FORM 10-K
Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
-------------- -----------------------------------------
Common Stock, par value The NASDAQ Stock Market LLC
$0.10 per share
|
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. |_|
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 Act). Yes |_| No |X|
The aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $27,977,262 as of June 30, 2006.
The number of shares outstanding of the registrant's common stock as of March 15, 2007 was 1,995,594.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report on Form 10-K, 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 17, 2007.
1ST INDEPENDENCE FINANCIAL GROUP, INC.
FORM 10-K
For the Year Ended December 31, 2006
INDEX
PART I Page
Item 1. Business...................................................... 3
Item 1A. Risk Factors.................................................. 13
Item 1B. Unresolved Staff Comments..................................... 17
Item 2. Properties.................................................... 18
Item 3. Legal Proceedings............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders........... 18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities........... 19
Item 6. Selected Financial Data....................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 29
Item 8. Financial Statements and Supplementary Data................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 58
Item 9A. Controls and procedures....................................... 58
Item 9B. Other Information............................................. 58
PART III
Item 10. Directors, Executive Officers and Corporate Governace......... 58
Item 11. Executive Compensation........................................ 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 58
Item 13. Certain Relationships and Related Transactions, and Director
Independence................................................ 58
Item 14. Principal Accounting Fees and Services........................ 58
PART IV
Item 15. Exhibits, Financial Statement Schedules....................... 59
Signatures.............................................................. 61
|
PART I
Item 1. Business.
General
1st Independence Financial Group, Inc. (the "Company") was organized as
a Delaware corporation in June 1995 and is a bank holding company based in
Louisville, Kentucky which owns 1st Independence Bank, Inc. (the "Bank"). During
2004, the Company merged with Independence Bancorp, New Albany, Indiana. 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, 2006, the Company had total assets, deposits and equity of $342.8 million,
$254.1 million, and $40.3 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 another financial institution 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", 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." In a related transaction the Bank purchased in
January 2005 a commercial building located in Louisville, Kentucky, for $2.3
million from an affiliate of the financial institution which purchased Citizens.
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
3 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,
--------------------------------------------------------------------------------- ------------------
2006 2005 2004 2003 2002
-------------------- ------------------ ------------------ ------------------ ------------------
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 $ 49,943 18% $ 46,731 17% $ 35,746 15% $13,128 16% $13,005 14%
Residential 121,216 45 128,949 48 125,433 53 61,495 73 70,899 76
Construction 64,244 23 51,877 19 33,600 14 2,977 3 3,749 4
Commercial 20,393 7 23,757 9 21,040 9 3,365 4 2,181 2
Consumer
Home equity 14,026 5 16,615 6 16,672 7 1,963 2 1,630 2
Other 4,401 2 1,960 1 3,706 2 1,327 2 1,607 2
-------- --- -------- --- -------- --- ------- --- ------- ---
Total loans 274,223 100% 269,889 100% 236,197 100% 84,255 100% 93,071 100%
=== === === === ===
Less: allowance for
loan losses 3,745 2,911 2,549 391 390
-------- -------- -------- ------- -------
Loans, net $270,478 $266,978 $233,648 $83,864 $92,681
======== ======== ======== ======= =======
Loans held for sale $1,227 $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, 2006. 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 $16,156 $13,421 $ 20,366 $ 49,943
Residential 19,637 13,292 88,287 121,216
Construction 47,899 13,512 2,833 64,244
Commercial 11,156 3,760 5,477 20,393
Consumer 2,100 14,154 2,173 18,427
------- ------- -------- --------
Total $96,948 $58,139 $119,136 $274,223
======= ======= ======== ========
|
The following table (in thousands) sets forth as of December 31, 2006 the dollar amount of all loans that are due after December 31, 2007 and have either fixed rates of interest or floating or adjustable interest rates.
Floating or
Fixed rates adjustable rates Total
----------- ---------------- --------
Real estate:
Commercial $ 7,745 $ 26,042 $ 33,787
Residential 28,428 73,150 101,578
Construction 1,354 14,992 16,346
Commercial 5,725 3,512 9,237
Consumer 3,194 13,133 16,327
------- -------- --------
Total $46,446 $130,829 $177,275
======= ======== ========
|
Commercial Real Estate Loans. 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 typically
adjustable-rate loans with terms of 25 years or less and loan-to-value ratios
typically not exceeding 80%. At December 31, 2006, commercial real estate loans
totaled approximately $49.9 million or 18% 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. 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.
Included in the commercial real estate loan category are agricultural
loans. At December 31, 2006, agricultural loans totaled $2.1 million, or less
than 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, 2006, one-to four-family residential mortgage
loans totaled approximately $121.2 million, or 45% 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,
2006, loans held for sale totaled approximately $1.2 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, 2006, construction loans totaled approximately $64.2 million, or 23%, 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 principal payments.
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 typically
originated with maximum loan-to-value ratios of 80% of the value of the
respective property. At December 31, 2006, commercial loans totaled
approximately $20.4 million, or 7%, 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 with revolving home equity lines of credit composing
the majority of the consumer loan portfolio. 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 typically up to 2% higher than the
rate paid on the certificate. These loans generally mature concurrently with the
certificate of deposit on demand and the account must be assigned to the Company
as collateral for the loan. At December 31, 2006, consumer loans totaled
approximately $18.4 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, the Executive Vice
President and Chief Lending Officer, the Executive Vice President and Chief
Credit Officer and other officers of the Bank. The loan committee approves loans
that exceed the limits established for individual officers. 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 six 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 $500,000.
Generally, the commitment requires acceptance within 20 days of the date of
issuance. At December 31, 2006, the Company had approximately $71 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 $3.4
million at December 31, 2006.
December, 31 September 30,
------------------------------------------ -------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Nonaccrual loans $3,698 $1,140 $893 $ - $ -
Accruing loans past due 90 days or more 31 130 332 472 334
------ ------ ----- ---- ----
Total nonperforming loans 3,729 1,270 1,225 472 334
Other real estate owned 433 - - - 233
------ ------ ------ ---- ----
Total nonperforming assets $4,162 $1,270 $1,225 $472 $567
====== ====== ====== ==== ====
Total nonperforming loans to total loans 1.36% 0.47% 0.52% 0.56% 0.36%
==== ==== ==== ==== ====
Total nonperforming assets to total assets 1.21% 0.38% 0.41% 0.36% 0.45%
==== ==== ==== ==== ====
|
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, 2006, these
loans totaled approximately $11.1 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 Year ended ended Year ended
December 31, December 31, December 31, September 30,
------------ ------------ -------------- ---------------------
2006 2005 2004 2004 2003
---- ---- ---- ---- ----
Allowance for loan losses
Balance at beginning of period $2,911 $2,549 $2,560 $ 391 $390
Allowance of acquired company - - - 1,046 -
Provision for loan losses 847 354 - 1,203 2
Net charge-offs (recoveries):
Residential 16 (11) 9 (2) 1
Commercial 1 2 - 67 -
Consumer (4) 1 2 15 -
------ ------ ------ ------ ----
Balance at end of period $3,745 $2,911 $2,549 $2,560 $391
====== ====== ====== ====== ====
Total loans outstanding $274,223 $269,889 $236,197 $213,719 $84,796
======== ======== ======== ======== =======
Average loans outstanding $276,629 $257,333 $224,201 $112,844 $84,335
======== ======== ======== ======== =======
Allowance for loan losses to
period-end loans 1.37% 1.08% 1.08% 1.20% 0.46%
===== ===== ===== ===== =====
Net loans charged off to average loans 0.00% 0.00% 0.00% 0.07% 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,
--------------------------------------------------------------------------------- -----------------
2006 2005 2004 2003 2002
------------------ ------------------- ------------------- ------------------- -----------------
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 $1,508 18% $ 715 17% $ 651 15% $ 61 16% $ 54 14%
Residential 832 45 581 48 255 53 285 73 298 76
Construction 358 23 153 19 358 14 14 3 16 4
Commercial 856 7 859 9 957 9 16 4 9 2
Consumer 191 7 603 7 328 9 15 4 13 4
------ --- ------ --- ------ --- ---- --- ---- ---
Total allowance for
loan losses $3,745 100% $2,911 100% $2,549 100% $391 100% $390 100%
====== === ====== === ====== === ==== === ==== ===
|
Return on Equity and Assets Ratios
Ratios have been adjusted to reflect the discontinued operations of
Citizens.
Three months
Year ended Year ended ended
December 31, December 31, December 31,
2006 2005 2004
---- ---- ----
Average equity to average assets 11.57% 11.59% 12.76%
Return on average equity 4.93 11.92 2.51
Return on average assets 0.57 1.38 0.32
Dividend payout ratio 31.96 16.83 0.00
|
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, 2006, the Company had securities (including mortgage-backed
securities) classified as "held to maturity" and "available for sale" in the
amount of $1.9 million and $16.4 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, 2006,
the Company's securities available for sale had an amortized cost of $16.5
million and fair market value of $16.4 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, 2006, 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, 2006, 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,
------------------------------
2006 2005 2004
---- ---- ----
Investment securities available for sale:
Mortgage-backed $11,795 $11,556 $18,011
U.S. government and federal agencies 1,985 1,974 2,525
Municipal bonds 2,641 2,610 505
Equity - - 5,682
------- ------- -------
Total $16,421 $16,140 $26,723
======= ======= =======
Investment securities held to maturity:
Mortgage-backed $ - $ - $ 2
Municipal bonds 1,900 1,975 2,148
------- ------- -------
Total $ 1,900 $ 1,975 $ 2,150
======= ======= =======
Total investment securities $18,321 $18,115 $28,873
======= ======= =======
|
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, 2006. The following table does not take into consideration the effects of scheduled repayments or the effects of possible prepayments.
December 31, 2006
----------------------------------------------------------------------------------------------------
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 $ 24 5.00% $ 76 7.01% $3,806 4.78% $7,889 5.32% $11,795 5.16%
U.S government and federal
agencies 986 3.07 998 5.24 - - - - 1,984 4.16
Municipal bonds 184 2.15 - - 820 3.57% 1,638 4.51 2,642 4.05
------ ---- ------ ---- ------ ---- ------ ---- ------- ----
Total $1,194 2.97% $1,074 5.37% $4,626 4.57% $9,527 5.18% $16,421 4.86%
====== ==== ====== ==== ====== ==== ====== ==== ======= ====
Held-to-maturity securities:
Mortgage-backed securities $ - -% $ - -% $ - -% $ - -% $ - -%
Municipal bonds 90 4.92 50 5.12 1,504 4.35 256 5.57 1,900 4.56
------ ---- ------ ---- ------ ---- ------ ---- ------- ----
Total $ 90 4.92% $ 50 5.12% $1,504 4.35% $ 256 5.57% $ 1,900 4.56%
====== ==== ====== ==== ====== ==== ====== ==== ======= ====
|
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, 2006,
the Company had brokered deposits totaling $23.7 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, 2006.
Amount
-------
3 months or less $26,206
Over 3 through 6 months 6,899
Over 6 through 12 months 22,571
Over 12 months 5,253
-------
Total $60,929
=======
|
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
Year ended Year ended ended
December 31, 2006 December 31, 2005 December 31, 2004
------------------- ------------------- --------------------
Average Average Average Average Average Average
balance rate balance rate balance rate
------- ---- ------- ---- ------- ----
Demand and savings $ 61,710 2.96% $ 59,520 1.85% $ 48,633 1.15%
Time 187,463 4.39 177,801 3.24 155,491 2.61
-------- -------- --------
$249,173 4.04 $237,321 2.89 $204,124 2.27
======== ======== ========
|
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, 2006, the Company's short-term borrowings totaled $36.5 million; of which $35.0 million were short-term FHLB advances. See note 10 to the consolidated financial statements for additional information.
Information regarding short-term FHLB advances follows:
Three months
Year ended Year ended ended
December 31, December 31, December 31,
2006 2005 2004
---- ---- ----
Amount outstanding:
Period end $35,000 $18,000 $22,500
Maximum month end
balance during period 35,000 28,000 22,500
Average balance during
Period 18,216 16,541 19,575
Weighted average interest rate:
Period end 5.44% 4.33% 2.42%
During the period 5.20 3.43 2.14
|
Personnel
As of December 31, 2006, the Company had 85 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 Deposit Insurance Fund ("DIF"). 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 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 are determined
semiannually by the FDIC.
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. At
December 31, 2006, 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, 2007, the Bank could pay dividends to the
Company of approximately $7,883,000, 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, 2006, 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 of 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-K, quarterly reports on
Form 10-Q, 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 1-800-732-0330. 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., 8620 Biggin Hill Lane,
Louisville, Kentucky 40220-4117.
Item 1A. Risk Factors.
Risks Related to our Business
We are subject to extensive regulation that could limit or restrict our activities and impose financial requirements or limitations on the conduct of our business, which limitations or restrictions could adversely affect our profitability.
As a bank holding company, we are primarily regulated by the Board of Governors of the Federal Reserve System. Our subsidiary is primarily regulated by the FDIC and the Kentucky Office of Financial Institutions. Our compliance with Federal Reserve Board, FDIC and Kentucky banking regulations is costly. A failure to comply with the banking regulations may limit our growth and restrict certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to the capital requirements of our regulators.
The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects our business and financial results, our cost of compliance could adversely affect our ability to operate profitably and a failure to comply could limit our ability to implement our business strategy. See the caption entitled "Regulatory Matters" included in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this report, which is Part II, Item 7 of this report, for further information.
Our business strategy includes the continuation of growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow.
We have grown rapidly in terms of branch expansion, total assets, net loans, and deposits. We may not be able to continue to grow at the same rate that we have grown in the past. We currently serve our customers through a network of eight banking offices, consisting of two full-service banking locations in Louisville, Kentucky, and one full-service banking location in each of New Albany, Jeffersonville, and Clarksville, Indiana. We also have one full-service banking location in Harrodsburg, Kentucky, Lawrenceburg, Kentucky, and Marengo, Indiana. Our business strategy calls for continued expansion and the opening of additional branches during the next three to five years. We have not yet attempted to establish branches in any of the other counties in Kentucky or southern Indiana. Our branch expansion strategy entails other risks, including:
o the entrance into new markets where we lack experience;
o the experience of unexpected competition;
o the introduction of new products and services into our business
with which we have no prior experience;
o the time and costs of evaluating new markets, hiring experienced
local management and opening new offices;
o the ability to implement and improve our operational, credit,
financial, management and other internal risk controls and
processes and our reporting systems and procedures;
o the ability to manage a growing number of client relationships;
o the ability to recruit and retain additional experienced bankers to
accommodate growth;
o the ability to maintain controls and procedures sufficient to
accommodate an increase in expected loan volume andinfrastructure;
o the diversion of our management's attention from our existing
businesses as a result of our growth strategy;
o the additional expenditures our asset growth may require to expand
our administrative and operational infrastructure; and
o the ability to maintain cost controls and asset quality while
attracting additional loans and deposits on favorable terms.
The occurrence of any of these factors could have an adverse effect on our financial condition. We can provide no assurance that we will be able to overcome the risks associated with growth or any other problems encountered in executing our growth strategy.
Our recent results do not indicate our future results, and may not provide guidance to assess the risk of an investment in our common stock.
We are unlikely to sustain our historical rate of growth, and may not even be able to expand our business at all. Further, our recent growth may distort some of our historical financial ratios and statistics. In the future, we may not have the ability to find suitable expansion opportunities. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. If we are not able to successfully grow and expand our business, our financial condition and results of operations could be adversely affected.
Our business would be harmed if we lost the services of any of our senior management team and are unable to recruit or retain suitable replacements.
We believe that our success to date and our prospects for future success depend significantly on the efforts of our senior management team, which includes N. William White, our President and Chief Executive Officer, R. Michael Wilbourn, our Executive Vice President and Chief Financial Officer, Gregory A. DeMuth, our Executive Vice President and Chief Lending Officer of the Bank, David M. Hall, our Executive Vice President-Retail Banking of the Bank, Kathy L. Beach, our Executive Vice President and Chief Operations Officer, Alan D. Shepard, our Executive Vice President and Chief Credit Officer of the Bank and certain of our senior bankers. We have $0.5 million of key-man life insurance on both Mr. White and Mr. Wilbourn. There is no assurance, however, that $0.5 million would be enough to compensate us for the loss of Mr. White or Mr. Wilbourn. We do not have key-man insurance on any other officer of the Company or the Bank. In addition to their skills and experience as bankers, these persons provide us with extensive community ties upon which our competitive strategy is based.
A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business.
A significant portion of our loan portfolio is secured by real estate. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A weakening of the real estate market in our market areas could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected. Acts of nature, including hurricanes, tornados, earthquakes, fires and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition. Additionally, a slowdown in real estate activity in the markets we serve may also negatively impact our financial condition.
An economic downturn, either nationally or in the local market area, could adversely affect our financial condition, results of operations and cash flows.
Deterioration in local, regional, national or global economic conditions could result in, among other things, an increase in loan delinquencies, a change in the housing turnover rate or a reduction in the level of available wholesale deposits. If the communities in which we operate do not grow, or if the prevailing local or national economic conditions are unfavorable, our business strategy may not succeed. A weakening of the employment market in our primary market area could result in an increase in the number of borrowers who default on their loans. Further, the banking industry is affected by general economic conditions such as inflation, interest rates, recession, unemployment and other factors beyond our control. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas even if they do occur.
Our cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures.
In the past, the Bank has relied heavily on brokered certificates of deposits and borrowings for the funds necessary for banking operations. As a general matter, deposits are a cheaper source of funds than brokered certificates of deposit or borrowings, because interest rates paid for deposits are typically less than interest rates charged for brokered certificates of deposit or borrowings. Our business strategy includes funding more of our operations with deposits; however, we cannot provide any assurances that we will be able attract sufficient deposits.
Competition from other financial institutions and others may adversely affect our profitability.
The banking business generally, and because of its desirability and the opportunities for growth, the Louisville, Kentucky and southern Indiana market area in particular, is highly competitive, and we experience strong competition from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other financial institutions, which operate in our primary market area and elsewhere.
We compete with these institutions to make loans and to attract new customers and in pricing loans and deposits. Many of our competitors are well-established and much larger financial institutions and can offer customers more attractive pricing terms. While we believe we can and do successfully compete with these other financial institutions in our markets, we may face a competitive disadvantage as a result of our smaller size.
We also compete with private lenders, mezzanine and venture capital firms and angel investors in some of our lending divisions, including our community redevelopment lending and mezzanine financing divisions. Many of these competitors are subject to minimal or no regulation and may be able to make accommodations for customers that we are unable to make.
We are currently subject to claims regarding the merger of Independence Bancorp with Harrodsburg First Financial Bancorp, Inc. that could result in substantial defense, judgment or settlement costs.
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 us in connection with an offer to purchase up to 300,000 shares of our stock in a tender offer on or about May 28, 2003. The Plaintiffs allege that we 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 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. This matter is currently scheduled for trial in July 2007. If we are ultimately unsuccessful in this litigation, it may have a negative effect on our results of operations or cash flows.
Risks Related to Our Industry
Our profitability is vulnerable to interest rate fluctuations.
Most of our assets and liabilities are monetary in nature, and thus subject us to significant risks from changes in interest rates. Consequently, our results of operations can be significantly affected by changes in interest rates and our ability to manage interest rate risk. Changes in market interest rates, or changes in the relationships between short-term and long-term market interest rates, or changes in the relationship between different interest rate indices can affect the interest rates charged on interest-earning assets differently than the interest paid on interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income or a decrease in interest rate spread. In addition to affecting our profitability, changes in interest rates can impact the valuation of our assets and liabilities. A discussion of how we measure our exposure to interest rate changes is provided in Part II, Item 7 of this report.
We could suffer loan losses from a decline in credit quality.
We could sustain losses if borrowers, guarantors or related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for credit losses, that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations and financial condition.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
We manage our credit exposure through careful monitoring of loan applicants and loan concentrations in particular industries, and through loan approval and review procedures. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding our borrowers, the economies in which we and our borrowers operate, as well as the judgment of our regulators.
There is no precise method of predicting loan losses, so we cannot assure you that our loan loss allowance will be sufficient to absorb future loan losses or prevent a material adverse effect on our business, financial condition or results of operations.
Failure to achieve and maintain effective internal controls in accordance with
Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on
our ability to report our financial results timely and accurately and on our
stock price.
Section 404 of the Sarbanes-Oxley Act requires annual assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm regarding their opinion of the effectiveness of our internal control over financial reporting based upon their audit. We are required to complete our initial assessment by the filing of our Form 10-K for the year ended December 31, 2007 and to obtain the opinion of our independent registered public accounting firm by the filing of our Form 10-K for the year ended December 31, 2008. During the course of our assessment, we may identify deficiencies in our internal controls over financial reporting which we may not be able to remediate in time to meet this deadline. A failure to maintain adequate internal controls may result in material misstatements in our financial statements and a failure to meet our reporting obligations. As a result investors may lose confidence in our reported financial information and our stock price could decline.
Our operations could be interrupted if our network or computer systems fail or experience a security breach.
Our computer systems and network infrastructure could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could result in a loss of customers and thereby have a material adverse effect on our business, operating results and financial condition.
Risks Relating to an Investment in Our Common Stock
Additional growth may require us to raise additional capital in the future, but that capital may not be available when it is needed, which could adversely affect our financial condition and results of operations.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future. We may at some point, however, need to raise additional capital to support our continued growth. Our ability to raise capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise capital, if needed, on terms acceptable to us. If we cannot raise capital when needed, our ability to implement our business strategy could be materially impaired.
Our stock price may fluctuate and be volatile.
The prices at which our common stock has traded may not be indicative of future market prices. The trading price of our common stock has, in the past, and could continue in the future to fluctuate significantly. Volatility in our stock price could result from the following factors, among others:
o variations in quarterly operating results;
o changes in financial estimates by securities analysts;
o the operating and stock price performance of other companies in the
banking industry; and
o general stock market or economic conditions.
The stock market in recent years has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of affected companies.
Our ability to pay dividends is limited, and we may be unable to pay future dividends if we decide to do so.
Our ability to continue our current dividends is limited by regulatory restrictions, by the bank's ability to pay dividends to us based on its capital position and profitability, and by our need to maintain sufficient capital to support the bank's operations. The ability of the bank to pay dividends to us is limited by its obligations to maintain sufficient capital and by other restrictions on its dividends that are applicable to banks that are regulated by the FDIC. If the bank does not satisfy these regulatory requirements it will be unable to pay dividends to us and we will be unable to pay dividends on our common stock to you.
The holders of our junior subordinated debentures have rights that are senior to those of our common shareholders.
As of December 31, 2006 we had $9.3 million of trust preferred securities outstanding. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by us. Further, the junior subordinated debentures are senior to our shares of common stock. We have the right to defer payment of interest on the junior subordinated debentures for a period not exceeding 20 consecutive quarters. If we defer, or fail to make, interest payments on the junior subordinated debentures, we will be prohibited, subject to certain exceptions, from paying cash dividends on our common stock until we pay all deferred interest and resume interest payments on the junior subordinated debentures.
We have implemented anti-takeover devices that could make it more difficult for another company to purchase us, even though such a purchase may increase shareholder value.
In many cases, shareholders would receive a premium for their shares if we were purchased by another company. However, state and federal law and our certificate of incorporation and bylaws make it difficult for anyone to purchase us without approval of our board of directors. For example, our articles of incorporation divide the board of directors into three classes of directors serving staggered three-year terms with approximately one-third of the board of directors elected at each annual meeting of shareholders. The classification of directors makes it more difficult for shareholders to change the composition of the board of directors. As a result, at least two annual meetings of shareholders would be required for the shareholders to change a majority of the directors, whether or not a change in the board of directors would be beneficial and whether or not a majority of shareholders believe that such a change would be desirable. In addition, our certificate of incorporation provides that in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the then outstanding shares of common stock be entitled or permitted to any vote with respect to the shares held in excess of the 10% limit. Consequently, a takeover attempt may prove difficult, and shareholders may not realize the highest possible price for their securities.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The Company's corporate office is located 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 Branch banking facility 12,636 Owned
104 South Chiles Street
Lawrenceburg, Kentucky Branch banking facility 2,550 Owned
1015 Crossroad Drive
Louisville, Kentucky Corporate office (including 14,190 Owned
(Stony Brook Branch) finance and accounting, loan
8620 Biggin Hill Lane and deposit operations),
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 8 to the Company's consolidated financial statements herein for additional information. The New Albany, Indiana branch is leased from Chalfant Industries, Inc., a company owned by the Company's Chairman of the Board of Directors.
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, 2006.
On or about May 28, 2004, a complaint was filed in the Circuit Court of
Anderson County in the Commonwealth of Kentucky by Larry Sutherland, Judy
Sutherland, John Henry Disponett, Brenda Disponett, Todd Hyatt, Lois Ann
Disponett, Sue Saufley, and Hugh Coomer. Soon thereafter, an amended complaint
was filed which added Lois Hawkins and Norma K. Barnett as plaintiffs. The
lawsuit arises from offers to purchase securities made by the Company in
connection with an offer to purchase up to 300,000 shares of its stock in a
tender offer on or about May 28, 2003. The Plaintiffs allege that the Company
made certain material misrepresentations in connection with certain statements
made in the tender offer. The Plaintiffs are seeking to recover compensatory and
punitive damages in connection with the shares it sold in the tender offer and
their attorneys' fees. 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. This matter is currently scheduled for trial in July 2007. 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, 2006.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Since its issuance in October 1995, the Company's common stock has traded on the NASDAQ Global Market System. The Company's trading symbol is FIFG. 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
----------------------------------------------------
2006 3/31 6/30 9/30 12/31
---- ---- ---- ---- -----
High $19.00 $18.80 $18.00 $17.90
Low 17.49 16.20 15.67 16.40
Cash dividend declared
per share 0.08 0.08 0.08 0.08
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
|
The number of shareholders of record of common stock as of December 31, 2006, was approximately 410. 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, 2006, there were 1,995,594 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, 2006 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 51,550 $ 11.83 223,450
1996 Stock Option Plan 81,000 16.50 30,000 (1)
Restricted Stock Plan - - 76,500
Equity compensation plans not
approved by stockholders n/a n/a n/a
------- ------- -------
Total 132,550 $ 14.69 329,950
======= ======= =======
(1) No longer eligible for grant as of January 28, 2007.
|
Performance Graph
The following Performance Graph and related information shall not be deemed "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.
Comparative Stock Performance Graph
The following performance graph compares the performance of the
Company's Common Stock to the NASDAQ Market Index (U.S.) and the NASDAQ
Financial Stocks Index for the five year period ended December 31, 2006. The
graph assumes an investment of $100 in each of the Company's Common Stock, the
NASDAQ Market Index (U.S.) and the NASDAQ Financial Stocks Index on December 31,
2001 and that all dividends were reinvested.
[GRAPHIC OMITTED]
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
-------- -------- --------- -------- -------- --------
1st Independence Financial Group, Inc. $100.00 $121.29 $221.53 $187.85 $186.96 $168.82
NASDAQ Market Index (U.S.) 100.00 69.13 103.36 112.49 114.88 126.22
NASDAQ Financial Stocks Index 100.00 102.98 139.28 162.56 166.42 191.34
|
Item 6. Selected Financial Data.
Selected Consolidated Financial Data
(in thousands except per share data)
Three months ended
Year ended December 31, December 31, Year ended September 30,
--------------------- ------------- ----------------------------------
Results of operations: 2006 2005 2004 2004 2003 2002
---------- --------- ----------- --------- ---------- ---------
Net interest income $ 10,623 $ 10,252 $ 2,330 $ 4,678 $ 3,422 $ 3,592
Provision for loan losses 847 354 - 1,203 3 -
Noninterest income 1,791 6,957 538 682 652 337
Noninterest expense 8,839 10,093 2,537 6,026 2,715 2,476
Net income (loss) 1,940 4,481 240 (1,093) 1,307 670
Per Share Data:
Income (loss) from continuing operations
Basic $ 1.00 $ 2.38 $ 0.13 $ (0.84) $ 0.94 $ 0.77
Diluted 0.99 2.33 0.12 (0.84) 0.94 0.77
Income from subsidiary held for disposal
Basic 0.00 0.00 0.00 0.02 0.20 (0.42)
Diluted 0.00 0.00 0.00 0.02 0.20 (0.42)
Net income (loss)
Basic 1.00 2.37 0.13 (0.83) 1.05 0.54
Diluted 0.99 2.32 0.13 (0.83) 1.05 0.54
Weighted average shares outstanding
Basic 1,941 1,889 1,864 1,318 1,244 1,243
Diluted 1,957 1,929 1,917 1,318 1,245 1,243
Book value - end of period $ 20.20 $ 19.61 $ 19.68 $ 19.38 $ 16.98 $ 16.47
Market value - end of period 16.40 18.50 18.98 20.00 19.42 11.61
Cash dividends declared 0.32 0.40 0.00 0.38 0.60 0.60
Dividend payout ratio 31.96% 16.83% 0.00% (47.30)% 54.94% 110.75%
At December 31, At September 30,
------------------------------------ ----------------------------------
Balance Sheet Data: 2006 2005 2004 2004 2003 2002
---------- --------- ----------- --------- ---------- ---------
Total assets $342,806 $336,187 $337,191 $320,032 $173,764 $153,052
Securities 18,321 18,115 28,873 29,478 31,892 14,564
Loans, excluding held for sale 274,223 269,889 236,197 213,719 84,796 93,510
Allowance for loan losses 3,745 2,911 2,549 2,560 391 390
Deposits 254,077 264,323 223,308 219,817 106,692 98,049
Short-term borrowings 36,526 18,747 23,233 7,121 - 4,000
Long-term borrowings 10,279 13,279 14,247 14,234 6,155 1,000
Stockholders' equity 40,303 38,261 37,706 37,081 20,772 22,066
Shares outstanding at end of period 1,996 1,951 1,916 1,913 1,223 1,340
Three months ended
Year ended December 31, December 31, Year ended September 30,
----------------------- ----------- ----------------------------------
Financial Performance Ratios: 2006 2005 2004 2004 2003 2002
---------- --------- ----------- --------- ---------- ---------
Return on average assets 0.57% 1.38% 0.32% (0.68)% 0.91% 0.76%
Return on average stockholders' equity 4.93 11.92 2.51 (4.58) 5.65 4.32
Net interest margin 3.40 3.44 3.45 3.13 2.82 3.05
Efficiency ratio (1) 71.20 81.88 88.46 112.28 67.35 63.02
Asset Quality Ratios (2):
Nonperforming loans to total loans 1.36% 0.47% 0.52% 0.57% 0.48% 0.36%
Nonperforming assets to total assets 1.21 0.38 0.41 0.44 0.31 0.45
Net charge-offs (recoveries) to
average loans 0.00 0.00 0.00 0.07 0.00 0.02
Allowance for loans losses to total
loans (excluding held for sale) 1.37 1.08 1.08 1.20 0.46 0.42
Allowance for loans losses to
nonperforming loans (3) 100.43 229.21 208.08 210.01 95.13 116.77
Liquidity and Capital Ratios:
Loans to deposits 107.93% 102.11% 105.77% 97.23% 79.48% 95.37%
Average stockholders' equity
to average total assets 11.57 11.59 12.76 14.79 16.08 17.70
Tangible equity to assets (4) 8.47 8.01 7.81 8.01 11.75 14.42
Leverage ratio 11.60 10.20 9.60 9.90 11.40 11.70
Tier 1 risk-based capital ratio 14.60 13.10 13.30 13.90 20.60 20.60
Total risk-based capital ratio 15.90 15.10 15.60 16.20 21.10 21.10
(1) Efficiency ratio is noninterest expense divided by net interest income plus noninterest income (excluding securities
gains and losses).
(2) At period end, except for net charge-offs to average loans.
(3) Nonperforming loans consist of nonaccrual loans, loans contractually past due 90 days or more and restructured loans.
(4) Calculated by dividing stockholders' equity less goodwill and core deposit intangibles by total assets.
|
Item 7. Management's Discussion and Analysis of Financial Condition and Results 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-K 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. Forward-looking statements, which
are based on certain assumptions and describe future plans, strategies, and
expectations of the Company, are generally identified by use of the words
"plan," "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar expressions. 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.
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 Company 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.
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 December 31, 2006, the
Company had total assets, deposits and stockholders' equity of $342.8 million,
$254.1 million, and $40.3 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.
The Company is currently a defendant in a lawsuit that asserts that the
Company made certain material misrepresentations in connection with its offer to
purchase up to 300,000 shares of stock in a tender offer in May 2003. The
plaintiffs are seeking to recover damages in connection with the shares they
sold in the tender offer and attorneys fees. This matter is currently scheduled
for trial in July 2007. 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 interest in Citizens Financial
Bank, Inc., Glasgow, Kentucky ("Citizens") to another financial institution 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,
Ke