================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-26570
1ST INDEPENDENCE FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1284899
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8620 Biggin Hill Lane
Louisville, Kentucky 40220-4117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502)753-0500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes|_| No |X|
The registrant had 1,992,994 shares of common stock outstanding at July
27, 2007.
================================================================================
1st INDEPENDENCE FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarter Ended June 30, 2007
INDEX
Part I - Financial Information
Item 1. Financial Statements Page Number
-----------
Condensed Consolidated Balance Sheets as of June 30, 2007
(unaudited) and December 31, 2006 3
Condensed Consolidated Statements of Income for the three
months and six months ended June 30, 2007 and 2006 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three months and six months ended June 30, 2007 and 2006
(unaudited) 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2007 and 2006 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7-9
Item 2. Management's Discussion and Analysis of Financial Condition 9-13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
Part II - Other Information
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits 14
Signatures 15
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Balance Sheets
(in thousands except share data)
(Unaudited)
June 30, December 31,
2007 2006
-------------- --------------
Assets
Cash and and due from banks $ 8,028 $ 16,678
Interest-bearing demand deposits 5,500 6,370
Federal funds sold 12,015 531
-------------- --------------
Cash and cash equivalents 25,543 23,579
Inerest-bearing deposits 100 100
Available-for-sale securities at fair value 17,072 16,421
Held-to-maturity securities, fair value of $1,743 and
$1,930 at June 30, 2007 and December 31, 2006, respectively 1,747 1,900
Loans held for sale 1,388 1,227
Loans, net of allowance for loan losses of $2,964 and
$3,745 at June 30, 2007 and December 31, 2006, respectively 263,945 270,478
Premises and equipment, net 8,347 8,322
Federal Home Loan Bank (FHLB) stock 2,313 2,313
Bank owned life insurance 3,539 3,435
Goodwill 11,142 11,142
Other real estate owned 2,615 433
Interest receivable and other assets 3,501 3,456
-------------- --------------
Total assets $341,252 $342,806
============== ==============
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand $ 16,334 $ 18,261
Savings, NOW and money market 80,602 78,083
Time 170,622 157,733
-------------- --------------
Total deposits 267,558 254,077
Short-term borrowings 10,942 36,526
Long-term debt 20,279 10,279
Interest payable and other liabilities 2,254 1,621
-------------- --------------
Total liabilities 301,033 302,503
-------------- --------------
Commitments and contingencies - -
Stockholders' equity
Preferred stock, $0.10 par value, 500,000 shares authorized, no
shares issued or outstanding - -
Common stock, $0.10 par value, 5,000,000 shares authorized,
1,993,394 shares and 1,995,594 shares outstanding at
June 30, 2007 and December 31, 2006, respectively 296 296
Additional paid-in capital 39,840 39,775
Retained earnings 15,090 15,169
Unearned ESOP compensation (229) (291)
Accumulated other comprehensive (loss) (203) (71)
Treasury stock, at cost, common,
969,835 shares and 969,835 shares at June 30, 2007 and
December 31, 2006, respectively (14,575) (14,575)
-------------- --------------
Total stockholders' equity 40,219 40,303
-------------- --------------
Total liabilities and stockholders' equity $341,252 $342,806
============== ==============
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Income
(in thousands except per share data)
(Unaudited) (Unaudited)
Three months ended June 30, Six months ended June 30,
---------------------------- -------------------------
2007 2006 2007 2006
----------- ---------- -------- ----------
Interest and dividend income
Interest and fees on loans $ 5,201 $ 5,229 $10,326 $10,088
Interest on securities
Taxable 162 160 328 314
Tax exempt 45 46 90 91
Interest on federal funds sold 101 88 177 150
Dividends 53 40 96 81
Interest on deposits with financial institutions 76 74 154 134
----------- ---------- -------- ----------
Total interest and dividend income 5,638 5,637 11,171 10,858
----------- ---------- -------- ----------
Interest expense
Deposits 2,732 2,531 5,323 4,734
FHLB advances 280 176 639 410
Other 181 179 358 352
----------- ---------- -------- ----------
Total interest expense 3,193 2,886 6,320 5,496
----------- ---------- -------- ----------
Net interest income 2,445 2,751 4,851 5,362
Provision for loan losses 20 31 195 112
----------- ---------- -------- ----------
Net interest income after provision for loan losses 2,425 2,720 4,656 5,250
----------- ---------- -------- ----------
Noninterest income
Service charges 149 144 269 246
Gain on loan sales 251 218 452 426
Increase in cash value of life insurance 52 49 104 98
Other 82 68 161 149
----------- ---------- -------- ----------
Total noninterest income 534 479 986 919
----------- ---------- -------- ----------
Noninterest expense
Salaries and employee benefits 1,210 1,122 2,438 2,270
Net occupancy 398 405 823 799
Data processing fees 202 191 410 377
Professional fees 117 186 287 302
Marketing 16 24 81 56
Other 879 360 1,339 739
----------- ---------- -------- ----------
Total noninterest expense 2,822 2,288 5,378 4,543
----------- ---------- -------- ----------
Income before income taxes 137 911 264 1,626
Income tax expense 12 284 29 505
----------- ---------- -------- ----------
Net income $ 125 $ 627 $ 235 $ 1,121
=========== ========== ======== ==========
Net income per share
Basic $0.06 $0.32 $0.12 $0.58
Diluted 0.06 0.32 0.12 0.58
Weighted average shares outstanding
Basic 1,968 1,936 1,968 1,928
Diluted 1,979 1,953 1,979 1,949
Cash dividends declared per share $0.08 $0.08 $0.16 $0.16
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited) (Unaudited)
Three months ended June 30, Six months ended June 30,
-------------------------- --------------------------
2007 2006 2007 2006
--------- ----------- ----------- ----------
Net income $ 125 $ 627 $ 235 $ 1,121
Other comprehensive income, net of tax
Change in unrealized gains and losses on
available-for-sale securities (153) (132) (132) (171)
Less reclassification adjustment for realized gains
included in net income - - - -
--------- ----------- ----------- ----------
Other comprehensive income (loss) (153) (132) (132) (171)
--------- ----------- ----------- ----------
Comprehensive income (loss) $ (28) $ 495 $ 103 $ 950
========= =========== =========== ==========
See notes to condensed consolidated financial statements.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six months ended June 30,
-------------------------------
2007 2006
------------- ------------
Cash Flows from Operating Activities:
Net income $ 235 $ 1,121
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation 347 363
Provision for loan losses 195 112
Gain on loan sales (452) (426)
Origination of loans held for sale (26,545) (24,824)
Proceeds from loans held for sale 26,835 24,412
Compensation expense on stock options 43 26
ESOP compensation 106 87
Amortization of unearned compensation on restricted stock 15 6
Amortization of premiums and discounts on securities 12 19
Deferred income taxes 46 (108)
FHLB stock dividend - (59)
Amortization of loan fees (117) (166)
Amortization of intangibles, net 130 130
Increase in cash value of life insurance (104) (98)
Changes in:
(Increase) in interest receivable and other assets (23) (311)
Increase in interest payable and other liabilities 702 129
------------- ------------
Net cash provided by operating activities 1,425 413
------------- ------------
Cash Flows from Investing Activities:
Proceeds from maturities of interest-bearing deposits - 100
Purchases of available-for-sale securities (1,995) (1,491)
Proceeds from maturities of available-for-sale securities 1,131 1,168
Proceeds from maturities of held-to-maturity securities 152 68
Net decrease (increase) in loans 4,079 (13,764)
Purchases of premises and equipment (372) (379)
Proceeds from sale of FHLB stock - 476
------------- ------------
Net cash provided by (used in) investing activities 2,995 (13,822)
------------- ------------
Cash Flows from Financing Activities:
Net increase in deposits 13,480 7,522
Net (decrease) increase in short-term borrowings (25,584) 6,908
Proceeds from issuance of long-term debt 10,000 -
Repayment of long-term debt - (3,000)
Repurchase and retirement of common stock (37) -
Proceeds from exercise of stock options - 339
Cash dividends paid (315) (308)
------------- ------------
Net cash (used in) provided by financing activities (2,456) 11,461
------------- ------------
Net increase (decrease) in cash and cash equivalents 1,964 (1,948)
Cash and cash equivalents at beginning of period 23,579 21,563
------------- ------------
Cash and cash equivalents at end of period $ 25,543 $ 19,615
============= ============
Supplemental Cash Flow Information:
Interest paid $ 6,090 $ 5,430
Income taxes paid 25 705
Real estate acquired in settlement of loans 2,271 181
See notes to condensed consolidated financial statements.
1st INDEPENDENCE FINANCIAL GROUP, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of 1st
Independence Financial Group, Inc. (the "Company") are presented in accordance
with the requirements of Form 10-Q and accounting principles generally accepted
in the United States of America for interim financial information. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. These condensed consolidated financial statements and
notes thereto included in this report should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K annual report for the year ended December 31, 2006 filed with the
United States Securities and Exchange Commission ("SEC'). In the opinion of
management, all adjustments necessary to make the financial statements not
misleading and to fairly present the financial position, results of operations
and cash flows for the reporting interim periods have been made and were of a
normal recurring nature. The results of operations for the period are not
necessarily indicative of the results to be expected for the full year. The
condensed consolidated balance sheet of the Company as of December 31, 2006 has
been derived from the audited consolidated balance sheet of the Company as of
that date.
The unaudited condensed financial statements include the accounts of the Company
and its wholly-owned subsidiary, 1st Independence Bank, Inc. (the "Bank") and
1st Independence Mortgage, a division of the Bank.
2. Stock-Based Compensation
For the three months and six months ended June 30, 2007 and June 30, 2006, the
Company recorded $12,000 and $43,000, respectively, and $8,000 and $26,000,
respectively, in employee stock-based compensation expense, which is included in
salaries and employee benefits. As of June 30, 2007 and June 30, 2006, there was
$51,000 and $39,000, respectively, of unrecognized stock-compensation expense
for previously granted unvested options that will be recognized over a
weighted-average period of 1.6 and 1.6 years, respectively.
3. Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses for the six months
ended June 30 follows (in thousands):
2007 2006
---- ----
Beginning balance $3,745 $2,911
Provision for loan losses 195 112
Loans charged off (984) (1)
Recoveries 8 3
------ ------
Ending balance $2,964 $3,025
====== ======
4. Net Income Per Share Computations
The following is a reconciliation of the numerator and denominator of the basic
and diluted per share computations (in thousands except per share data):
Three months ended
June 30,
2007 2006
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Net income $125 $627
==== ====
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 1,968 1,936
===== =====
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 1,968 1,936
Plus: dilutive effect of stock options 11 17
----- -----
Adjusted weighted average shares 1,979 1,953
===== =====
Net income per share data:
Basic $0.06 $0.32
===== =====
Diluted $0.06 $0.32
===== =====
Six months ended
June 30,
2007 2006
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Net income $235 $1,121
==== ======
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 1,968 1,928
===== =====
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 1,968 1,928
Plus: dilutive effect of stock options 11 21
----- -----
Adjusted weighted average shares 1,979 1,949
===== =====
Net income per share data:
Basic $0.12 $0.58
===== =====
Diluted $0.12 $0.58
===== =====
Options to purchase 16,500 common shares for both the three months and six
months ended June 30, 2007 and 17,000 and 7,500 common shares for the three
months and six months ended June 30, 2006, respectively, were excluded from the
diluted calculations above because the exercise prices on the options were
greater than the average market price for the period.
5. Contingencies and Subsequent Event
On July 18, 2007 a jury in the case of Larry Sutherland, et.al., v. Harrodsburg
First Financial Bancorp, Inc., in the Circuit Court of Anderson County in the
Commonwealth of Kentucky returned a verdict awarding damages to the plaintiffs
of $403,620. The lawsuit originated from offers to purchase securities made by
the Company in connection with an offer to purchase up to 300,000 shares of its
stock in a tender offer on or about May 28, 2003. The plaintiffs alleged that
the Company made certain material misrepresentations in connection with certain
statements made in the tender offer. Management, after discussion with legal
counsel, has decided to record an accrual of $403,620 as of June 30, 2007
relating to the lawsuit. Notwithstanding the accrual, the Company believes that
it has strong basis for appeal, but continues at this time to review the verdict
and evaluate a decision to appeal the verdict. Reference is made to Part II,
Item 1 of this report on Form 10-Q for additional information.
6. Recently Issued Accounting Standards
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"), which
clarifies the accounting and disclosure for uncertainty in tax positions, as
defined. FIN 48 seeks to reduce the diversity in practice associated with
certain aspects of the recognition and measurement related to accounting for
income taxes. FIN 48 is effective for fiscal years beginning after December 15,
2006 and the cumulative effect of applying the provisions of this Interpretation
are recognized as an adjustment to the beginning balance of retained earnings.
The Company adopted the Interpretation on January 1, 2007 as required. The
Company and its subsidiaries file a consolidated U.S. Corporation income tax
return, a combined unitary return in the state of Indiana and a corporate income
tax return in the state of Kentucky. The only periods subject to examination for
the Company's federal return are the 2003, 2005 and 2006 tax years. A federal
examination audit of the tax year 2004 was completed in 2006 with no material
adjustments. The periods subject to examination for the Company's state returns
in Kentucky and Indiana are all years after 2002. The Company has no
unrecognized tax benefits and does not anticipate any increase in unrecognized
benefits during 2007 relative to any tax positions taken prior to January 1,
2007. The Company believes that its income tax filing positions and deductions
would be sustained on audit and does not anticipate any adjustments that would
result in a material change to its financial position. Therefore, no reserves
for uncertain income tax positions have been recorded pursuant to FIN 48. In
addition, the Company did not record a cumulative effect adjustment related to
the adoption of FIN 48.
The Company chose to continue its policy for recording interest related to
unrecognized tax benefits in other interest expense and penalties in other
noninterest expense. No penalties or interest were recorded during the first six
months of 2007 and no such accruals existed as of January 1, 2007.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("SFAS 157"), which provides guidance on how
to measure assets and liabilities that use fair value. SFAS 157 will apply
whenever another US GAAP standard requires (or permits) assets or liabilities to
be measured at fair value but does not expand the use of fair value to any new
circumstances. This Statement also will require additional disclosures in both
annual and quarterly reports. SFAS 157 will be effective for financial
statements issued for fiscal years beginning after November 15, 2007, and will
be adopted by the Company beginning in the first quarter of 2008. The Company is
currently evaluating the potential impact this Statement may have on the
Company's financial position and results of operations, but does not believe the
impact of the adoption will be material.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities"
("SFAS 159"), which permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities using different measurement techniques. SFAS 159 requires additional
disclosures related to the fair value measurements included in the entity's
financial statements. This Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Accordingly, the
Company will adopt SFAS 159 in the first quarter of 2008. The Company is
currently evaluating the potential impact this Statement may have on the
Company's financial position and results of operations, but does not believe the
impact of the adoption will be material.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in Item 1 of Part I of this
report in addition to the consolidated financial statements of the Company and
the notes thereto included in the Company's Form 10-K for the year ended
December 31, 2006, including note 1 which describes the Company's significant
accounting policies including its use of estimates. See the caption entitled
"Application of Critical Accounting Policies" in this section for further
information.
Forward-Looking Statements
The following discussion contains statements which are forward-looking rather
than historical fact. These forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and involve known and unknown risks, uncertainties and other factors, which may
cause the Company's actual results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such statements are subject to certain risks and
uncertainties including among other things, changes in economic conditions in
the market areas the Company conducts business, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
market areas the Company conducts business, competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected and other risks as detailed in the Company's various
filings with the United States Securities and Exchange Commission. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
General
The Company provides commercial and retail banking services, including
commercial real estate loans, one-to-four family residential mortgage loans via
1st Independence Mortgage, home equity loans and lines of credit and consumer
loans as well as certificates of deposit, checking accounts, money-market
accounts and savings accounts within its market area. At June 30, 2007, the
Company had total assets, deposits and stockholders' equity of $341.3 million,
$267.6 million, and $40.2 million, respectively. The Company's business is
conducted principally through the Bank. Unless otherwise indicated, all
references to the Company refer collectively to the Company and the Bank.
On July 18, 2007 a jury in the case of Larry Sutherland, et.al., v. Harrodsburg
First Financial Bancorp, Inc., in the Circuit Court of Anderson County in the
Commonwealth of Kentucky returned a verdict awarding damages to the plaintiffs
of $403,620. The lawsuit originated from offers to purchase securities made by
the Company in connection with an offer to purchase up to 300,000 shares of its
stock in a tender offer on or about May 28, 2003. The plaintiffs alleged that
the Company made certain material misrepresentations in connection with certain
statements made in the tender offer. Management, after discussion with legal
counsel, has decided to record an accrual of $403,620 as of June 30, 2007
relating to the lawsuit. Notwithstanding the accrual, the Company believes that
it has strong basis for appeal, but continues at this time to review the verdict
and evaluate a decision to appeal the verdict.
Application of Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of
operation is based upon the Company's unaudited condensed consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions for Form 10-Q. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The Company's most critical accounting policies require
the use of estimates relating to other than temporary impairment of securities,
the allowance for loan losses and the valuation of goodwill. See the caption
entitled "Critical Accounting Policies" in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section of the
Company's Form 10-K for the year ended December 31, 2006 for additional
information.
Overview
Net income for the quarter ended June 30, 2007 was $125,000 or $0.06 per diluted
share compared to $627,000 or $0.32 per diluted share for the comparable period
in 2006. Net income for the six months ended June 30, 2007 was $235,000 or $0.12
per diluted share compared to $1,121,000 or $0.58 per diluted share for the
comparable period in 2006. The decrease in net income and net income per diluted
share for the six-month period was primarily due to a decrease in net interest
income after taxes of $337,000, an increase in noninterest expenses after taxes
of $551,000 (which includes $259,000 after taxes relating to the litigation
accrual made in the second quarter of 2007 previously discussed) and an increase
of $55,000 after taxes in the provision for loan losses. Partially offsetting
these factors was an increase in noninterest income after taxes of $44,000. The
decrease in net income and net income per diluted share for the quarter was
primarily due to a decrease in net interest income after taxes of $202,000 and
an increase in noninterest expenses after taxes of $352,000 (which includes
$259,000 after taxes relating to the litigation accrual previously discussed).
Partially offsetting these factors was an increase in noninterest income after
taxes of $36,000 and a decrease of $7,000 after taxes in the provision for loan
losses.
Results of Operations
Net Interest Income
Net interest income is the most significant component of the Company's revenues.
Net interest income is the difference between interest income on
interest-earning assets (primarily loans and investment securities) and interest
expense on interest-bearing liabilities (deposits and borrowed funds). Net
interest income depends on the volume and rate earned on interest-earning assets
and the volume and rate paid on interest-bearing liabilities.
Net interest income was $2.4 million and $4.9 million, respectively, for the
three months and six months ended June 30, 2007, a decrease of $0.4 million or
11% and $0.5 million or 10%, respectively, from $2.8 million and $5.4 million,
respectively, for the comparable periods of 2006. On an annualized basis, the
net interest spread and net interest margin were 2.78% and 3.20%, respectively,
for the current quarter, compared to 3.09% and 3.50% for the same period of
2006. For the six months ended June 30, 2007 the net interest spread and net
interest margin were 2.76% and 3.20%, respectively, compared to 3.08% and 3.47%
for the first half of 2006. The decrease in the net interest margin was
primarily due to a faster increase in interest rates on interest-bearing
liabilities, including the effect of the increasing rate on the $4.1 million of
variable rate subordinated debentures, compared to the rates on interest-earning
assets. Also contributing to the decrease in net interest margin was a decrease
in the volume of net earning assets. Changes in volume resulted in a decrease in
net interest income of $0.2 million and $0.2 million, respectively, for the
second quarter and first half of 2007 compared to the same periods in 2006, and
changes in interest rates and the mix resulted in a decrease in net interest
income of $0.2 million and $0.3 million, respectively, for the second quarter
and first half of 2007 versus the comparable periods in 2006.
The Bank, like many other financial institutions, is vulnerable to an increase
in interest rates to the extent that interest-bearing liabilities mature or
reprice more rapidly than interest-earning assets. Historically, the lending
activities of commercial banks emphasized the origination of short to
intermediate term variable rate loans that are more closely matched with the
deposit maturities and repricing of interest-bearing liabilities which occur
closer to the same general time period. While having interest-bearing
liabilities that reprice more frequently than interest-earning assets is
generally beneficial to net interest income during periods of declining interest
rates, it is generally detrimental during periods of rising interest rates.
To reduce the effect of interest rate changes on net interest income, the Bank
has adopted various strategies to improve matching interest-earning asset
maturities to interest-bearing liability maturities. The principal elements of
these strategies include; originating variable rate commercial loans that
include interest rate floors; originating one-to-four family residential
mortgage loans with adjustable rate features, or fixed rate loans with short
maturities; maintaining interest-bearing demand deposits, federal funds sold,
and U.S. government securities with short to intermediate term maturities;
maintaining an investment portfolio that provides stable cash flows, thereby
providing investable funds in varying interest rate cycles; lengthening the
maturities of our time deposits and borrowings when it would be cost effective;
and attracting low cost checking and transaction accounts, which tend to be less
interest rate sensitive when interest rates increase.
The Bank measures its exposure to changes in interest rates using an overnight
upward and downward shift (shock) in the Treasury yield curve. As of June 30,
2007, if interest rates increased 200 basis points and decreased 200 points,
respectively, the Bank's net interest income would decrease by 0.2% and increase
by 0.5%, respectively.
Provision for Loan Losses
The provision for loan losses was $20,000 and $195,000 for the three months and
six months ended June 30, 2007, compared to $31,000 and $112,000 for the same
periods in 2006. Nonperforming loans were $2.3 million at June 30, 2007 and $3.7
million at December 31, 2006, or 0.88% and 1.36%, respectively, of total loans.
The allowance for loan losses was $3.0 million and $3.7 million at June 30, 2007
and December 31, 2006, or 1.11% and 1.37%, respectively, of total loans. Net
charge-offs were $976,000 in the first six months of 2007 compared to a net
recovery of $2,000 in the same period in 2006. The increase in net charge-offs
in 2007 was primarily due to three large borrowers in the residential
construction and commercial and industrial portfolios. These charge-offs had
been adequately reserved for in previous periods.
The Company maintains the allowance for loan losses at a level that it considers
to be adequate to provide for credit losses inherent in its loan portfolio.
Management determines the level of the allowance by performing a quarterly
analysis that considers concentrations of credit, past loss experience, current
economic conditions, the amount and composition of the loan portfolio (including
nonperforming and potential problem loans), estimated fair value of underlying
collateral, loan commitments outstanding, and other information relevant to
assessing the risk of loss inherent in the loan portfolio. As a result of
management's analysis, a range of the potential amount of the allowance for loan
losses is determined.
The Company will continue to monitor the adequacy of the allowance for loan
losses and make additions to the allowance in accordance with the analysis
referred to above. Because of uncertainties inherent in estimating the
appropriate level of the allowance for loan losses, actual results may differ
from management's estimate of credit losses and the related allowance.
Noninterest Income
Noninterest income was $0.5 million for the three months ended June 30, 2007,
compared to $0.5 million for the same period in 2006 and $1.0 million for the
six months ended June 30, 2007, compared to $0.9 million for the first half of
2006. The gain on loan sales was up for the second quarter and first half of
2007 versus the same periods of 2006 due to an increase in volume versus a
softened housing market leading to a slow down in secondary market mortgage
activity and lower margins in 2006. The gain on loan sales was $251,000 for the
three months ended June 30, 2007, compared to $218,000 for the comparable period
in 2006 and $452,000 for the first half of 2007 compared to $426,000 for the
first half of 2006. Service charge income was $149,000 for the three months
ended June 30, 2007, compared to $144,000 for the comparable period in 2006 and
$269,000 for the first half of 2007 compared to $246,000 for the first half of
2006. The Company continues to evaluate its deposit product offerings with the
intention of continuing to expand its offerings to the consumer and business
depositor.
Noninterest Expense
Noninterest expense was $2.8 million for the quarter ended June 30, 2007
compared to $2.3 million the same period in 2006 and $5.4 million for the six
months ended June 30, 2007 compared to $4.5 million for the first half of 2006.
Contributing to the increases were an increase in salaries and employee benefits
due to merit and promotional salary increases and management additions,
increased health care costs, increased stock option expense and increased
restricted stock expense. Partially offsetting these increases in salaries and
employee benefits was a reduction in the amount of expense necessary to cover
the Company's 401(k) match as the match is now covered by released ESOP shares.
Additional factors contributing to the overall increase in noninterest expenses
were an increase in data processing expenses which was primarily due to the
growth of the Bank's services and its commitment to upgrade systems productivity
and various increases in other noninterest expenses including an increase in
expenses relating to other real estate owned due to the higher levels of other
real estate owned and as previously discussed the litigation accrual made in the
second quarter of 2007 of $404,000. Other factors impacting the six-month period
only were an increase in net occupancy expenses relating to the Bank's branch
expansion plans and certain equipment upgrades and an increase in marketing
expense. Partially offsetting these increases was a decrease in professional
fees due to a reduced amount of services required nothwithstanding an increased
amount of services required including preparation work for compliance with
certain of the upcoming requirements of the Sarbanes-Oxley Act of 2002.
Income Tax Expense (Benefit)
The effective income tax rate on income before income taxes was 9.0% for the
three months ended June 30, 2007 compared to 31.2% for the same period in 2006
and 11.0% for the first six months of 2007 compared to 31.1% for the first half
of 2006. The decrease in the effective tax rate for the quarter and six- month
period is primarily due to an increase in the percentage of tax exempt interest
income compared to income before income taxes.
Financial Condition
The Company's total assets were $341.3 million at June 30, 2007 compared to
$342.8 million at December 31, 2006, a decrease of 1.5 million or 0.5%. Net
loans decreased $6.6 million, while other real estate owned went up $2.2
million, cash and cash equivalents increased $2.0 million, investments increased
$0.5 million, loans held for sale increased $0.2 million and bank owned life
insurance went up $0.1 million.
Net loans were $263.9 million at June 30, 2007, compared to $270.5 million at
December 31, 2006, a decrease of $6.6 million or 2.4%. The decrease in loans was
primarily due to a decrease in residential real estate loans which decreased
$13.4 million or 11.0%. The decrease in total loans was partially offset by
increases in real estate construction and real estate commercial loan
portfolios, which increased $2.9 million or 4.5% and $4.4 million or 8.9%,
respectively. The increases were primarily a result of lending activity in the
Kentucky markets. All loan categories increased or remained the same as a
percentage of total loans, except residential real estate loans, which decreased
from approximately 45% to 40% of total loans. The decrease in residential real
estate loans as a percentage of total loans is partly due to those loans now
being sold in the secondary market through 1st Independence Mortgage, a division
of the Bank, rather than being retained for the Company's loan portfolio. The
Company continues to identify opportunities to cross sell its other products,
including home equity and consumer loans for its loan portfolio resulting from
customer relationships established through the origination of loans by 1st
Independence Mortgage.
Deposits increased $13.5 million or 5.3% to $267.6 million at June 30, 2007
compared to $254.1 million at December 31, 2006. This increase was attributable
to an increase in time deposits of $12.9 million and an increase of savings, NOW
and money market deposits of $2.5 million which more than offset a decrease in
demand deposits of $1.9 million. The increase in savings, NOW and money market
deposits resulted primarily from the effects of a general marketing campaign
promoting a more competitively priced NOW account product in an effort to reduce
the Company's dependency on higher costing time deposits.
Short-term borrowings decreased $25.6 million to $10.9 million at June 30, 2007,
compared to $36.5 million at December 31, 2006 while long-term debt increased
$10.0 million to $20.3 million at June 30, 2007, compared to $10.3 million at
December 31, 2006. The increase in long-term debt was due to the Company
deciding to utilize a long-term FHLB fixed rate advance and thus reducing the
level of short-term FHLB advances. The Company uses short-term borrowings,
primarily short-term FHLB advances, to fund short-term liquidity needs and
manage net interest margin.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in financial
transactions that contain credit, interest rate, and liquidity risk that are not
recorded in the financial statements such as loan commitments and performance
letters of credit. As of June 30, 2007, unused loan commitments and performance
letters of credit were $46,356,000 and $2,035,000, respectively.
Since many of the unused loan commitments are expected to expire or be only
partially used, the total amount of commitments does not necessarily represent
future cash requirements.
Liquidity and Capital Resources
Liquidity to meet borrowers' credit and depositors' withdrawal demands is
provided by maturing assets, short-term liquid assets that can be converted to
cash and the ability to attract funds from depositors. Additional sources of
liquidity include brokered deposits, advances from the FHLB and other short-term
borrowings, such as federal funds purchased and securities sold under repurchase
agreements.
At June 30, 2007 and December 31, 2006, brokered deposits were $19.6 million and
$23.7 million, respectively. The weighted average cost and maturity of brokered
deposits were 4.94% and six months at June 30, 2007 compared to 4.86% and six
months at December 31, 2006. The Company plans to continue using brokered
deposits for the foreseeable future to support loan demand when pricing for
brokered deposits is more favorable than short-term borrowings or rates within
the Company's local markets.
At June 30, 2007 and December 31, 2006, the Bank had total FHLB advances
outstanding of $21.0 million and $36.0 million, respectively, with $11.0 million
and $1.0 million, respectively, included in long-term debt in the accompanying
condensed consolidated balance sheet and the remaining amount included in
short-term borrowings. Additionally, the Bank had $60.0 million of unused
commitments under its line of credit with the FHLB and sufficient collateral to
borrow an additional $62.6 million.
The Company's liquidity depends primarily on dividends paid to it as sole
stockholder of the Bank. At June 30, 2007, the Bank may pay up to $8.7 million
in dividends to the Company without regulatory approval, subject to the ongoing
capital requirements of the Bank.
The Company has $9.3 million of subordinated debentures outstanding, which are
included in long-term debt in the accompanying condensed consolidated balance
sheet with $4.1 million of the debentures being variable rate obligations with
interest rates that reprice quarterly (March 26, June 26, September 26 and
December 26) and are tied to the three-month London Interbank Offering Rate
("LIBOR") plus 3.15%. The weighted average rate on the variable rate obligations
was 8.50% and 8.51% for the second quarter and first half of 2007, respectively,
compared to 8.14% and 7.92% for the same periods in 2006. At June 30, 2007 the
rate on the variable rate obligations was 8.51% compared to 8.61% at June 30,
2006. The remaining $5.2 million of debentures carry a fixed interest rate of
6.4% until March 26, 2008 when the debentures become variable rate obligations
that reprice quarterly at the three-month LIBOR rate plus 3.15%.
Stockholders' equity decreased $0.1 million from $40.3 million at December 31,
2006 to $40.2 million at June 30, 2007. The individual items within
stockholders' equity that changed were net income of $0.2 million, cash
dividends declared of $0.3 million ($0.16 per share), a decrease of $0.1 million
in accumulated other comprehensive loss and an increase of $0.1 million relating
to stock option and ESOP plan transactions and other miscellaneous equity
transactions.
Bank holding companies and their subsidiary banks are required by regulators to
meet risk based capital standards. These standards, or ratios, measure the
relationship of capital to a combination of balance sheet and off-balance sheet
risks. The following table presents these ratios as of June 30, 2007 and
December 31, 2006 for the Consolidated Company and the Bank along with the
regulator's minimum ratio to be considered well capitalized.
To Be Well
June 30, 2007 December 31, 2006 Capitalized
------------- ----------------- -----------
Total risk-based capital to risk-weighted assets
Consolidated company 15.6% 15.9% N/A%
Bank 14.8 14.7 10.0
Tier 1 capital to risk-weighted assets
Consolidated company 14.4 14.6 N/A
Bank 13.7 13.5 6.0
Tier 1 capital to average assets
Consolidated company 11.6 11.6 N/A
Bank 11.0 10.7 5.0
Regulatory Matters
On July 20, 2006, the Bank received its most recent Community Reinvestment Act
("CRA") Performance Evaluation prepared as of May 15, 2006. The Bank was
assigned a "Needs to Improve" rating due in part to the Bank's low level of
residential lending to low and moderate income borrowers within the Louisville,
Kentucky Metropolitan Statistical Area. Management has taken appropriate steps
to improve the residential lending issues cited by the Federal Deposit Insurance
Corporation ("FDIC") during the CRA Performance Evaluation. By statute, a bank
with a "less than satisfactory" CRA rating has limitations on certain future
business activities until the CRA rating improves. Management does not believe
these limitations will have any material affect on the Bank's current business
plan.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is included in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company's management carried out an evaluation, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures as of the end of the quarter ended June 30, 2007. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in its reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the United States Securities and
Exchange Commission's rules and forms.
(b) Changes in Internal Control over Financial Reporting
There have not been any changes in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during the quarter ended June 30, 2007 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company, from time to time, is a party to ordinary routine litigation, which
arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Company holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to its business. Except as discussed below, there were no
potentially material lawsuits or other legal proceedings pending or known to be
contemplated against the Company at June 30, 2007.
On or about May 28, 2004, a complaint was filed in the Circuit Court of
Anderson County in the Commonwealth of Kentucky by Larry Sutherland, Judy
Sutherland, John Henry Disponett, Brenda Disponett, Todd Hyatt, Lois Ann
Disponett, Sue Saufley, and Hugh Coomer. Soon thereafter, an amended complaint
was filed which added Lois Hawkins and Norma K. Barnett as plaintiffs. The
lawsuit arises from offers to purchase securities made by the Company in
connection with an offer to purchase up to 300,000 shares of its stock in a
tender offer on or about May 28, 2003. The Plaintiffs allege that the Company
made certain material misrepresentations in connection with certain statements
made in the tender offer. In the lawsuit, the plaintiffs sought to recover
compensatory and punitive damages in connection with the shares they sold in the
tender offer and their attorneys' fees. On April 14, 2006 a partial summary
judgment was entered against the plaintiffs. In the partial summary judgment,
the Circuit Court held that the only remedy available to the plaintiffs is the
return of the stock upon the tender of the consideration received by the
plaintiffs in exchange for the stock. Subsequent to the partial summary
judgment, the plaintiffs amended their complaint to allege certain additional
material misrepresentations had been made by the Company. On July 18, 2007 a
jury in the Circuit Court of Anderson County in the Commonwealth of Kentucky
returned a verdict awarding damages to the plaintiffs of $403,620. Management,
after discussion with legal counsel, has decided to record an accrual of
$403,620 as of June 30, 2007 relating to the lawsuit. Notwithstanding the
accrual, the Company believes that it has strong basis for appeal, but continues
at this time to review the verdict and evaluate a decision to appeal the
verdict.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders (the "Meeting"), held May 17,
2007, the following matters were submitted for a vote by the security holders:
Election of the persons named below as directors:
Votes cast for Votes withheld
-------------- --------------
For a three-year term:
Jack L. Coleman, Jr. 1,472,461 236,320
Thomas Les Letton 1,472,461 236,320
Charles L. Moore II 1,471,931 236,850
In addition, the terms of Matthew C. Chalfant, Stephen R. Manecke,
Dr. Ronald L. Receveur, W. Dudley Shryock, H. Lowell Wainwright, Jr.
and N. William White as directors continued following the meeting.
Ratification of the appointment of BKD, LLP as the Company's
independent registered public accounting firm for the year ending
December 31, 2007. There were 1,697,536 votes for and 9,668 votes
against and 1,578 abstentions.
Item 6. Exhibits
(a) Exhibits
3.1 Certificate of Incorporation (incorporated by reference
from the Exhibits to the Company's Form S-1 Registration
Statement, initially filed on June 14, 1995,
Registration No. 33-93458).
3.2 Amended Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-KSB filed
on December 29, 2004).
3.3 Bylaws (incorporated by reference from the Exhibits to the
Company's Form S-1, Registration Statement, initially filed
on June 14, 1995, Registration No. 33-93458).
31.1 Rule 13a-14(a) / 15d-14(a) Certification of Principal
Executive Officer ("Section 302 Certifications").
31.2 Rule 13a-14(a) / 15d-14(a) Certification of Principal
Financial Officer ("Section 302 Certifications").
32.1 Section 1350 Certifications ("Section 906
Certifications").
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1st INDEPENDENCE FINANCIAL GROUP, INC.
Date: August 6, 2007 By: /s/ R. Michael Wilbourn
-------------------------
R. Michael Wilbourn
Executive Vice President
and Chief Financial Officer
Exhibit Index
Exhibit
Number Description
3.1 Certificate of Incorporation (incorporated by reference
from the Exhibits to the Company's Form S-1 Registration
Statement, initially filed on June 14, 1995,
Registration No. 33-93458).
3.2 Amended Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Form 10-KSB filed
on December 29, 2004).
3.3 Bylaws (incorporated by reference from the Exhibits to the
Company's Form S-1, Registration Statement, initially filed
on June 14, 1995, Registration No. 33-93458).
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").