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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
or
|_| TRANSITION REPORT UNDER 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.
(Name of small business issuer 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: (502)753-0500
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
(Title of Class)
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. |_|
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
|_|
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |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|
Registrant's revenues for the year ended December 31, 2005 were $25.4
million.
The aggregate market value of the voting and non-voting common stock
held by non-affiliates of the registrant, based on the closing price of the
registrant's common stock as quoted on the NASDAQ National Market on March 15,
2006, was approximately $31.2 million.
The number of shares outstanding of the registrant's common stock as of
March 15, 2006 was 1,962,158.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report on Form 10-KSB, to
the extent not set forth herein, is incorporated herein by reference to the
registrant's definitive proxy statement to be filed in connection with the
annual meeting of stockholders to be held May 18, 2006.
Transitional Small Business Disclosure Format (Check one): Yes |_| No
|X|
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1ST INDEPENDENCE FINANCIAL GROUP, INC.
FORM 10-KSB
For the Year Ended December 31, 2005
INDEX
PART I Page
Item 1. Description of Business..................................... 3
Item 2. Description of Property..................................... 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.... 17
Item 6. Management's Discussion and Analysis or Plan of Operation... 18
Item 7. Financial Statements........................................ 26
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 54
Item 8A. Controls and Procedures..................................... 54
Item 8B. Other Information........................................... 54
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act......... 54
Item 10. Executive Compensation...................................... 54
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ 54
Item 12 Certain Relationships and Related Transactions.............. 54
Item 13. Exhibits.................................................... 55
Item 14 Principal Accountant Fees and Services...................... 56
Signatures .................................................. 57
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK FACTORS
This filing, like many written and oral communications presented by the
Registrant (as defined herein) and its authorized officials, may contain certain
forward-looking statements regarding the Registrant's prospective performance
and strategies within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
The Registrant intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement for
purposes of said safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and
describe future plans, strategies, and expectations of the Registrant, are
generally identified by use of the words "plan," "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Registrant's
ability to predict results or the actual effects of its plans or strategies is
inherently uncertain. Accordingly, actual results may differ materially from
anticipated results.
The factors that could have a material adverse effect on the operations
of the Registrant include, but are not limited to: changes in general economic
conditions; interest rates, deposit flows, loan demand, real estate values,
competition and demand for financial services and loan, deposit, and investment
products in the Registrant's local markets; changes in the quality of
composition of the loan or investment portfolios; changes in accounting
principles, policies, or guidelines; changes in legislation and regulation;
changes in the monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and the Federal Reserve Board; war or terrorist
activities; and other economic, competitive, governmental, regulatory,
geopolitical, and technological factors affecting the Registrant's operations,
pricing, and services.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this filing.
Except as required by applicable law or regulation, the Registrant undertakes no
obligation to update these forward-looking statements to reflect events or
circumstances that occur after the date on which such statements were made.
PART I
Item 1. Description of Business.
General
1st Independence Financial Group, Inc. (the "Company") was organized as
a Delaware corporation in June 1995, and was formerly known as Harrodsburg First
Financial Bancorp, Inc. 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 had 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. Additionally, as previously disclosed, the Company changed is
fiscal year-end from September 30 to December 31.
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 Bank currently serves its customers through a network of eight
branch offices located in Harrodsburg, Lawrenceburg and Louisville (Stony Brook
main office branch and St. Matthews branch office), Kentucky and New Albany,
Jeffersonville, Marengo and Clarksville, Indiana. The Bank also operates a
mortgage division, 1st Independence Mortgage, which originates one-to-four
family residential mortgage loans. 1st Independence Mortgage operates throughout
the Bank's branch network. The Bank also offers limited trust services. On
November 1, 2004, the Bank formed a title insurance company, Foundation Title
Company, LLC, located in Jeffersonville, Indiana. The Company decided to exit
the title insurance business at the end of November 2005 and sold the title
insurance company at its carrying value.
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 December
31, 2005, the Company had total assets, deposits and equity of $336.2 million,
$264.3 million, and $38.3 million, respectively. The Company's business is
conducted principally through the Bank. Unless otherwise indicated, all
references to the Company refer collectively to the Company and the Bank and its
subsidiaries.
In January 2005, the Company completed the sale of its entire interest
in its majority owned subsidiary, 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. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-lived
Assets", at September 30, 2004 the Company reclassified its investment in
Citizens as an available-for-sale asset and recognized an after tax loss of
approximately $239,000. In a related transaction the Company's subsidiary bank,
1st Independence Bank, Inc., purchased in January 2005 a commercial building
located in Louisville, Kentucky, for $2.3 million from Ascencia Bank, Inc., an
affiliate of Porter Bancorp, Inc. 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 which it
opened in November 2005. See note 4 to the Company's consolidated financial
statements, presented herein, for additional information. Additionally, the
financial tables also presented herein, have been revised to reflect the
discontinued operations of Citizens prior to the sale.
Market Area and Competition
The competition for deposit products comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Company's market area of Anderson, Jefferson,
and Mercer Counties in Kentucky and Floyd, Clark and Crawford Counties in
Indiana. Deposit competition also includes a number of insurance products sold
by local agents and investment products such as mutual funds and other
securities sold by local and regional brokers. Loan competition varies depending
upon market conditions and comes from other insured financial institutions such
as commercial banks, thrift institutions, credit unions, multi-state regional
banks, and mortgage bankers.
Analysis of Loan Portfolio. The following table (in thousands except
percentages) sets forth information concerning the composition of the Company's
loan portfolio in dollar amounts and in percentages of the total loan portfolio
as of the dates indicated. Loan balances related to the discontinued operations
of Citizens have been eliminated.
December 31, September 30,
--------------------------------------------------------------- ----------------------------------------
2005 2004 2003 2002 2001
-------------------- -------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Amount Total loans Amount Total loans Amount Total loans Amount Total loans Amount Total loans
-------- ----------- -------- ----------- -------- ----------- -------- ----------- -------- ------------
Real estate:
Commercial $ 46,731 17% $ 35,746 15% $13,128 16% $13,005 14% $ 11,950 12%
Residential 128,949 48 125,433 53 61,495 73 70,899 76 81,249 79
Construction 51,877 19 33,600 14 2,977 3 3,749 4 4,420 4
Commercial 23,757 9 21,040 9 3,365 4 2,181 2 1,150 1
Consumer
Home equity 16,615 6 16,672 7 1,963 2 1,630 2 1,873 2
Other 1,960 1 3,706 2 1,327 2 1,607 2 1,941 2
-------- --- -------- --- ------ --- ----- --- ------- ---
Total loans 269,889 100% 236,197 100% 84,255 100% 93,071 100% 102,583 100%
=== === === === ===
Less: allowance for
loan losses 2,911 2,549 391 390 407
-------- -------- ------- ------- --------
Loans, net $266,978 $233,648 $83,864 $92,681 $102,176
======== ======== ======= ======= ========
Loans held for sale $1,278 $2,344 $ - $ - $ -
====== ====== ====== ====== ======
Loan Maturity Tables
The following table (in thousands) sets forth the maturity of the
Company's loan portfolio at December 31, 2005. The table does not include
prepayments or scheduled principal repayments. Adjustable-rate mortgage loans
are shown as maturing based on contractual maturities.
Due after 1
Due within 1 through 5 Due after 5
year years years Total
---- ----- ----- -----
Real estate:
Commercial $11,878 $15,946 $ 18,907 $ 46,731
Residential 14,769 18,553 95,627 128,949
Construction 31,918 14,462 5,497 51,877
Commercial 13,361 5,899 4,497 23,757
Consumer 1,349 15,462 1,764 18,575
------- ------- -------- --------
Total $73,275 $70,322 $126,292 $269,889
======= ======= ======== ========
The following table (in thousands) sets forth as of December 31, 2005
the dollar amount of all loans that are due after December 31, 2006 and have
either fixed rates of interest or floating or adjustable interest rates.
Floating or
Fixed rates adjustable rates Total
----------- ---------------- --------
Real estate:
Commercial $10,038 $ 24,815 $ 34,853
Residential 30,593 83,587 114,180
Construction 3,466 16,493 19,959
Commercial 6,002 4,394 10,396
Consumer 1,851 15,375 17,226
------- -------- --------
Total $51,950 $144,664 $196,614
======= ======== ========
Commercial Real Estate Loans. Since the completion of the Merger, the
Company has changed the composition of its loan portfolio to emphasize
commercial real estate loans in order to enhance yields on its assets. The
commercial real estate loans originated are generally made to individuals, small
businesses and partnerships located in the Company's primary market area. Such
loans are generally secured by first mortgages on apartment buildings, office
buildings, churches and other properties. Adjustable-rate loans for this type of
lending have a margin that is 50 to 150 basis points higher than the margin
added to single-family owner-occupied property loans. Commercial real estate
loans are adjustable-rate loans with terms of 30 years or less and loan-to-value
ratios typically not exceeding 80%. At December 31, 2005, commercial real estate
loans totaled approximately $46.7 million or 17% of the total loan portfolio.
Commercial real estate lending entails significant additional risks as
compared to one- to four-family residential lending. For example, such loans
typically involve large loans to single borrowers or related borrowers, the
payment experience on such loans is typically dependent on the successful
operation of the project, and these risks can be significantly affected by the
supply and demand conditions in the market for commercial property.
Loans secured by commercial real estate generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. To minimize these risks, the Company generally
limits loans of this type to its market area and to borrowers with which it has
substantial experience and expertise in the commercial real estate market. The
Company's underwriting procedures require verification of the borrower's credit
history, income, financial statements, banking relationships, credit references,
and income projections for the property. It is their current practice to obtain
personal guarantees from all principals obtaining this type of loan. The Company
also obtains appraisals on each property. All appraisals on commercial and
multi-family real estate are reviewed by the Company's management.
Included in the commercial real estate loan category are agricultural
loans. Since the completion of the Merger, the Company has de-emphasized the
origination of agriculture loans. At December 31, 2005, agricultural loans
totaled $1.2 million, or less than one half of 1% of the Company's loan
portfolio.
Residential Loans. The Company's residential loans consist of one- to
four-family residential mortgage loans that are secured by property located in
its primary market area. The Company generally originates one- to four-family
residential mortgage loans without private mortgage insurance in amounts up to
85% of the lesser of the appraised value or selling price of the mortgaged
property. Loans in excess of 89.9% of the value of the mortgaged property
typically carry higher rates commensurate with the higher risk associated with
this type of loan. At December 31, 2005, one-to four-family residential
mortgage loans totaled approximately $128.9 million, or 48% of the total loan
portfolio.
The Company offers three types of residential adjustable rate mortgage
loans, all of which use the index value of the Weekly Average Yield on United
States Treasury Securities Adjusted to a Constant Maturity of One Year plus a
set margin added to it. The interest rates on these loans have an initial
adjustment period of between one and five years, and generally adjust annually
thereafter, with a maximum adjustment of 2% per year and a maximum increase of
5% over the life of the loan. The index margin on a non owner-occupied one- to
four-family property loan is generally 50 basis points higher than on an
owner-occupied property loan. The Company's adjustable-rate one-to- four family
and multi-family mortgage loans are for terms of up to 30 years, amortized on a
monthly basis, with principal and interest due each month. Borrowers may
refinance or prepay loans at their option without penalty. All fixed rate
one-to-four family loans with a term of ten to thirty years are originated and
sold on the secondary market through 1st Independence Mortgage. At December 31,
2005, loans held for sale totaled approximately $1.3 million.
Loan originations are generally obtained from existing and walk-in
customers, members of the local community, and referrals from realtors,
builders, depositors and borrowers within the Company's market area. Mortgage
loans originated and held by the Company in its portfolio generally include
due-on-sale clauses which gives it the contractual right to deem the loan
immediately due and payable in the event that the borrower sells or otherwise
transfers an interest in the property to a third party.
During periods of rising interest rates, the risk of default on
adjustable-rate loans may increase due to increases in interest costs to
borrowers. Further, adjustable-rate loans that provide for initial rates of
interest below the fully indexed rates may be subject to increased risk of
delinquency or default as the higher, fully indexed rate of interest
subsequently replaces the lower, initial rate.
Construction and Land Development Loans. The Company engages in
construction lending involving loans to qualified borrowers for construction of
one- to four-family dwellings, multi-family residential units, commercial
buildings and churches, and single family subdivision land development loans
with the intent of such loans converting to permanent financing upon completion
of construction. All construction and development loans are secured by a first
lien on the property under construction. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant. At December
31, 2005, construction loans totaled approximately $51.9 million, or 19%, of the
Company's total loan portfolio.
Construction/permanent loans generally have adjustable or fixed
interest rates and are underwritten in accordance with the same terms and
requirements as permanent mortgages, except the loans generally provide for
disbursement in stages during a construction period of up to twelve months,
during which the borrower is not required to make monthly payments. If
construction improvements are not completed at the end of six months, accrued
interest must be paid to date. Accrued interest must be paid at completion of
construction to the first day of the following month, and monthly payments start
the first day of the following month if the loan is converted to permanent
financing. Borrowers must satisfy all credit requirements that would apply to
permanent mortgage loan financing for the subject property and must execute a
construction loan agreement.
Construction financing generally is considered to involve a higher
degree of risk of loss than long term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction cost proves to be
inaccurate, the Company may be required to advance funds beyond the amount
originally committed to permit completion of the development. The Company has
sought to minimize this risk by requiring precise construction cost estimates,
specifications, and drawing plans from qualified borrowers in their market area
along with tighter underwriting guidelines relating to borrower cash flow and
net worth.
Commercial Loans. The Company originates fixed-rate and adjustable-rate
commercial loans secured by commercial properties. These loans are originated
with maximum loan-to-value ratios of 80% of the value of the respective
property. At December 31, 2005, commercial loans totaled approximately $23.8
million, or 9%, of the total loan portfolio.
Loans secured by commercial properties generally have larger balances
and involve a greater degree of risk than one- to four-family residential
mortgage loans. Of primary concern in commercial lending are the borrower's
creditworthiness and the feasibility and cash flow potential of the project.
Payments on loans secured by income properties often depend on successful
operation and management of the properties. As a result, repayment of such loans
may be subject to a greater extent than residential real estate loans to adverse
conditions in the real estate market or the economy. To monitor cash flows on
income properties, the Company requires borrowers and loan guarantors, if any,
to provide annual financial statements on commercial loans. In reaching a
decision on whether to make a commercial loan, the Company considers the net
operating income of the property, the borrower's expertise, credit history and
profitability and the value of the underlying property. The Company generally
requires an environmental survey for all commercial loans over $500,000.
Consumer Lending. The Company originates consumer loans on either a
secured or unsecured basis. The Company generally makes certificate of deposit
loans for terms of up to the terms of the certificate of deposit collateralizing
the loan and up to the face amount of the certificate. The interest rate charged
on these loans is up to 2% higher than the rate paid on the certificate, and
interest is changed on a quarterly basis. These loans are payable on demand and
the account must be assigned to the Company as collateral for the loan. At
December 31, 2005, consumer loans totaled approximately $18.6 million, or 7%, of
the total loan portfolio.
Consumer loans may entail greater risk than residential loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Loan Approval Authority and Underwriting. The Company has established
various lending limits for its officers and maintains a loan committee that
consists of the President and Chief Executive Officer of the Bank, the Executive
Vice President - Commercial Banking, the Executive Vice President - Retail
Banking and six other senior officers of the Bank. Any two officers may join
together to approve loans, but only to the limit of the higher authority of the
two officers. The loan committee approves loans that exceed the limits
established for individual officers and may approve secured loans of up to
$1,500,000 and unsecured loans up to $10,000. In January 2005, the loan policy
was amended to provide for two classes of secured loans. Class I loans are those
secured by investment grade securities, securities listed on the major stock
exchanges, deposit accounts, life insurance cash surrender value, and real
estate mortgages meeting certain loan to value ratios. Class II loans consist of
all other asset-based lending. The loan committee may approve Class I and Class
II loans of $3,000,000 and $2,000,000, respectively. At the same time, approval
limits for unsecured loans were increased to $25,000. The Bank's directors' loan
committee, which consists of four outside Bank directors, must approve all loans
that exceed the lending limits of the loan committee.
For all loans originated by the Company, upon receipt of a completed
loan application from a prospective borrower, a credit report is generally
ordered, income and certain other information is verified and, if necessary,
additional financial information is requested. An appraisal of the real estate
intended to be used as security for the proposed loan is obtained. All
appraisals are reviewed by the Bank's loan officers designated by the Bank's
Board of Directors. An independent appraiser designated and approved by the
Bank's Board of Directors is utilized for all real estate mortgage loans. For
construction/permanent loans, the funds advanced during the construction phase
are disbursed based upon various stages of completion in accordance with the
results of inspection reports that are based upon physical inspection of the
construction by an independent contractor hired by the Bank or in some cases by
an officer of the Bank. For real estate loans, the Bank requires either title
insurance or a title opinion. Borrowers must also obtain fire and casualty,
hazard or flood insurance (for loans on property located in a flood zone, flood
insurance is required) prior to the closing of the loan.
Loan Commitments. The Company issues written commitments to prospective
borrowers on all approved commercial real estate loans in excess of $100,000.
Generally, the commitment requires acceptance within 20 days of the date of
issuance. At December 31, 2005, the Company had approximately $63 million of
commitments to cover originations and unused lines of credit.
Nonperforming and Problem Assets
Loan Delinquencies. The Company's collection procedures provide that
when a loan is 10 days past due, a notice of nonpayment is sent. Delinquent
notices are sent if the loan becomes delinquent for more than 30 days and
generally the borrower will receive a letter or be personally contacted by an
officer of the Bank. If payment is still delinquent after 60 days, the customer
will again receive a letter and/or telephone call and may receive a visit from
an officer representative of the Bank. If the delinquency continues, similar
subsequent efforts are made to eliminate the delinquency. If the loan continues
in a delinquent status for 90 days past due and no repayment plan is in effect,
management will generally initiate legal proceedings.
Loans are reviewed on a monthly basis by management and are generally
placed on a non-accrual status when the loan becomes more than 90 days
delinquent and, in the opinion of management, the collection of additional
interest is doubtful. Interest accrued and unpaid at the time a loan is placed
on non- accrual status is charged against interest income. Subsequent interest
payments are applied to the outstanding principal balance.
Nonperforming Assets. The following table (in thousands except
percentages) sets forth information regarding nonaccrual loans, other real
estate owned and certain other repossessed assets and loans. Nonperforming asset
balances related to the discontinued operations of Citizens have been
eliminated. Additionally, as of the dates indicated, the Company had no loans
categorized as troubled debt restructurings within the meaning of Statement of
Financial Accounting Standards ("SFAS") No. 15 and impaired loans within the
meaning of SFAS No. 114, as amended by SFAS No. 118, were approximately $514,000
at December 31, 2005.
December 31, September 30,
--------------------------- ------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Nonaccrual loans $1,140 $ 893 $ - $ - $ -
Accruing loans past due 90 days or more 130 332 472 334 222
------ ------ ---- ---- ----
Total nonperforming loans 1,270 1,225 472 334 222
Other real estate owned - - - 233 -
------ ------ ---- ---- ----
Total nonperforming assets $1,270 $1,225 $472 $567 $222
====== ====== ==== ==== ====
Total nonperforming loans to total loans 0.48% 0.52% 0.56% 0.36% 0.22%
===== ===== ==== ==== ====
Total nonperforming assets to total assets 0.38% 0.41% 0.36% 0.45% 0.18%
===== ===== ==== ==== ====
In addition to the nonperforming loans discussed above, there were
loans for which payments were current or less than 90 days past due where
borrowers are experiencing financial difficulties. At December 31, 2005, these
loans totaled approximately $4.8 million. These loans are monitored by
management and considered in determining the level of the allowance for loan
losses. Management does not believe these loans represent a significant exposure
to loss.
Classified Assets. Federal regulations provide for a classification
system for problem assets of insured institutions that covers all problem
assets. Under this classification system, problem assets of insured institutions
are classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. The Company's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
Federal Deposit Insurance Corporation ("FDIC") and the Kentucky Office of
Financial Institutions which may order the establishment of additional general
or specific loss allowances. A portion of general loss allowances established to
cover possible losses related to assets classified as substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
Allowance for Loan Losses. It is management's policy to provide for
losses on loans in its loan portfolio. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in the Company's loan portfolio. Such evaluation, which includes a review of all
loans of which full collectibility of interest and principal may not be
reasonably assured, considers the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral,
current economic conditions, and the relationship of the allowance for loan
losses to outstanding loans.
The following table (in thousands except percentages) sets forth
information with respect to the Company's allowance for loan losses at the dates
and for the periods indicated below. Balances related to the discontinued
operations of Citizens have been eliminated.
Three months
Year ended ended Years ended
December 31, December 31, September 30,
------------ ------------ --------------------------------------------
2005 2004 2004 2003 2002 2001
---- ---- ---- ---- ---- ----
Allowance for loan losses
Balance at beginning of period $2,549 $2,560 $ 391 $390 $407 $372
Acquisition of Independence - - 1,046 - - -
Provision for loan losses 354 - 1,203 2 - 35
Net charge-offs (recoveries):
Residential (11) 9 (2) 1 17 -
Commercial 2 - 67 - - -
Consumer 1 2 15 - - -
------ ------ ------ ---- ---- ----
Balance at end of period $2,911 $2,549 $2,560 $391 $390 $407
====== ====== ====== ==== ==== ====
Total loans outstanding $269,889 $236,197 $213,719 $84,796 $93,510 $103,021
======== ======== ======== ======= ======= ========
Average loans outstanding $257,333 $224,201 $112,844 $84,335 $96,669 $102,989
======== ======== ======== ======= ======= ========
Allowance for loan losses to
period-end loans 1.08% 1.08% 1.20% 0.46% 0.42% 0.40%
===== ===== ===== ===== ===== =====
Net loans charged off to average loans 0.00% 0.00% 0.07% 0.00% 0.02% 0.00%
===== ===== ===== ===== ===== =====
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for loan losses
will be adequate to cover losses that may in fact be realized in the future and
that additional provisions for losses will not be required.
Analysis of the Allowance for Loan Losses
The following table (in thousands except percentages) sets forth the
allocation of the allowance by category, which management believes can be
allocated only on an approximate basis. The allocation of the allowance to each
category is not necessarily indicative of future loss and does not restrict the
use of the allowance to absorb losses in any category. Balances related to the
discontinued operations of Citizens have been eliminated.
December 31, September 30,
--------------------------------------------------------------- ----------------------------------------
2005 2004 2003 2002 2001
-------------------- -------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Amount Total loans Amount Total loans Amount Total loans Amount Total loans Amount Total loans
-------- ----------- -------- ----------- -------- ----------- -------- ----------- -------- ------------
Real estate:
Commercial $ 715 17% $ 651 15% $ 61 16% $ 54 14% $ 46 12%
Residential 581 48 255 53 285 73 298 76 314 79
Construction 153 19 358 14 14 3 16 4 28 4
Commercial 859 9 957 9 16 4 9 2 4 1
Consumer 603 7 328 9 15 4 13 4 15 4
------ --- ------ --- ---- --- ---- --- ---- ---
Total allowance for
loan losses $2,911 100% $2,549 100% $391 100% $390 100% $407 100%
====== === ====== === ==== === ==== === ==== ===
Return on Equity and Assets Ratios
Ratios have been adjusted to reflect the discontinued operations of
Citizens.
Three months
Year ended ended Year ended Year ended
December 31, December 31, September 30, September 30,
2005 2004 2004 2003
---- ---- ---- ----
Average equity to average assets 11.59% 12.76% 14.79% 16.08%
Return on average equity 11.92 2.51 (4.58) 5.65
Return on average assets 1.38 0.32 (0.68) 0.91
Dividend payout ratio 16.83 0.00 (46.75) 61.28
Investment Activities
The Company is required under federal regulations to maintain a
sufficient amount of liquid assets that may be invested in specified short-term
securities and certain other investments. However, the Federal Deposit Insurance
Corporation ("FDIC") does not prescribe by regulation to a minimum or percentage
of liquid assets. The level of liquid assets varies depending upon several
factors, including: (i) the yields on investment alternatives, (ii) management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities, (iii) expectation of future yield levels, and (iv)
management's projections as to the short-term demand for funds to be used in
loan origination and other activities. Investment securities, including
mortgage-backed securities, are classified at the time of purchase, based upon
management's intentions and abilities, as securities held to maturity or
securities available for sale. Debt securities acquired with the intent and
ability to hold to maturity are classified as held to maturity and are stated at
cost and adjusted for amortization of premium and accretion of discount, which
are computed using the level yield method and recognized as adjustments of
interest income. All other debt securities are classified as available for sale
to serve principally as a source of liquidity.
Current regulatory and accounting guidelines regarding investment
securities (including mortgage backed securities) require the Company to
categorize securities as "held to maturity," "available for sale" or "trading."
As of December 31, 2005, the Company had securities (including mortgage-backed
securities) classified as "held to maturity" and "available for sale" in the
amount of $2.0 million and $16.1 million, respectively and had no securities
classified as "trading." Securities classified as "available for sale" are
reported for financial reporting purposes at the fair market value with net
changes in the fair market value from period to period included as a separate
component of stockholders' equity, net of income taxes. At December 31, 2005,
the Company's securities available for sale had an amortized cost of $16.3
million and fair market value of $16.1 million. Changes in the fair market value
of securities available for sale do not affect the Company's net income. In
addition, changes in the fair market value of securities available for sale do
not affect the Bank's regulatory capital requirements or its loan-to-one
borrower limit.
At December 31, 2005, the Company's investment portfolio policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
federal agency or federally sponsored agency obligations, (iii) local municipal
obligations, (iv) mortgage-backed securities, (v) banker's acceptances, (vi)
certificates of deposit, (vii) equity investments, and (viii) investment grade
corporate bonds and commercial paper. The board of directors may authorize
additional investments.
As a source of liquidity and to supplement the Company's lending
activities, the Company has invested in residential mortgage-backed securities.
Mortgage-backed securities can serve as collateral for borrowings and, through
repayments, as a source of liquidity. Mortgage-backed securities represent a
participation interest in a pool of single-family or other type of mortgages.
Principal and interest payments are passed from the mortgage originators,
through intermediaries (generally quasi-governmental agencies) that pool and
repackage the participation interests in the form of securities to investors.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by quasi-governmental agencies, make up a
majority of the pass-through certificates market.
At December 31, 2005, the Company's securities portfolio did not
contain securities of any issuer, other than those issued by U.S. government or
its agencies, with an aggregate book value in excess of 10% of the Company's
equity.
Investment Portfolio. The following table (in thousands) sets forth the
carrying value of the Company's investment securities at the dates indicated.
Balances related to the discontinued operations of Citizens have been
eliminated.
December 31, September 30,
----------------------------- -------------
2005 2004 2003(1) 2002
---- ---- ------- ----
Investment securities available for sale:
Mortgage-backed $11,556 $18,011 $21,138 $ 8,034
U.S. government and federal agencies 1,974 2,525 1,502 -
Municipal bonds 2,610 505 - -
Equity - 5,682 4,496 4,309
------- ------- ------- -------
Total $16,140 $26,723 $27,136 $12,343
======= ======= ======= =======
Investment securities held to maturity:
Mortgage-backed $ - $ 2 $ - $ -
U.S. government and federal agencies - - 3,059 2,007
Municipal bonds 1,975 2,148 1,917 214
------- ------- --------- -------
Total $ 1,975 $ 2,150 $ 4,976 $ 2,221
======= ======= ======== =======
Total investment securities $18,115 $28,873 $32,112 $14,564
======= ======= ======= =======
(1) December 31, 2003 amount does not reflect the Company's 22.5% equity
investment in Independence.
Investment Portfolio Maturities. The following table sets forth
information regarding the scheduled maturities, carrying values, market value
and weighted average yields for the Company's investment securities portfolio at
December 31, 2005. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
December 31, 2005
----------------------------------------------------------------------------------------------------
More Than One to More Than Five to
One Year or Less Five Years Ten Years More Than Ten Years Total
----------------- ------------------- ------------------ --------------------- ------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------- -------- -------- --------- ------- -------- ------- -------- -------- --------
Available-for-sale securities:
Mortgage-backed securities $ - -% $ 211 6.15% $5,027 4.65% $6,318 5.03% $11,556 4.89%
U.S government and federal
agencies - - 1,974 4.17 - - - - 1,974 4.17
Municipal bonds - - 183 2.15 420 3.55% 2,007 3.95 2,610 3.76
Equity securities - - - - - - - - - -
--- --- ------ ---- ------ ---- ------ ---- ------- ----
Total $ - -% $2,368 4.19% $5,447 4.57% $8,325 4.77% $16,140 4.62%
=== === ====== ==== ====== ==== ====== ==== ======= ====
Held-to-maturity securities:
Mortgage-backed securities $ - -% $ - -% $ - -% $ - -% $ - -%
Municipal bonds 5 5.25 135 4.97 1,460 4.21 375 5.51 1,975 4.51
--- ---- ------ ---- ------ ---- ------ ---- ------- ----
Total $ 5 5.25% $ 135 4.97% $1,460 4.21% $ 375 5.51% $ 1,975 4.51%
=== ==== ====== ==== ====== ==== ====== ==== ======= ====
Sources of Funds
General. Deposits are the major external source of the Company's funds
for lending and other investment purposes. The Company derives funds from
amortization and prepayment of loans and, to a much lesser extent, maturities of
investment securities, borrowings, mortgage-backed securities and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's primary market area through the offering of a
selection of deposit instruments including regular savings accounts, money
market accounts, and term certificate accounts. Deposit account terms vary
according to the minimum balance required, the time period the funds must remain
on deposit, and the interest rate, among other factors. At December 31, 2005,
the Company had brokered deposits totaling $59.6 million.
The following table (in thousands) sets forth the amount of the
Company's certificates of deposit of $100,000 or more by time remaining until
maturity as of December 31, 2005.
Amount
-------
3 months or less $35,620
Over 3 through 6 months 10,395
Over 6 through 12 months 14,163
Over 12 months 8,784
-------
Total $68,962
=======
The following table (in thousands except rates) sets forth the
Company's average balances and interest rates for interest-bearing demand
deposits and time deposits for the periods indicated. Balances related to the
discontinued operations of Citizens have been eliminated.
Three months Three months
Year ended ended ended Year ended
December 31, December 31, December 31, September 30,
2005 2004 2003 2002
---- ---- ---- ----
Average Average Average Average Average Average Average Average
balance rate balance rate balance rate balance rate
------- ---- ------- ---- ------- ---- ------- ----
Demand and savings $ 59,520 1.85% $ 48,633 1.15% $ 18,783 1.18% $20,403 1.56%
Time 177,801 3.24 155,491 2.61 84,840 2.98 79,560 4.76
-------- -------- -------- -------
$237,321 2.89 $204,124 2.27 $103,623 2.65 $99,963 4.10
======== ======== ======== =======
Short-Term Borrowings. Deposits are the primary source of funds for the
Company's lending and investment activities and for its general business
purposes. The Company can also obtain advances from the Federal Home Loan Bank
of Cincinnati ("FHLB") and other short-term borrowings, such as federal funds
purchased and issuance of securities sold under repurchase agreements to
supplement its supply of lendable funds and to also supplement short-term
liquidity. A pledge of the Bank's stock in the FHLB and a portion of its first
mortgage loans typically secure FHLB advances. At December 31, 2005, the
Company's short-term borrowings totaled $18.7 million; of which $18.0 million
were short-term FHLB advances. See note 11 to the consolidated financial
statements for additional information.
Information regarding short-term FHLB advances follows:
Three months Three months
Year ended ended ended Year ended
December 31, December 31, December 31, September 30,
2005 2004 2003 2002
---- ---- ---- ----
Amount outstanding:
Period end $18,000 $22,500 $ - $4,000
Maximum month end 28,000 22,500 - 6,000
balance during period
Average balance during 16,541 19,575 - 2,625
Period
Weighted average interest rate:
Period end 4.33% 2.42% -% 2.15%
During the period 3.43 2.14 - 2.17
Personnel
As of December 31, 2005, the Company had 81 full-time equivalent
employees. None of the Company's employees are represented by a collective
bargaining group. The Company believes that its relationship with its employees
is good.
Regulation of the Company
General. The Company is a registered bank holding company subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). In addition, the Company is subject to the provisions of Kentucky's
banking laws regulating bank acquisitions and various activities of controlling
bank shareholders. As a bank holding company, the Company is subject to
regulation, supervision, and examination by the Board of Governors of the
Federal Reserve System (the "FRB") and is required to file periodic reports with
the FRB. The Kentucky Office of Financial Institutions ("KOFI") may also conduct
examinations of the Company to determine whether it is in compliance with
applicable Kentucky banking laws and regulations. In addition, the FRB has
enforcement authority over the Company and any of its non-financial institution
subsidiaries. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for the benefit of the
Company's stockholders.
The Gramm-Leach-Bliley Act, which became effective in March 2001,
permits greater affiliation among banks, securities firms, insurance companies,
and other companies under a new type of financial services company known as a
"financial holding company." A financial holding company essentially is a bank
holding company with significantly expanded powers. Financial holding companies
are authorized by statute to engage in a number of financial activities
previously impermissible for bank holding companies, including securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; and merchant banking activities.
The act also permits the FRB and the Treasury Department to authorize additional
activities for financial holding companies if they are "financial in nature" or
"incidental" to financial activities. A bank holding company may become a
financial holding company if each of its subsidiary banks is well capitalized,
well managed, and has at least a "satisfactory" CRA rating. A financial holding
company must provide notice to the FRB within 30 days after commencing
activities previously determined by statute or by the FRB and the Department of
the Treasury to be permissible. The Company has not submitted notice to the FRB
of its intent to be deemed a financial holding company.
Regulatory Capital Requirements. The FRB has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining
and supervising a bank holding company and in analyzing applications to it under
the Bank Holding Company Act. The FRB's capital adequacy guidelines are similar
to those imposed on the Bank. See "Regulation of the Bank - Regulatory Capital
Requirements."
Restrictions on Dividends. The FRB has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the FRB's
view that a bank holding company should pay cash dividends only to the extent
that the holding company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the holding company's capital needs, asset quality and overall financial
condition. The FRB also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Accordingly, the Company's ability to pay dividends is dependent on the Bank's
ability to pay dividends to the Company. Furthermore, under the federal prompt
corrective action regulations, the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Acquisition of Banks. The BHC Act also requires a bank holding company
to obtain prior approval from the FRB before acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank which is
not already majority owned or controlled by that bank holding company.
Acquisition of any additional banks would require prior approval from both the
FRB and the KOFI.
Non-Banking Activities. A bank holding company is generally prohibited
from engaging in, or acquiring, direct or indirect control of more than 5% of
the voting securities of any company engaged in non-banking activities. One of
the principal exceptions to this prohibition is for activities found by the FRB
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Some of the principal activities that the FRB has
determined by regulation to be so closely related to banking are: (i) making or
servicing loans; (ii) performing certain data processing services; (iii)
providing discount brokerage services; (iv) acting as fiduciary, investment or
financial advisor; (v) leasing personal or real property; (vi) making
investments in corporations or projects designed primarily to promote community
welfare; and (vii) acquiring a savings and loan association.
Regulation of the Bank
General. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws. The
Bank is a Kentucky state-chartered stock-form commercial bank and its deposit
accounts are insured under the Bank Insurance Fund ("BIF"), and through its
acquisition of First Financial Bank, some of its deposits are insured by the
Savings Association Insurance Fund ("SAIF"). The Bank is subject to extensive
regulation and supervision by the KOFI as its chartering agency, and by the
FDIC, as its deposit insurer. The Bank must file reports with the KOFI and the
FDIC concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other depository institutions. The deposits of the
Bank are insured by the FDIC to the maximum extent provided by law.
Federal and Kentucky banking laws and regulations control, among other
things, the Bank's required reserves, investments, loans, mergers and
consolidations, issuance of securities, payment of dividends and other aspects
of the Bank's operations. The regulatory structure also gives the respective
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including polices with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Supervision, regulation and examination
of the Bank by the bank regulatory agencies are intended primarily for the
protection of depositors rather than for holders of the Company's stock or for
the Company as the holder of the stock of the Bank.
Insurance of Deposit Accounts. The Bank is a member of the BIF and,
through its acquisition of First Financial Bank, also holds some deposits that
are considered to be insured by the SAIF.
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories, consisting of (1)
well capitalized, (2) adequately capitalized, or (3) undercapitalized, and one
of three supervisory subcategories within each capital group, based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The supervisory subgroup to which an
institution is assigned is based on the supervisory evaluation provided to the
FDIC by the institution's primary federal regulator, and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for both BIF and SAIF deposits are determined
semiannually by the FDIC and currently range from zero basis points to 27 basis
points.
The FDIC is authorized to raise the assessment rates in certain
circumstances, including maintaining or achieving the designated reserve ratio
of 1.25%, which requirement the BIF and SAIF currently meet.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") among other
things, spread the obligations for payment of the financing corporation ("FICO")
bonds across all SAIF and BIF members. Prior to January 1, 2000, BIF members
were assessed for FICO payments at approximately 20% of SAIF members. Full pro
rata sharing of the FICO payments between BIF and SAIF members began on January
1, 2000.
Under the Federal Deposit Insurance Act, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in unsafe
or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC. The Bank does not know of any practice,
condition, or violation that might lead to the termination of deposit insurance.
Regulatory Capital Requirements. The FDIC has adopted regulations
requiring institutions under their respective jurisdictions to maintain
specified minimum ratios of capital to total assets and capital to risk-weighted
assets. Specifically, all savings institutions and banks must maintain the
following ratios: (1) Tier 1 or core capital equal to at least 4% (3% if the
institution has received the highest rating on its most recent examination) of
total adjusted assets; and (2) total capital (defined as Tier 1 capital plus
supplementary Tier 2 capital) equal to 8% of total risk-weighted assets. In
addition, savings institutions are required under applicable federal law to
maintain tangible equity capital equal to at least 1.5% of total adjusted
assets. At December 31, 2005, the Bank was in compliance with the capital
requirements of the FDIC.
Dividend and Other Capital Distribution Limitations. The KOFI imposes
restrictions on the ability of Kentucky commercial banks to pay dividends and to
make other capital distributions. In general, banks are prohibited from
paying any dividends or other capital distributions if, after the distribution,
they would be undercapitalized under applicable federal law.
In addition, under applicable provisions of Kentucky law, the prior
approval of the KOFI is required if the total of all dividends declared by the
Bank in any calendar year exceeds its respective net profits, as defined, for
that year combined with its retained net profits for the preceding two calendar
years, less any required transfers to surplus or a fund for the retirement of
any preferred stock. At January 1, 2006, the Bank could pay dividends to the
Company of approximately $5,278,000, without regulatory approval.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of twelve (12) regional federal home loan banks that
administer the home financing credit function of savings associations. Each FHLB
serves as a reserve or central bank for its members within its assigned region.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of
the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year.
Federal Reserve System. The FRB requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW, and Super NOW checking accounts)
and non-personal time deposits. At December 31, 2005, the Bank was in compliance
with these FRB requirements.
Transactions with Affiliates
Under current federal law, transactions between depository
institutions, such as the Bank, and their affiliates are governed by Sections
23A and 23B o the Federal Reserve Act. An affiliate is any company or entity
that controls, is controlled by, or is under common control with the financial
institution, other than a subsidiary. Generally, a bank's subsidiaries are not
treated as affiliates unless they are engaged in activities as principal that
are not permissible for national banks. In a holding company context, at a
minimum, the parent holding company of a bank, and any companies that are
controlled by such parent holding company, are affiliates of the bank.
Generally, Section 23A limits the extent to which the bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such bank's capital stock and surplus, and contains an aggregate limit
on all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus. The term "covered transaction" includes the making of
loans or other extensions of credit to an affiliate; the purchase of assets from
an affiliate; the purchase of, or an investment in, the securities of an
affiliate; the acceptance of securities of an affiliate as collateral for a loan
or extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, or acceptances on letters of credit issued on behalf of an
affiliate. Section 23B requires that covered transactions and a broad list of
other specified transactions be on terms substantially the same as or no less
favorable to, the bank or its subsidiary as similar transactions with
non-affiliates.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company
to its executive officers and directors. However, the Sarbanes-Oxley Act
contains a specific exemption for loans made by the Bank to its executive
officers and directors in compliance with federal banking laws. Section 22(h) of
the Federal Reserve Act governs a bank's loans to directors, executive officers,
and principal shareholders. Under Section 22(h), loans to directors, executive
officers, and shareholders who control, directly or indirectly, 10% or more of
voting securities of a bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the bank's total capital and surplus. Section
22(h) also prohibits loans above amounts prescribed by the appropriate federal
banking agency to directors, executive officers, and shareholders who control 10
% of more of voting securities of a bank, and their respective related
interests, unless such loan is approved in advance by a majority of the board of
directors of the bank. Any "interested" director may not participate in the
voting. The loan amount (which includes all other outstanding loans to such
person) as to which such prior board of director approval is required, is the
greater of $25,000 or 5% of capital and surplus or any loans over $500,000.
Further, pursuant to Section 22(h), loans to directors, executive officers, and
principal shareholders must be made on terms substantially the same as those
offered in comparable transactions to other persons. There is an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
executive officers over other employees. Section 22(g) of the Federal Reserve
Act places additional limitations on loans to executive officers.
Available Information
The Company files annual reports on Form 10-KSB, quarterly reports on
Form 10-QSB, current reports on Form 8-K, and amendments to those reports with
the United States Securities and Exchange Commission (the "SEC") pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such reports can
be read and copied at the public reference facilities maintained by the SEC at
the Public Reference Room, 100 F Street, NE, Washington, D. C. 20549.
Information regarding the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. These reports are also available at the
SEC's website at www.sec.gov. You also may obtain electronic or paper copies of
our reports free of charge by contacting John F. Barron, Senior Vice President
and Controller, 1st Independence Financial Group, Inc., P.O. Box 206309,
Louisville, Kentucky 40250-6309.
Item 2. Description of Property.
(a) Properties
The Company's corporate office is located at 104 South Chiles Street in
Harrodsburg, Kentucky. In addition, the Company occupies a building at 8620
Biggin Hill Lane in Louisville, Kentucky where the Company's finance and
accounting, loan and deposit operations, mortgage operations and a full service
banking office (Stony Brook Branch) are located. The Company conducts its
banking business through eight full service banking offices located in
Harrodsburg, Lawrenceburg and two locations in Louisville, Kentucky (St.
Matthews Branch and Stony Brook Branch) and Jeffersonville, New Albany, Marengo
and Clarksville, Indiana. 1st Independence Mortgage conducts its business
throughout the Bank's branch network.
The location of the Company's properties, the approximate square
footage and whether owned or leased is described in the following table:
Location Nature Square Feet Status
-------- ------ ----------- ------
Harrodsburg, Kentucky Corporate office and branch 12,636 Owned
104 South Chiles Street banking facility
Lawrenceburg, Kentucky Branch banking facility 2,550 Owned
1015 Crossroad Drive
Louisville, Kentucky Finance and accounting, loan 14,190 Owned
(Stony Brook Branch) and deposit operations,
8620 Biggin Hill Lane mortgage operations and
branch banking facility
Louisville, Kentucky Branch banking facility 3,606 Leased
(St. Matthews Branch)
4220 Shelbyville Road
Clarksville, Indiana Branch banking facility 2,817 Leased
1325 Veterans Parkway
Jeffersonville, Indiana Branch banking facility 3,562 Leased
1711 East 10th Street
Marengo, Indiana Branch banking facility 5,856 Owned
309 South Bradley Street
New Albany, Indiana Branch banking facility 11,200 Leased
3801 Charlestown Road
See note 9 to the Company's consolidated financial statements herein
for additional information. The Clarksville, Indiana branch and New Albany,
Indiana branch are leased from Chalfant Industries, Inc., a company owned by a
director of the Company and the Bank.
(b) Investment Policies. See "Item 1. Description of Business" above
for a general description of the Company's investment policies and any
regulatory or Board of Directors' percentage of assets limitations regarding
certain investments. The Company's investments are primarily acquired to produce
income, and to a lesser extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See
"Item 1. Description of Business - Lending Activities and - Regulation of the
Bank," and "Item 2. Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Description
of Business - Lending Activities and - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Description of Business -
Lending Activities and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data. Not Applicable.
Item 3. 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 December 31, 2005.
On or about May 28, 2004, a complaint was filed in the Circuit Court of
Anderson County in the Commonwealth of Kentucky by Larry Sutherland, Judy
Sutherland, John Henry Disponett, Brenda Disponett, Todd Hyatt, Lois Ann
Disponett, Sue Saufley, and Hugh Coomer. Soon thereafter, an amended complaint
was filed which added Lois Hawkins and Norma K. Barnett as plaintiffs. The
lawsuit arises from offers to purchase securities made by the Company in
connection with an offer to purchase up to 300,000 shares of its stock in a
tender offer on or about May 28, 2003. The Plaintiffs allege that the Company
made certain material misrepresentations in connection with certain statements
made in the tender offer. The Plaintiffs are seeking to recover compensatory and
punitive damages in connection with the shares it sold in the tender offer and
their attorneys' fees. Discovery in the matter is currently underway and a trial
date has not been set. Based upon the advice of counsel, management records an
estimate of the amount of ultimate expected loss for litigation, if any.
Management, after discussion with legal counsel, believes the ultimate result of
this litigation will not have a material adverse effect on the Company's
financial position, results of operations or cash flows. However, events could
occur that could cause any estimate of ultimate loss to differ materially in the
near term.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter ended December 31, 2005.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Since its issuance in October 1995, the Company's common stock has
traded on the NASDAQ National Market System. The Company's current trading
symbol is FIFG. Prior to July 9, 2004, the Company's trading symbol was HFFB.
The quarterly high and low sales prices for the Company's common stock as
reported by NASDAQ and any dividends declared during the quarter are set forth
in the table below.
Quarter Ended
----------------------------------------------------
2005 3/31 6/30 9/30 12/31
---- ---- ---- ---- -----
High $19.99 $23.05 $20.50 $20.00
Low 18.21 17.41 19.00 18.00
Cash dividend declared
per share 0.16 0.08 0.08 0.08
Quarter Ended
----------------------------------------------------
2004 3/31 6/30 9/30 12/31
---- ---- ---- ---- -----
High $25.00 $22.00 $20.51 $20.15
Low 21.05 17.32 17.50 18.36
Cash dividend declared
per share 0.30 - 0.08 -
The number of shareholders of record of common stock as of December 31,
2005, was approximately 430. This does not reflect the number of persons or
entities who held stock in nominee or "street" name through various brokerage
firms. At December 31, 2005, there were 1,951,408 shares outstanding. The
Company's ability to pay dividends to stockholders is dependent upon the
dividends it receives from the Bank. The payment of cash dividends by the Bank
is limited by regulations of the FDIC. See "Regulations of the Bank - Dividend
and Other Capital Distribution Limitations."
Set forth below is information as of December 31, 2005 with respect to
compensation plans under which equity securities of the Company are authorized
for issuance.
Equity Compensation Plan Information
(c)
(a) (b) Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price future issuance under
exercise of of outstanding equity compensation plan
outstanding options, options, warrants [excluding securities
warrants and rights and rights reflected in column (a)]
---------------------- ------------------- ------------------------
Equity compensation plans approved
by stockholders:
2004 Omnibus Stock Option Plan 57,800 $ 9.99 232,200
1996 Stock Option Plan 127,500 16.29 20,000
Restricted Stock Plan - - 83,500
Equity compensation plans not
approved by stockholders n/a n/a n/a
------- ------ -------
Total 185,300 $14.33 335,700
======= ====== =======
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following is a discussion of the consolidated financial condition
and results of operations of the Company for the periods presented, and certain
factors that may affect the Company's prospective financial condition. This
section should be read in conjunction with the consolidated financial statements
and the notes thereto appearing elsewhere or incorporated by reference in this
Annual Report on Form 10-KSB including note 1 which describes the Company's
significant accounting policies including its use of estimates. See the caption
entitled "Critical Accounting Policies and Estimates" in this section for
further information. 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 risks and uncertainties that could
render them materially different, including, but not limited to, changes in
general economic conditions; interest rates, deposit flows, loan demand, real
estate values, competition and demand for financial services and loan, deposit,
and investment products in the Company's local markets; changes in the quality
and composition of the loan or investment portfolios; changes in accounting
principles, policies, or guidelines; changes in legislation and regulation;
changes in the monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and the Federal Reserve Board; war or terrorist
activities; and other economic, competitive, governmental, regulatory,
geopolitical, and technological factors affecting the Company's operations,
pricing, and services, and other risks as detailed in the Company's various
Securities and Exchange Commission filings.
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").
See note 3 to the Company's consolidated financial statements for the accounting
treatment of the Bank Merger.
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 December 31, 2005, the
Company had total assets, deposits and stockholders' equity of $336.2 million,
$264.3 million, and $38.3 million, respectively. The Company's business is
conducted principally through the Bank. Unless otherwise indicated, all
references to the Company refer collectively to the Company and the Bank.
As a result of completing the acquisition of Independence, the Company
gained access to customers in the Louisville, Kentucky metro area. Accordingly,
the Company has experienced a significantly different mix of loan growth since
the completion of the acquisition. 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 $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
and subsequently opened the branch in November 2005.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and
results of operations is based upon the Company's 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.
On an ongoing basis, management evaluates the Company's accounting
polices and estimates it uses to prepare the consolidated financial statements.
In general, management's estimates are based on historical experience, on
information from regulators and third party professionals and other assumptions
believed to be reasonable under the circumstances. Actual results could differ
from those estimates.
The following critical accounting policies affect the Company's more
significant judgements and estimates used to prepare the consolidated financial
statements:
Other Than Temporary Impairment of Securities. Securities are
evaluated periodically to determine whether a decline in their value is other
than temporary. Management utilizes criteria such as the magnitude and duration
of the decline, in addition to the reasons underlying the decline, to determine
whether the loss in value is other than temporary. The term "other than
temporary" is not intended to indicate that the decline is permanent. It
indicates that the prospects for a near term recovery of value are not
necessarily favorable, or that there is a lack of evidence to support fair
values equal to, or greater than, the carrying value of the investment. Once a
decline in value is determined to be other than temporary, the value of the
security is reduced and a corresponding charge to earnings is recognized.
Allowance for Loan Losses. Determining the amount of the allowance for
loan losses necessarily involves a high degree of judgment. To assess the
adequacy of the allowance, management uses historical information as well as the
prevailing business environment, as it is affected by changing economic
conditions and various external factors, which may impact the portfolio in ways
currently unforeseen. The allowance is increased by provisions for loan losses
and by recoveries of loans previously charged-off and reduced by loans
charged-off. For a full discussion of the methodology of assessing the adequacy
of the allowance for loan losses, see the "Provision for Loan Losses" section
elsewhere within this Management's Discussion and Analysis or Plan of Operations
and note 6 to the Company's consolidated financial statements.
Goodwill. The Merger was accounted for under the purchase method of
accounting for business combinations. Acquisitions under the purchase method of
accounting require that assets acquired and liabilities assumed be recorded at
their fair value which is an estimate determined by the use of internal or other
valuation techniques. These valuation estimates result in goodwill and other
intangible assets. Goodwill is subject to an annual impairment test and is
evaluated using various fair value techniques. See note 8 to the Company's
consolidated financial statements for further information.
Overview
Net income for the year ended December 31, 2005 was $4,481,000 or $2.32
per diluted share compared to a loss of ($1,036,000) or ($0.69) per diluted
share for the twelve months ended December 31, 2004. The Company changed its
fiscal year from September 30 to December 31, effective December 31, 2004.
Accordingly, results of operations and related statistical information set forth
in this Management's Discussion and Analysis or Plan of Operations for the
twelve months ended December 31, 2004 is unaudited and is derived by taking the
(audited) twelve months ended September 30, 2004 amount and adding the (audited)
three months ended December 31, 2004 amount and subtracting the (unaudited)
three months ended December 31, 2003 amount. The increases in net income and net
income per diluted share for the year ended December 31, 2005 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. Other
factors which contributed to the increase were a decrease of $560,000, after
taxes, in the provision for loan losses taken in the twelve months ended
December 31, 2005 compared to the same period in 2004, an after tax charge of
$158,000 relating to the Bank's termination of its pension plan in the third
quarter of 2004, a $356,000 goodwill writeoff recorded in the third quarter of
2004 in regards to the Citizens disposal and certain merger-related expenses
also taken in the third quarter of 2004. 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 former Chairman and CEO.
Net income for the three months ended December 31, 2004 was $240,000
compared to $183,000 for the comparable period of 2003, an increase of 31%. The
increase in net income was due the significance of the Merger to the Company's
operations. Net income per diluted share was $0.13 compared to $0.15, a decrease
of 13%. The decrease in earnings per share is a result of the shares issued in
connection with the acquisition of Independence during July 2004.
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 $10.3 million for the year ended December 31,
2005, an increase of $4.1 million or 67% from $6.2 million for the twelve months
ended December 31, 2004. Net interest spread and net interest margin were 3.14%
and 3.44%, respectively, for the year ended December 31, 2005, compared to 3.07%
and 3.30% for the twelve months ended December 31, 2004. The increase in the net
interest margin was due to an increase in the volume of net interest bearing
assets, primarily resulting from the Merger and due to loan growth since the
Merger. Changes in volume resulted in an increase in net interest income in 2005
of $4.4 million and changes in interest rates and the mix resulted in a decrease
in net interest income of $0.3 million versus the comparable periods in 2004.
Net interest income was $2.3 million for the three months ended
December 31, 2004, an increase $1.5 million or 171% from $858,000 for the
comparable period of 2003. The increase was primarily due to an increase in the
volume of net interest bearing assets, primarily resulting from the Merger. The
increase in volume resulted in an increase in net interest income of $1.1
million, and decreases in interest rates resulted in an increase in net interest
income of $335,000. The favorable change in net interest income due to decreases
in interest rates is largely a result of decreases in rates paid on interest
bearing liabilities more than offsetting the decreases in rates earned on
interest earning assets due to a change in funding strategy. 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. Additionally, the loan
mix has shifted from 1-4 family residential loans to shorter-term commercial
real estate loans. As a result of the above factors, the Company's net yield on
earning assets increased to 3.45% compared to 2.76% for the three months ending
December 31, 2004 compared to the comparable period in 2003.
For a detailed analysis of interest income and interest expense, see
"Average Balance Sheets" and "Rate/Volume Analysis" below.
Average Balance Sheets
The following tables set forth certain information relating to the
Company for the periods indicated. The average yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from daily
balances for 2005 and 2004 and month-end balances for 2003. Management does not
believe that the use of month-end balances instead of average daily balances has
caused any material differences in the information presented.
Year ended December 31, Twelve months ended December 31,
2005 (1) 2004 (1)
-------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- --------- ----------- ----------- --------- ------------
(in thousands except percentages)
Earning assets:
Loan, net of unearned income $259,119 $17,009 6.56% $148,072 $ 9,158 6.17%
Investment securities and other (2) 38,827 1,437 3.70 37,569 1,238 3.29
-------- ------- -------- -------
Total earning assets 297,946 18,446 6.19 185,641 10,396 5.58
------- -------
Less allowance for loan losses 2,747 1,404
-------- --------
295,199 184,237
Assets of discontinued operations 41,923
Non-earning assets:
Cash and due from banks 4,604 4,320
Premises and equipment, net 7,856 3,726
Other assets 16,431 11,172
-------- --------
Total assets $324,090 $245,378
======== ========
Interest bearing liabilities:
Deposits $237,321 6,852 2.89 $150,147 3,556 2.36
Borrowings 31,302 1,342 4.29 18,398 690 3.75
-------- ------- -------- -------
Total interest bearing liabilities 268,623 8,194 3.05 168,545 4,246 2.51
-------- --------
Liabilities of discontinued operations 37,631
Non-earning liabilities:
Non-interest bearing deposits 16,016 6,916
Other liabilities 1,861 2,228
-------- --------
Total liabilities 286,500 215,320
Minority interests 13 1,770
Stockholders' equity 37,577 28,288
-------- --------
Total liabilities and stockholders' equity $324,090 $245,378
======== ========
Net interest income $10,252 $ 6,150
======= =======
Net interest spread (3) 3.14% 3.07%
====== ======
Net interest margin (4) 3.44% 3.30%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 110.92% 110.14%
====== ======
(1) Average balances and interest income and interest expense related to the
discontinued operations of Citizens have been eliminated.
(2) Includes interest-earning overnight deposits and term deposits with
the FHLB.
(3) Net interest spread represents the difference between the average yield
on earning assets and the average cost of interest bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average earning assets.
Three months ended December 31, Three months ended December 31,
2004 (1) 2003 (1)
-------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- --------- ----------- ----------- --------- ------------
(in thousands except percentages)
Earning assets:
Loan, net of unearned income $224,201 $ 3,456 6.12% $ 84,053 $ 1,335 6.30%
Investment securities and other (2) 43,491 334 3.05 39,228 319 3.22
-------- ------- -------- -------
Total earning assets 267,692 3,790 5.62 123,281 1,654 5.32
------- -------
Less allowance for loan losses 2,676 391
-------- --------
265,016 122,890
Assets of discontinued operations 39,381 42,104
Non-earning assets:
Cash and due from banks 6,009 2,783
Premises and equipment, net 5,206 2,063
Other assets 16,554 4,605
-------- --------
Total assets $332,166 $174,445
======== ========
Interest bearing liabilities:
Deposits $204,124 1,166 2.27 $103,623 693 2.65
Borrowings 35,331 294 3.31 6,155 103 6.63
-------- ------- -------- -------
Total interest bearing liabilities 239,455 1,460 2.42 109,778 796 2.87
-------- --------
Liabilities of discontinued operations 34,997 37,732
Non-earning liabilities:
Non-interest bearing deposits 15,669 1,352
Other liabilities 2,915 2,996
-------- --------
Total liabilities 293,036 151,858
Minority interests 1,780 1,775
Stockholders' equity 37,350 20,812
-------- --------
Total liabilities and stockholders' equity $332,166 $174,445
======== ========
Net interest income $ 2,330 $ 858
======= =======
Net interest spread (3) 3.20% 2.45%
====== ======
Net interest margin (4) 3.45% 2.76%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 111.79% 112.30%
====== ======
(1) Average balances and interest income and interest expense related to the
discontinued operations of Citizens have been eliminated.
(2) Includes interest-earning overnight deposits and term deposits with
the FHLB.
(3) Net interest spread represents the difference between the average yield
on earning assets and the average cost of interest bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average earning assets.
Rate/Volume Analysis
The following table below sets forth certain information regarding
changes in interest income and interest expense of the Company for the periods
indicated. For each category of earning assets and interest bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in average volume multiplied by old rate); and (ii) changes in rates (change in
rate multiplied by old average volume). Changes in rate/volume (change in rate
multiplied by the change in volume) have been allocated to the changes due to
volume and rate in proportion to the absolute value of the changes due to volume
and rate prior to the allocation. Average balances are derived from daily
balances for 2005 and 2004 and month-end balances for 2003. Management does not
believe that the use of month-end balances instead of average daily balances has
caused any material difference in the information presented.
Year ended December 31, Three months ended December 31,
2005 vs. 2004 (1) 2004 vs. 2003 (1)
------------------------------------ ------------------------------------
Increase (decrease) due to change in Increase (decrease) due to change in
------------------------------------ ------------------------------------
Volume Rate Net Volume Rate Net
--------- --------- --------- ---------- --------- ----------
(in thousands)
Interest income
Loans $7,241 $ 610 $7,851 $2,225 $(104) $2,121
Investment securities and other (2) 42 157 199 34 (19) 15
------ ----- ------ ------ ----- ------
Total interest income 7,283 767 8,050 2,259 (123) 2,136
------ ----- ------ ------ ----- ------
Interest expense
Deposits 2,377 919 3,296 659 (186) 473
Borrowings 539 113 652 463 (272) 191
------ ----- ------ ------ ----- ------
Total interest expense 2,916 1,032 3,948 1,122 (458) 664
------ ----- ------ ------ ----- ------
Net interest income $4,367 $(265) $4,102 $1,137 $ 335 $1,472
====== ===== ====== ====== ===== ======
(1) Average balances and changes in interest income and interest expense
related to the discontinued operations of Citizens have been eliminated.
(2) Includes interest-earning overnight deposits and term deposits with
the FHLB.
Provision for Loan Losses
The provision for loan losses was $354,000 for the year ended December
31, 2005, compared to $1,203,000 for the twelve months ended December 31, 2004.
Nonperforming loans were $1.3 million at December 31, 2005 and $1.2 million at
December 31, 2004, or 0.47% and 0.52%, respectively, of total loans. The
allowance for loan losses was $2.9 million and $2.5 million at December 31, 2005
and December 31, 2004, or 1.08% and 1.08%, respectively, of total loans. The
higher amount of provision for loan losses in 2004 compared to 2005 was
primarily attributable to the changes in the loan mix as a result of the Merger,
as described below.
The Company did not a record a provision for loan losses for the three
months ended December 31, 2004 and 2003. The provision for loan losses was $1.2
million for the year ended September 30, 2004. Nonperforming loans were $1.2
million at both December 31, 2004 and September 30, 2004, or 0.52% and 0.57%,
respectively, of total loans. The allowance for loan losses was approximately
$2.5 million at December 31, 2004 and September 30, 2004, or 1.08% and 1.20%,
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.
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 made the decision to no longer
originate long-term residential real estate loans for its loan portfolio. The
Company's loan growth since the Merger has primarily consisted of shorter-term
construction loans, commercial real estate loans, other commercial loans and
other loan types traditional to the banking industry. The Company therefore has
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.
Noninterest Income
Noninterest income was $7.0 million for the year ended December 31,
2005, compared to $1.2 million for the twelve months ended December 31, 2004.
Significant increases in noninterest income for the year ended December 31,
2005 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
gains on loan sales. The gains on loan sales represents a new source of
noninterest income to the Company as the Company did not previously engage in
significant secondary market sales prior to the Merger. Service charge income
was $391,000 for the year ended December 31, 2005, compared to $195,000 for the
twelve months ended December 31, 2004. The increase was 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.
During March 2005, the Bank began offering products which include overdraft
privileges on certain individual deposit products and cash management services
for business depositors. Both of these products are fee-based and should result
in further increases in service charge income. The Bank also introduced a new
deposit product known as "ATM Advantage" during September 2005. This new product
offers unlimited use of competitor's ATM networks with reimbursement of all
foreign and surcharge fees. The product does not pay interest and requires a
minimum balance to avoid a monthly service charge. This product could reduce
service charge income but the effect would be offset by more non-interest
bearing deposits which should contribute to additional net interest income.
Contributing to the increase in other noninterest income were the effects of
the Merger and approximately $264,000 of title insurance revenue for the year
ended December 31, 2005 from the Company's title insurance company which began
operations in November 2004. The Company decided to exit the title insurance
business at the end of November 2005 and sold the title insurance company at its
carrying value.
Noninterest income was $538,000 for the three months ended December
31, 2004, an increase of $434,000 from $104,000 for the comparable period in
2003. The most significant increase in noninterest income was $293,000 in gains
on sales of loans held for sale. As was previously discussed, this was a direct
result of the Merger, as the Company did not engage in significant loan sales
prior to the Merger. Service charge income was $82,000 for the three months
ended December 31, 2004, compared to $31,000 for the comparable period in 2003.
The increase of $51,000 is primarily attributable to the Merger. As was
previously discussed, the Company and Independence traditionally did not have
significant service charge income since the vast majority of their deposit
accounts were consumer accounts. Since the Merger, the Company has expanded its
offerings to the consumer and business depositor including fee-based products
for overdraft privileges on certain individual deposit products and cash
management services for business depositors.
Noninterest Expense
Noninterest expense was $10.1 million for the year ended December 31,
2005 compared to $7.8 million for the twelve months ended December 31, 2004. All
categories of noninterest expense for the year ended December 31, 2005
increased significantly over the comparable period in 2004 as a result of the
Merger which was effective on July 9, 2004 except for other noninterest expense
which was flat due to several items recorded in 2004 that did not recur in 2005.
In addition, contributing to the increase in salaries and employee benefits was
$356,000 which the Company accrued during the first quarter of 2005 for the
severance expense relating to the retirement of the Company's former Chairman
and CEO. Factors limiting the increase were $797,000 of charges recorded in the
second quarter of 2004 in connection with the termination of a data processing
contract, $239,000 relating to the Bank's termination of its pension plan in the
third quarter of 2004, and items effecting other noninterest expense were a
$356,000 goodwill writeoff recorded in the third quarter of 2004 in regards to
the Citizens disposal and certain merger-related expenses also taken in the
third quarter of 2004.
Noninterest expenses were $2.5 million for the three months ended
December 31, 2004, an increase of $1.8 million from the $724,000 for the
comparable period in 2003. All categories of noninterest expenses except
marketing expense increased, primarily as a result of the Merger. The
significant increases were in professional fees and other noninterest expenses.
Professional fees increased $186,000 as a result of legal fees of $40,000 and
$52,000, respectively, associated with the Company's litigation (See "General")
and the Merger. Additionally, accounting fees increased $64,000, which was also
related to the Merger.
Income Tax Expense (Benefit)
The effective income tax rate on income (loss) from continuing
operations was 33.6% for the year ended December 31, 2005 compared to (41.8%)
for the twelve months ended December 31, 2004. The change in the effective
income tax rate was primarily due to the change in income from continuing
operations.
The effective income tax rate on income from continuing operations was
28.7% and 31.5%, respectively, for the three months ended December 31, 2004
compared to 2003.
Financial Condition
The Company's total assets were $336.2 million at December 31, 2005
compared to $337.2 million at December 31, 2004, a decrease of $1.0 million or
0.3%.
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 $10.6
million in available-for-sale securities, offset by a $33.3 million increase in
net loans, an $11.6 million increase in cash and cash equivalents and a $2.8
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,
mortgage banking operations and a branch, and the purchase of a branch that was
previously leased.
Securities available for sale decreased $10.6 million during the year
ended December 31, 2005. The decrease was primarily due to the sale of FHLMC
preferred stock for $5.1 million during the first quarter of 2005 and other
proceeds from maturities and sales less purchases of securities amounting to
$4.3 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 a $1.0 million decrease in
unrealized gains on the available for sale portfolio.
Net loans were $267.0 million at December 31, 2005, compared to $233.6
million at December 31, 2004 or an increase of 14%. The significant increase in
loans was in the real estate construction and real estate commercial loan
portfolios, which increased $18.3 million or 54% and $11.0 million or 31%,
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 53% to 48% of total loans, home equity loans which decreased from
7% to 6% 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 $41.0 million or 18.4% to $264.3 million at December
31, 2005 compared to December 31, 2004. This increase was largely attributable
to a $5.3 million increase in savings, NOW and money market deposits and a $36.6
million increase in time deposits. Demand deposits decreased $0.9 million. The
increase in savings, NOW and money market deposits resulted primarily from the
effects of a general marketing campaign during 2005 focusing on existing
products. As previously mentioned, during September 2005 the Company introduced
a new deposit product known as "ATM Advantage" as part of its efforts to
continue to grow core deposits. This new product offers unlimited use of
competitor's ATM networks with reimbursement of all foreign and surcharge fees.
The product does not pay interest but requires a minimum balance to avoid a
monthly service charge. The net increase in time deposits was primarily
attributable to brokered deposits, which increased by $24.1 million, to $59.6
million. This increase was directly related to funding needs of the Company's
loan portfolio.
Short-term borrowings decreased $4.5 million or 19% to $18.7 million at
December 31, 2005, compared to $23.2 million at December 31, 2004. The Company
uses short-term borrowings, primarily short-term Federal Home Loan Bank ("FHLB")
advances, to fund short-term liquidity needs and manage net interest margin. The
decrease in short-term borrowings was related to payoffs of borrowings due to
the Bank's improved liquidity.
Liquidity
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 December 31, 2005 and December 31, 2004, brokered deposits were
$59.6 million and $35.5 million, respectively. The weighted average cost and
maturity of brokered deposits were 3.90% and nine months at December 31, 2005
compared to 2.77% and nine months at December 31, 2004. The Company plans to
continue using brokered deposits for the foreseeable future to support loan
demand in its market area when pricing for brokered deposits is more favorable
than short-term borrowings.
At December 31, 2005 and December 31, 2004, the Bank had total FHLB
advances outstanding of $22.0 million and $27.5, respectively. Additionally, the
Bank had $22.0 million of unused commitments under its line of credit with the
FHLB and sufficient collateral to borrow an additional $61.8 million.
The Company's liquidity depends primarily on dividends paid to it as
sole shareholder of the Bank. As discussed in note 14 to the consolidated
financial statements, the Bank may pay $5,278,000 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 consolidated balance
sheets. 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%. At December 31,
2005, the rate on these debentures was 7.67%. 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 plus 3.15%. At the rates that were in effect at December 31,
2005, the Company's cash requirement to service interest on the debentures for
2006 was $651,000.
Sources and Uses of Cash
The Company derives most of its cash flow from the Bank's activities.
Cash flow of the Bank is provided primarily through financing activities, which
include net increases in deposits and short-term borrowings. These funds are
used to fund investing activities, which include making loans and increasing the
investment portfolio.
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 transactions include traditional
off-balance sheet credit-related financial instruments, and commitments under
long-term debt and operating lease agreements.
The Company provides customers with off-balance sheet credit support
through loan commitments, unused lines of credit, letters of credit, and
commitments to sell loans. A summary of these financial instruments at December
31, 2005 follows:
Less than 1 to 3 3 - 5 Over 5
Total one year years years years
----- -------- ----- ----- -----
(in thousands)
Off- balance sheet items:
Commitments to make loans $ 3,283 $ 3,283 $ - $ - $ -
Unused lines of credit 57,117 27,678 14,297 6,367 8,775
Performance letters of credit 2,474 1,343 211 920 -
Mortgage banking rate-lock 2,669 2,669 - - -
Since many of the commitments and unused lines of credit are expected
to expire or be only partially used, the total amount of commitments does not
necessarily represent future cash requirements.
The Company is required to make future payments on long-term debt,
which includes long-term FHLB advances and subordinated debentures. In addition
to owned banking facilities, the Company has entered into long-term leases to
support its activities. A summary of these aggregate contractual obligations at
December 31, 2005 follows:
Less than 1 to 3 3 - 5 Over 5
Total one year years years years
----- -------- ----- ----- -----
(in thousands)
Aggregate contractual obligations:
FHLB borrowings $4,000 $3,000 $ - $ - $1,000
Subordinated debentures 9,279 - - - 9,279
Operating lease commitments 3,064 237 473 508 1,846
Asset/Liability Management
The Bank, like many other financial institutions, is vulnerable to an
increase in interest rates to the extent 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
December 31, 2005, if interest rates increased 200 basis points and decreased
200 points, respectively, the Bank's net interest income would increase by 3.5%
and remain unchanged, respectively.
Item 7. Financial Statements.
The following report of independent registered public accounting firm
and the consolidated financial statements of the Company are included below:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
1st Independence Financial Group, Inc.
Harrodsburg, Kentucky
We have audited the accompanying consolidated balance sheets of 1st
Independence Financial Group, Inc. (Company) as of December 31, 2005 and 2004,
and the related consolidated statements of operations,comprehensive income
(loss), changes in stockholders' equity and cash flows for the year ended
December 31, 2005, the three-month period ended December 31, 2004, and year
ended September 30, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and 2004, and the results of its operations and its cash flows
for the year ended December 31, 2005, the three-month period ended December 31,
2004, and year ended September 30, 2004, in conformity with accounting
principles generally accepted in the United States of America.
/s/ BKD, LLP
Louisville, Kentucky
February 17, 2006
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Consolidated Balance Sheets
(in thousands except share data)
December 31, December 31,
2005 2004
-------------- ---------------
Assets
Cash and and due from banks $ 4,327 $ 4,131
Interest-bearing demand deposits 5,886 4,749
Federal funds sold 11,350 1,066
------------- --------------
Cash and cash equivalents 21,563 9,946
Inerest-bearing deposits 100 100
Available-for-sale securities at fair value 16,140 26,723
Held-to-maturity securities, fair value of $1,974 and
$2,165 at December 31, 2005 and 2004, respectively 1,975 2,150
Loans held for sale 1,278 2,344
Loans, net of allowance for loan losses of $2,911 and
$2,549 at December 31, 2005 and 2004, respectively 266,978 233,648
Premises and equipment, net 8,215 5,385
Federal Home Loan Bank (FHLB) stock 2,688 2,588
Bank owned life insurance 3,235 3,047
Goodwill 11,142 11,142
Interest receivable and other assets 2,873 1,972
Assets of subsidiary held for disposal - 38,146
------------- --------------
Total assets $336,187 $337,191
============= ==============
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand $ 15,570 $ 16,474
Savings, NOW and money market 51,167 45,866
Time 197,586 160,968
------------- ---------------
Total depositsotal deposits 264,323 223,308
Short-term borrowings 18,747 23,233
Long-term debt 13,279 14,247
Deferred income taxes - 1,625
Interest payable and other liabilities 1,577 1,161
Liabilities of subsidiary held for disposal - 34,129
------------- ---------------
Total liabilitiesl liabilities 297,926 297,703
------------- ---------------
Commitments and contingencies - -
Minority interest - 1,782
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,
1,951,408 shares and 1,916,368 shares outstanding at
December 31, 2005 and 2004, respectively 292 289
Additional paid-in capital 39,236 38,588
Retained earnings 13,849 10,122
Unearned ESOP compensation (380) (490)
Unearned compensation on restricted stock (24) -
Accumulated other comprehensive income (loss) (137) 3,772
Treasury stock, at cost, common,
969,835 shares and 969,835 shares at December 31, 2005 and
and 2004, respectively (14,575) (14,575)
------------- ---------------
Total stockholders' equity 38,261 37,706
------------- ---------------
Total liabilities and stockholders' equity $336,187 $337,191
============= ===============
See notes to consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Consolidated Statements of Operations
(in thousands except per share data)
(unaudited)
Three months Three months
Year ended ended ended Year ended
December 31, December 31, December 31, September 30,
2005 2004 2003 2004
------------ ------------ ------------ -------------
Interest and dividend income
Interest and fees on loans $17,009 $ 3,456 $ 1,335 $ 7,037
Securities
Taxable 693 201 259 917
Tax exempt 125 27 17 83
Federal funds sold 332 36 - 51
Dividends 143 54 39 150
Deposits with financial institutions 144 16 4 22
------- ------- ------- -------
Total interest and dividend income 18,446 3,790 1,654 8,260
------- ------- ------- -------
Interest expense
Deposits 6,852 1,166 693 3,083
FHLB advances 727 153 13 117
Other 615 141 90 382
------- ------- ------- -------
Total interest expense 8,194 1,460 796 3,582
------- ------- ------- -------
Net interest income 10,252 2,330 858 4,678
Provision for loan losses 354 - - 1,203
------- ------- ------- -------
Net interest income after provision for loan losses 9,898 2,330 858 3,475
------- ------- ------- -------
Noninterest income
Service charges 391 82 31 144
Earnings of equity method investee - - 25 30
Gain on loan sales 1,041 293 - 315
(Loss) on sale of premises and equipment (156) - (3) (89)
Increase in cash surrender value of life insurance 188 45 45 176
Net realized gains (losses) on sales of
available-for-sale securities 4,883 - - (7)
Other 610 118 6 113
------- ------- ------- -------
Total noninterest income 6,957 538 104 682
------- ------- ------- -------
Noninterest expense
Salaries and employee benefits 4,850 1,292 404 2,384
Net occupancy expense 1,431 248 59 626
Data processing fees 630 164 56 305
Professional fees 785 218 32 283
Marketing expense 362 24 33 77
Data processing termination charges - - - 797
Other 2,035 591 140 1,554
------- ------- ------- -------
Total noninterest expense 10,093 2,537 724 6,026
------- ------- ------- -------
Income (loss) from continuing operations before income
taxes and minority interest 6,762 331 238 (1,869)
Income tax expense (benefit) from continuing operations 2,273 95 75 (763)
------- ------- ------- -------
Income (loss) from continuing operations before
minority interest and discontinued operations 4,489 236 163 (1,106)
Income from subsidiary held for disposal 6 24 36 36
Income tax expense from subsidiary held for disposal 2 17 - 13
------- ------- ------- -------
Income (loss) before minority interest 4,493 243 199 (1,083)
Minority interest in (income) of consolidated
subsidiary and subsidiary held for disposal (12) (3) (16) (10)
------- ------- ------- -------
Net income (loss) $ 4,481 $ 240 $ 183 $(1,093)
======= ======= ======= =======
Income (loss) per share from continuing operations
Basic $2.38 $0.13 $0.14 ($0.84)
Diluted $2.33 $0.12 $0.14 ($0.84)
Income per share from subsidiary held for disposal
Basic $0.00 $0.00 $0.03 $0.02
Diluted $0.00 $0.00 $0.03 $0.02
Net income (loss) per share
Basic $2.37 $0.13 $0.16 ($0.83)
Diluted $2.32 $0.13 $0.15 ($0.83)
Weighted average shares outstanding
Basic 1,889 1,864 1,163 1,318
Diluted 1,929 1,917 1,204 1,318
See notes to consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)
Three months Three months
Year ended ended ended Year ended
December 31, December 31, December 31, September 30,
2005 2004 2003 2004
--------- ------------- ----------- -----------
Net income (loss) $ 4,481 $ 240 $ 183 $ (1,093)
Other comprehensive income (loss), net of tax
Change in unrealized gains and losses on available-for-sale
securities (686) 305 252 716
Less reclassification adjustment for realized gains (losses)
included in net income 3,223 - - (4)
------- ------- ------- -------
Other comprehensive income (loss) (3,909) 305 252 720
------- ------- ------- -------
Comprehensive income (loss) $ 572 $ 545 $ 435 $ (373)
======= ======= ======= =======
See notes to consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Consolidated Statements of Changes in Stockholders' Equity
(in thousands except share and per share data)
Common Stock Accumulated
--------------- Additional Unearned Other Total
Number of Paid-in Retained ESOP Unearned Comprehensive Treasury Stockholders'
Shares Amount Capital Earnings Compensation Compensation Income (Loss) Stock Equity
--------- ------ ---------- -------- ------------ ------------ ------------- -------- -------------
Balance September 30, 2003 1,222,978 $218 $21,315 $11,492 $(622) $ - $ 2,747 $(14,378) $20,772
Net income - - - 183 - - - - 183
Change in other comprehensive
income, net of tax - - - - - - 252 - 252
Purchase of stock for treasury - - - - - - - (4) (4)
ESOP shares released - - 28 - 57 - - - 85
--------- ---- ------- ------- ----- ---- ------- -------- -------
Balance December 31, 2003 1,222,978 $218 $21,343 $11,675 $(565) $ - $ 2,999 $(14,382) $21,288
Net income (loss) - - - (1,276) - - - - (1,276)
Change in other comprehensive
income, net of tax - - - - - - 468 - 468
Cash dividends declared,
$0.38 per share - - - (517) - - - - (517)
Purchase of stock for treasury (10,680) - - - - - - (193) (193)
Exercise of stock options 5,000 1 82 - - - - - 83
Shares issued in acquisition,
net of cost 696,070 69 17,096 - - - - - 17,165
ESOP shares released - - 14 - 49 - - - 63
--------- ---- ------- ------- ----- ---- ------- -------- -------
Balance September 30, 2004 1,913,368 $288 $38,535 $ 9,882 $(516) $ - $ 3,467 $(14,575) $37,081
Net income - - - 240 - - - - 240
Change in other comprehensive
income, net of tax - - - - - - 305 - 305
Exercise of stock options 3,000 1 29 - - - - - 30
ESOP shares released - - 24 - 26 - - - 50
--------- ---- ------- ------- ----- ---- ------- -------- -------
Balance December 31, 2004 1,916,368 $289 $38,588 $10,122 $(490) $ - $ 3,772 $(14,575) $37,706
Net income - - - 4,481 - - - - 4,481
Cash dividends declared,
$0.40 per share - - - (754) - - - - (754)
Change in other comprehensive
income (loss), net of tax - - - - - - (3,909) - (3,909)
Exercise of stock options 54,500 5 877 - - - - - 882
Retirement of stock received
as part of exercise of
stock options (20,960) (2) (411) - - - - - (413)
Issuance of restricted stock 2,000 - 38 - - (38) - - -
Forfeiture of restricted stock (500) - (9) - - 9 - - -
Amortization of unearned
compensation - - - - - 5 - - 5
ESOP shares released - - 153 - 110 - - - 263
--------- ---- ------- ------- ----- ---- ------- -------- -------
Balance December 31, 2005 1,951,408 $292 $39,236 $13,849 $(380) $(24) $ (137) $(14,575) $38,261
========= ==== ======= ======= ===== ==== ======= ======== =======
See notes to consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three months Three months
Year ended ended ended Year ended
December 31, December 31, December 31, September 30,
2005 2004 2003 2004
------------ ------------- ------------ -------------
Cash Flows from Operating Activities:
Net income (loss) $ 4,481 $ 240 $ 183 $(1,093)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
Depreciation 613 106 30 352
Goodwill impairment - 47 - 356
Provision for loan losses 354 - - 1,203
Gain on loan sales (1,041) (293) - (315)
Origination of loans held for sale (60,408) (18,247) - (16,263)
Proceeds from loans held for sale 62,515 18,382 - 15,750
ESOP compensation 210 50 84 147
Amortization of unearned compensation on restricted stock 5 - - -
Amortization of premiums and discounts on securities 117 43 57 221
Deferred income taxes 3 68 (2) (768)
FHLB stock dividend (100) (21) (19) (77)
Increase in equity investment of subsidiary - - (15) -
Amortization of loan fees (330) (53) (27) (155)
Amortization of intangibles, net 336 98 - 117
Net realized (gains) losses on available-for-sale securities (4,883) - - 7
Loss on sale of premises and equipment 156 - - 89
Minority interest in income of consolidated subsidiary and
subsidiary held for disposal 12 2 14 10
Increase in cash value of life insurance (188) (45) (45) (176)
(Income) from subsidiary held for disposal (4) (7) (36) (22)
Changes in:
(Increase) decrease in interest receivable and other assets (594) 618 (86) (140)
Increase (decrease) in interest payable and other liabilities 507 (177) (306) 107
------- ------- ------- -------
Net cash provided by (used in) operating activities 1,761 811 (168) (650)
------- ------- ------- -------
Cash Flows from Investing Activities:
Purchases of available-for-sale securities (7,319) - (1,000) (1,946)
Proceeds from maturities of available-for-sale securities 5,474 1,031 1,185 9,508
Proceeds from the sales of available-for-sale securities 11,267 - 500 1,739
Purchases of held-to-maturity securities - - (1,577) (1,577)
Proceeds from maturities of held-to-maturity securities 165 - 1,000 3,555
Net (increase) decrease in loans (33,578) (23,105) 96 (6,959)
Purchases of premises and equipment (3,635) (454) (106) (1,929)
Proceeds from sales of premises and equipment 24 - - -
Proceeds, net from sale of subsidiaries 2,260 - - -
Net cash acquired in business acquisition - - - 8,462
------- ------- ------- -------
Net cash (used in) provided by investing activities (25,342) (22,528) 98 10,853
------- ------- ------- -------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits 40,968 3,457 (1,324) (10,603)
Net (decrease) increase in short-term borrowings (4,486) 16,112 - 7,120
Proceeds from long-term debt - - - -
Repayment of long-term debt (1,000) - (155) (1,400)
Purchase of treasury stock - - (4) (197)
Proceeds from exercise of stock options 470 30 - 83
Cash dividends paid (754) - - (517)
------- ------- ------- -------
Net cash provided by (used in) financing activities 35,198 19,599 (1,483) (5,514)
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents 11,617 (2,118) (1,553) 4,689
Cash and cash equivalents at beginning of period 9,946 12,064 7,375 7,375
------- ------- ------- -------
Cash and cash equivalents at end of period $21,563 $ 9,946 $ 5,822 $12,064
======= ======= ======= =======
Supplemental Cash Flow Information:
Interest paid $ 7,800 $ 1,380 $ 796 $ 3,405
Income taxes paid 1,965 - - 82
Net (decrease) increase in cash and cash equivalents of
discontinued operations (1,795) 215 (51) 418
Real estate acquired in settlement of loans 33 - - -
See notes to consolidated financial statements.
1st INDEPENDENCE FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
1st Independence Financial Group, Inc. ("Company") is a holding company whose
principal activity is the ownership and management of its wholly owned
subsidiary, 1st Independence Bank, Inc. ("Bank") and 1st Independence Mortgage,
a division of the Bank. The Bank is primarily engaged in providing a full range
of banking and financial services to individual and corporate customers in
Indiana and Kentucky. The Bank is subject to competition from other financial
institutions and is subject to the regulation of certain federal and state
agencies and undergoes periodic examinations by those regulatory authorities.
1st Independence Mortgage engages in mortgage banking operations. The Bank sold
its majority ownership in Foundation Title Company, LLC at the end of November
2005 after deciding to exit the title insurance business. On July 9, 2004, the
Company completed its acquisition of Independence Bancorp and it's wholly owned
subsidiary Independence Bank ("IB"). Concurrent with the acquisition, the
Company liquidated Independence Bancorp and changed the company's name to 1st
Independence Financial Group, Inc. Also concurrent with the merger, the Company,
in substance, merged it's newly acquired subsidiary IB into its wholly owned
subsidiary First Financial Bank, and became a Kentucky state chartered bank
named 1st Independence Bank. The merger of the bank subsidiaries was accounted
for at historical cost, as a combination of entities under common control. See
note 3 for further information regarding the Company's acquisition of
Independence Bancorp and its subsidiary IB. As discussed in note 4, on January
28, 2005 the Company completed the sale of its entire interest in its majority
owned subsidiary, Citizens Financial Bank, Inc. ("Citizens").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
the Bank. All significant inter-company accounts and transactions have been
eliminated in consolidation. The financial position and results of operations of
Citizens were removed from the detail line items in the Company's financial
statements and presented separately as "subsidiary held for disposal."
The Company changed its fiscal year-end from September 30 to December 31 in
2004. References to periods refers to the one year period ended December 31,
2005, three month periods ended December 31, 2004 and 2003, or one year period
ended September 30, 2004, as appropriate.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. In connection with
the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties.
Cash Equivalents
The Company considers all liquid investments with original maturities of three
months or less to be cash equivalents.
Securities
Available-for-sale securities, which include any security for which the Company
has no immediate plan to sell, but which may be sold in the future, are carried
at fair value. Unrealized gains and losses are recorded, net of related income
tax effects, in other comprehensive income.
Held-to-maturity securities, which include any security for which the Company
has the positive intent and ability to hold until maturity, are carried at
historical cost adjusted for amortization of premiums and accretion of
discounts.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
Mortgage Banking Activities
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or market value. To deliver closed loans
to the secondary market and to control its interest rate risk prior to sale, the
Company enters into "best efforts" contracts. The aggregate market value of
mortgage loans held for sale considers the price of the sales contracts. No
servicing is retained on loans sold into the secondary market.
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoffs are reported at their outstanding principal
balances adjusted for any charge-offs, the allowance for loan losses, any
deferred fees or costs on originated loans and unamortized premiums or discounts
on purchased loans. Interest income is reported on the interest method and
includes amortization of net deferred loan fees and costs over the loan term.
Generally, loans are placed on nonaccrual status at 90 days past due and
interest is considered a loss unless the loan is well-secured and in the process
of collection.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to income. Loan losses are
charged against the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revisions as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan-by-loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment.
Premises and Equipment
Depreciable assets and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is charged to expense using the
straight-line method over the estimated useful lives of the assets which
generally range from 5 to 39 years for buildings and related components and from
3 to 10 years for furniture, fixtures and equipment.
Federal Home Loan Bank Stock
Federal Home Loan Bank ("FHLB") stock is a required investment for institutions
that are members of the FHLB system. The required investment in the common stock
is based on a predetermined formula and is carried at cost.
Bank Owned Life Insurance
The Bank has purchased life insurance policies on certain key executives.
Company owned life insurance is recorded at its cash surrender value or the
amount that can be realized.
Goodwill
Goodwill is tested annually for impairment. If the implied fair value of
goodwill is lower than its carrying amount, goodwill impairment is indicated and
goodwill is written down to its implied fair value. Subsequent increases in
goodwill value are not recognized in the consolidated financial statements.
Treasury Stock
Treasury stock is stated at cost. Cost is determined by the average cost method.
Stock Options
The Company has two stock-based employee compensation plans ("Plans"), which are
described more fully in note 18. The Company accounts for these Plans using the
intrinsic value method of accounting for stock-based compensation proscribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. No stock-based employee compensation
expense is reflected in net income as all stock options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the grant date. The following table illustrates the effect on net
income (loss) and net income (loss) per share, if the Company had applied the
fair value provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee compensation
(in thousands except per share data).
Three months
Year ended ended Year ended
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Net income (loss) as reported $4,481 $ 240 $(1,093)
Less total stock-based employee
compensation expense (including
forfeitures of $65, $0 and $0)
determined under fair value method for
all awards, net of related tax effects (47) 4 59
------ ----- -------
Pro forma net income (loss) $4,528 $ 236 $(1,152)
====== ===== =======
Basic net income (loss) per share
As reported $2.37 $0.13 $(0.83)
Pro forma 2.40 0.13 (0.87)
Diluted net income (loss) per share
As reported $2.32 $0.13 $(0.83)
Pro forma 2.35 0.12 (0.87)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for 2005:
Year ended
December 31,
2005
-----------
Risk-free interest rate 4.17%
Dividend yield 1.69%
Volatility factor 27%
Expected term of options (in years) 10
There were no stock options granted in the three months ended December 31, 2004
or the year ended September 30, 2004.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax effects of
differences between the consolidated financial statement and tax basis of assets
and liabilities. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax asset will not be
realized. The Company files consolidated income tax returns with 1st
Independence Bank.
Employee Stock Ownership Plan ("ESOP")
The cost of shares issued to the ESOP, but not yet allocated to participants, is
shown as a reduction to stockholders' equity. Compensation expense is based on
the market price of shares as they are committed to be released to participant
accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends
on unearned ESOP shares reduce debt and accrued interest.
Net Income Per Share
Net income per share has been computed based upon the weighted-average common
shares outstanding during each year. Unearned ESOP shares have been excluded
from the computation of average shares outstanding.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale, which are recognized as a separate component of equity.
Other comprehensive income (loss) includes $9,794 and $375 of unrealized gains
related to Citizens for the periods ending December 31, 2004, and September 30,
2004, for which deferred taxes were provided.
Effect of Newly Issued But Not Yet Effective Accounting Standards
The Financial Accounting Standards Board ("FASB") recently issued new accounting
standards on share-based payments ("Statement 123R"). Statement 123R addresses
accounting for share-based payments to employees, including our stock option
plan. We will adopt Statement 123R in the first quarter of 2006 as required by
the standard. Under the new rules, compensation expense will be based on the
fair value of options granted, determined at the date of grant, spread over the
employee's vesting or service period; whereas under previous rules, compensation
expense was based on the intrinsic value of options granted, which was always
zero for our plan. When we adopt Statement 123R in 2006, we do not expect a
material impact on net income and net income per share based on current
assumptions about the fair value of options granted. Previously reported net
income and net income per share will not be restated.
Reclassifications
Certain reclassifications have been made to the 2004 consolidated financial
statements to conform to the 2005 consolidated financial statement presentation.
These reclassifications had no effect on net income.
2. Restrictions on Cash and Due from Banks
The Bank is required by law to maintain average reserve balances, in the form of
vault cash and non-interest bearing balances with the Federal Reserve Bank,
against a percentage of certain deposit liabilities. The reserve required was
approximately $869,000 and $1,917,000 at December 31, 2005 and 2004,
respectively.
3. Business Acquisition
On July 9, 2004, the Company acquired 78% of the outstanding common stock of
Independence Bancorp, thus completing its acquisition of 100% of Independence
Bancorp. The results of Independence Bancorp's operations have been included in
the consolidated financial statements since that date. Independence Bancorp is
the bank holding company of 1st Independence Bank located in New Albany,
Indiana. As a result of the acquisition, the Company will have an opportunity to
gain entry into the southern Indiana and greater Louisville, Kentucky markets.
Also by retaining the charter of IB, the Company effected a conversion of the
Bank from a federally chartered savings bank to a Kentucky chartered commercial
bank.
The aggregate purchase price, including vested stock options, was $17,656,000.
The value of the common shares issued was determined based upon their market
value as of the acquisition date. The value of the vested options was determined
using an option pricing model.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition of the remaining 78% interest
of the outstanding common stock (in thousands).
Cash and cash equivalents $ 4,008
Securities 6,224
Loans held for sale 771
Loans, net 96,019
Premises and equipment 1,463
Core deposits 27
Goodwill 10,851
Other assets 1,615
--------
Total assets acquired 120,978
--------
Deposits 95,302
Long-term debt 7,344
Other liabilities 676
--------
Total liabilities assumed 103,322
--------
Net assets acquired $ 17,656
========
In connection with the acquisition of the remaining 78% interest in Independence
Bancorp, the Company engaged an independent third party valuation professional
to determine the amount of the core deposit intangible and adjusted its carrying
value as of the acquisition date to the amount from the valuation. The third
party valuation was $258,000, resulting in additional $27,000 allocation to the
acquisition of the remaining 78% interest. The core deposit base has a useful
life of approximately eight years and is being amortized using accelerated
methods.
The goodwill acquired was assigned entirely to the banking segment of the
Company. Of that total amount, none is expected to be deductible for tax
purposes.
Premiums on loans and deposits are being amortized over 39 months and nine
months, respectively, using the level yield method.
The following pro forma disclosures, including the effect of the purchase
accounting adjustments, depict the results of operations as though the merger
had taken place at the beginning of the year ended September 30, 2004 (in
thousands except per share data).
Year ended
September 30,
2004
------------
Net interest income $6,789
Net loss (1,162)
Basic and diluted net income per share (0.61)
4. 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 accordance
with Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", the financial position and results of operations
of Citizens prior to the sale were removed from the detail line items in the
Company's financial statements and presented separately as "subsidiary held for
disposal." Recorded goodwill related to the Company's investment in Citizens in
the amount of $356,000 was written off as impaired in the fourth quarter of
2004.
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.
The following is a condensed balance sheet as of December 31, 2004 and September
30, 2004 and a condensed statement of operations for the three month period
ended December 31, 2004 and the year ended September 30, 2004 for Citizens (in
thousands):
December 31, September 30,
2004 2004
----------- -------------
Assets
Cash and cash equivalents $ 1,796 $ 1,581
Available-for-sale securities 5,777 7,189
Loans, net of allowance for loan losses of $596 at
December 31, 2004 and $582 at September 30, 2004 28,930 30,731
Premises and equipment, net 209 219
Other real estate owned 404 526
Other assets 1,030 1,098
------- -------
Total assets $38,146 $41,344
======= =======
Liabilities
Deposits $31,829 $34,675
Federal funds purchased 254 -
FHLB advances 1,949 2,471
Other liabilities 97 118
------- -------
Total liabilities 34,129 37,264
Stockholders' equity 4,017 4,080
------- -------
Total liabilities and stockholders' equity $38,146 $41,344
======= =======
Three months ended Year ended
December 31, September 30,
2004 2004
---- ----
Interest income $554 $2,356
Interest expense 236 1,213
---- ------
Net interest income 318 1,143
Provision for loan losses 13 80
Noninterest income 56 202
Noninterest expense 337 1,230
Income tax expense 17 13
---- ------
Net income $ 7 $ 22
==== ======
5. Securities
The amortized cost and approximate fair value of securities are as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains (Losses) Fair Value
----------- ------------ ----------- --------------
Available-for-sale securities
December 31, 2005
U.S. government agencies $ 1,999 $ 1 $ (26) $ 1,974
State and municipal 2,643 26 (59) 2,610
Mortgage-backed 11,705 16 (165) 11,556
Equity securities - - - -
------- ------ ----- -------
$16,347 $ 43 $(250) $16,140
======= ====== ===== =======
December 31, 2004
U.S. government agencies $ 2,533 $ 1 $ (9) $ 2,525
State and municipal 485 21 (1) 505
Mortgage-backed 17,910 178 (77) 18,011
Equity securities 76 5,606 - 5,682
------- ------ ----- -------
$21,004 $5,806 $ (87) $26,723
======= ====== ===== =======
September 30, 2004
U.S. government agencies $ 2,545 $ 5 $ (1) $ 2,549
State and municipal 485 22 - 507
Mortgage-backed 18,973 242 (51) 19,164
Equity securities 76 5,029 - 5,105
------- ------ ----- -------
$22,079 $5,298 $ (52) $27,325
======= ====== ===== =======
Held-to-maturity securities
December 31, 2005
State and municipal $1,975 $ 40 $ (41) $1,974
Mortgage-backed - - - --
------ ------ ----- ------
$1,975 $ 40 $ (41) $1,974
====== ====== ===== ======
December 31, 2004
State and municipal $2,148 $ 58 $ (43) $2,163
Mortgage-backed 2 - - 2
------ ------ ----- ------
$2,150 $ 58 $ (43) $2,165
====== ====== ===== ======
September 30, 2004
State and municipal $2,151 $ 68 $ (40) $2,179
Mortgage-backed 2 - - 2
------ ------ ----- ------
$2,153 $ 68 $ (40) $2,181
====== ====== ===== ======
The amortized cost and approximate fair value of available-for-sale securities
and held-to-maturity securities at December 31, 2005, by contractual maturity,
are shown below (in thousands). Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Available for Sale Held to Maturity
--------------------------- ----------------------------
Amortized Approximate Amortized Approximate
Cost Fair Value Cost Fair Value
------------ ------------ ------------ -------------
Due within one year $ - $ - $ 5 $ 5
Due after one year through five years 2,184 2,156 135 137
Due after five years through ten years 434 421 1,460 1,456
Due after ten years 2,024 2,007 375 376
Mortgage-backed securities 11,705 11,556 - -
Equity securites - - - -
------- ------- ------ ------
$16,347 $16,140 $1,975 $1,974
======= ======= ====== ======
The carrying value of securities pledged as collateral, to secure public
deposits and for other purposes, was $2,365,000, $879,000 and $925,000 at
December 31, 2005, December 31, 2004, and September 30, 2004, respectively.
Gross gains of $5,012,000 and gross losses of $129,000 resulting from sales of
available-for-sale securities were realized for the year ended December 31, 2005
and gross gains of $313 and gross losses of $7,514 resulting from sales of
available-for-sale securities were realized for the year ended September 30,
2004. There were no sales of securities for the three months ended December 31,
2004.
The following table is a summary of investment securities with gross unrealized
losses at December 31, 2005, December 31, 2004 and September 30, 2004,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position (in thousands):
Less than 12 months 12 months or longer Total
------------------- ------------------- -----------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ---------- ---------- ---------- ---------- ----------
December 31, 2005
U.S. government agencies $ 974 $ (26) $ - $ - $ 974 $ (26)
State and municipal 2,098 (56) 794 (44) 2,892 (100)
Mortgage-backed 10,573 (165) - - 10,573 (165)
------ ----- ------ ----- ------- -----
Total temporarily impaired $13,645 $(247) $ 794 $ (44) $14,439 $(291)
======= ===== ====== ===== ======= =====
December 31, 2004
U.S. government agencies $ 503 $ (1) $ 991 $ (9) $ 1,494 $ (10)
State and municipal 639 (33) 214 (10) 853 (43)
Mortgage-backed 1,582 (26) 4,836 (51) 6,418 (77)
------ ----- ------ ----- ------- -----
Total temporarily impaired $2,724 $ (60) $6,041 $ (70) $ 8,765 $(130)
====== ===== ====== ===== ======= =====
September 30, 2004
U.S. government agencies $1,506 $ (2) $ - $ - $ 1,506 $ (2)
State and municipal 458 (30) 218 (10) 676 (40)
Mortgage-backed 3,402 (24) 3,420 (26) 6,822 (50)
------ ----- ------ ----- ------- -----
Total temporarily impaired $5,366 $ (56) $3,638 $ (36) $ 9,004 $ (92)
====== ===== ====== ===== ======= =====
These declines primarily resulted from recent increases in market interest rates
and failure of certain investments to maintain consistent credit quality
ratings.
Based on evaluation of available evidence, including recent changes in market
interest rates, credit rating information and information obtained from
regulatory filings, management believes the declines in fair value for these
securities are temporary.
Should the impairment of any of these securities become other than temporary,
the cost basis of the investment will be reduced and the resulting loss
recognized in net income in the period the other-than-temporary impairment is
identified.
6. Loans and Allowance for Loan Losses
The composition of the loan portfolio at each of the dates indicated was as
follows (in thousands):
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Residential real estate $128,949 $125,433 $115,879
Commercial real estate 46,731 35,746 31,297
Commercial 23,757 21,040 16,983
Construction 51,877 33,600 30,100
Consumer 1,960 3,706 3,937
Home equity 16,615 16,672 14,900
------- -------- --------
Total loans 269,889 236,197 213,096
Less allowance for loan losses 2,911 2,549 2,560
-------- -------- --------
Net loans $266,978 $233,648 $210,536
======== ======== ========
Activity in the allowance for loan losses was as follows (in thousands):
Three months
Year ended ended Year ended
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Balance at the beginning of period $2,549 $2,560 $ 391
Allowance of Independence Bancorp - - 1,046
Provision for loan losses 354 - 1,203
Loans charged off (11) (46) (84)
Recoveries on loans 19 35 4
------ ------ ------
Balance at end of period $2,911 $2,549 $2,560
====== ====== ======
Impaired loans were as follows (in thousands):
Three months
Year ended ended Year ended
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Impaired loans at end of period $514 $565 $688
Impaired loans at end of period with
allowance allocated 448 181 93
Allowance allocated for impaired loans 128 102 72
Average impaired loans during the period 511 568 173
Interest income recognized during the period 19 8 7
Interest income received during the period 18 5 5
Nonperforming loans were as follows (in thousands):
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Loans past due 90 days or more
and still on accrual $ 130 $ 332 $ 363
Nonaccrual loans 1,140 893 857
------ ------ ------
Total nonperforming loans $1,270 $1,225 $1,220
====== ====== ======
Loans held for sale activity is as follows (in thousands):
Three months
Year ended ended Year ended
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Balance at the beginning of period $ 2,344 $ 2,186 $ -
Acquired in business acquisition - - 1,358
Origination of loans held for sale 60,408 18,247 16,263
Sales proceeds (62,515) (18,382) (15,750)
Gain on sales of loans 1,041 293 315
------- ------- -------
Balance at end of period $ 1,278 $ 2,344 $ 2,186
======= ======= =======
In conjunction with the mortgage banking activities, the Company enters into
commitments to originate and commitments to sell loans, both of which are
considered derivatives. The Company's commitments are generally for fixed rate
mortgage loans, lasting 45 days and are at market rates when initiated. The
Company had commitments to originate $2,669,000, $1,739,000 and $10,861,000 in
loans as of December 31, 2005, December 31, 2004, and September 30, 2004,
respectively, which it intends to sell.
7. Premises and Equipment
A summary of premises and equipment follows (in thousands):
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Land $1,387 $ 679 $ 697
Buildings and improvements 5,714 3,323 3,268
Furniture, fixtures and equipment 2,460 2,332 2,038
Construction in progress 151 304 176
------ ------ ------
9,712 6,638 6,179
Less accumulated depreciation 1,497 1,253 1,157
------ ------ ------
Net premises and equipment $8,215 $5,385 $5,022
====== ====== ======
Depreciation expense was $613,000, $106,000 and $352,000 for the year ended
December 31, 2005, the three months ended December 31, 2004 and the year ended
September 30, 2004, respectively.
8. Goodwill and Intangible Assets
The change in the carrying amount of goodwill is as follows (in thousands):
Three months
Year ended ended Year ended
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Balance at the beginning of period $11,142 $11,188 $ 356
Impairment - (46) (356)
Acquired goodwill - - 11,188
------- ------- -------
Balance at end of period $11,142 $11,142 $11,188
======= ======= =======
In 2003, the Company acquired 22.5% of the outstanding shares of Independence
Bancorp for a total cost of $2,000,000, which was paid in cash. The Company
recorded its investment using the equity method, and accordingly, recognized its
proportionate share of the earnings of the investee. The excess of the purchase
price over the underlying equity in net assets of $258,233 was recognized as a
core deposit intangible and is being amortized over eight-years using an
accelerated method.
Acquired intangible assets are as follows (in thousands):
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Core deposit intangible $258 $258 $258
Less accumulated amortization 78 24 9
---- ---- ----
Net core deposit intangible $180 $234 $249
==== ==== ====
Estimated amortization expense for each of the next five years follows (in
thousands):
2006 $47
2007 40
2008 33
2009 26
2010 19
9. Leases
As a result of the merger, the Company assumed the following operating leases
entered into by Independence Bancorp:
A lease was entered into in December 2000 to lease an office facility which is
now the Bank's New Albany, Indiana branch from an entity owned by the Company's
Chairman under an operating lease for 15 years. Base monthly rentals are
$10,000, with increases in January 2006 and 2011 equal to the percentage
increase in the U. S. Consumer Price Index - All Urban Consumers ("CPI-U") for
the prior five-year period. The Company may purchase the facility at any time
for $1,187,000, plus an increase equal to the percentage increase in the CPI-U
from January 1, 2001, until the month of purchase.
A lease was entered into in December 2001 to lease an office building for the
Bank's Jeffersonville, Indiana branch. This three year operating lease was from
January 1, 2002, through year-end 2004 with three three-year renewal options. In
March 2005, the Bank exercised its option to purchase the facility for $322,000.
A lease was entered into in August 2002 to lease an office facility for the
Bank's mortgage banking operations. This three year operating lease was from
August 1, 2002, to July 31, 2005, with a two-year renewal option. Monthly
payments were $2,200, $2,300 and $2,400 through July 2003, 2004 and 2005,
respectively. The Bank moved its mortgage banking operations to a building that
was purchased in 2005 by the Bank and did not renew this lease.
A lease was entered into in April 2003 to lease an office building for the
Bank's St. Matthews, Kentucky branch. This 15-year operating lease is from May
1, 2003, through April 30, 2018, with a five-year renewal option. Monthly
payments are $4,000, $4,500, $5,000, $6,500 and $8,000 through April 2005, 2007,
2009, 2013 and 2018, respectively.
A lease was entered into in May 2004 to lease an office facility for the Bank's
Clarksville, Indiana branch from an entity owned by the Company's Chairman under
an operating lease starting in October 2004 for 15 years. The lease contains a
provision for additional rent in addition to the base rent for common area
expenses. This common area expense rent adjusts annually based upon the actual
expenses paid by the landlord. Monthly payments are $4,550, $5,155 and $5,855
through September 2009, 2014 and 2019, respectively.
Rent expense for operating leases was $267,000, $64,000 and $40,000 for the
year ended December 31, 2005, the three months ended December 31, 2004, and the
year ended September 30, 2004, respectively. Rent expense paid to related
parties was $181,000, $44,000 and $30,000 for the year ended December 31, 2005,
the three months ended December 31, 2004, and the year ended September 30, 2004,
respectively. Rent commitments under noncancelable operating leases at December
31, 2005 were as follows, before considering renewal options (in thousands):
2006 $ 237
2007 239
2008 235
2009 248
2010 260
Thereafter 1,845
------
$3,064
======
10. Interest-bearing deposits
Interest-bearing time deposits in denominations of $100,000 or more were
$68,962,000, $60,030,000 and $52,012,000 on December 31, 2005, December 31,
2004, and September 30, 2004, respectively. Time deposits include $59,618,000
and $35,525,000 of brokered deposits at December 31, 2005 and December 31, 2004,
respectively. There were no brokered deposits at September 30, 2004.
At December 31, 2005, the scheduled maturities of time deposits are as follows
(in thousands):
2006 $161,008
2007 27,406
2008 5,407
2009 1,880
2010 830
Thereafter 1,055
--------
$197,586
========
11. Short-term Borrowings
Short-term borrowings were as follows (in thousands):
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Securities sold under agreements to repurchase $ 747 $ 733 $ 621
Single maturity FHLB advance with variable
rate of 4.33% and maturity date of March
22, 2006 18,000 - -
Single maturity FHLB advances with variable
rate of 2.42% and maturity dates of January
14, 2005, through February 18, 2005 - 22,500 -
Single maturity FHLB advances with variable
rate of 2.03% and maturity dates of October
29, 2004 and November 23, 2004 - - 6,500
------- ------- ------
$18,747 $23,233 $7,121
======= ======= ======
Securities sold under agreements to repurchase consist of obligations of the
Bank to other parties. The obligations are secured by the underlying securities
and such collateral is held by First Tennessee Bank. The maximum amount of
outstanding agreements at any month end during the year ended December 31, 2005,
the three months ending December 31, 2004, and the year ended September 30,
2004, totaled $747,000, $733,000 and $782,000, respectively, and the average of
such agreements totaled $514,000, $574,000 and $626,000 for the year ended
December 31, 2005, the three months ended December 31, 2004 and the year ended
September 30, 2004, respectively. The agreements at December 31, 2005, mature
within one to three days.
The Company had a $2.5 million line of credit with an unaffiliated institution
that the Company elected to cancel in January 2006. The Company had never
borrowed against the line of credit.
12. Long-term Debt
Long-term debt was as follows (in thousands):
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
FHLB advance with fixed rate of 5.20% with
maturity date of March 7, 2011 $ 1,000 $ 1,000 $ 1,000
FHLB advance with fixed rate of 1.95% with
maturity date of June 9, 2006 3,000 3,000 3,000
FHLB advance with fixed rate of 2.32% with
maturity date of September 12, 2005 - 968 955
Subordinated debentures 9,279 9,279 9,279
------- ------- -------
$13,279 $14,247 $14,234
======= ======= =======
The FHLB advances are secured by mortgage loans; the minimum balance required
was approximately $27,800,000, $37,125,000 and $17,250,000 at December 31, 2005,
December 31, 2004, and September 30, 2004, respectively. The advances are
subject to restrictions or penalties in the event of prepayment.
Aggregate annual maturities of FHLB borrowings at December 31, 2005, were (in
thousands):
2006 $3,000
2011 1,000
------
$4,000
======
The subordinated debentures relate to transactions entered into as part of the
formation of two separate trusts in 2003. One trust (Harrodsburg Statutory Trust
I) was formed by the Company and the other trust (Independence Bancorp Statutory
Trust I) was formed by Independence Bancorp and acquired by the Company as part
of the acquisition of Independence. Both trusts were formed to issue trust
preferred securities as part of pooled offerings. The Company issued $5,155,000
of subordinated debentures and Independence issued $4,124,000 of subordinated
debentures to the respective trusts in exchange for the proceeds of the
offerings. Issuance costs are being amortized over the life of the preferred
securities. Distributions on each issue are paid quarterly on March 26, June 26,
September 26 and December 26 of each year.
The subordinated debentures, which mature March 26, 2033, are redeemable prior
to the maturity date at the option of the Company on or after March 26, 2008 at
their principal amount plus accrued interest. As defined in the trust
indentures, the prepayment would require prior approval of the Board of
Governors of the Federal Reserve System. The Company also has the option to
defer interest payments on the subordinated debentures from time to time for a
period not to exceed twenty consecutive quarters. If payments are deferred, the
Company is prohibited from paying dividends to its common stockholders.
The $5,155,000 subordinated debentures bear interest at 6.4% through March 26,
2008 and thereafter a variable rate with repricing quarterly based on the
three-month London Interbank Offering Rate ("LIBOR") plus 3.15%. The $4,124,000
subordinated debentures bear interest at a variable rate repricing quarterly
based on the three-month LIBOR plus 3.15%. At December 31, 2005 that rate was
7.67%.
During the year ended September 30, 2004, the Company applied the provisions of
Financial Accounting Standards Board Interpretation No. 46 (Revised),
"Consolidation of Variable Interest Entities", to its trust preferred security
issues. The primary impact of this change was to report the Company's
subordinated debentures to the Trusts on the face of the accompanying balance
sheet rather than the capital notes issued by the Trust, as was previously
presented. This change has been made for all periods presented. This change did
not have a material impact on the Company's total assets, liabilities,
stockholders' equity or results of operations.
13. Income Taxes
The provision (benefit) for income taxes includes these components (in
thousands):
Three months
Year ended ended Year ended
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Current $2,270 $27 $ 5
Deferred 3 68 (768)
------ --- -----
Income tax expense (benefit) $2,273 $95 $(763)
====== === =====
A reconciliation of income tax expense (benefit) at the statutory rate to the
Company's actual income tax expense (benefit) is shown below (in thousands):
Three months
Year ended ended Year ended
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Computed at the statutory rate of 34% $2,296 $114 $(631)
Increase (decrease) resulting from:
State income taxes 97 5 (41)
Tax exempt interest (79) (16) (25)
Nondeductible expenses 13 4 6
Increase in cash surrender value
of life insurance (64) (15) (60)
Other 10 3 (12)
------ ---- -----
Income tax expense (benefit) $2,273 $ 95 $(763)
====== ==== =====
The significant components of deferred tax assets and liabilities are reflected
in the following table (in thousands):
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Deferred tax assets
Allowance for loan losses $ 971 $ 871 $ 875
Basis differential in equity method investment - 211 208
ESOP liability 57 67 57
Deferred loan fees 283 227 226
Net operating loss and charitable contribution
carryovers - 119 179
Alternative minimum tax credit carryover - 9 --
Transaction costs 35 38 38
Accrued salary costs - 17 30
Building donation 90 - --
Unrealized losses on available-for-sale securities 71 - --
Other 4 - --
----- ------ ------
Total deferred tax assets 1,511 1,559 1,613
----- ------ ------
Deferred tax liabilities
Depreciation 386 400 345
Federal Home Loan Bank stock dividends 532 511 503
Unrealized gains on available-for-sale securities - 1,944 1,784
Core deposit intangible 64 78 90
Fair market value adjustments 141 236 273
Other 1 15 15
----- ------ ------
Total deferred tax liabilities 1,124 3,184 3,010
----- ------ ------
Net deferred tax (assets) liabilities ($387) $1,625 $1,397
===== ====== ======
Retained earnings at December 31, 2005, December 31, 2004, and September 30,
2004, include approximately $2,135,000 for which no deferred federal income tax
liability has been recognized. This amount represents an allocation of income to
bad debt deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debt losses or adjustments arising from carryback of
net operating losses would create income for tax purposes only, which would be
subject to the then-current corporate income tax rate. The deferred income tax
liabilities on the preceding amounts that would have been recorded if they were
expected to reverse into taxable income in the foreseeable future were
approximately $726,000 at December 31, 2005, December 31, 2004, and September
30, 2004.
14. Capital Requirements and Restrictions on Retained Earnings
Banks and holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective action regulations involve
quantitative measures of assets, liabilities and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure
to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
At year-end 2005, the Company and the Bank were considered well capitalized
under these regulations. Actual and required capital amounts and ratios are
presented below (in thousands except ratios).
To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2005
Total capital (to risk-weighted assets)
Consolidated $38,987 15.1% $20,671 8.0% $25,839 10.0%
Bank 35,082 13.6 20,643 8.0 25,804 10.0
Tier 1 capital (to risk-weighted assets)
Consolidated 33,845 13.1 10,335 4.0 15,503 6.0
Bank 32,171 12.5 10,322 4.0 15,482 6.0
Tier 1 capital (to average assets)
Consolidated 33,845 10.2 13,269 4.0 16,586 5.0
Bank 32,171 9.7 13,212 4.0 16,515 5.0
As of December 31, 2004
Total capital (to risk-weighted assets)
Consolidated $36,984 15.6% $19,019 8.0% $23,773 10.0%
Bank 31,642 15.1 16,775 8.0 20,968 10.0
Tier 1 capital (to risk-weighted assets)
Consolidated 31,555 13.3 9,509 4.0 14,264 6.0
Bank 26,570 12.7 8,387 4.0 12,581 6.0
Tier 1 capital (to average assets)
Consolidated 31,555 9.6 13,184 4.0 16,480 5.0
Bank 26,570 9.5 11,187 4.0 13,983 5.0
As of September 30, 2004
Total capital (to risk-weighted assets)
Consolidated $35,898 16.2% $17,704 8.0% $22,130 10.0%
Bank 30,372 15.8 15,339 8.0 19,174 10.0
Tier 1 capital (to risk-weighted assets)
Consolidated 30,854 13.9 8,852 4.0 13,278 6.0
Bank 25,709 13.4 7,670 4.0 11,504 6.0
Tier 1 capital (to average assets)
Consolidated 30,854 9.9 12,463 4.0 15,579 5.0
Bank 25,709 10.0 10,296 4.0 12,870 5.0
The Bank is subject to certain regulations on the amount of dividends it may
declare without prior regulatory approval. Under these regulations, the amount
of dividends that may be paid in any year is limited to that year's net profits,
as defined, combined with the retained net profits of the preceding two years,
less dividends declared during those periods. The Company's ability to pay
dividends is substantially determined by the Bank's ability to pay dividends to
the Company. At January 1, 2006, the Bank could pay dividends of approximately
$5,278,000 to the Company without regulatory approval.
15. Related Party Transactions
Loans to executive officers and directors, including loans to affiliated
companies of which executive officers and directors are principal owners, and
loans to members of the immediate family of such persons are summarized as
follows (in thousands):
Three months
Year ended ended Year ended
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Balance at beginning of period $5,397 $4,571 $ 451
Changes in composition of related
parties 4,308 - -
New loans, including renewals and
advances 4,026 832 4,727
Payments, including renewals (3,748) (6) (607)
------ ------ ------
Balance at end of period $9,983 $5,397 $4,571
====== ====== ======
In management's opinion, such loans and other extensions of credit and deposits
were made in the ordinary course of business and were made on substantially the
same terms (including interest rates and collateral) as those prevailing at the
time for comparable transactions with other persons. Further, in management's
opinion, these loans did not involve more than normal risk of collectibility or
present other unfavorable features.
Deposits from related parties held by the Bank at December 31, 2005, December
31, 2004, and September 30, 2004, totaled $839,000, $1,578,000 and $826,000,
respectively.
Leases from related parties are disclosed in Note 9.
16. Employee Benefits
The Bank terminated its noncontributory defined benefit pension plan (Pension
Trust) as of July 9, 2004, and accrued a termination payment of $231,000 in the
fourth quarter of the year ending September 30, 2004, upon determining the
termination liability. The multi-employer pension plan covered all full-time
employees with one year of service who had attained the age of 21. Pension
expense, including termination payments, for the three month period ended
December 31, 2004, and the year ended September 30, 2004, was $0 and $306,000,
respectively.
The Bank has a retirement savings 401(k) plan covering substantially all
employees. The Company amended the plan at the time of merger allowing employees
to contribute up to 15% of their compensation with 1st Independence Bank, which
is matched at a discretionary rate determined annually by the board of
directors. Prior to the amendment, employees could contribute up to 15% of their
compensation with the Bank matching 25% of the employee's contribution on the
first 6% of the employee's compensation. Employer contributions charged to
expense for the year ended December 31, 2005, the three months ended December
31, 2004 and the year ended September 30, 2004, were $91,000, $21,000 and
$35,000, respectively.
As part of the conversion of the Bank from the mutual to stock form of
ownership, in 1995 the Company established an employee stock ownership plan
("ESOP") covering substantially all employees of the Bank. The ESOP acquired
174,570 shares of Company common stock at $10 per share at the time of the
conversion with funds provided by a loan from the Company. Accordingly,
$1,745,700 of common stock acquired by the ESOP was shown as a reduction of
stockholders' equity. Shares are released to participants proportionately as the
loan is repaid. Dividends on allocated shares are recorded as dividends and
charged to retained earnings. Dividends on unallocated shares are used to reduce
the Bank's obligation to repay the loan and are treated as compensation expense.
Compensation expense is recorded equal to the fair market value of the stock
when contributions are made to the ESOP.
ESOP expense for the year ended December 31, 2005, the three month ended
December 31, 2004, and the year ended September 30, 2004, was $210,000, $50,000
and $89,000, respectively.
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Allocated shares 119,925 117,268 106,705
Shares released for allocation 10,941 2,657 10,563
Unearned shares 38,024 48,965 51,622
Less shares distributed to former
employees (10,303) - -
-------- -------- ----------
Total ESOP shares 158,587 168,890 168,890
======== ======== ==========
Fair value of unearned shares $703,444 $929,356 $1,032,440
======== ======== ==========
17. Stock Incentives
The Company has two stock option plans. The 1996 plan is a fixed option plan
under which the Company may grant options that vest over four years (20%
immediate and 20% on each of the next four anniversary dates) to selected
employees for up to 200,000 shares of common stock. The exercise price of each
option is intended to equal the fair value of the Company's stock on the date of
grant. An option's maximum term is 10 years. At December 31, 2005, 20,000
options remain available to be granted under this plan.
In July 2004, the Company formed a second plan for up to 300,000 shares of the
Company's common stock. The plan allows for both incentive and non-qualified
options to be granted at the discretion of the Company's board of directors,
generally with ten year maturities and with a three year vesting schedule (25%
immediate and 25% on each of the next three anniversary dates). Commensurate
with the Company's acquisition of Independence, 60,300 options of Independence
were transferred into the plan at their existing terms. At December 31, 2005,
232,200 options remain available to be granted under this plan.
In addition to the two stock option plans described above, the Company has a
restricted stock plan that was approved by the stockholders of the Company in
1997. The restricted stock plan allows for awards to selected employees for up
to 85,000 shares of the Company's common stock. Awards made to employees under
the plan have a five year vesting schedule (20% on each of the five anniversary
dates following the date of grant). The Company expenses the restricted stock
awards over the years during which the shares vest based on the fair market
value of the common stock at the date of the grant to the employee. As of
December 31, 2005, 1,500 shares had been awarded that were still outstanding.
The following summarizes activity under the plans for the years 2003, 2004 and
2005:
Restricted
Options Stock
--------------------------------------------------- -------------
Range of
Exercise Weighted Average
Shares Prices Exercise Price Shares
---------- ---------------- --------------- ----------
Outstanding September 30, 2003 200,000 $11.26 to $16.50 $16.29 -
Granted - - - -
Options transferred in
acquisition of Independence 60,300 $8.00 to $10.00 $8.82 -
Exercised (5,000) $16.50 $16.50 -
Forfeited - - - -
------- -----
Outstanding September 30, 2004 255,300 $8.00 to $16.50 $14.52 -
Granted - - - -
Exercised (3,000) $10.00 $10.00 -
Forfeited - - -
------- -----
Outstanding December 31, 2004 252,300 $8.00 to $16.50 $14.58 -
Granted 10,000 $18.99 $18.99 2,000
Exercised (54,500) $8.00 to $16.50 $15.61 -
Forfeited (22,500) $13.50 to $18.99 $16.11 (500)
------- -----
Outstanding December 31, 2005 185,300 $8.00 to $18.99 $14.33 1,500
======= =====
(Weighted average contractual
life of 2.6 years)
Exercisable Options:
September 30, 2004 253,300 $8.00 to $16.50 $14.55
December 31, 2004 250,300 $8.00 to $16.50 $14.61
December 31, 2005 179,675 $8.00 to $18.99 $14.18
The following table summarizes information about stock options outstanding at
December 31, 2005:
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted
Average Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---- -------------- ----------- --------------
$8.00 34,050 4.1 years $8.00 34,050 $8.00
$10.00 16,250 7.1 years $10.00 16,250 $10.00
$11.26 5,000 6.1 years $11.26 5,000 $11.26
$16.50 to $18.99 130,000 1.5 years $16.64 124,375 $16.54
------- -------
$8.00 to $18.99 185,300 2.6 years $14.33 179,675 $14.18
======= =======
The weighted average fair value of stock options granted in 2005 was $6.65.
18. 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
Year ended ended Year ended
December 31, December 31, September 30,
2005 2004 2004
---- ---- ----
Income (numerator) amounts used for basic and diluted per
share computations:
Income (loss) from continuing operations $4,489 $236 $(1,106)
====== ==== =======
Income from discontinued operations $ 4 $ 7 $ 23
====== ==== =======
Net income (loss) $4,481 $240 $(1,093)
====== ==== =======
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 1,889 1,864 1,318
===== ===== =====
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 1,889 1,864 1,318
Plus: dilutive effect of stock options 40 53 -
----- ----- -----
Adjusted weighted average shares 1,929 1,917 1,318
===== ===== =====
Basic net income (loss) per share:
Income (loss) from continuing operations $2.38 $0.13 $(0.84)
Income from discontinued operations - - 0.02
Net income (loss) 2.37 0.13 (0.83)
Diluted net income (loss) per share:
Income (loss) from continuing operations $2.33 $0.12 $(0.84)
Income from discontinued operations - - 0.02
Net income (loss) 2.32 0.13 (0.83)
Options to purchase 255,300 common shares, which equates to 46,325 incremental
common equivalent shares for the year ended September 30, 2004 were excluded
from the diluted calculations above as their effect would have been
antidilutive. In addition, options to purchase 7,500 common shares for the year
ended December 31, 2005 were excluded from the diluted calculations above
because the exercise price on the options were greater than the average market
price for certain periods within the year.
19. Disclosures About Fair Value of Financial Instruments
The following table presents estimated fair values of the Company's financial
instruments. The fair values of certain of these instruments were calculated by
discounting expected cash flows, which involves significant judgments by
management and uncertainties. Fair value is the estimated amount at which
financial assets or liabilities could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. Because no
market exists for certain of these financial instruments and because management
does not intend to sell these financial instruments, the Company does not know
whether the fair values shown below represent values at which the respective
financial instruments could be sold individually or in the aggregate (in
thousands).
December 31, 2005 December 31, 2004 September 31, 2004
----------------- ----------------- ------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
----------- --------- --------- ----------- ---------- -----------
Financial assets
Cash and cash equivalents $ 21,563 $ 21,563 $ 9,946 $ 9,946 $ 12,064 $ 12,064
Interest-bearing deposits 100 100 100 100 100 100
Available-for-sale securities 16,140 16,140 26,723 26,723 27,325 27,325
Held-to-maturity securities 1,975 1,974 2,150 2,165 2,152 2,180
Loans held for sale 1,278 1,297 2,344 2,379 2,187 2,220
Loans, net of allowance for
loan losses 266,978 266,091 233,648 234,685 210,536 211,450
FHLB stock 2,688 2,688 2,588 2,588 2,568 2,568
Interest receivable 1,665 1,665 1,129 1,129 1,117 1,117
Financial liabilities
Deposits $264,323 $263,115 $223,308 $222,488 $219,817 $219,498
Short-term borrowings 18,747 18,747 23,233 23,233 7,121 7,121
Long-term debt 13,279 13,268 14,247 14,283 14,234 14,267
Interest payable 666 666 272 272 290 290
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and Cash Equivalents, Interest-bearing Deposits, FHLB Stock and Interest
Receivable
The carrying amount approximates fair value.
Securities
Fair values equal quoted market prices, if available. If quoted market prices
are not available, fair value is estimated based on quoted market prices of
similar securities.
Loans
The fair value of loans, including loans held for sale, is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. Loans with similar characteristics were aggregated for
purposes of the calculations. The carrying amount of accrued interest
approximates its fair value.
Deposits
Deposits include demand deposits, savings accounts, NOW accounts and certain
money market deposits. The carrying amount approximates fair value. The fair
value of fixed-maturity time deposits is estimated using a discounted cash flow
calculation that applies the rates currently offered for deposits of similar
remaining maturities.
Short-term Borrowings, FHLB Advances and Interest Payable The carrying amount
approximates fair value.
Long-term Debt
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
Commitments to Originate Loans, Letters of Credit and Lines of Credit
The fair value of commitments to originate loans is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of forward sale commitments is estimated based on current market
prices for loans of similar terms and credit quality. The fair values of letters
of credit and lines of credit are based on fees currently charged for similar
agreements or on the estimated cost to terminate or otherwise settle the
obligations with the counterparties at the reporting date. The fair value of
commitments to originate loans, letters of credit and lines of credit are not
material.
20. Significant Estimates and Concentrations and Contingencies
Accounting principles generally accepted in the United States of America require
disclosure of certain significant estimates and current vulnerabilities due to
certain concentrations. Estimates related to the allowance for loan losses are
reflected in the footnote regarding loans. Current vulnerabilities due to
certain concentrations of credit risk are discussed in the note on commitments
and credit risk.
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 the Company's 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 for this litigation and, after discussion with legal counsel, 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.
21. Commitments and Credit Risks
Commitments to Originate Loans
Commitments to originate loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since a portion of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies, but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate.
At December 31, 2005, December 31, 2004, and September 30, 2004, the Bank had
outstanding commitments to originate loans aggregating approximately $3,283,000,
$15,597,000 and $17,679,000, respectively. The Bank also had commitments to
originate approximately $2,669,000, $1,739,000 and $10,861,000, respectively, of
fixed rate loans for sale into the secondary market. The commitments extended
over varying periods of time with the majority being disbursed within a one-year
period.
Letters of Credit
Letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. These guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
The Bank had total outstanding letters of credit amounting to approximately
$2,474,000, $2,886,000 and $1,579,000, at December 31, 2005, December 31, 2004,
and September 30, 2004, respectively.
Lines of Credit
Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire
without being drawn upon, the total unused lines do not necessarily represent
future cash requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, commercial real estate and residential real estate. Management uses
the same credit policies in granting lines of credit as it does for
on-balance-sheet instruments.
At December 31, 2005, December 31, 2004 and September 30, 2004, the Bank had
granted unused lines of credit to borrowers aggregating approximately
$57,117,000, $38,626,000 and $46,000, respectively.
Cash and Cash Equivalents
At December 31, 2005, the Company had approximately $5,871,000 of deposits
with correspondent banks in excess of federally insured amounts.
Bank Owned Life Insurance
As of December 31, 2005, the Company's investment in life insurance of
$3,235,000 was with one insurance company.
22. Selected Quarterly Financial Data (unaudited) All amounts are in thousands
except per share data.
Quarter
--------------------------------------------
1st 2nd 3rd 4th
------- ------- ------ -------
2005
----
Interest and dividend income $4,085 $4,398 $4,766 $5,197
Interest expense 1,720 1,902 2,108 2,464
Net interest income 2,365 2,496 2,658 2,733
Provision for loan losses 202 - 60 92
Net interest income after provision for loan losses 2,163 2,496 2,598 2,641
Noninterest income 5,489 642 291 535
Noninterest expense 2,859 2,436 2,248 2,550
Net income 3,109 483 462 427
Net income per share:
Basic 1.66 0.26 0.24 0.22
Diluted 1.62 0.25 0.24 0.22
2004
----
Interest and dividend income $1,639 $1,640 $3,327 $3,790
Interest expense 756 724 1,307 1,460
Net interest income 883 916 2,020 2,330
Provision for loan losses 5 21 1,177 -
Net interest income after provision for loan losses 878 895 843 2,330
Noninterest income 72 (9) 516 538
Noninterest expense 808 1,902 2,592 2,537
Net income (loss) 134 (656) (754) 240
Net income (loss) per share:
Basic 0.11 (0.56) (0.43) 0.13
Diluted 0.11 (0.56) (0.43) 0.13
The net income for the first quarter of 2005 includes a securities gain of $3.3
million or $1.77 per basic share and $1.72 per diluted share securities.
23. 1st Independence Financial Group, Inc. (parent company only)
Condensed Balance Sheets
(in thousands)
December 31, December 31, September 30,
2005 2004 2004
------------ ------------- ------------
Assets
Cash and cash equivalents $ 1,420 $ 345 $ 539
Investment in subsidiaries 43,373 43,969 43,071
Available-for-sale securities 974 992 999
Note receivable 541 673 922
Debt issuance costs, net of accumulated amortization 127 132 133
Other assets 1,138 883 873
------- ------- -------
Total assets $47,573 $46,994 $46,537
======= ======= =======
Liabilities and Stockholders' Equity
Subordinated debentures $ 9,279 $ 9,279 $ 9,279
Dividends payable - - 170
Other liabilities 33 9 7
Stockholders' equity 38,261 37,706 37,081
------- ------- -------
Total liabilities and stockholders' equity $47,573 $46,994 $46,537
======= ======= =======
Condensed Statements of Operations
(in thousands)
Three months
Year ended ended Year ended
December 31, December 31, September 30,
2005 2004 2004
------------ ------------ -------------
Income
Cash dividends from subsidiaries $ - $ - $ -
Other income 85 20 141
------ ----- -------
Total income 85 20 141
------ ----- -------
Expenses
Interest expense 600 137 381
Amortization of core deposit intangibles and debt issuance costs 5 1 35
Other expenses 732 343 720
------ ----- -------
Total expenses 1,337 481 1,136
------ ----- -------
Income (loss) from continuing operations before income
taxes, equity in undistributed net income of subsidiary, and
equity in undistributed net income of subsidiary held for disposal (1,252) (461) (995)
Income tax expense (benefit) from continuing operations (467) (162) (207)
------ ----- -------
Income (loss) from continuing operations before equity in
undistributed net income (loss) of subsidiary, and equity in
undistributed net income of subsidiary held for disposal (785) (299) (788)
Equity in undistributed net income (loss) of subsidiary from
continuing operations 5,266 535 (317)
Equity in undistributed net income of subsidiary held for disposal - 4 12
------ ----- -------
Net income (loss) $4,481 $ 240 $(1,093)
====== ===== =======
Condensed Statements of Cash Flows
(in thousands)
Three months
Year ended ended Year ended
December 31, December 31, September 30,
2005 2004 2004
------------ ------------ -----------
Cash flows from operating activities:
Net income (loss) $ 4,481 $ 240 $(1,093)
Adjustments to reconcile net income to net cash (used in)
operations:
Amortization of core deposit intangibles and debt
issuance costs 5 1 35
Amortization of unearned compensation on restricted stock 5 - -
Deferred income taxes - (3) (194)
Amortization of premiums on securities - - 15
Net realized losses on available-for-sale securities - - 7
Goodwill impairment - 12 356
Undistributed net income of subsidiary (5,266) (535) 317
Undistributed net income of unconsolidated statutory trusts 2 - -
Income from discontinued operations - (4) (12)
Changes in:
(Increase) in other assets (304) (16) (536)
Increase (decrease) in other liabilities 24 (168) (190)
----------- ------------ -----------
Net cash (used in) operating activities (1,053) (473) (1,295)
----------- ------------ -----------
Cash flows from investing activities:
Repayment of note receivable 132 249 60
Proceeds from the sales of available-for-sale securities - - 1,740
Proceeds from maturities of available-for-sale securities - - 183
Proceeds from sale of subsidiary 2,300 - -
Additional capital contributed to subsidiary (20) - -
Cash acquired in acquisition - - 176
----------- ------------ -----------
Net cash provided by investing activities 2,412 249 2,159
----------- ------------ -----------
Cash flows from financing activities:
Purchase of treasury stock - - (197)
Proceeds from exercise of stock options 470 30 82
Cash dividends paid (754) - (517)
----------- ------------ -----------
Net cash provided by (used in) financing activities (284) 30 (632)
----------- ------------ -----------
Net (decrease) increase in cash and cash equivalents 1,075 (194) 232
Cash and cash equivalents at beginning of period 345 539 307
----------- ------------ -----------
Cash and cash equivalents at end of period $ 1,420 $ 345 $ 539
=========== ============ ===========
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 8A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this
Annual Report on Form 10-KSB, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
(b) Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial
reporting identified by the principal executive officer or principal financial
officer that occurred in the three month period ended December 31, 2005 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Item 8B. Other Information.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Other than the information set forth below regarding the Company's
"Code of Ethics," information concerning this item is omitted from this report
pursuant to General Instruction E. (3) of Form 10-KSB and instead is
incorporated by reference to the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended, which the Company intends to file with the
Commission not later than 120 days after December 31, 2005.
Code of Ethics
The Company adopted a Code of Conduct for its Principal Executive
Officer and Senior Financial Officers (the "Code of Conduct") in June 2003. The
Code of Conduct is available free of charge by writing to the Secretary of the
Company at 104 South Chiles Street, Harrodsburg, Kentucky, 40330-1620.
Item 10. Executive Compensation.
Information concerning this item is omitted from this report pursuant
to General Instruction E. (3) of Form 10-KSB and instead is incorporated by
reference to the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended, which the Company intends to file with the Commission not later than
120 days after December 31, 2005.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Information concerning this item is omitted from this report pursuant
to General Instruction E. (3) of Form 10-KSB and instead is incorporated by
reference to the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended, which the Company intends to file with the Commission not later than
120 days after December 31, 2005.
Item 12. Certain Relationships and Related Transactions.
Information concerning this item is omitted from this report pursuant
to General Instruction E. (3) of Form 10-KSB and instead is incorporated by
reference to the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended, which the Company intends to file with the Commission not later than
120 days after December 31, 2005.
Item 13. Exhibits.
(a) The following exhibits are filed as part of this report.
Exhibit
number Description
------- -------------------------------------------------
2.1 Stock Purchase Agreement (incorporated by reference
to Exhibit 2.1 to the Company's Form 8-K filed on
October 22, 2004).
2.2 Contract of Sale (incorporated by reference to
Exhibit 2.2 to the Company's Form 8-K filed on
October 22, 2004).
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 from the Exhibits
to the Company's Form S-1, Registration Statement,
initially filed on June 14, 1995, Registration No.
33-93458).
10.1* 1996 Stock Option Plan (incorporated by reference
to Exhibit 10.1 to the Company's Form 10-K filed on
December 29, 1997).
10.2* Restricted Stock Plan and Trust Agreement
(incorporated by reference to Exhibit 10.2 to the
Company's Form 10-K filed on December 29, 1997).
10.3* Form of Employment Agreement for N. William White
(incorporated by reference to Exhibit 10.6 to the
Company's Form S-4 Registration Statement, initially
filed on February 27, 2004, Registration No.
333-113163).
10.4* Form of Employment Agreement for R. Michael
Wilbourn (incorporated by reference to Exhibit 10.7
to the Company's Form S-4 Registration Statement,
initially filed on February 27, 2004, Registration
No. 333-113163).
10.5* Form of Employment Agreement for Kathy L. Beach
(incorporated by reference to Exhibit 10.7 to the
Company's Form 10-KSB filed on December 29, 2004).
10.6* 2004 Omnibus Stock Option Plan (incorporated by
reference to Appendix G to the proxy statement/
prospectus contained in the Company's Form S-4
Registration Statement, initially filed on February
27, 2004, Registration No. 333-113163).
10.7 Bank Lease with Chalfant Industries, Inc.
(incorporated by reference to Exhibit 10.9 to the
Company's Form 10-KSB filed on December 29, 2004).
10.8* Form of Stock Option Award under the 1996 Stock
Option Plan (incorporated by reference to Exhibit
99.3 to the Company's Form S-8 Registration
Statement, initially filed on August 13, 2004,
Registration No. 333-118198).
10.9* Form of Restricted Stock Agreement under the
Restricted Stock Plan and Trust Agreement
(incorporated by reference to Exhibit 99.5 to the
Company's Form S-8 Registration Statement,
initially filed on August 13, 2004, Registration
No. 333-118198).
10.10* Form of Stock Award Agreement under the 2004
Omnibus Stock Option Plan (incorporated by
reference to Exhibit 99.2 to the Company's Post
Effective Amendment No. 1 Under Cover of Form S-8
to Form S-4 Registration Statement, initially filed
on August 13, 2004, Registration No. 333-113163).
10.11* Severance Agreement and Release, dated March 31,
2005, by and among the Company, 1st Independence
Bank and Arthur L. Freeman (incorporated by
reference to Exhibit 10.13 to the Company's
Form 8-K filed on April 1, 2005).
14.1 Code of Ethics for Principal Executive Officer and
Senior Financial Officers (incorporated by
reference to Exhibit 14.0 to the Company's Form
10-KSB filed on December 23, 2003).
21.1 Subsidiaries of the Registrant.
23.1 Consent of BKD, LLP.
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").
* Management contract or compensatory plan or arrangement.
Item 14. Principal Accountant Fees and Services.
Information concerning this item is omitted from this report pursuant
to General Instruction E. (3) of Form 10-KSB and instead is incorporated by
reference to the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended, which the Company intends to file with the Commission not later than
120 days after December 31, 2005.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, 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: March 16, 2006 By /s/ N. William White
---------------------------------------
N. William White, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Matthew C. Chalfant
-----------------------------
Matthew C. Chalfant Chairman of the Board and March 16, 2006
Director
/s/ N. William White
-----------------------------
N. William White President, Chief Executive March 16, 2006
Officer and Director
(Principal Executive Officer)
/s/ Jack L. Coleman, Jr.
-----------------------------
Jack L Coleman, Jr. Director March 16, 2006
/s/ James W. Dunn
-----------------------------
James W. Dunn Director March 16, 2006
/s/ Thomas Les Letton
-----------------------------
Thomas Les Letton Director March 16, 2006
/s/ Stephen R. Manecke
-----------------------------
Stephen R. Manecke Director March 16, 2006
/s/ Charles Moore II
-----------------------------
Charles Moore II Director March 16, 2006
/s/ Ronald L. Receveur
-----------------------------
Ronald L. Receveur Director March 16, 2006
/s/ W. Dudley Shryock
-----------------------------
W. Dudley Shryock Director March 16, 2006
/s/ H. Lowell Wainwright, Jr.
-----------------------------
H. Lowell Wainwright, Jr. Director March 16, 2006
/s/ R. Michael Wilbourn
-----------------------------
R. Michael Wilbourn Executive Vice President March 16, 2006
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ John F. Barron
-----------------------------
John F. Barron Senior Vice President March 16, 2006
and Controller
Exhibit Index
-------------
Exhibit
number Description
------- ---------------------------------------------------
2.1 Stock Purchase Agreement (incorporated by reference
to Exhibit 2.1 to the Company's Form 8-K filed on
October 22, 2004).
2.2 Contract of Sale (incorporated by reference to
Exhibit 2.2 to the Company's Form 8-K filed on
October 22, 2004).
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 from the Exhibits
to the Company's Form S-1, Registration Statement,
initially filed on June 14, 1995, Registration No.
33-93458).
10.1* 1996 Stock Option Plan (incorporated by reference
to Exhibit 10.1 to the Company's Form 10-K filed
on December 29, 1997).
10.2* Restricted Stock Plan and Trust Agreement
(incorporated by reference to Exhibit 10.2 to the
Company's Form 10-K filed on December 29, 1997).
10.3* Form of Employment Agreement for N. William White
(incorporated by reference to Exhibit 10.6 to the
Company's Form S-4 Registration Statement, initially
filed on February 27, 2004, Registration No.
333-113163).
10.4* Form of Employment Agreement for R. Michael
Wilbourn (incorporated by reference to Exhibit 10.7
to the Company's Form S-4 Registration Statement,
initially filed on February 27, 2004, Registration
No. 333-113163).
10.5* Form of Employment Agreement for Kathy L. Beach
(incorporated by reference to Exhibit 10.7 to the
Company's Form 10-KSB filed on December 29, 2004).
10.6* 2004 Omnibus Stock Option Plan (incorporated by
reference to Appendix G to the proxy statement/
prospectus contained in the Company's Form S-4
Registration Statement, initially filed on February
27, 2004, Registration No. 333-113163).
10.7 Bank Lease with Chalfant Industries, Inc.
(incorporated by reference to Exhibit 10.9 to the
Company's Form 10-KSB filed on December 29, 2004).
10.8* Form of Stock Option Award under the 1996 Stock
Option Plan (incorporated by reference to Exhibit
99.3 to the Company's Form S-8 Registration
Statement, initially filed on August 13, 2004,
Registration No. 333-118198).
10.9* Form of Restricted Stock Agreement under the
Restricted Stock Plan and Trust Agreement
(incorporated by reference to Exhibit 99.5 to the
Company's Form S-8 Registration Statement,
initially filed on August 13, 2004, Registration
No. 333-118198).
10.10* Form of Stock Award Agreement under the 2004
Omnibus Stock Option Plan (incorporated by
reference to Exhibit 99.2 to the Company's Post
Effective Amendment No. 1 Under Cover of Form S-8
to Form S-4 Registration Statement, initially filed
on August 13, 2004, Registration No. 333-113163).
10.11* Severance Agreement and Release, dated March 31,
2005, by and among the Company, 1st Independence
Bank and Arthur L. Freeman (incorporated by
reference to Exhibit 10.13 to the Company's
Form 8-K filed on April 1, 2005).
14.1 Code of Ethics for Principal Executive Officer and
Senior Financial Officers (incorporated by
reference to Exhibit 14.0 to the Company's Form
10-KSB filed on December 23, 2003).
21.1 Subsidiaries of the Registrant.
23.1 Consent of BKD, LLP.
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").
* Management contract or compensatory plan or arrangement.