank, Inc. (the
"Bank"), Foundation Title Company, LLC, a majority-owned subsidiary of the Bank,
1st Independence Mortgage, 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 June 30, 2005, the Company had two stock-based compensation plans. As
permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), the Company follows the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for its stock
option plans under the intrinsic value based method. Accordingly, no stock-based
compensation expense has been recognized for stock options issued under the
plans as all stock options granted under the plans had an exercise price equal
to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and basic and diluted net
income per share had compensation expense been determined based on the fair
value of the stock options at the grant date consistent with the provisions of
SFAS No. 123 (in thousands except per share data):
Three months ended
June 30,
2005 2004
---- ----
Net income (loss) as reported $483 ($656)
Less total stock-based employee compensation expense
(including forfeitures of $45 and $zero) determined
under fair value method for all awards, net of
related tax effects (40) 1
---- -----
Pro forma net income (loss) $523 ($657)
==== =====
Basic net income (loss) per share
As reported $0.26 ($0.56)
Pro forma 0.28 (0.56)
Diluted net income (loss) per share
As reported $0.25 ($0.56)
Pro forma 0.27 (0.56)
Six months ended
June 30,
2005 2004
---- ----
Net income (loss) as reported $3,592 ($522)
Less total stock-based employee compensation expense
(including forfeitures of $45 and $zero) determined
under fair value method for all awards, net of
related tax effects (38) 2
------ -----
Pro forma net income (loss) $3,630 ($524)
====== =====
Basic net income (loss) per share
As reported $1.91 ($0.45)
Pro forma 1.93 (0.45)
Diluted net income (loss) per share
As reported $1.87 ($0.45)
Pro forma 1.89 (0.45)
3. Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses for the six months
ended June 30 follows (in thousands):
2005 2004
---- ----
Beginning balance $2,549 $ 391
Provision for loan losses 202 26
Loans charged off (6) -
Recoveries 12 -
------ ------
Ending balance $2,757 $ 417
====== ======
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
June 30,
2005 2004
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income (loss) from continuing operations $486 ($657)
==== =====
Income from discontinued operations $ - $ 2
==== =====
Net income (loss) $483 ($656)
==== =====
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 1,883 1,171
===== ====
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 1,883 1,171
Plus: dilutive effect of stock options 34 -
----- -----
Adjusted weighted average shares 1,917 1,171
===== =====
Basic net income (loss) per share data:
Income (loss) from continuing operations $0.26 ($0.56)
===== ======
Income from discontinued operations $ - $ -
===== ======
Net income (loss) $0.26 ($0.56)
===== ======
Diluted net income (loss) per share data:
Income (loss) from continuing operations $0.25 ($0.56)
===== ======
Income from discontinued operations $ - $ -
===== ======
Net income (loss) $0.25 ($0.56)
===== ======
Six months ended
June 30,
2005 2004
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income (loss) from continuing operations $3,593 ($517)
====== =====
Income (loss) from discontinued operations $ 4 $ (9)
====== =====
Net income (loss) $3,592 ($522)
====== =====
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 1,876 1,168
===== =====
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 1,876 1,168
Plus: dilutive effect of stock options 43 -
----- -----
Adjusted weighted average shares 1,919 1,168
===== =====
Basic net income (loss) per share data:
Income (loss)from continuing operations $1.92 ($0.44)
===== ======
Income (loss) from discontinued operations $ - ($0.01)
===== ======
Net income (loss) $1.91 ($0.45)
===== ======
Diluted net income (loss) per share data:
Income (loss) from continuing operations $1.87 ($0.44)
===== ======
Income (loss) from discontinued operations $ - ($0.01)
===== ======
Net income (loss) $1.87 ($0.45)
===== ======
Options to purchase 195,000 and 200,000 common shares, which equate to 35,226
and 47,170 incremental common equivalent shares, respectively, for the three
months and six months ended June 30, 2004 were excluded from the diluted
calculations above as their effect would have been antidilutive.
5. Contingencies
The Company is a defendant in a lawsuit that asserts that the Company made
certain material misrepresentations in connection with certain statements made
in connection with its offer to purchase up to 300,000 shares of stock in a
tender offer in May 2003. The plaintiffs are seeking to recover damages in
connection with the shares they sold in the tender offer and attorneys fees.
Based upon the advice of counsel, management records an estimate of the amount
of ultimate expected loss for litigation, if any. Management has not recorded a
loss provision for this litigation as, after discussion with legal counsel,
management believes the ultimate results of this litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows. Events could occur that could cause the estimate of
ultimate loss to differ materially in the near term. Reference is made to Part
II, Item 1 of this report on Form 10-QSB for additional information.
6. Recently Issued Accounting Standards
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.123 (revised 2004), " Share-Based
Payment" ("SFAS 123R"). This Statement requires expensing of stock options and
other share-based payments beginning in 2005, and supersedes FASB's earlier rule
(the original SFAS 123) that had allowed companies to choose between expensing
stock options and showing pro forma disclosure only. The Statement required that
public entities (other than those filing as small business issuers) apply SFAS
123R as of the first interim or annual reporting period that begins after June
15, 2005. However, on April 14, 2005 the Securities and Exchange Commission
issued a rule that revises the required date of adoption under SFAS 123R. The
new rule allows for public entities to adopt the provisions of SFAS 123R at the
beginning of the first fiscal year beginning after June 15, 2005. Public
entities that file as small business issuers will continue to be required to
apply SFAS 123R in the first interim or annual reporting period that begins
after December 15, 2005. The Company, which will adopt the Statement in the
first quarter of 2006 as required, is currently evaluating the effect of the
adoption of this Statement.
7. Completion of Subsidiary Disposal
On January 28, 2005 the Company completed the sale of its entire interest in its
majority owned subsidiary, Citizens Financial Bank, Inc., to Porter Bancorp,
Inc. for $2.3 million, pursuant to a Stock Purchase Agreement, dated as of
October 22, 2004, between Porter Bancorp, Inc. and the Company. In a related
transaction, on January 28, 2005, the Company's subsidiary bank, 1st
Independence Bank, Inc., purchased a commercial building located in Louisville,
Kentucky, for $2.3 million from Ascencia Bank, Inc., an affiliate of Porter
Bancorp, Inc. See note 4, "Subsidiary Held for Disposal" to the consolidated
financial statements included in the Company's Form 10-KSB for the year ended
December 31, 2004 for additional information.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in Item 1 of 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, 2004, including note 1 which describes the Company's significant
accounting policies including its use of estimates. See the caption entitled
"Application of Critical Accounting Policies" in this section for further
information.
Forward-Looking Statements
The following discussion contains statements which are forward-looking rather
than historical fact. These forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and involve known and unknown risks, uncertainties and other factors, which may
cause the Company's actual results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such statements are subject to certain risks and
uncertainties including 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 Securities and Exchange Commission. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made.
General
On July 9, 2004, the Company changed its name to 1st Independence Financial
Group, Inc. and acquired the remaining 77.5% interest of Independence Bancorp,
New Albany, Indiana ("Independence") in a purchase transaction calling for the
exchange of one share of its common stock for each share of Independence common
stock held by Independence shareholders (the "Merger"). The Company initially
acquired 22.5% of Independence on December 31, 2002. Upon completion of the
Merger, the Company issued approximately 696,000 shares to the Independence
shareholders and exchanged approximately 60,000 stock options held by directors,
executive officers, and employees of Independence.
In connection with the Merger, the Company's, wholly owned subsidiary, First
Financial Bank and Independence's wholly owned subsidiary, 1st Independence Bank
merged their operations (the "Bank Merger"). The Bank Merger occurred at the
same time as the Merger and the resulting institution became a Kentucky
state-chartered bank known as 1st Independence Bank, Inc. (the "Bank").
The Company provides commercial and retail banking services, with an emphasis on
commercial real estate loans, one-to-four family residential mortgage loans via
1st Independence Mortgage, home equity loans and lines of credit and consumer
loans as well as certificates of deposit, checking accounts, money-market
accounts and savings accounts within its market area. At June 30, 2005, the
Company had total assets, deposits and stockholders' equity of $317.9 million,
$246.2 million, and $37.4 million, respectively. The Company's business is
conducted principally through the Bank. Unless otherwise indicated, all
references to the Company refer collectively to the Company and the Bank.
As a result of completing the acquisition of Independence, the Company gained
access to customers in the Louisville, Kentucky metro area. Accordingly, the
Company expects a significantly different mix of loan growth going forward. The
Company historically provided primarily residential real estate loan products in
its markets in central Kentucky.
The Company is a defendant in a lawsuit that asserts that the Company made
certain material misrepresentations in connection with certain statements made
in connection with its offer to purchase up to 300,000 shares of stock in a
tender offer in May 2003. The plaintiffs are seeking to recover damages in
connection with the shares they sold in the tender offer and attorneys fees.
Based upon the advice of counsel, management records an estimate of the amount
of ultimate expected loss for litigation, if any. Management has not recorded a
loss provision for this litigation as, after discussion with legal counsel,
management believes the ultimate result of this litigation will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows. Events could occur that could cause the estimate of
ultimate loss to differ materially in the near term.
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.
The Bank also purchased property and a building, located in Louisville,
Kentucky, that was previously used as an operations center and retail branch of
Ascencia Bank, an affiliate of Porter Bancorp. The purchase price of the
building and property was equal to $2.3 million. The Bank moved its finance and
accounting, loan and deposit operations, and mortgage banking operations into
the building in April 2005. The Bank also received regulatory approval during
the second quarter of 2005 to establish a full service branch at this location.
The Bank anticipates opening the branch during the second half of 2005.
Application of Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of
operation is based upon the Company's condensed consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's most critical accounting policies require the use of
estimates relating to other than temporary impairment of securities, the
allowance for loan losses and the valuation of goodwill. See the caption
entitled "Critical Accounting Policies" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section of the
Company's Form 10-KSB for the period ended December 31, 2004 for additional
information.
Overview
Net income for the quarter ended June 30, 2005 was $483,000 or $0.25 per diluted
share compared to a loss of ($656,000) or ($0.56) per diluted share for the
comparable period in 2004. Net income for the six months ended June 30, 2005 was
$3,592,000 or $1.87 per diluted share compared to a loss of ($522,000) or
($0.45) per diluted share for the first half of 2004. The increases in net
income and net income per diluted share for the six month period were primarily
due to after tax securities gains of $3,308,000 taken in the first quarter of
2005 and the significance of the Merger to the Company's operations including an
after tax charge of approximately $526,000 recorded in the second quarter of
2004 in connection with the termination of a data processing contract. Partially
offsetting these factors 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 Chairman and CEO. The increases in net income and net income per
diluted share for the quarter were primarily due to the significance of the
Merger to the Company's operations including the after tax charge of
approximately $526,000 recorded in the second quarter of 2004 in connection with
the termination of a data processing contract previously mentioned.
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 $2.5 million and $4.9 million, respectively, for the
three months and six months ended June 30, 2005, an increase of $1.6 million or
172% and $3.1 million or 170%, respectively, from $0.9 million and $1.8 million,
respectively, for the comparable periods of 2004. On an annualized basis, the
net interest spread and net interest margin were 2.93% and 3.32%, respectively,
for the current quarter, compared to 2.83% and 3.00% for the same period of
2004. For the six months ended June 30, 2005 the net interest spread and net
interest margin were 3.13% and 3.41%, respectively, compared to 2.77% and 2.96%
for the first half of 2004. The increases were primarily due to an increase in
the volume of net interest bearing assets, primarily resulting from the Merger.
Changes in volume resulted in an increase in net interest income of $1.7 million
and $3.0 million for the second quarter and first half of 2005 compared to the
same periods in 2004, and changes in interest rates and the mix resulted in a
decrease in net interest income of $0.1 million for the three months ended June
30, 2005 and an increase in net interest income of $0.1 million for the first
half of 2005 versus the comparable periods in 2004. The favorable change in net
interest income for the six months ended June 30, 2005 due to changes in
interest rates is largely a result of increases in loan yields and decreases in
rates on the Company's borrowings. Previously, the Company relied substantially
on time deposits as its funding source. Subsequent to the Merger, the Company
began using short-term borrowings and short-term time deposits, including
brokered certificates of deposit with terms generally ranging from one to two
years as primary funding sources. New loan originations for the Bank's loan
portfolio are now predominately shorter-term commercial real estate loans as
opposed to 1-4 family residential loans.
The Bank, like many other financial institutions, is vulnerable to an increase
in interest rates to the extent that interest-bearing liabilities mature or
reprice more rapidly than interest-earning assets. Historically, the lending
activities of commercial banks 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 June 30,
2005, if interest rates increased 200 basis points and decreased 200 points,
respectively, the Bank's net interest margin would increase by 2.2% and decrease
by 4.0%, respectively.
Provision for Loan Losses
The provision for loan losses was $zero and $202,000 for the three months and
six months ended June 30, 2005, compared to $21,000 and $26,000 for the same
periods in 2004. Nonperforming loans were $0.5 and $1.2 million at June 30, 2005
and December 31, 2004, or 0.17% and 0.52%, respectively, of total loans. The
allowance for loan losses was $2.8 million and $2.5 million at June 30, 2005 and
December 31, 2004, or 1.06% and 1.08%, respectively, of total loans.
The Company maintains the allowance for loan losses at a level that it considers
to be adequate to provide for credit losses inherent in its loan portfolio.
Management determines the level of the allowance by performing a quarterly
analysis that considers concentrations of credit, past loss experience, current
economic conditions, the amount and composition of the loan portfolio (including
nonperforming and potential problem loans), estimated fair value of underlying
collateral, loan commitments outstanding, and other information relevant to
assessing the risk of loss inherent in the loan portfolio. As a result of
management's analysis, a range of the potential amount of the allowance for loan
losses is determined. Management consistently adjusts the allowance to the
mid-point of the range.
Prior to the acquisition of Independence, the Company operated as a thrift and
provided primarily residential real estate loan products in its markets in
central Kentucky. As a result of the Merger and the bank's conversion to a
state-chartered commercial bank, management no longer intends to originate
long-term residential real estate loans for its loan portfolio. The Company's
future loan growth is expected to primarily consist of shorter-term construction
loans, commercial real estate loans, other commercial loans and other loan types
traditional to the banking industry. The Company therefore expects different
risk characteristics including but not limited to higher individual loan amounts
and increased exposure to economic conditions.
The Company will continue to monitor the adequacy of the allowance for loan
losses and make additions to the allowance in accordance with the analysis
referred to above. Because of uncertainties inherent in estimating the
appropriate level of the allowance for loan losses, actual results may differ
from management's estimate of credit losses and the related allowance.
Non-interest Income
Non-interest income was $0.6 million for the three months ended June 30, 2005,
compared to ($9,000) for the same period in 2004 and $6.1 million for the six
months ended June 30, 2005, compared to $63,000 for the first half of 2004.
Significant increases in non-interest income for the six-month period resulted
from a $5.0 million gain on sale of Federal Home Loan Mortgage Corporation
(FHLMC) preferred stock recorded in the first quarter of 2005 and effecting both
the quarter and six-month period were gains on loan sales. The gains on loan
sales represents a new source of non-interest income to the Company, as the
Company did not previously engage in significant secondary market sales prior to
the Merger. Service charge income was $99,000 for the three months ended June
30, 2005, compared to $32,000 for the comparable period in 2004 and $160,000 for
the first half of 2005, compared to $52,000 for the six months ended June 30,
2004. The quarter and six month increases were primarily attributable to the
Merger. Traditionally, the Company did not have significant service charge
income since the vast majority of their deposit accounts were consumer accounts.
The Company continues to evaluate its deposit product offerings with the
intention of expanding its offerings to the consumer and business depositor.
These products currently include overdraft privileges on certain individual
deposit products and cash management services for business depositors which the
Bank began offering in March 2005. Both of the new products are fee-based and
should result in further increases in service charge income. Contributing to the
increase in other non-interest income were the effects of the Merger and
approximately $81,000 and $131,000 of title insurance revenue for the three
months and six months ended June 30, 2005, respectively, from the Company's
title insurance company which began operations in November 2004.
Non-interest Expense
Non-interest expense was $2.4 million for the quarter ended June 30, 2005
compared to $1.9 million the same period in 2004 and $5.3 million for the six
months ended June 30, 2005 compared to $2.7 million for the first half of 2004.
All categories of non-interest expense increased significantly as a result of
the Merger. In addition, contributing to the six-month increase in salaries and
employee benefits was $356,000 which the Company accrued during the first
quarter of 2005 for the severance expense relating to the retirement of the
Company's Chairman and CEO. Factors limiting the quarter and six-month increase
were the charges recorded in the second quarter of 2004 in connection with the
termination of a data processing contract and the departure of certain
employees.
Income Tax Expense (Benefit)
The effective income tax rate on income (loss) from continuing operations was
30.8% for the three months ended June 30, 2005 compared to (35.3%) for the same
period in 2004 and 34.6% for the first six months of 2005 compared to (40.8%)
for the first half of 2004.
Financial Condition
The Company's total assets were $317.9 million at June 30, 2005 compared to
$337.2 million at December 31, 2004, a decrease $19.3 million or 5.7%. The
decrease in total assets was primarily due to the sale of Citizens, which
accounted for $38.1 million of the decrease, and a decrease of $8.5 million in
available-for-sale securities, offset by a $24.3 million increase in net loans
and a $2.7 million increase in premises and equipment. The increase in premises
and equipment resulted from the purchase of property and a building which is
being used for the Company's finance and accounting, loan and deposit
operations, and mortgage banking operations, and the purchase of a branch that
was previously leased.
Securities available for sale decreased $8.5 million during the six months ended
June 30, 2005. The decrease was primarily due to the sale of FHLMC preferred
stock for $5.1 million during the first quarter of 2005 and proceeds from
maturities of securities amounting to $2.6 million. The Company owned the FHLMC
preferred stock for a number of years, and its cost basis was $75,000. Given the
significant amount of unrealized appreciation on the FHLMC preferred stock,
management determined that it was appropriate to sell the FHLMC preferred stock.
The aggregate proceeds on the sale were $5.1 million; therefore a gain of $5.0
million was realized. Other changes in securities available for sale included an
$742,000 decrease in unrealized gains on the available for sale portfolio.
Net loans were $257.9 million at June 30, 2005, compared to $233.6 million at
December 31, 2004, an increase of $24.3 million or 10.4%. The significant
increases in loans were in the real estate construction and real estate
commercial loan portfolios, which increased $9.8 million or 29% and $9.1 million
or 25%, 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 53% to 49% of total loans and consumer
other which decreased from 2% to 1% of total loans. The decrease in residential
real estate loans as a percentage of total loans is primarily due to those loans
now being sold in the secondary market through 1st Independence Mortgage, a
division of the Bank, rather than being retained for the Company's loan
portfolio. The Company continues to identify opportunities to cross sell its
other products, including home equity and consumer loans for its loan portfolio
resulting from customer relationships established through the origination of
loans by 1st Independence Mortgage.
Deposits increased $22.9 million or 10.2% to $246.2 million at June 30, 2005
compared to December 31, 2004. This increase was largely attributable to a $20.7
million increase in savings, NOW and money market deposits, as demand deposits
decreased $1.3 million, and time deposits grew $3.5 million. The increase in
savings, NOW and money market deposits resulted primarily from the effects of a
marketing campaign during the first half of 2005.
Short-term borrowings decreased $4.7 million or 20.2% to $18.5 million at June
30, 2005, compared to $23.2 million at December 31, 2004. The Company uses
short-term borrowings, primarily short-term Federal Home Loan Bank (FHLB)
advances, to fund short-term liquidity needs and manage net interest margin. The
decrease in short-term borrowings was related to payoffs of borrowings due to
the Bank's excess liquidity.
Deferred income taxes decreased $1.6 million to $10,000 at June 30, 2005, and
interest payable and other liabilities, increased $0.3 million to $1.5 million.
These changes primarily result from the $1.7 million income tax effect from the
first quarter 2005 sale of FHLMC preferred stock.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in financial
transactions that contain credit, interest rate, and liquidity risk that are not
recorded in the financial statements such as loan commitments and performance
letters of credit. As of June 30, 2005, unused loan commitments and performance
letters of credit were $42,272,000 and $3,059,000, respectively.
Since many of the unused loan commitments are expected to expire or be only
partially used, the total amount of commitments does not necessarily represent
future cash requirements.
Liquidity and Capital Resources
Liquidity to meet borrowers' credit and depositors' withdrawal demands is
provided by maturing assets, short-term liquid assets that can be converted to
cash and the ability to attract funds from depositors. Additional sources of
liquidity include brokered deposits, advances from the FHLB and other short-term
borrowings, such as federal funds purchased and securities sold under repurchase
agreements.
During 2004, the Bank assumed liabilities for brokered deposits as a result of
the Merger. At June 30, 2005 and December 31, 2004, brokered deposits were $58.3
million and $35.5 million, respectively. The weighted average cost and maturity
of brokered deposits were 3.37% and eight months at June 30, 2005 compared to
2.77% and nine months at December 31, 2004. The Company plans to continue using
brokered deposits for the foreseeable future to support expected loan demand in
its new market area when pricing for brokered deposits is more favorable than
short-term borrowings.
At June 30, 2005 and December 31, 2004, the Bank had total FHLB advances
outstanding of approximately $23.0 million and $27.5 million, respectively, with
$5.0 million in each period 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 $12.0 million of unused
commitments under its line of credit with the FHLB and sufficient collateral to
borrow an additional $59.1 million.
The Company's liquidity depends primarily on dividends paid to it as sole
shareholder of the Bank. At June 30, 2005, the Bank may pay up to $4.9 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. Approximately $4.1 million of the debentures are variable rate
obligations with interest rates that reprice quarterly, and are tied to the
three-month London Interbank Offering Rate (LIBOR) plus 3.15%. 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%. The Company also had a $2.5 million
unused line of credit with an unaffiliated bank at June 30, 2005.
Stockholders' equity decreased $261,000 from $37.7 million at December 31, 2004
to $37.4 million at June 30, 2005. The significant drivers of the change were
net income of $3.6 million, cash dividends declared of $450,000 ($0.24 per
share), and a decrease in accumulated other comprehensive income of $3.8
million. The decrease in accumulated other comprehensive income was primarily
due to a $3.3 million (net of income tax) reclassification adjustment associated
with the sale of the FHLMC preferred stock previously discussed and a $490,000
(net of income tax) decrease related to unrealized losses on securities
available for sale arising during the period. The reclassification adjustment is
necessitated due to the realized gain on the sale being included in net income
for the period.
Bank holding companies and their subsidiary banks are required by regulators to
meet risk based capital standards. These standards, or ratios, measure the
relationship of capital to a combination of balance sheet and off-balance sheet
risks. The following table presents these ratios as of June 30, 2005 and
December 31, 2004 for the Consolidated Company and the Bank along with the
regulator's minimum ratio to be considered well capitalized.
To Be Well
June 30, 2005 December 31, 2004 Capitalized
------------- ----------------- -----------
Total risk-based capital to risk-weighted assets
Consolidated company 15.5% 15.6% 10.0%
Bank 13.7 15.1 10.0
Tier 1 capital to risk-weighted assets
Consolidated company 14.4 13.3 6.0
Bank 12.6 12.7 6.0
Tier 1 capital to average assets
Consolidated company 11.5 9.6 5.0
Bank 10.1 9.5 5.0
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company's management carried out an evaluation, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures as of the end of the quarter ended June 30, 2005. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in its reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in Internal Control over Financial Reporting
There have not been any changes in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during the quarter ended June 30, 2005 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company, from time to time, is a party to ordinary routine litigation,
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Company holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to its business. Except as discussed below, there were no
potentially material lawsuits or other legal proceedings pending or known to be
contemplated against the Company at June 30, 2005.
On or about May 28, 2004, a complaint was filed in the Circuit Court of Anderson
County in the Commonwealth of Kentucky by Larry Sutherland, Judy Sutherland,
John Henry Disponett, Brenda Disponett, Todd Hyatt, Lois Ann Disponett, Sue
Saufley, and Hugh Coomer. Soon thereafter, an amended complaint was filed which
added Lois Hawkins and Norma K. Barnett as plaintiffs. The lawsuit arises from
offers to purchase securities made by the Company in connection with an offer to
purchase up to 300,000 shares of its stock in a tender offer on or about May 28,
2003. The Plaintiffs allege that the Company made certain material
misrepresentations in connection with certain statements made in the tender
offer. The Plaintiffs are seeking to recover compensatory and punitive damages
in connection with the shares it sold in the tender offer and their attorneys'
fees. Discovery in the matter is currently underway and a trial date has not
been set. Based upon the advice of counsel, management records an estimate of
the amount of ultimate expected loss for litigation, if any. Management, after
discussion with legal counsel, believes the ultimate result of this litigation
will not have a material adverse effect on the Company's financial position,
results of operations or cash flows. However, events could occur that could
cause any estimate of ultimate loss to differ materially in the near term.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders (the "Meeting"), held May 19,
2005, the following matters were submitted for a vote by the security holders:
Election of the persons named below as directors for the terms set
forth next to their names:
Votes cast for Abstentions
-------------- -----------
For a three-year term: N. William White 1,574,477 14,738
James W. Dunn 1,584,617 12,836
Matthew C. Chalfant 1,605,391 12,836
For a two-year term: Thomas Les Letton 1,585,264 12,836
Charles M. Moore 1,604,051 12,836
Jack L. Coleman, Jr. 1,568,087 12,836
For a one-year term: Stephen R. Manecke 1,604,149 12,836
Dr. Ronald L. Receveur 1,593,524 14,738
W. Dudley Shryock 1,584,617 12,836
Ratification of the appointment of BKD, LLP as the Company's
independent public accountants for the year ending December 31, 2005.
There were 1,443,911 votes for and 5,700 votes against and 153,501
abstentions.
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: July 29, 2005
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").