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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[x] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1995
[ ] Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________ to ____________
Commission file number: 0-15777
FIRST INDEPENDENCE CORPORATION
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(Name of Small Business Issuer charter)
Michigan 38-2583843
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 Michigan Avenue, Detroit, Michigan 48226
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(Address of principal executive offices)(Zip Code)
(313)256-8400
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common stock, par value $1.00 per share
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 ( )
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB. [ ]
State issuer's revenues for its most recent fiscal year.
Total revenues for the year ended December 31, 1995 were $8,348,677.
State the aggregated market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date
within the past 60 days.
The aggregate market value of voting stock held by non-affiliates at
December 31, 1995 was $599,753 based on appraised value of shares determined as
of December 31, 1995, by an independent appraiser for purposes of the
Registrant's Employee Stock Ownership Plan. [See Item 5. "Market for the
Registrant's Common Equity and Related Stockholder Matters."]
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No[ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of May 31, 1996.
Common stock par value $1.00 per share, 336,760 shares
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.)
into which the document is incorporated: (1) any annual report to
security-holders; (2) any proxy or information statement and (3) any prospectus
filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities
Act"). The listed documents should be clearly described for identification
purposes (e.g., annual report to security-holders for fiscal year ended
December 31, 1995):
NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
First Independence Corporation (the "Corporation") is a Michigan corporation
organized in March, 1984. The Corporation was organized in order to engage in
the acquisition, operation, and management of banks and banking related
businesses and to engage in such other activities as are permitted and
authorized to bank holding companies under the Bank Holding Company Act of
1956, as amended. On January 13, 1986, the Corporation consummated a
reorganization and merger pursuant to which the Corporation became the parent
bank holding company of First Independence National Bank of Detroit, Detroit,
Michigan (the "Bank").
The Bank was organized in 1969 under the laws of the United States as a
minority-owned, community-oriented national bank. The Bank's principal office
is in the central business district of Detroit at 44 Michigan Avenue, Detroit,
Michigan 48226. It also operates branches in Detroit at 12200 Livernois
Avenue, 7020 West Seven Mile Road at Livernois Avenue, and in the Millender
Center Office/Apartment Complex at 545 Brush Street.
The Bank provides banking services to individuals, businesses, local, state,
and federal governmental units, and institutional customers. Its services
include demand deposits, savings and time deposits, collections, cash
management, night depositories, and consumer, commercial, and real estate
loans.
Consumer loans are made to individuals for a variety of personal purposes such
as home improvements, home equity lines of credit, car and boat purchases,
student loans, and credit cards. The Bank usually obtains collateral for these
loans but sometimes makes such loans on an unsecured basis. Character of the
borrower, credit history, amount of total indebtedness compared to total
income, nature and value of collateral and ratio of loan amount to collateral
value all are factors taken into account in making such loans. In connection
with home improvement loans and home equity loans, the Bank frequently lends on
the security of second mortgages. Such loans normally do not exceed 80% of
the value of real estate collateral. The aggregate of first and second
mortgages must meet this collateral value requirement. Customers' credit
ratings must justify second mortgage loans.
Commercial loans are made to businesses and to individuals for business
purposes. They include a wide variety of financing transactions such as
working capital lines of credit, receivable financing, commercial real estate
loans, equipment loans and equipment leasing transactions. The history and
strength of the borrower, type of business, cash flow compared to debt service
requirements, type and nature of collateral, collateral values, credit history,
and ratios of loan amounts to collateral value are among the principal
considerations in making these loans. These loans do not usually exceed 80% of
the value of the collateral and cash flow available for debt service must be at
least 1.25 times the debt service requirement.
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Real estate loans are made to finance the purchase or construction of
residential real estate and commercial real estate. In the case of single
family residential real estate (usually considered 1-4 units), the cash flow
and credit history of the borrower and value of the real estate are among the
principal factors in evaluating loans. Normally, the Bank will lend up to 80%
of the appraised value of residential real estate used as a residence of the
borrower. The Bank also will lend up to 80% of the appraised value of
commercial real estate which includes apartment buildings of more than four
units, retail structures, warehouse and factory buildings and office
structures. Cash flow from the building, borrower's credit history, value of
the collateral and ratio of the loan to value as well as the ratio of the debt
service requirements to the cash flow of the property are all factors
considered in making these loans.
The Bank offers a credit card program affiliated with the Master Charge
Inter-Bank charge card system. It maintains a correspondent relationship with
several major banks in the Detroit area in order to provide for the clearance
of checks, the transfer of funds, the periodic sale and purchase of federal
funds, and participation in large loans which would be beyond the Bank's legal
lending limit if made by the Bank alone.
In 1994 the Bank opened a mortgage brokerage office in Southfield, Michigan.
The Bank originates residential mortgages in that office primarily for resale
in the secondary market. The Bank's income in this activity is generated from
commitment fees or "points" charged to the borrower and from discounts realized
when loans are sold to secondary market investors for lower yields than that
which would be realized from the mortgage. The difference is a profit for the
Bank. The Bank pays the originators' commissions from the points charged to
the borrowers and from the profits realized upon sale of the mortgage. It is
the Bank's policy to commit to a loan to a borrower only if the secondary
market investor has committed to the Bank to purchase the loan when made.
SUPERVISION AND REGULATION
Various federal laws and regulations affect the businesses of the Corporation
and the Bank. These laws and regulations are administered with respect to the
Corporation and the Bank by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") and the Office of the Comptroller of the
Currency (the "Comptroller"), respectively. In 1991, in the exercise of their
supervisory and regulatory authority over the Corporation and the Bank, the
Federal Reserve Board and the Comptroller required the Corporation's and the
Bank's Board of Directors to adopt a resolution and enter into a formal
agreement requiring the Board to manage and improve certain operations, comply
with certain laws and regulations, to conserve and increase capital of the
Corporation and the Bank, and to manage and improve loan quality. These
matters are further described below at pages 4-7 and under "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources and Dividends" at page 32.
The following is a summary of certain statutes and regulations affecting the
Corporation and the Bank. This summary is qualified in its entirety by such
statutes and regulations.
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The Corporation is a bank holding company under the Bank Holding Company Act of
1956, and as such, it is subject to supervision, regulation and periodic
examination by the Federal Reserve Board. As a bank holding company, the
Corporation is required to file with the Federal Reserve Board annual reports
and other information regarding its business operations and those of the Bank.
The Bank Holding Company Act requires the Corporation to obtain the prior
approval of the Federal Reserve Board before acquiring substantially all the
assets of any bank or bank holding company or ownership or control of any
voting shares of any bank or bank holding company, if, after such acquisition,
it would own or control, directly or indirectly, more than 5 percent of the
voting shares of such bank or bank holding company. The Bank Holding Company
Act also requires the Corporation to obtain the prior approval of the Federal
Reserve Board before engaging in or acquiring more than 5 percent of the voting
shares of any company engaged in non-banking activities.
As a bank holding company, the Corporation is also prohibited from acquiring
shares of any bank located outside the state of Michigan unless such an
acquisition is specifically authorized by statute of the state of the bank
whose shares are to be acquired. Under a Michigan statute applicable to the
Corporation, it may acquire a bank located in any state in the United States if
the laws of the other state permit ownership of banks located in that state by
a Michigan-based bank holding company. Under the same Michigan statute, the
Corporation or the Bank may be acquired by a bank holding company located in
any state in the United States subject to approval of the Financial
Institutions Bureau of the State of Michigan and the existence of a reciprocal
law in such other state.
The Bank is a national banking association under the National Bank Act, and as
such, it is subject to supervision, regulation and periodic examination by the
Comptroller. It is required to file with the Comptroller periodic reports
regarding its business operations.
Like all national banks, the Bank is a member of the Federal Reserve System and
is therefore subject to applicable provisions of the Federal Reserve Act and
regulations of the Federal Reserve Board promulgated thereunder. Deposits of
the Bank are insured to the extent provided by law by the Bank Insurance Fund
administered by the Federal Deposit Insurance Corporation ("FDIC"). Thus, the
FDIC also has certain regulatory authority over the Bank.
The National Bank Act, Federal Reserve Act, other federal (and in some
instances, state) laws and regulations govern, among other things, the scope of
the Bank's business, the investments the Bank may make, the amount of loans the
Bank may make and the interest it may charge on loans, transactions between the
Bank and the Corporation and the Bank's and Corporation's directors and
executive officers and other affiliates of the Bank, reserves the Bank must
maintain against deposits, and the Bank's activities with respect to business
combinations and branching. Federal regulations also require the Corporation
and the Bank to fulfill certain minimum capital requirements and restrict
dividends payable to the Corporation by the Bank. In addition, the 1991 formal
agreement between the Bank and the Comptroller ("Comptroller Agreement")
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specifically requires the Bank to increase capital, make no declaration or
payment of dividends without prior approval of the Comptroller, and requires
certain other management and board actions to be taken. These requirements are
discussed below in this section at page 6 and in "Item 6. Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Capital Resources and Dividends" at page 32.
The FDIC Improvement Act of 1991 (the "FDIC Improvement Act") establishes
deposit insurance premiums, regulatory compliance costs, and emphasizes capital
maintenance. The FDIC Improvement Act covers such matters as the following:
(1) bank regulators, including the Comptroller and the Federal Reserve Board,
are required to take prompt corrective action with respect to deterioration in
the capital of an institution; (2) regulators are required to intervene early
and undertake expedited resolution of troubled financial institutions; (3) the
FDIC is required to establish a system of risk-based deposit insurance with
premiums for an institution based on the probability that the Bank Insurance
Fund ("BIF") will incur a loss related to such institution, the likely amount
of the loss and the reserve needs of the BIF.
Under the FDIC Improvement Act regulations, five capital categories are
established to define the relevant capital levels. The following table
summarizes the risk-based capital levels for each category and the Bank's
capital ratios in each category shown:
<TABLE>
<CAPTION>
TOTAL TIER 1 TIER 1 UNDER A
RISK-BASED RISK-BASED LEVERAGE CAPITAL ORDER OR
CAPITAL CATEGORY RATIO (B) RATIO (B) RATIO DIRECTIVE (A)
- ---------------------- ---------- ---------- -------- ------------------
<S> <C> <C> <C> <C>
Well Capitalized >= 10.0% >= 6.0% >= 5.0% NO
Adequately Capitalized >= 8.0% >= 4.0% >= 4.0%
Undercapitalized < 8.0% < 4.0% < 4.0%
Significantly Under- < 6.0% < 3.0% < 3.0%
Capitalized
Critically Undercapitalized: tangible equity <= 2.0%.
Bank's ratios at
December 31, 1995 11.80% 10.54% 5.43%
</TABLE>
_______________________________________________________
Note A: Regardless of a bank's capital level, no bank is considered "well
capitalized" if it is subject to a cease and desist order, formal agreement,
capital directive or any other directives that require the bank to achieve or
maintain a higher level of capital.
Note B: The Risk Based Capital Ratios exclude the effect on the Bank's capital
of unrecognized gains and losses on securities held for sale pursuant to
Financial Accounting Standards Board Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
The table shows that the Bank's risk-based capital ratios fall within the range
of well-capitalized banks, but, due to the Bank being subject to the 1991
Comptroller Agreement, the Bank is considered "adequately capitalized."
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The Community Reinvestment Act ("CRA") provides for bank reinvestment in the
communities from which deposits are received. Under new regulations adopted in
1995, regulators evaluate actual performance of financial institutions in their
community reinvestment activities rather than emphasizing plans, process and
mere statistics. Commitment to community reinvestment is viewed by the Bank and
regulatory agencies as an important part of banking. The Bank's CRA rating is
"satisfactory" and the Bank is working to improve its record-keeping with
respect CRA activities in order to increase its rating to outstanding. The Bank
was organized to provide capital to minority businesses and households in the
Detroit Area and, for over 25 years, it has been doing so. Over 60% of the
Bank's loans are made to businesses and households in Wayne County. Many of its
employees are residents in Detroit and are active in block clubs and community
organizations. Each of the Bank's directors also is engaged as a board member
in one or more Detroit-based community organizations. The Bank intends to build
on its record of community service by increasing involvement of its employees
and offices in community affairs and, as record keeping of its financing
activities is improved, its CRA involvement will be increasingly evident.
The 1991 Comptroller Agreement between the Bank and the Comptroller (the
"Comptroller Agreement") provides, among other things, that the Bank must: (1)
appoint a compliance committee of the Board; (2) correct violations of law and
administrative regulations and adopt procedures to prevent future violations;
(3) achieve and maintain a level of equity capital at least equal to 5.50
percent of adjusted total assets (this was achieved in October, 1994, and the
Bank ended 1995 with an equity capital ratio of 5.49% at December 31, 1995) ;
(4) not declare or pay dividends without the prior written approval of the
Comptroller; (5) maintain a level of liquidity which is sufficient to sustain
the Bank's current operations and withstand any anticipated or extraordinary
demands against its funding base; (6) maintain an adequate allowance for loan
and lease losses; (7) develop a three year capital program to maintain adequate
and at least minimum required regulatory capital levels; (8) develop and
implement a plan to improve and sustain the earnings of the Bank; (9) revise
the Bank's loan policy and include an insider loan policy; (10) establish a
loan review system to review the Bank's loans periodically to identify and
categorize problem credits; (11) develop a program to reduce criticized assets;
and (12) obtain current and satisfactory credit information from borrowers and
cure any collateral deficiencies as may be identified from time to time. The
Corporation's Resolution adopted at the request of the Chicago Federal Reserve
Bank (the "Federal Reserve Resolution") provides that the Corporation will not
declare or pay any dividends or incur any additional debt without the prior
written consent of the Federal Reserve Bank of Chicago. It also provides for
submission to that Bank of written plans for increasing the Corporation's
capital and for servicing the Corporation's debt.
As of December 31, 1994, and continuing through 1995, the Bank had fully
complied with the Comptroller Agreement except for those provisions relative to
loan review and certain loan administration matters which were in partial
compliance. Near the end of 1995, as part of its ongoing effort to strengthen
the loan department, a new Senior Loan Officer was hired along with an
additional experienced commercial loan officer, loan review consultants were
retained, the loan collection staff was increased to three full-time persons,
and collection practices were modified to notify borrowers at an earlier stage
of delinquency. Workout activity with respect
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to delinquent loans and borrowers whose businesses were slow has increased.
These activities have involved structuring payment plans that bear closer
relationship to the customer's cash flow or forbearance from exercising certain
legal rights in some instances if delinquent borrowers demonstrate a desire and
ability to repay, work cooperatively with the Bank by increasing collateral and
financial reporting, and honor their modified agreements.
Management has continued working to reduce operating costs and improve
profitability of the Bank. Revenues increased and operating costs (excluding
interest expense) as a percentage of revenues declined. Nevertheless, the
Corporation lost $57,000 in 1996 (the Bank's share of the loss was $31,000) as
a result of unauthorized employee loan activity and defalcations in the loan
department. During the annual audit and examination after the close of 1995,
the Bank identified approximately $645,000 of loans with insufficient
collateral and inadequate documentation which were made in late 1995 by a
consumer loan officer with no lending authority (acting in collusion with a
loan administrator and one or more customers) who circumvented the Bank's
internal control system. In addition, about $176,000 of such loans were booked
and activated by these two employees in January, 1996. It also was discovered
that these same individuals had made $390,000 of fictictious unauthorized
"loans" in 1995 and $138,000 in January, 1996. These persons no longer are
employed by the Bank and the unauthorized transactions continue to be under
active investigation by the Bank and appropriate federal agencies and
authorities.
As a result of the unauthorized loan activity, the Corporation's charges
against income were $670,000. This resulted in the loss of ($57,000) instead
of income of $613,000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview" at page 14 for a detailed
discussion of the effects of the unauthorized loan activity.
The unauthorized loan activity resulted in the Bank's non-compliance with the
loan quality provisions of the Comptroller Agreement. The Bank also had not,
at December 31, 1995, satisfied the provision of the Comptroller Agreement
which requires the Bank to comply with all laws and regulations. The Bank's
lack of adequate documentation on certain consumer loans as a result of the
consumer lender's activity and the need to restate its year end financial
report to the Federal Deposit Insurance Corporation amounted to violations of
law or regulations which management has corrected or is in the process of
correcting. In conjunction with the Bank's continuing investigation of the
unauthorized loan activity, it is examining whether there was a violation of
legal lending limits. The Bank's new automated consumer lending documentation
program is expected to significantly eliminate the likelihood of consumer law
violations in the future. Management expects its actions described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview" and continuing collection efforts combined with
additional monitoring of loans, improved credit programs and procedures, and
better consumer compliance review and documentation, to enable it to be in full
compliance before the end of 1996.
The Bank's management believes that stronger underwriting, in addition to the
revised loan administration and controls implemented since January, 1996, is
vital to improving credit quality. Thus, strict adherence to credit criteria
for new loans, thorough analysis of prospective borrowers'
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ability to repay, and careful evaluation of collateral are all required in
considering new loan requests.
The business of commercial banking is affected by the monetary and fiscal
policies of various government agencies, including the Federal Reserve Board.
Among the regulatory techniques available to the Federal Reserve Board are open
market operations and United States government securities, changing the discount
rate for bank borrowings, and imposing and changing the reserve requirements
applicable to member bank deposits and to certain borrowings by member banks and
their affiliates. These policies influence to a significant extent the overall
growth and distribution of bank loans, investments and deposits, and the
interest rates charged on loans, as well as the interest rates paid on savings
and time deposits. In view of constantly changing conditions in the national
economy and the money market, as well as the effect of the policies of monetary
and fiscal authorities, no definitive predictions can be made by the Corporation
as to future changes in interest rates, credit availability, or deposit levels.
The Bank attempts to manage its asset mix (loans and investments) its interest
rate structure for assets and for deposit liabilities and has worked to increase
fee income sources such as mortgage banking and brokerage in order to establish
diverse sources of revenue and provide some protection against changes in
interest rates and economic or industry conditions.
COMPETITION AND MARKET
The Bank is a community bank primarily serving Wayne County, Michigan. It also
provides some services in Oakland and Macomb Counties. Wayne County household
income is moderate to low ($28,000 in Wayne County for 1989 according to the
1990 census. The value of real estate in Wayne County also tends to be
relatively low ($48,500 average home value). This market area encompasses a
high proportion of lower-middle and low income individuals and small
businesses. Historically, this market may have been underserved by competing
financial institutions. However, management believes that it can serve this
community profitably and control the somewhat higher level of credit risk
inherent in such loan portfolio by careful underwriting and by hiring and
retaining competent, professional staff.
The Bank's main office and three branches are all located in the City of
Detroit. Although the Detroit area economy is affected by the cycle of the
automobile industry, it has become more diverse in the past decade.
Nevertheless, when that industry is strong, employment and wages are high and
stable. When the automobile industry is performing weakly, employment is lower
and many businesses which serve the automobile companies tend to slow down.
This could impact business and retail customers' ability to repay their loans
if their business declines or if they lose their jobs. Management believes
that, in this way, the business of the Bank is indirectly affected by the
automobile industry. Deposits and business activity of governmental units are
affected by tax revenues which vary with the overall levels of activity in the
automobile industry. However, the volume of business which is done with the
Bank by governmental units, large companies and community service agencies is
small in relation to their total banking business. Thus, factors affecting the
general level of economic activity are more likely to affect the Bank
indirectly. In addition, the Bank does not specialize heavily in one segment
of activity. Thus,
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specific industry trends and variations do not directly impact its business but
may have indirect effects as they impact the general economy in Southeast
Michigan.
In 1994 Detroit's Enterprise Zone was selected as one of four such zones in the
United States for $100 million of Federal funding over a ten-year period. This
has spawned commitments of approximately $2 billion of financing and investment
in the City of Detroit over the same ten year period and the Bank expects to
participate and benefit from those financing opportunities and the new
development which could occur in the city over that period. New housing starts
already have increased in Detroit over the past two years and the Bank
anticipates that its own residential mortgage lending, home improvement
financing and construction lending will increase over the next several years as
a result of those changes in the City of Detroit.
The Bank has a mortgage origination office in Southfield, Michigan, adjacent to
Detroit. This office is staffed by mortgage brokers paid on commission. They
attract residential mortgage business primarily from Oakland County and Wayne
County. The mortgage brokerage business is intensely competitive on the basis
of interest rates and personal relationships from which leads are developed.
Oakland County's average income is among the highest income levels; the City of
Detroit is relatively low for the northeastern and midwest industrial states;
Macomb County's average income tends to be strong middle class.
In the conduct of the commercial banking business by the Bank, there is
significant competition with other federally insured depository institutions,
such as banks, savings associations and credit unions. Additionally, the Bank
faces increasing competition in certain aspects of its business from consumer
finance companies, securities brokerage firms and large national retailers.
The business of the Corporation and the Bank includes several longstanding
relationships with certain customers. The loss of some of these customers
could have a material adverse effect on the Corporation and the Bank, but
management has no reason to believe that there will be any material change in
these long term relationships.
EMPLOYEES
At December 31, 1995 the Bank employed approximately 66 full-time equivalent
employees, seven of which are commission employees in the mortgage brokerage
operation and are compensated based solely on their performance, except that
they receive benefits on the same basis as all other employees. None of the
employees are unionized. The Corporation has no employees of its own and no
payroll since it engages in no active business. While relationships between
management and other employees are considered good, management is continuing to
build stronger relationships, loyalty and more efficient work habits.
Techniques used include regular meetings with employees, training
opportunities, and use of consultants from time to time for enhancing
communication within the Bank.
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OTHER TRENDS, EVENTS, UNCERTAINTIES
Management is not aware of any significant trends, events or uncertainties, or
recommendations by regulatory authorities, other than those discussed generally
on pages 3-9 that will have or are reasonably likely in management's opinion,
to have a material effect on the Company's liquidity, capital resources or
operations.
CONSOLIDATED STATISTICAL INFORMATION
Selected statistical information is presented in Item 6 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" should
be read in conjunction with the consolidated financial statements and notes to
financial statements which are filed as part of this report.
ITEM 2. DESCRIPTION OF PROPERTIES
The 28,500 square foot headquarters of the Corporation and the Bank, located at
44 Michigan Avenue, Detroit, Michigan, was purchased by the Bank in March,
1987. The Bank also owns the land and approximately a 4,000 square foot branch
at 12200 Livernois in Detroit. The Bank leases the premises at 7020 West Seven
Mile Road, and at 545 Brush Street at the Millender Center Office/Apartment
complex in Detroit. All of these properties are considered by management to be
well maintained and adequate for the purpose intended. The Bank modified its
main office in 1995 in order to move all of its operations and accounting into
the main office from separate leased space two blocks away. The lease on that
space (on Shelby Street in Detroit) will terminate in August, 1997 and the
additional benefits will be realized if the Shelby premises are able to be
subleased.
The Bank has a mortgage production office located at 15565 Northland Drive,
Suite 703 West, Southfield, Michigan 48075 in 2,100 square foot leased
premises. This site houses a staff of approximately 12 persons who originate
and process mortgages in southern Oakland County.
ITEM 3. LEGAL PROCEEDINGS
In 1991, a former senior officer of the Bank filed a complaint in the Circuit
Court for the County of Wayne, Michigan, against the Bank, a nonoperating
subsidiary of the Bank, and the Corporation and certain directors and another
former officer thereof alleging wrongful termination. In May 1993, a jury
verdict was entered against the Corporation and a nonoperating subsidiary of
the Bank, certain directors and another former officer thereof in the amount of
$320,000 by a Wayne County Circuit Court. A judgment was entered on the
verdict in October, 1994. An accrual for the judgment is reflected in the
consolidated financial statements and attorney fees and other litigation costs
are expensed as they are incurred. The Corporation has appealed the judgment
to the Michigan Court of Appeals and is taking vigorous action in the
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appeal to overturn the judgment. In the opinion of the Corporation's counsel,
numerous errors were committed in the course of the trial which are manifest and
they believe the likelihood of reversal by the Court of Appeals is very strong.
In this case the employee who was discharged was an officer of the Bank and, by
virtue of that position, an officer of the Corporation. The Corporation did not
ever pay him a paycheck and had no active business. Furthermore, counsel
believes that the plaintiff did not prove under Michigan law the elements of an
implied contract or retaliatory discharge, both of which were the basis for the
verdict and judgment. Nevertheless, the outcome of the appeal cannot be
predicted and an adverse judgment could have a negative effect on the
Corporation's liquidity because its sole source of income is cash dividends from
the Bank which has not paid such dividends for more than five years and may not
pay them without specific approval of the Comptroller.
The Bank is routinely engaged in litigation, both as plaintiff and defendant,
which is incidental to its business, and in certain proceedings, claims or
counterclaims have been asserted against it. Except as discussed in the
preceding paragraph, management does not currently anticipate that the ultimate
liability, if any, arising out of such litigation and any litigation involving
the Corporation will have a material effect on the consolidated financial
position of the Corporation.
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. On May 23, 1995, the Corporation held its annual meeting at which the
following six directors were elected by the votes shown below:
<TABLE>
<CAPTION>
NAME FOR AGAINST ABSTAIN
--------------------- ------- ------- -------
<S> <C> <C> <C>
Don Davis 224,174 0 1,284
Dr. Charles E. Morton 224,144 0 1,314
Richard W. Shealey 224,174 0 1,284
Dennis H. Silber 224,176 0 1,282
Gerald Van Wyke 224,176 0 1,282
Eloise C. Whitten 224,151 0 1,307
</TABLE>
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 1995, there were 336,760 shares of the Corporation's common
stock issued and outstanding. The stock was held by approximately 2,100
shareholders and has previously traded in the Detroit metropolitan area over
the counter on an infrequent basis. During 1994-1995, to the knowledge of the
Corporation's management, an established trading market did not, and does not,
exist for these shares. For purposes of estimating value of the Registrant's
common stock, the value determined by an independent appraisal as of December
31, 1995 for the Corporation's Employee Stock Ownership Plan has been used.
The Bank may not currently pay cash dividends to the Corporation pursuant to
the Comptroller's Agreement, without prior approval of the Comptroller.
Therefore, since it received no cash dividends from the Bank, the Corporation
does not presently have the ability to pay cash dividends on its outstanding
preferred stock or common stock. It is expected that dividends will be able to
be paid by the Bank to the Corporation for the year 1996 later in the year. If
the Bank's earnings continue at the 1995 level or better in 1996, the Bank's
intends to request the approval of the Comptroller to pay dividends to the
Corporation in an amount sufficient for the Corporation to pay the 1996
dividends on the Class A and B Preferred Stock, the interest on the Senior
Notes and, if applicable, the dividends of the Class C Preferred Stock, Series
MI-1.
Federal law (12 U.S.C. Section 60) limits payment of dividends to the net
profits of a bank remaining after ten (10%) percent of the net profits of each
half year of operations are transferred to capital surplus, and the dividend
paid in any calendar year may not, without the prior approval of the
Comptroller, exceed the net profits of the current year plus the net profits of
the two preceding years (less the required transfers to surplus). 12 U.S.C.
Section 56 provides that dividends may not be paid if undivided profits have
been depleted by losses or otherwise. In other words, dividends may be paid
only from net earnings and not from the Bank's capital. The Bank's retained
deficit account is approximately ($365,000) so that it may not pay dividends
until subsequent net earnings exceed $365,000, and then only to the extent
allowed by the Comptroller until the Comptroller Agreement is terminated.
Cash dividends on common stock were not declared or paid in 1989 through 1995
and presently, they may not be declared or paid without the prior written
approval of the Federal Reserve Bank of Chicago. (See "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview and - Capital Resources and Dividends."). No cash dividends may be
paid on the Common Stock until dividends are paid or provided for on the Class
A and Class B Preferred Stock and the Class C Preferred Stock, Series 1994-1
and Series MI-1. (See "Capital Resources and Dividends," p. 32).
12
<PAGE> 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following selected financial data are derived from the consolidated
financial statements of the Corporation. The data should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included herein.
Condensed Consolidated Statement of Operations
For the years ended December 31 (in thousands)
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Interest income $6,427 $5,182
Interest expense 1,826 1,418
----- -----
Net interest income 4,601 3,764
Provision for loan losses 861 270
Other operating income 1,922 1,517
Other operating expense 5,719 5,113
------ -----
Income (loss) before federal income tax (57) (102)
Federal income tax expense (credits) 0 0
------ -----
Net Income (Loss) (57) (102)
Preferred stock dividend requirements 34 34
------ -----
Income (loss attributable to common stock) $ (91) $ (136)
====== ======
Net income (loss) per share
of common stock $ (.27) $ (.40)
</TABLE>
Condensed Balance Sheet
Average balances for December 31 (in thousands)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,945 $ 2,940
Interest-bearing deposits -- --
Investment securities
Held for sale 10,316 11,888
Held to maturity 20,640 10,099
Federal funds sold and securities
purchased under agreements to resell 9,517 9,520
Loans (net) 39,877 37,004
Other assets 4,727 7,361
------- -------
TOTAL ASSETS $89,022 $78,812
======= =======
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY
1995 1994
------- -------
<S> <C> <C>
Deposits:
Non-interest bearing 26,828 $26,918
Interest bearing 50,045 41,476
------- -------
TOTAL DEPOSITS 76,873 68,394
Other borrowed funds 6,214 3,728
Accrued expenses and other liabilities 935 1,925
Notes payable 900 900
------- -------
TOTAL LIABILITIES 84,922 74,947
Shareholders' Equity 4,100 3,865
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $89,022 $78,812
======= =======
</TABLE>
The following information and analysis should be read in conjunction with the
audited consolidated financial statements and related footnotes appearing
elsewhere in this report.
RESULTS OF OPERATIONS
OVERVIEW
In 1995 the Corporation had a net loss of ($57,000) compared to a net loss of
($102,000) in 1994. This slight improvement was the result of an increase of
$842,000 in net interest income with both higher levels of earning assets and
higher yields earned. This higher revenue was substantially offset by $591,000
more in 1995 for the provision for loan losses (total $861,000) than was
provided in 1994. The increased provision in 1995 resulted from unauthorized
loan activity engaged in by two employees of the Bank near the end of 1995. In
1994, the Corporation's net loss of ($102,000) was incurred after recognizing a
$320,000 accrued expense for a judgment in a lawsuit filed by a former senior
officer as discussed in the Legal Proceedings section of this report.
Excluding the 1994 litigation accrual, the Corporation had net earnings from
operations in 1994 of $218,000.
After the close of 1995 during the Bank's year end audit and examinations, the
Bank identified approximately $645,000 of loans with insufficient collateral
and inadequate documentation which were made in late 1995 by a consumer loan
officer with no lending authority (acting in collusion with a loan
administrator and one or more customers) who circumvented the Bank's internal
control system. In addition, about $176,000 of such loans were booked and
activated by these two employees in January, 1996. It also was discovered that
these same individuals had made
14
<PAGE> 16
and booked $390,000 of fictitious unauthorized "loans" in 1995 and $138,000 in
January, 1996. These persons no longer are employed by the Bank and the
unauthorized loan transactions continue to be under active investigation by the
Bank and appropriate federal agencies and authorities.
In response to the unauthorized loan activity, the Bank has taken numerous
actions. The Bank President's employment was terminated in February, 1996; the
Chairman, Don Davis, was appointed as Interim President and CEO, and a search is
being undertaken by the Board for a new President; the Bank has hired a new
consumer loan officer and two new loan administrators; an experienced senior
auditor has been added to the internal audit department; the loan review
consultant is performing loan file reviews and will submit quarterly reports to
the Board of Directors; the Bank's fidelity insurance underwriters have been
notified and claims are being prepared with respect to the losses experienced;
all 1995 and January, 1996 consumer loans were reviewed to identify any
additional unauthorized or fictitious loans; implemented an automated consumer
loan documentation and compliance system; documentation and, in some cases,
collateral has been improved with respect to some of the unsecured or
inadequately secured consumer loans; and revised and strengthened controls have
been instituted in the loan department for booking, activating and funding
consumer loans.
As a result of the unauthorized loan activity, the Bank charged off the
$390,000 of fictitious "loans" and $40,000 of interest which had accrued on
loans made by the two employees. It also took additional provisions for loan
losses in an amount of $240,000 for loans which were insufficiently
collateralized and inadequately documented in 1995. In the first quarter of
1996 the Bank charged off the $138,000 of fictitious unauthorized "loans" which
had been booked in January, 1996, and made additional provisions for loan
losses of $90,000 for the $176,000 of loans for which collateral and
documentation were inadequate. These actions resulted in additional charges
against income in 1995 of $670,000 directly attributable to the unauthorized
loans, yielding a loss for the year of ($57,000) and additional charges against
income in the first quarter of 1996 of $228,000 directly attributable to the
unauthorized loans, yielding net income for the first quarter of approximately
$5,000. The total provision taken for loan losses in 1995 was $861,000 and in
the first quarter of 1996 was $317,750. See "Provision and Allowance for Loan
Losses" at page 19. Management believes the allowance for loan losses is
adequate as of December 31, 1995 as a result of these provisions for loan
losses.
The Bank's net loss in 1995 was about ($31,000). The principal difference
between results of the Bank and the Corporation on a consolidated basis was net
interest expense accrued by the Corporation in the amount of $27,000. In 1994,
the Bank's net income was $393,000; the principal differences from the
Corporation's net income in that year were interest expense of $81,000,
expenses pertaining to shareholders of $94,000, and the accrued $320,000
expense on the employment lawsuit.
<PAGE> 17
The following table sets forth a consolidating condensed statement of
operations for the ended December 31, 1995.
Condensed Statement of Operations
For the year ended December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
First First
Independence Independence
Corporation National Bank Elimination Consolidated
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income $ 1 $6,426 $6,427
Interest expense 27 1,799 1,826
---- ------ ------
Net interest income (26) 4,627 4,601
Provision for
loan losses -- 861 861
Other operating income 1,922 1,922
Other operating expenses 5,719 5,719
---- ------ ------
(Loss) before federal
income tax and income
from subsidiary (26) (31) (57)
Federal income tax
expense (credit)
---- ------ --- ------
Income/(Loss) before
income from
subsidiary (26) (31) (57)
Income/(Loss) from
subsidiary $(31) $31
---- ------ --- ------
NET INCOME/(LOSS): $(57) $ (31) $31 $ (57)
==== ====== === ======
</TABLE>
16
<PAGE> 18
NET INTEREST INCOME
Net interest income is the amount of income generated by interest earning
assets reduced by the total interest cost of funds obtained to carry them.
The following table demonstrates the effect of changes in the average volume
and rate of rate sensitive assets and liabilities for the periods indicated.
The change due to both rate and volume has been allocated to the volume
variance.
Rate/Volume Analysis
<TABLE>
<CAPTION>
1995 COMPARED TO 1994 1994 COMPARED TO 1993
INCREASE/(DECREASE) DUE TO INCREASE/(DECREASE) DUE TO
-------------------------- --------------------------
(IN THOUSANDS) CHANGE IN: CHANGE IN:
---------- ----------
Interest Income VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Loans $271 $256 $ 527 $ 448 $ 7 $ 455
Taxable investment securities 485 107 592 (190) (225) (415)
Nontaxable investment
securities ( 4) ( 4) 5 (4) 1
Federal funds sold and
securities purchased under
agreements to resell 158 158 (75) 114 39
Interest-bearing bank
deposits (28) (28) 0 28 28
---- ---- ------ ---- ----- -----
TOTAL INTEREST INCOME 724 521 1,245 188 (80) 108
---- ---- ------ ---- ----- -----
Interest Expense
Deposits:
Money Market Accounts 30 11 0 (3) (3)
Savings ( 3) (19) (64) 20 (42) (22)
NOW Accounts ( 4) (61) (4) 3 (10) (7)
Certificates of Deposit 218 (79) 139 (13) 31 18
$100,000 or more 33 171 204 (21) 7 (14)
Time deposits 85 91 176 3 13 16
Short-term borrowing (54) (54) -- -- --
Long-term borrowing
---- ---- ------ ---- ----- -----
TOTAL INTEREST EXPENSE 359 49 408 (8) (4) (12)
---- ---- ------ ---- ----- -----
NET INTEREST INCOME $365 $472 $ 837 $ 196 $ (76) $ 120
==== ==== ====== ===== ===== =====
</TABLE>
Net interest income increased 22.24% or $837,000, to $4,601,000 in 1995 from
$3,764,000 in 1994. This increase was primarily the result of an increase in
average loans and U.S. Treasury and Government securities. Net average loans
in 1995 increased $2,873,000 to $39,877,000 compared to $37,004,000 in 1994.
Non-accruing loans are included in the loan totals in calculating interest
rates earned on loans in the average balance sheet shown on the next page.
Average Treasury and Government Agency Securities increased $9,023,000 in 1995
to $30,642,000 from $21,619,000 in 1994.
The increases in earning assets were funded through a $7,167,000 increase in
average certificates of deposits of $100,000 and more and an increase of
$2,486,000 in average short term borrowings. Rates on the higher average level
of total interest bearing liabilities increased 10 basis points to 3.18% in
1995 compared to 3.08% in 1994. However, with higher yields on average total
earning assets, the net interest margin increased 28 basis points to 5.73% in
1995 from 5.45% in 1994.
17
<PAGE> 19
The following table sets forth for the periods indicated the Corporation's
average balances of assets and liabilities and the interest earned or paid
thereon, expressed both in dollars and rates.
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31
(IN THOUSANDS) 1995 1994
-------------------------- ---------------------------
INTEREST RATE INTEREST RATE
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
ASSETS BALANCE EXPENSE PAID BALANCE EXPENSE PAID
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury & Government
Agencies $30,642 $1,772 5.78 $21,619 $1,182 5.47
State & Municipal Securities 147 9 6.12 232 13 5.60
Other 167 10 5.99 136 7 5.15
-------
TOTAL INVESTMENT SECURITIES 30,956 1,791 5.79 21,987
Federal funds sold 9,517 568 5.97 9,520 410 4.31
Inter bank deposit 590 28 4.75
Loans (net) 39,877 4,068 10.21 37,004 3,542 9.57
------- ------ ----- ------- ------ ----
TOTAL EARNING ASSETS 80,350 69,101
TOTAL INTEREST INCOME $6,427 8.00 $5,182 7.50
------ ----- ------ ----
Other assets held under agency
agreements 2,350
Other assets 8,672 7,361
------- -------
TOTAL ASSETS $89,022 $78,812
======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Money Market Accts $ 792 $ 21 2.65 $ 925 $ 28 3.03
Savings 15,555 350 2.25 15,655 414 2.64
NOW Accounts 3,941 79 2.00 3,280 69 2.10
Certificates of Deposit
$100,00 or more 15,601 398 2.55 8,434 257 3.05
Time deposits 14,156 647 4.57 13,182 441 3.35
Short-term borrowings 6,214 304 4.89 3,728 128 3.43
Notes payable 900 27 3.00 900 81 9.00
------- ------ ----- ------- ------ ----
TOTAL INTEREST-BEARING
LIABILITIES 57,159 46,104
TOTAL INTEREST EXPENSE $1,826 3.19 $1,418 3.08
------ ----- ------ ----
Other liabilities held under
agency agreements 2,350
Other liabilities 27,763 26,493
Shareholders' equity 4,100 3,865
------- -------
TOTAL LIABILITIES AND
SHAREHOLDER EQUITY $89,022 $78,812
======= =======
Net interest income $4,601 $3,764
====== ======
Interest spread (avg. rate
earned minus avg. rate paid) 4.81% 4.42%
===== =====
Net interest margin (net
interest income/total
earning assets) 5.73% 5.45%
===== =====
Asset utilization (earning
assets/total assets minus
assets held under agency
agreement) 90.26% 90.37%
====== ======
</TABLE>
18
<PAGE> 20
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Banking practice as well as the Comptroller Agreement require the Bank to
maintain an adequate allowance for loan losses on an ongoing basis. Management
reviews the Bank's allowance for loan losses quarterly to determine its
adequacy in relation to the risks in the loan portfolio. The allowance for
loan losses is maintained at a level which, in management's judgment, is
adequate to absorb reasonably foreseeable loan losses. The determination of
the adequacy of the allowance is based on various factors including an
evaluation of loan loss experience, current economic conditions, the
composition of the loan portfolio and factors regarding specific loans such as
cash flows, collateral values and payment history. Management believes the
allowance for loan losses to be adequate as of December 31, 1995.
In accordance with another provision of the Comptroller Agreement, the Board of
Directors of the Corporation has adopted a new loan review system which is
being implemented by the Bank's management and staff. The loan review process
involves periodic review of loan files and customer financial information in
relation to local economic and business trends in order to identify actual and
potential loan problems. Potential problems can then be identified at an early
stage where active intervention by management staff may improve credit quality
and forestall further deterioration, resulting in a higher quality portfolio.
Management takes the loan review results into consideration along with
previously identified problem loans in evaluating the allowance for loan
losses.
Management establishes the provision against income each quarter to maintain
the allowance for loan losses at a level sufficient to absorb potential losses
in the loan portfolio. Economic conditions, risks inherent in the portfolio,
loan loss experience, and conditions peculiar to specific industries are
factors considered in determining the adequacy of the loan loss allowance.
However, it is possible that potential losses exist in the loan portfolio that
have not been specifically identified.
Effective January 1, 1995 the Corporation adopted Financial Accounting Standard
No. 114, "Accounting by Creditors for Impairment of a Loan" and No. 118
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure". Application of those Accounting Standards is reflected in the
1995 Provision for Loan Losses and Allowance for Loan Losses. Under these
accounting standards a loan is considered impaired, based on current
information and events, if it is probable that the Bank will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The allowance for loan losses is
used to reflect in the balance sheet the reduced value of the loan portfolio as
a result of the existence of impaired loans.
The allowance for loan losses totaled $1,163,835 at December 31, 1995 compared
to the 1994 year end balance of $804,839. The allowance for loan losses
represented 2.60% of loans compared with 2.17% in 1994. The increase in the
ratio for 1995 is the result of a significant increase in non-accrual loans
arising out of the unauthorized loan activity experienced by the Bank in late
1995. The loan officers involved booked $645,000 of loans as of December 31,
19
<PAGE> 21
1995 which were inadequately collateralized or unsecured. In addition,
non-accrual loans included $458,000 of commercial loans and one residential
mortgage for $200,000, all of which had previously been made to a customer who
was involved with the borrowers of the unauthorized loans. The decisions to
place these loans on non-accrual immediately, although most of them were
performing, and to increase the allowance for loan losses in connection with
these loans were made in order to reflect accurately, in management's best
judgment, the value and risks of the loans considering the circumstances in
which they were made. The provision for loan losses, charged against income in
1995, totaled $861,000 compared to a $270,000 provision against income in 1994.
The increase was primarily due to the unauthorized activities of the consumer
loan officer ($630,000 of the total provision).
The allowance for loan losses was 40.1% of the aggregate of non-accrual loans
and loans delinquent 90 days or more at December 31, 1995. At December 31,
1994, the allowance was 53.8% of such loans. The 1995 percentage is
significantly lower than in 1994 because management put $1,478,000 of impaired
loans on non-accrual status as a result of determination that their collateral
was inadequate, although they were performing. This decision resulted in a
significant increase in non-accrual loans in 1995 and, as a result of the
non-accrual status, the periodic loan payments by the borrowers will pay the
loans down more rapidly than if they still were accruing interest for financial
reporting purposes. The allowance for loan losses also was increased
substantially to accommodate these non-accrual loans and, in management's
opinion, is adequate. The total amount of the allowance for loan losses is
based on management's evaluation of the portfolio, past experience, economic
conditions, composition of the portfolio, collateral location and values, cash
flow positions of borrowers, delinquencies and other factors deemed relevant.
Also see the discussion about "Non-performing Loans" at page 30 below.
The loan review system and charge-off policy assist management in identifying
problem loans and credit deterioration earlier than in the past and continuing
implementation of the loan review system will improve this process further.
Effective collection efforts, when implemented early, generally result in lower
losses. Management expects this trend to resume as a result of recent
strengthening of the collection department. Loans charged off in 1995
aggregated $763,069 compared with $438,367 in 1994. Of this amount, $390,109
was attributed to fictitious loans. The remaining $372,960 charged off was
$65,407 (or 15%) less than the charge-offs in 1994 as a result of a continuing
effort to address problem loans in the loan portfolio. In addition, collection
efforts resulted in recoveries of $261,064 in 1995 on loans previously charged
off compared to $204,633 in 1994, an improvement of over 27%.
20
<PAGE> 22
The table listed below presents management's allocation of the allowance for
loan losses for the last two years.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1995 1994
ALLOWANCE (A) ALLOWANCE (A)
--------- --- --------- ---
<S> <C> <C> <C> <C>
Commercial $ 483 40% $ 97 20%
Real estate mortgage 100 34 115 58
Consumer 360 26 127 22
Unallocated 221 - 466 -
---- -- ---- --
$1,164 100% $805 100%
====== === ==== ===
</TABLE>
(A) Percent of loans in each category to total loans.
21
<PAGE> 23
The following table summarizes, for the periods indicated, total loans
outstanding, average loans outstanding, loans charged off, recoveries and
provision charged to operations. Although charge offs in 1994 were heavily
concentrated in the commercial loan category, the allocation of the allowance
for loan losses at year end reflected management's assessment and allocation of
risk at year end after those charge offs had occurred. As of December 31, 1995,
management believed that there was increased risk in the consumer portion of the
portfolio than in the previous year. The high charge offs in the consumer loan
category in 1995 reflect the loss which was realized upon discovering the
unauthorized activity in the consumer loan area. The allocation to commercial
loans reflects the allocation of $133,000 of the allowance to commercial loans
related to the consumer loan problem. After making those charge offs,
management believes the allowance at December 31, 1995 properly reflects the
risks identified among the parts of the portfolio.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1995 1994
----------- -----------
<S> <C> <C>
Loans at end of year $44,714,000 $37,082,000
=========== ===========
Average loans outstanding
during the period 40,852,000 37,872,000
=========== ===========
Allowance for loan losses
at beginning of year 804,839 768,573
Loans charged off:
Commercial 149,228 396,978
Consumer 573,841 28,023
Real estate mortgages 40,000 13,366
----------- -----------
TOTAL LOANS CHARGED OFF 763,069 438,367
Less recoveries:
Commercial (146,391) (112,800)
Consumer (54,814) (76,653)
Real estate mortgages (59,860) (15,180)
----------- -----------
(261,065) (204,633)
----------- -----------
NET LOANS CHARGED OFF 502,004 233,734
Provision for loan losses 861,000 270,000
----------- -----------
Allowance for loan losses
at end of year $ 1,163,835 $ 804,839
=========== ===========
Provision for loan losses/
average loans 2.10% 0.71%
Net loans charged off/average
loans 1.22% .62%
Allowance for loan losses/
loans at end of year 2.60% 2.17%
Total loans charged off/
average loans 1.86% 1.16%
</TABLE>
22
<PAGE> 24
OTHER OPERATING INCOME
Other operating income increased by $405,000 or 26.70% to $1,922,000 in 1995
from $1,517,000 in 1994. This increase was primarily the result of the growth
of the mortgage brokerage operation to $900,000 of revenues in 1995 compared to
$340,000 of revenues in 1994 when that activity was first begun. Service
charges on deposit accounts decreased $77,000 in 1995 as a result of higher
earnings credits applied to customer deposit accounts and offset the higher
income from the mortgage brokerage activity.
OTHER OPERATING EXPENSES
Total other operating expenses increased by $606,000 or 11.85% to $5,719,000 in
1995 from $5,113,000 in 1994. This increase was primarily the result of
increased mortgage brokerage business with an increase of approximately
$400,000 in salary, commission, and related expenses. This increase was due to
a full year of operation in 1995 compared to seven months in 1994.
Furthermore, occupancy expenses, supplies and equipment depreciation in the
mortgage brokerage operation in 1995 were approximately $80,000 more than in
1994. In addition, 1995 operating expenses were higher than 1994 due to
approximately $160,000 of cost associated with a conversion from a five-year
old leased computer system to a new system which was purchased. Expenses
included approximately two months of both depreciation and lease costs,
temporary personnel, consultants, training costs, and new stationery and
supplies. Other operating expense also was higher in 1995 compared to 1994 due
to the relocation of the operations and accounting departments, at a cost of
approximately $100,000 from leased premises to rebuilt space in the Bank's main
office.
FEDERAL INCOME TAX
Income taxes are based on amounts reported in the statement of operations
(after exclusion of non-taxable income, principally interest on state and
municipal securities) and include deferred income taxes on temporary
differences in assets and liabilities for tax and financial statement purposes.
No income taxes were paid or accrued in 1995 or 1994.
23
<PAGE> 25
BALANCE SHEET ANALYSIS
ASSET AND LIABILITY MANAGEMENT
A primary concern of management is to ensure that the assets and liabilities
are managed to optimize profitability while maintaining an asset-liability mix
which is prudent with respect to liquidity and interest rate risk.
Accordingly, maturity and reinvestment flows of assets and liabilities are
continuously managed and monitored. Additionally, management identifies and
reacts to changes in regulatory and market conditions in making asset and
liability decisions.
LIQUIDITY
Liquidity represents the ability to meet cash requirements principally for
either increased credit-demand or withdrawal of deposits. Liquidity is
supplied from both assets and liabilities. Management continuously monitors
the Bank's cash position to ensure that customer requirements can be met
without loss exposure to the Bank or Corporation.
The Comptroller Agreement requires the Bank to take measures to maintain a
level of liquidity sufficient to sustain the Bank's current operations and to
withstand any unanticipated or extraordinary demands on the Bank's funding
base. The Bank has lines of credit from correspondent banks in the amount of
$2 million and a line under which up to $30 million of securities can be sold
under agreement to repurchase. It also has pledged sufficient investment
securities to secure public funds. The Bank monitors liquidity regularly and,
in the opinion of management, has sufficient liquidity to sustain its
operations and to withstand any unanticipated or extraordinary demands.
Management believes the Bank is very liquid. Its liquidity ratio at almost all
times exceeds 30% of total deposits after reduction of deposits secured by U.S.
Treasury investments. This high liquidity is maintained in part because the
Bank has substantial short term deposits from governments and governmental
agencies. Maintaining high liquidity assures the Bank that it can fund
withdrawals of those deposits as required by the customers. In addition, the
Bank maintains its liquidity to fund the various fluctuations between customer
withdrawals and deposits. Liquidity also is managed so that the Bank will have
cash resources available for making loans as and when required.
Although the Bank's cash flows during the year may fluctuate relatively widely
in certain categories during the year, it manages these carefully with its
liquid balance sheet and prudent asset/liability management. Thus, sales and
purchases of securities are virtually balanced with re-investment promptly
following sales unless there is a specific need for the funds such as for
loans. The $8.1 million increase in loans during 1995 was funded by increased
deposits. Likewise, higher Fed funds were financed by increased deposits.
24
<PAGE> 26
The Bank's cash position remains relatively constant, but items due from banks
can fluctuate. Items due from banks are checks waiting to be cleared and, at
any time, there is a balance in this category that needs to be cleared,
normally within 24 to 48 hours.
DEPOSITS
The relative size of retail deposits is an important factor in determining
liquidity requirements, since stable deposits do not require significant
liquidity levels to meet the net withdrawal demands of customers on a short-
and intermediate-term basis. Management has designed a marketing program to
increase and retain retail deposits. The Bank has substantial deposits from
local governments and governmental agencies. It has approximately $8.5 million
of non-interest bearing certificates of deposit which were received in
December, 1994 from the United States Treasury which will decline by
approximately 20% each year for five years. The timing of this decline cannot
be predicted with certainty. This deposit is part of a Treasury program which
replaced its treasury tax and loan deposit program for minority banks. The
Treasury deposits are fully collateralized by government securities.
Frequently, at the end of a year or other accounting period the Bank receives
large deposits from large corporations or governmental agencies for very short
terms, even only one night. Sometimes, these are tax deposits. Other times
they are tax revenues collected and not ready to be used. Such deposits may be
held in NOW accounts, certificates of deposit or may be made in the form of
repurchase agreements on government securities. Because the Bank receives a
significant amount of these deposits, it maintains a high degree of liquidity
so that their withdrawal can be funded easily. These deposits are not all
predictable or regular, but some of them do follow patterns such as payroll
cycles, tax revenue receipts and the like. The year end balances of these
deposits shown in the balance sheet in the Financial Statements may be
significantly different from the average amount shown in the following average
balance sheet.
The average amounts of deposits and the average rates paid on deposits for the
years indicated are summarized in the following table:
<TABLE>
<CAPTION>
1995 1994
---- ----
AVERAGE AVERAGE AVERAGE AVERAGE
(IN THOUSANDS) BALANCE RATE BALANCE RATE
------- ------- ------- ------
<S> <C> <C> <C> <C>
Non-interest bearing
demand deposits $25,852 $20,554
U.S. Treasury, tax and
loan deposits* 976 5,652
Interest bearing
demand deposits 4,733 2.11 4,205 2.31
Savings deposits 15,555 2.25 15,655 2.64
Time deposits:
$100,000 or more 15,601 2.55 8,434 3.05
Other time deposits 14,156 4.57 13,182 3.35
------- -------
Total $76,873 $67,682
======= =======
</TABLE>
- ---------------------------------------
*Represents non-retail deposits held overnight and remitted to the federal
government the following day.
25
<PAGE> 27
The maturities of time deposits of $100,000 or more outstanding at December 31,
1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994
---- ----
<S> <C> <C>
Three months or less $11,087 $3,901
Over three through six
months 1,177 1,363
Over six through twelve
months 3,323 9,099
Over twelve months 5,149 212
------- -------
Total $20,736 $14,575
======= =======
</TABLE>
Historically, a significant portion of the time deposits of $100,000 or more
with terms of three months or less rollover for a similar period. Management
closely monitors these funds to ensure stability of the deposit base and is not
aware of any significant changes in these deposits.
SHORT-TERM BORROWINGS
Short-term borrowings of the Bank at December 31, 1995 and 1994 are summarized
below. These transactions take the form of securities sold under agreements to
repurchase. These agreements are a form of transaction used by some customers
in lieu of a deposit in an interest bearing account. Thus, the balances of
these arrangements can fluctuate widely from time to time. The Bank only can
offer this arrangement when it has securities available to secure these
transactions. Normally, it has securities available for its customers' needs.
(IN THOUSANDS) 1995 1994
---- ----
Securities sold under retail
repurchase agreement $ 3,775 $ 4,824
Weighted average interest rate 4.66% 2.99%
These borrowings represent a source of funds as an alternative to traditional
deposits for liquidity management. The Corporation does not use short-term
borrowings to fund long-term assets.
Other information relating to the Corporation's short-term borrowing follows:
(IN THOUSANDS) 1995 1994
Maximum amount outstanding
at any month end $ 7,556 $ 4,824
Average amount outstanding 6,214 3,682
Average rate during the year 4.89 % 3.43 %
26
<PAGE> 28
INVESTMENTS
The investment securities portfolio is a source of earnings with relatively
minimal principal risk. As a result, the Bank's portfolio is primarily U.S.
Treasury and Government agency obligations, obligations collateralized by U.S.
Government agencies, primarily in the form of collateralized mortgage
obligations and mortgage-backed securities. In addition to purchasing
securities with minimal risk, the Bank does not purchase securities with long
periods of maturity so that interest rate risk in the securities portfolio is
reduced. The maturity schedule of the portfolio is generally short to
intermediate term with maturities less than five years.
The following table shows the maturities and weighted average yields from the
investment portfolio at December 31, 1995. Yields are not calculated on a tax
equivalent basis:
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
(IN THOUSANDS) ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
-------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury and U.S.
Government Agencies $6,043 $ 6,360 -0- -0- $12,403
State -0- -0- -0- -0- -0-
Other -0- -0- -0- -0- -0-
TOTAL: $6,043 $ 6,360 -0- -0- $12,403
Weighted Average Yield 5.76% 6.89% 6.26%
Held to Maturity
U.S. Treasury and U.S.
Government Agencies $3,696 $12,875 -0- -0- $16,571
State -0- -0- -0- -0- -0-
Other -0- -0- -0- 167 167
TOTAL: $3,696 $12,875 -0- 167 $16,738
Weighted Average Yield 6.81% 5.91% -0- 6.00% 6.06%
</TABLE>
At December 31, 1995, $12,403,000 of the total investment securities were held
for sale; $16,738,000 were being held to maturity. At year end, as permitted
by SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities",
the Bank made a one-time adjustment by reclassifying approximately $2 million
of securities held to maturity to securities held for sale. This was done to
increase liquidity. Increased liquidity among investments also enables the
Bank to reprice them by selling them and reinvesting in different yielding
instruments or investments.
A summary of the maturity distribution, carrying value, and market value of
investment securities at December 31, 1995 and 1994 is shown in Note 3 to the
Consolidated Financial Statements on page 52.
27
<PAGE> 29
LOANS
Maturities and sensitivity to changes in interest rates of certain loan
categories as of December 31, 1995 are summarized in the following table.
<TABLE>
<CAPTION>
AFTER ONE
BUT WITHIN AFTER
(IN THOUSANDS) ONE YEAR FIVE YEARS FIVE YEARS TOTAL
<S> <C> <C> <C> <C>
Commercial $ 3,609 $ 413 $ 216 $ 7,938
Commercial Real estate 634 8,156 1,204 9,994
Residential Real Estate 1,996 4,293 9,294 15,553
Consumer 287 3,012 7,930 11,229
------- -------- ------- --------
Total Loans $ 6,496 $ 19,574 $18,644 $ 44,714
======= ======== ======= ========
<CAPTION>
Loans maturing after one year with:
<S> <C> <C>
Fixed interest rates $ 17,919 $17,903
Variable interest rates 1,655 741
-------- -------
Total $ 19,574 $18,644
======== =======
</TABLE>
Only 14.6% of the Bank's loans mature within one year. The remaining 85.4% of
the loan portfolio matures after one year, with 43.7% maturing after one year
but within five years. About 80.1% of the loan portfolio is comprised of fixed
rate loans maturing after one year. These loans, which amount to approximately
44.6% of the Bank's average earning assets are not all liquid. If interest
rates were to rise significantly, the Bank's net interest margin could be
adversely affected. However, the high average level of Fed Funds held by the
Bank (which have no interest cost associated with them) and the Bank's
continuing ability to maintain a low cost deposit base have mitigated this risk
to some degree. Management has adopted an asset/liability management goal to
decrease the percent of fixed rate loans primarily by concentrating new
commercial loan activity on variable rate loans. In addition, the Bank will
consider selling some fixed rate residential loans where that can be done on a
favorable basis.
TYPES OF LOANS
Over the years, the Corporation's management has placed emphasis on increasing
the loan portfolio for the purpose of enhancing the yield on earning assets and
increasing the level of investment by the Corporation in its urban community.
With the increase in yield, the level of risk generally also increases. See
discussion of Provision and Allowance for Loan Losses on pages 19-22.
Commercial loans increased by $382,000 from the end of 1994 to December 31,
1995, commercial real estate loans increased by $1,383,000 and residential real
estate loans increased $2,863,000 over the same period. Consumer loans rose by
$3,005,000. The Commercial Portfolio remained relatively steady with the
runoff and maturity of loans being balanced by new loan origination. The
increases in the real estate portfolio was due primarily to increased real
estate loan activity from refinancings in residential property and the improved
business climate and new construction in commercial real estate.
28
<PAGE> 30
The following table sets forth the composition of the Corporation's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
(IN THOUSANDS) 1995 1994
---- ----
<S> <C> <C> <C> <C>
Commercial $ 7,938 17.75% $ 7,556 20.38%
Commercial Real Estate 9,994 22.35 8,611 23.22
Residential Real Estate 15,553 34.79 12,690 34.22
Consumer 11,229 25.11 8,225 22.18
------- ------ ------- ------
$44,714 100.00% $37,082 100.00%
======= ====== ======= ======
</TABLE>
Commercial loans are generally secured by accounts receivable, inventory and
machinery and equipment. In some cases, those loans also are secured by real
estate, usually a warehouse or industrial building. These loans are subject to
the risks of the industries in which they do business, such as auto supply,
restaurants, various retail sales, beauty parlors, or various kinds of
distribution. The value of the collateral and the business cash flow are the
primary sources of repayment. Secondarily the loans may be paid by guarantors.
Commercial real estate includes apartment buildings, churches, warehouses,
strip shopping areas and other retail buildings. The cash flow from these
properties is the primary source of repayment. The collateral provides the
ultimate source of repayment in event of default.
Residential real estate is the largest single loan category and depends upon
the cash flow of individual owners. Their cash flow usually depends on jobs
and the business climate. Most homeowners will make their home mortgage the
highest priority of their financial obligations, but when they are unable to
pay, the value of the home and its location are very important factors to
repayment of the loan.
Consumer lending at the Bank has grown significantly in recent years. Much of
this lending is secured by second mortgages on homes for home improvement
loans. In some cases, the Bank obtains FHA mortgage insurance on the loan
(which insures 90% of the loan) but such insurance depends upon the size of
portfolio that the Bank has. The insurance fund is limited to 10% of the total
amount of such loans owned by the Bank. The primary collateral for home
improvement loans, however, is the home. Thus, the value of the collateral and
the amount of the first mortgage, if any, are important to repayment.
Other consumer loans include automobile or boat loans or MasterCard loans. In
addition, there are consumer lines of credit which, in some cases, are secured
by the borrower's home equity. In all these cases, the principal risk is the
cash flow of the borrower. The secondary risk is the value of the collateral
and, in the case of home equity loans, the amount of the first mortgage in
relation to the Bank's second mortgage bears strongly on the actual value of
the Bank's lien position.
29
<PAGE> 31
NONPERFORMING LOANS
Nonperforming loans include loans with principal or interest past due 90 days
or more; they also include loans that have matured and are being extended or
rewritten after their stated maturity date. Non-accrual loans are those
nonperforming or other impaired loans on which the Bank does not accrue
periodic interest income. Loans are placed on non-accrual status when
principal or interest is in default for a period of 90 days or more unless the
loan is in the process of collection and is well secured so that delinquent
principal and interest would be expected to be satisfied from the collateral.
The Bank also placed $1,478,000 of loans on non-accrual status because, in
management's judgment, the collateral position was not adequate. In addition,
there were $236,000 of loans that were considered impaired although they were
performing. These were loans to borrowers who were delinquent on other loans
or were subject to other circumstances that raised a question about whether all
interest and principal would be paid in accordance with their contract.
Nonperforming loans and non-accrual loans are all considered "impaired loans"
under SFAS 114, "Accounting by Creditors for Impairment of a Loan", and SFAS
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure." At December 31, 1995, total nonperforming and impaired loans
amounted to 7.01% of the total year end loans as compared with 4.04% at the end
of 1994. This was due to the unauthorized activities of the consumer loan
officer in the loan department in late 1995.
The largest single component of non-performing loans is a total of $645,000 of
non-accrual consumer loans made without authority by the two consumer loan
department employees without adequate documentation and sufficient collateral.
An existing customer of the Bank was involved in those loans, so management
also placed $458,000 of commercial loans and a $200,000 residential mortgage
loan to that customer on non-accrual. Efforts continue by management to
collect and obtain additional collateral for these loans. See discussion at
"Provision and Allowance for Loan Losses", pages 19-22 regarding the
unauthorized consumer lending activity discovered at the Bank in early 1996.
The Bank requires prompt corrective actions to be implemented on problem loans
as they are identified in order to increase the probability of collection.
Management also has tightened credit standards, closely monitors loan
concentrations, improved collection techniques, and is refinancing credit
worthy matured loans more promptly than the Bank has done in past years.
The following table details information concerning nonperforming, non-accrual
and other impaired loans as of December 31 for the years indicated.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994
---- ----
<S> <C> <C>
Non-accrual loans $1,958 $ 498
Other impaired loans 236 --
Loans past due 90 days or more 943 999
------ ------
$3,137 $1,497
====== ======
Nonperforming and impaired loans/
year end loans 7.01% 4.04%
</TABLE>
30
<PAGE> 32
The amount of interest income that would have been accrued on the loans on
non-accrual status at December 31, 1995, had those loans remained current was
approximately $98,000. Interest actually accrued on those loans before they
were placed on non-accrual status was insignificant.
At December 31, 1995, there were no significant loans other than those included
in the above table, for which information was known that caused management to
have serious doubts as to the ability of borrowers to comply with loan
repayment terms.
RATE SENSITIVITY ANALYSIS
Net interest income can fluctuate with changes in market interest rates.
Interest rate sensitivity is the relationship between market interest rate
fluctuations and net interest income derived from the repricing characteristics
of assets and liabilities. Management of interest rate sensitivity enables the
Corporation to maximize interest income with prudent interest rate risk. It
incorporates not only what is known, but also future projections. It attempts
to specify how possible interest rate fluctuations may affect both income and
costs.
Interest rate sensitivity is measured by analyzing the maturity and timing of
interest rate changes on assets and liabilities. A "gap" exits when the amount
of interest sensitive assets differs from interest sensitive liabilities within
a given period. If more liabilities than assets reprice over a given period,
the Corporation is exposed to rising rates; if the reverse is true the
Corporation is exposed to falling rates.
At December 31, 1995, the Corporation had a slight negative gap position that
ranged from approximately 2% to 5.3% of assets over a period of one year or
less. Management believes that this negative gap is not material and will
continue to monitor the interest rate sensitivity of the Bank in the future.
If interest rates were to increase sharply and remain increased for more than
one year, the Corporation's interest rate margins could be expected to
decrease.
31
<PAGE> 33
The following table reflects the Corporation's interest rate sensitivity at
December 31, 1995, and is not necessarily indicative of the Corporation's
position at any other date.
<TABLE>
<CAPTION>
PERIOD WITHIN WHICH REPRICING OCCURS
---------------------------------------------------
OVER THREE OVER SIX
THREE MONTHS THROUGH THROUGH OVER
OR LESS SIX MONTHS ONE YEAR ONE YEAR TOTAL
<S> <C> <C> <C> <C> <C>
Assets:
Mortgages Available for Sale $ 950 $ 950
Loans 7,161 $ 102 $ 374 $36,127 43,764
Federal Funds Sold 14,250 14,250
Investment Securities 1,503 2,496 5,740 19,403 29,142
Other Assets 6,511 6,511
------- -------- -------- ------- -------
Total Assets 23,864 2,598 6,114 62,041 94,617
------- -------- -------- ------- -------
Liabilities:
Interest bearing Demand
Deposits Savings and
Time Deposits 5,127 3,212 3,212 3,051 14,602
Jumbo 10,897 2,248 2,248 5,343 20,736
Savings 3,735 11,203 14,938
Money Market 503 502 1,005
NOW Accounts 1,647 4,941 6,588
------- -------- -------- ------- -------
Total Deposits 21,909 5,460 5,460 25,040 57,869
Short-Term Borrowings 3,775 3,775
Long-Term Borrowings 900 900
Other Liabilities 27,812 27,812
Stockholders' Equity 4,261 4,261
------- -------- -------- ------- -------
Total Liabilities 25,684 5,460 5,460 58,013 95,012
------- -------- -------- ------- -------
Rate Sensitive Gap $(1,820) $ (2,862) $ 654 $ 4,028
======= ======== ======== =======
Cumulative Rate
Sensitive Gap $ (1,820) $ (4,682) $ (4,028)
======= ======== ========
Percentage of Total
Earning Assets (2.06%) (5.29%) (4.55%)
</TABLE>
Management believes that approximately 25 percent of savings and interest
bearing demand deposits and 50 percent of money market savings are interest
rate sensitive within the period of three months or less. The balance of these
deposits are included in the over one year column.
CAPITAL RESOURCES AND DIVIDENDS
At December 31, 1995, the Corporation's shareholders' equity was $4,261,186
compared to $3,579,833 at the end of 1994.
At December 31, 1995, the Bank's ratio of equity capital to assets was 5.49%,
which is slightly below the 5.5% ratio required by the Comptroller Agreement.
This compared to an equity ratio of 6.21% at December 31, 1994. The lower
ratio in 1995 was due to (i) high interest bearing deposits received near year
end, but which were not held by the Bank during the rest of the year and (ii)
the high provision for loan losses in 1995 $861,000 compared to $270,000 in
1994. Management views the growth in assets as positive but must earn and
retain higher income in order to generate the capital to support such growth.
The unauthorized consumer loan activity committed in the loan department by two
employees who circumvented internal controls and the resulting losses had a
direct impact on capital. The lower equity capital impedes the Bank's ability
to grow until earnings replenish the lost capital.
32
<PAGE> 34
Generally, a national bank may declare and pay a cash dividend only from its
net profits for the current year combined with its retained net profits for the
preceding two years, minus any required transfers to surplus (12 U.S.C. Section
60). The term "net profits" means the remainder of all earnings from current
operations plus actual recoveries on loans and investments and other assets,
after deducting all current operating expenses, actual losses, accrued
dividends on preferred stock, if any, and all federal and state taxes. 12
U.S.C. Section 56 provides in effect that dividends may be paid only out of net
income and retained earnings, not from capital. At December 31, 1995, the Bank
had a retained deficit of approximately $365,000. Thus, it may not pay cash
dividends legally from current net income until it has realized earnings which
exceed $365,000. In addition to the statutory limitations, the Comptroller
Agreement prohibits the Bank from paying dividends to the Corporation without
the prior written consent of the Comptroller.
The resolution adopted by the Corporation's Board of Directors, at the request
of the Federal Reserve Bank of Chicago, also provides that the Corporation will
not declare or pay any cash dividends or increase its borrowings or incur any
debt without the prior written consent of the Federal Reserve Bank. In
accordance with the resolution, the Corporation had not paid the 6 percent
cumulative semi-annual dividend payable from March 1, 1991 through 1994 on its
Class A and Class B Preferred Stock. The semi-annual dividends covering
periods prior to that time had been declared and paid. Likewise, the
Corporation had not paid accrued interest on its $900,000 of Senior Notes for
the similar period.
The Corporation obtained written waivers from all the holders of its Class A
and Class B Preferred Stock and the holders of its Senior Notes through
December 31, 1995 with respect to defaults in payment of the preferred
dividends and interest. In March, 1995, the holders of the Preferred Stock
agreed to reduce the dividend from 6% to 4.75% effective January 1, 1994, and
the holders of the Senior Notes agreed to a reduction of the interest rate from
9% to 6% effective January 1, 1994. In March, 1995, the Board of Directors of
the Corporation approved issuance of approximately 439 shares of Class C
Preferred Stock, Series 1994-1, without par value, having a face value of
$1,000 per share, to the holders of the Class A and Class B Preferred Stock and
to the holders of the $900,000 of Senior Notes. These shares of Preferred
Stock constituted payment of the delinquent dividends and accrued interest
which had not been paid during 1991 through March 1, 1995, in the case of
dividends, and through December 1, 1994, in the case of interest. The Board of
Directors in March, 1996, authorized 101.4 shares of Series 1994-1 Preferred
Stock to cover the balance of dividends and interest that had accrued through
December 31, 1995. The Corporation in June, 1996, requested the holders of its
Class A and Class B Preferred Stock and of its $900,000 of Senior Notes for a
waiver of defaults during 1996 as a result of the loan department losses. The
waiver would not forgive any dividends or interest due in 1996 but would allow
the Corporation to make the payment any time in 1997 without penalty. The
Series 1994-1 Preferred Stock is not entitled to receive dividends, but a 4%
dividend is required to be paid on the Series 1994-1 Stock before any dividends
may be paid on the Common Stock.
Pursuant to the Corporation's and Bank's profit and capital plan, the
Corporation and Bank are continuing to seek additional capital via private
placement of additional securities. The terms
33
<PAGE> 35
of the additional capital will be subject to regulatory approval.
All banks are required to have and maintain a minimum total risk-based capital
ratio of 10.00% of assets in order to be considered well-capitalized under
federal regulations. In addition, they must have minimum tier 1 risk-based
capital (total risk-based capital minus allowance for loan losses) of 6.0% of
total assets and a tier 1 leverage ratio of at least 5% of total assets. At
December 31, 1995, the Bank had a total risk-based capital ratio of 11.80%, a
tier 1 risk-based capital ratio of 10.54% and a tier 1 leverage ratio of 5.42%.
(For purposes of the risk-based capital computation, the denominator of the
ratios are defined as average quarterly total assets net of the allowance for
loan and lease losses.) Regulators, including the Comptroller and the Federal
Reserve, have established risk based capital standards to ensure that the
standards cover interest rate risk, concentrations of credit risk and risks
from nontraditional activities.
FINANCIAL RATIOS
The following table sets forth selected financial ratios of the Corporation and
the Bank for the years indicated:
<TABLE>
<CAPTION>
CORPORATION BANK
------------------------ ------------------------
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
(1) Return on assets (net income/(loss)
divided by average total assets) (.06)% (.13)% (.04)% .41%
(2) Return on equity (net income/(loss)
divided by average equity) (1.39)% (2.64)% (.59)% 10.17%
(3) Dividend payout ratio
(dividends declared per share
divided by net income per share) * * * *
(4) Equity to assets ratio (average
equity divided by average total
assets) 4.61% 4.91% 6.01% 6.21%
</TABLE>
*Dividends on common stock were not declared or paid in 1995 and 1994.
EFFECT OF INFLATION ON FINANCIAL REPORTING
The financial statements and related data presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the related purchasing power of money
over time due to inflation. Management has elected not to present
supplementary information on the effects of inflation on financial reporting
because, unlike most industrial companies, all assets and liabilities of the
Corporation are monetary in nature. As a result, interest rates have more
significant impact on the Corporation's performance than does the general level
of inflation.
34
<PAGE> 36
NEW ACCOUNTING STANDARDS
In March, 1995, the Financial Accounting Standards Board issued SFAS 121
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," which requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is recognized.
Otherwise, an impairment loss is not recognized. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that an entity expects
to hold and use should be based on the fair value of the asset.
This statement requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell, except for assets that are covered by APB Opinion
No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. Assets that are covered by Opinion 30 will
continue to be reported at the lower of carrying amount or net realizable
value.
The Corporation services mortgage loans for investors. Fees earned for and in
connection with this activity are recognized as income when the related
mortgage payments are received. Mortgage servicing costs are charged to
expense as incurred.
In May, 1995, the Financial Accounting Standards Board issued SFAS 122,
"Accounting for Mortgage Servicing Rights," which requires the Corporation to
recognize as separate asset rights to service mortgage loans for others,
however those servicing rights are acquired. Corporation acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and sells or secures those loans with servicing rights retained, it must
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without the mortgage servicing rights) based on their relative
fair values. The capitalized cost of mortgage servicing rights is amortized in
proportion to, and over the period of, estimated net servicing income
(servicing revenue in excess of servicing costs).
Capitalized mortgage servicing rights are periodically assessed for impairment
based on the fair value of those rights calculated on a discounted basis. This
assessment is required to be performed on a disaggregate basis, according to
mortgage type, term, and rate. Identified impairments are recognized through a
valuation allowance.
The Corporation will implement the requirements of SFAS 121 and 122 in 1997.
These statements will have no material impact on financial position or results
of operations when adopted.
35
<PAGE> 37
In October, 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation". Under the provisions of SFAS 123,
the Company is encouraged, but not required, to measure compensation costs
related to its employee stock compensation plans based on the fair value of
awards, as defined by SFAS 123. If the Company elects not to recognize
compensation expense under this method, it is required to disclose the pro
forma net income and earnings per share effects, based on the fair value
methodology, in the notes to financial statements. The Company will implement
the requirements of SFAS 123 in 1996 and will only adopt the disclosure
provisions of this statement; accordingly, this statement will have no impact
on financial position or results of operations when adopted.
36
<PAGE> 38
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is on pages 39 through 64 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
<PAGE> 39
REPORT OF MANAGEMENT
Management of First Independence Corporation is responsible for the financial
statements and related financial information in this annual report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts based on management's estimates and
best judgments where appropriate. Financial information included throughout
this annual report is consistent with the financial statements.
Management is responsible for the integrity and objectivity of the consolidated
financial statements. Established accounting procedures are designed to
provide financial records and accounts which fairly reflect the transactions of
the Company. The hiring and training of qualified personnel and the assignment
of responsibilities are intended to provide an internal control structure at a
cost consistent with management's evaluation of the risks involved. These
controls are monitored by an internal auditor to provide reasonable assurance
that transactions are executed in accordance with management's authorization
that adequate accountability for the Company's assets is maintained.
The financial statements have been audited by Coopers & Lybrand, L.L.P.,
independent auditors, and their report follows.
The Corporation's Board of Directors oversees management's activity with
respect to internal controls and financial reporting. The Audit Committee of
the Board is composed of outside directors who meet with management, the
internal auditor, independent auditors and regulatory examiners to review
matters relating to financial reporting and internal controls. The internal
auditors, independent auditors and regulatory examiners have direct access to
the Audit Committee.
Don Davis
Chairman and
Chief Executive Officer
Rose Ann Lacy
Senior Vice President,
Treasurer and Chief
Financial Officer
38
<PAGE> 40
FIRST INDEPENDENCE CORPORATION AND SUBSIDIARY
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
39
<PAGE> 41
FIRST INDEPENDENCE CORPORATION AND SUBSIDIARY
CONTENTS
PAGES
Report of Independent Accountants.................................. 41
Financial Statements:
Consolidated Balance Sheet..................................... 42
Consolidated Statement of Operations........................... 43
Consolidated Statement of Changes in Stockholders' Equity...... 44
Consolidated Statement of Cash Flows........................... 45
Notes to Consolidated Financial Statements..................... 46-64
40
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying consolidated balance sheet of First
Independence Corporation and Subsidiary as of December 31, 1995 and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for each of the two years in the period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, First
Independence National Bank of Detroit (the "Bank") (a wholly owned subsidiary
of First Independence Corporation) entered into a written agreement (the
"Agreement") with the Office of the Comptroller of the Currency (the "OCC") in
1991. The Agreement requires, among other things, that the Bank achieve and
maintain a level of equity capital at least equal to 5.50 percent of adjusted
total assets, correct violations of law and administrative regulations and
adopt procedures to prevent future violations, obtain current and satisfactory
credit information from borrowers and cure any collateral deficiencies as may
be identified from time to time. Although management continues to work on
resolving non-compliance issues, as of December 31, 1995, the Bank was not in
compliance with certain provisions of the Agreement.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Independence Corporation and Subsidiary as of December 31, 1995 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Detroit, Michigan
March 22, 1996, except for Note 2,
as to which the date is June 25, 1996
41
<PAGE> 43
FIRST INDEPENDENCE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1995
<TABLE>
ASSETS
<S> <C>
Cash and due from banks $ 2,809,650
Federal funds sold 14,250,000
------------
Cash and cash equivalents 17,059,650
------------
Investment securities:
Available for sale 12,403,332
Held to maturity and other (market value of $16,588,945) 16,738,378
------------
Total investments 29,141,710
------------
Loans:
Commercial 7,937,829
Commercial real estate 9,993,535
Residential real estate 15,553,623
Consumer 11,229,447
------------
44,714,434
Allowance for loan losses 1,163,834
------------
Net loans 43,550,600
------------
Premises and equipment, net 3,640,184
Accrued interest receivable and other assets 1,224,851
------------
TOTAL ASSETS $ 94,616,995
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 26,847,015
Interest-bearing 57,868,909
------------
Total deposits 84,715,924
Securities sold under retail repurchase agreements 3,774,578
Accrued expenses and other liabilities 965,307
Notes payable 900,000
------------
Commitments and contingencies (Notes 2 and 11)
TOTAL LIABILITIES 90,355,809
------------
Stockholders' equity:
Preferred stock 2,658,908
Common stock, par value $1; 1,000,000 shares authorized;
shares issued and outstanding, 336,760 336,760
Capital surplus 2,369,782
Accumulated deficit (1,294,334)
Unrealized holding gains on investment securities
available for sale 190,070
------------
TOTAL STOCKHOLDERS' EQUITY 4,261,186
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 94,616,995
============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
42
<PAGE> 44
FIRST INDEPENDENCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended December 31, 1995 and 1994
<TABLE>
1995 1994
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 4,067,713 $ 3,542,459
Interest on investment securities:
Taxable 1,781,670 1,189,746
Tax-exempt 8,879 12,617
Interest on federal funds sold 568,088 409,734
Interest on deposits with banks - 27,522
----------- -----------
TOTAL INTEREST INCOME 6,426,350 5,182,078
INTEREST EXPENSE:
Interest on deposits 1,494,357 1,208,836
Interest on borrowed funds 331,336 208,752
----------- -----------
TOTAL INTEREST EXPENSE 1,825,693 1,417,588
----------- -----------
NET INTEREST INCOME 4,600,657 3,764,490
PROVISION FOR LOAN LOSSES 861,000 270,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,739,657 3,494,490
----------- -----------
OTHER OPERATING INCOME:
Service charges on deposit accounts 824,868 901,829
Securities gains, net - 11,681
Other 1,097,459 603,497
----------- -----------
TOTAL OTHER OPERATING INCOME 1,922,327 1,517,007
----------- -----------
OTHER OPERATING EXPENSES:
Salaries and benefits 2,774,904 2,270,307
Net occupancy expenses 484,321 409,707
Premises and equipment expenses 497,052 412,026
Other expenses 1,963,164 2,020,977
----------- -----------
TOTAL OTHER OPERATING EXPENSES 5,719,441 5,113,017
----------- -----------
LOSS BEFORE FEDERAL INCOME TAXES (57,457) (101,520)
Federal income tax expense - -
----------- -----------
NET LOSS (57,457) (101,520)
Preferred stock dividend requirements 34,200 34,200
----------- -----------
LOSS ATTRIBUTABLE TO COMMON STOCK $ (91,657) $ (135,720)
=========== ===========
Loss per share of common stock $ (0.27) $ (0.40)
=========== ===========
Loss per share of common stock assuming full dilution $ (0.27) $ (0.40)
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
43
<PAGE> 45
FIRST INDEPENDENCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAINS
(LOSSES) ON
PREFERRED COMMON CAPITAL ACCUMULATED INVESTMENT
STOCK STOCK SURPLUS DEFICIT SECURITIES TOTAL
---------- -------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 720,000 $336,760 $2,369,782 $ (965,857) $ 450,432 $2,911,117
Issuance of preferred stock 1,500,000 1,500,000
Changes in value of securities
available for sale (729,764) (729,764)
Net loss (101,520) (101,520)
---------- -------- ---------- ----------- ---------- -----------
Balance, December 31, 1994 2,220,000 336,760 2,369,782 (1,067,377) (279,332) 3,579,833
Issuance of Class C preferred
stock in lieu of interest
payments on senior notes 269,408 269,408
Declaration of preferred stock
dividends (169,500) (169,500)
Issuance of Class C preferred
stock in lieu of dividend
payments 169,500 169,500
Changes in value of securities
available for sale 469,402 469,402
Net income (57,457) (57,457)
---------- -------- ---------- ----------- ---------- -----------
Balance, December 31, 1995 $2,658,908 $336,760 $2,369,782 $(1,294,334) $ 190,070 $ 4,261,186
========== ======== ========== =========== ========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
44
<PAGE> 46
FIRST INDEPENDENCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (57,457) $ (101,520)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 362,905 257,884
Amortization of premiums and accretion of discounts, net 32,612 109,054
Provision for loan losses 861,000 270,000
Gain on sale of investment securities available for sale - (11,681)
Changes in:
Accrued interest receivable and other assets (85,826) 37,244
Accrued expenses and other liabilities 291,146 430,053
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,404,380 991,034
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale - 2,896,187
Proceeds from maturities of investment securities available for sale 6,165,716 1,763,714
Proceeds from maturities of investment securities held to maturity 5,424,000 (10,212,560)
Purchases of investment securities available for sale (6,059,663) -
Purchases of investment securities held to maturity (5,966,131) -
Net change in loans (8,134,084) (4,035,988)
Purchase of premises and equipment (1,237,234) (517,489)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (9,807,396) (10,106,136)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in:
Deposits 11,029,023 12 509,902
Securities sold under retail repurchase agreements (1,049,046) 1,241,087
Proceeds from issuance of preferred stock - 1,500,000
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,979,977 15,250,989
----------- ------------
Net increase in cash and cash equivalents 1,576,961 6,135,887
Cash and cash equivalents, beginning of year 15,482,689 9,346,802
----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $17,059,650 $ 15,482,689
=========== ============
Noncash financing and investing activities:
Transfer of loans to other real estate owned $ 77,000 $ 80,244
Issuance of Class C preferred stock in lieu of dividend payments 169,500 -
Issuance of Class C preferred stock in lieu of interest payments 269,408 -
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
45
<PAGE> 47
FIRST INDEPENDENCE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. ORGANIZATION: The consolidated financial statements include the
accounts of First Independence Corporation (the "Corporation") and
its wholly owned subsidiary, First Independence National Bank of
Detroit (the "Bank"). All significant intercompany balances and
transactions have been eliminated in consolidation.
First Independence Corporation (the "Corporation") is a Michigan
corporation organized in March 1984. The Corporation was organized
in order to engage in the acquisition, operation, and management of
banks and banking related businesses and to engage in such other
activities as are permitted and authorized to bank holding companies
under the Bank Holding Company Act of 1956, as amended. On January
13, 1986, the Corporation consummated a reorganization and merger
pursuant to which the Corporation became the parent bank holding
company of First Independence National Bank of Detroit, Detroit,
Michigan (the "Bank").
The Bank was organized in 1969 under the laws of the United States as
a minority-owned, community-oriented national bank. The Bank's
principal office is in the central business district of Detroit at 44
Michigan Avenue, Detroit, Michigan 48226. It also operates branches
in Detroit at 12200 Livernois Avenue, 7020 West Seven Mile Road at
Livernois Avenue, and in the Millender Center Office/Apartment
complex at 545 Brush Street. The Bank also has a mortgage
origination office in Southfield, Michigan, adjacent to Detroit.
The Bank provides banking services to individuals, businesses, local,
state and federal government units, and institutional customers. Its
services include demand deposits, savings and time deposits,
collections, cash management, night depositories, and consumer,
commercial and real estate loans.
b. MANAGEMENT ESTIMATES AND ASSUMPTIONS: The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
c. CASH EQUIVALENTS: For purposes of the statement of cash flows, cash
and cash equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are purchased and sold
for one-day periods. Included in cash and cash equivalents is
$80,000 of restricted cash.
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
d. INVESTMENT SECURITIES: Investment securities which the Corporation
has the positive intent and ability to hold until maturity are
classified as held to maturity and are carried at amortized cost.
Investment securities classified as available for sale are carried at
fair market value. Unrealized gains and losses on available for sale
securities are classified and reported as a separate component of
stockholders' equity until realized. Gains and losses on sales of
available-for-sale securities are recognized at the time of the
transaction and are determined by the specific identification method.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
e. ALLOWANCE FOR LOAN LOSSES: The Corporation adopted SFAS 114,
"Accounting by Creditors for Impairment of a Loan", as amended by
SFAS 118, as of January 1, 1995. Under this standard, a loan is
considered impaired, based on current information and events, if it
is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of impaired
loans is generally based on the present value of expected future cash
flows discounted at the historical effective interest rate, except
that all collateral-dependent loans are measured for impairment based
on the fair value of the collateral. The adopting of SFAS 114
did not result in any additional provision for loan losses as of
January 1, 1995.
The allowance for possible losses on loans is maintained at a level
believed adequate by management to absorb potential losses from
specific assets identified as having greater than a normal risk of
loss as well as losses from the remainder of the portfolio.
Management's determination of the level of the allowance is based
upon evaluation of the portfolio, past experience, current economic
conditions, size and composition of the portfolio, collateral
location and values, cash flows positions, industry concentrations,
delinquencies and other relevant factors.
f. LOAN FEES: Loan origination and commitment fees and certain direct
loan origination costs are deferred and recognized over the lives of
the related loans as an adjustment of the yields using the interest
method.
g. INTEREST ON LOANS: Interest on loans is credited to income when
earned. An allowance for interest on loans is provided when
management considers the collection of the related loans doubtful,
and the accrual of interest is suspended when loans become more than
90 days past due, unless the loan is in the process of collection and
is well secured so that delinquent principal and interest would be
expected to be satisfied from the collateral.
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
h. PREMISES AND EQUIPMENT: Premises and equipment are carried at cost
less accumulated depreciation. Provisions for depreciation and
amortization included in operating expenses are computed by the
straight-line method over the estimated useful lives of the related
assets. The cost of leasehold improvements is amortized ratably
over the term of the related lease.
The cost of major improvements and renewals that extend useful lives
is capitalized. Maintenance and repairs are charged to operating
expenses in the period incurred. When an asset is retired or
disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any profit or loss is
included in income.
i. INCOME TAXES: Income taxes are based on amounts reported in the
statement of operations (after exclusion of nontaxable income,
principally interest on state and municipal securities) and include
deferred income taxes on temporary differences in assets and
liabilities for tax and financial statement purposes. No income
taxes were paid in 1995 or 1994.
j. EARNINGS PER COMMON SHARE: Earnings per common share is calculated
using net loss less current year preferred dividends divided by
averagecommon shares outstanding of 336,760 at December 31, 1995 and
1994.
k. RECLASSIFICATIONS: Certain amounts in previously issued consolidated
financial statements have been reclassified to conform with current
year presentation.
2. CURRENT OPERATING ENVIRONMENT:
In 1990, the Bank incurred significant net losses which reduced the Bank's
capital position to a level considered unacceptable by the regulatory
authorities.
On April 15, 1991, the Bank entered into a written agreement (the
"Agreement") with the Office of Comptroller of the Currency (the "OCC")
which requires the Bank to achieve and maintain a level of equity capital
at least equal to 5.50 percent of its total assets. At December 31, 1995,
the Bank's equity capital to total assets ratio was 5.49 percent.
The Agreement also requires, among other things, that the Bank take
measures to maintain a level of liquidity sufficient to sustain the Bank's
current operations and to withstand any anticipated or extraordinary
demands on the Bank's funding base; develop a three-year capital program;
implement a profit plan; establish a loan review system; correct certain
violations of law; adopt or revise certain policies; and submit certain
plans, policies and procedures, including planned dividend payments, to the
OCC for its review and approval. The OCC monitors compliance under the
Agreement by receiving periodic reports from the Board of Directors and by
performing periodic examinations.
48
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. CURRENT OPERATING ENVIRONMENT, CONTINUED:
Due to the Bank's agreement with the OCC, it is legally prohibited from
paying dividends to the Corporation. Dividends from the Bank have
historically been the principal source of revenue and cash flow of the
Corporation. Because the Corporation was unable to make interest payments
on its Senior Notes, the Corporation was in technical default as of
December 31, 1995 and 1994. The Corporation received waivers from all of
the senior noteholders through December 31, 1995. In addition, the
Corporation's Board of Directors, at the request of the Federal Reserve
Bank of Chicago (the "Federal Reserve Bank"), has adopted a resolution
(the "Resolution") providing that the Corporation will not declare or pay
any cash dividends or increase its borrowings or incur any additional debt
without the prior written consent of the Federal Reserve Bank. The
Resolution also provides that the Corporation will submit to the Federal
Reserve Bank written plans for improving the Bank's capital position and
servicing the Corporation's outstanding debt. Pursuant to the resolution,
the Corporation has submitted to the Federal Reserve Bank written plans
for increasing the Bank's capital position and servicing the Corporation's
outstanding debt. Subject to the approval of the plan, the Corporation
may be unable to service its outstanding debt.
In March 1995, the holders of the senior notes agreed to a reduction of
the interest rate on the senior notes from 9 percent to 6 percent
retroactive to January 1, 1994. In addition, the Corporation negotiated a
reduction in the dividend rate on its Class A and Class B Preferred Stock
from 6 percent to 4.75 percent retroactive to January 1, 1994.
The Board of Directors approved in March 1995, the issuance of
approximately 439 shares of Class C Preferred Stock, Series 1994-1, no par
value with a fair value of $1,000 per share to the Class A and Class B
preferred stockholders and to holders of the senior notes as a partial
payment of the cumulative dividends in arrears and accrued interest which
had not been paid during 1991 through March 1, 1995 in the case of
dividends and through December 31, 1994 in the case of accrued interest.
The Series 1994-1 Preferred Stock is not entitled to receive dividends,
but a 4 percent dividend will be required to be paid on the Series 1994-1
Preferred Stock before any dividend may be paid on the Common Stock.
The Board in March 1996 authorized an additional 91 shares of Series
1994-1 Preferred Stock that will be used to pay the cumulative preferred
dividends in arrears and the unpaid accrued interest balance as of
December 31, 1995. The senior noteholders and Class A and Class B
preferred stockholders have agreed to accept the issuance of Class C
Series 1994-1 Preferred Stock in lieu of cash payment of the cumulative
preferred dividends in arrears and unpaid accrued interest as of December
31, 1995.
49
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. CURRENT OPERATING ENVIRONMENT, CONTINUED:
The Corporation, in June 1996, requested the holders of its Class A and B
Preferred Stock and of its $900,000 of senior notes for a waiver of default
during 1996 as a result of the Bank's losses. The waiver would not forgive
any dividends or interest due in 1996 but would allow the Corporation to
make the payments any time in 1997 without penalty.
After the close of 1995, the Bank identified approximately $645,000 of loans
with insufficient collateral and inadequate documentation which were made in
late 1995 by a consumer loan officer with no lending authority (acting in
collusion with a loan administrator and one or more customers) who
circumvented the Bank's internal control system. In addition, about
$176,000 of such loans were written by these two employees in January 1996.
It also was discovered that these same individuals had written $390,000 of
fictitious "loans" in 1995 and $138,000 in January 1996. These persons are
no longer employed by the Bank and the unauthorized loan transactions
continue to be under active investigation by the Bank and appropriate
federal agencies and authorities.
In response to the unauthorized and fictitious loan activity, the Bank has
taken numerous actions. The Bank president's employment was terminated in
February 1996; the Chairman, Don Davis, was appointed as interim president
and chief executive officer, and a search is being undertaken by the Board
for a new president; the Bank has hired a new consumer loan officer and two
new loan administrators; an experienced senior auditor has been added to the
internal audit department; a loan review consultant has been hired to
perform loan file reviews and will submit quarterly reports to the Board of
Directors; the Bank's fidelity insurance underwriters have been notified and
claims are being prepared with respect to the losses experienced; all 1995
and January 1996 consumer loans were reviewed to identify any additional
unauthorized or fictitious loans; the Bank has implemented an automated
consumer loan documentation and compliance system; documentation and, in
some cases, collateral has been improved with respect to some of the
unsecured or inadequately secured consumer loans; and revised and
strengthened controls have been instituted in the loan department for
consumer loans.
50
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. CURRENT OPERATING ENVIRONMENT, CONTINUED:
As a result of the unauthorized and fictitious loan activity, the Bank
charged off the $390,000 of fictitious "loans" and $40,000 of interest
which had accrued on loans made by the two employees. It also took
additional provisions for loan losses in the amount of $240,000 for loans
which were insufficiently collateralized and inadequately documented in
1995. In the first quarter of 1996, the Bank charged off the $138,000 of
fictitious "loans" which had been booked in January 1996, and made
additional provisions for loan losses of $90,000 for the $178,000 of loans
for which collateral and documentation were inadequate. These actions
resulted in additional charges against income in 1995 of $670,000 directly
attributable to the unauthorized loans, yielding a loss for the year of
($57,000) and additional charges against income in the first quarter of
1996 of $228,000 directly attributable to the unauthorized loans, yielding
net income for the first quarter of approximately $5,000. The total
provision taken for loan losses in 1995 was $861,000 and in the first
quarter of 1996 was $317,750.
Principally as a result of the unauthorized and fictitious loan activity,
the Bank was not in compliance with certain provisions of the Agreement as
of December 31, 1995. In conjunction with the Bank's continuing
investigation of the unauthorized loan activity, the Bank is also
investigating whether there was a violation of the legal lending limits.
Management believes that the Bank will be in full compliance with the
Agreement by the end of 1996.
51
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INVESTMENT SECURITIES:
Investment securities by contractual maturity at December 31, 1995,
including an analysis of unrealized gains and losses, are as follows.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
1995
----------------------------------------------------------
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
U. S. Treasury:
Maturing within one year $ 6,017,823 $ 28,821 $ 3,519 $ 6,043,125
Maturing after one, but within five years 2,650,723 86,402 2,737,125
----------- ---------- ---------- -------------
Total U. S. Treasury 8,668,546 115,223 3,519 8,780,250
U. S. government agencies maturing after one year, but
within five years 3,050,075 60,269 3,110,344
Mortgage-backed securities maturing after one, but within
five years 494,641 18,097 512,738
----------- ---------- ---------- -------------
Total available for sale 12,213,262 193,589 3,519 12,403,332
----------- ---------- ---------- -------------
U. S. Treasury:
Maturing within one year 2,686,487 24,545 2,711,032
Maturing after one, but within five years 3,961,182 44,131 4,005,313
----------- ---------- ---------- -------------
Total U. S. Treasury 6,647,669 68,676 6,716,345
U. S. government agencies:
Maturing within one year 1,009,599 11,651 1,021,250
Maturing after one year, but within five years 8,914,010 17,936 247,696 8,684,250
----------- ---------- ---------- -------------
9,923,609 29,587 247,696 9,705,500
Other 167,100 167,100
----------- ---------- ---------- -------------
Total held to maturity and other 16,738,378 98,263 247,696 16,588,945
----------- ---------- ---------- -------------
TOTAL INVESTMENT SECURITIES $28,951,640 $ 291,852 $ 251,215 $ 28,992,277
=========== ========== ========== =============
</TABLE>
Sales of investment securities resulted in realized gross gains and losses
of $18,320 and $6,689, respectively, for the year ended December 31, 1994.
There were no realized gross gains or losses for the year ended December
31, 1995.
Investment securities of $16,198,962 at December 31, 1995 were pledged for
public deposits, including State of Michigan deposits of $662,981 and for
other purposes as required by law. Investment securities of $5,583,004 at
December 31, 1995 have been sold under repurchase agreements.
52
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. ALLOWANCE FOR LOAN LOSSES:
The activity in the allowance for loan losses for 1995 and 1994 is
summarized below:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Balance, January 1 $ 804,839 $ 768,573
Provision for loan losses 861,000 270,000
Loans charged off (763,069) (438,367)
Recoveries on loans charged off 261,064 204,633
---------- ----------
Balance, December 31 $1,163,834 $ 804,839
========== ==========
</TABLE>
Total loans on which the accrual of interest has been discontinued
amounted to approximately $1,958,000 and $498,000 at December 31, 1995
and 1994, respectively.
At December 31, 1995, the total recorded investment in impaired loans, as
defined by SFAS 114, was $3,137,000. The total allowance for loan losses
related to impaired loans was $893,000 at December 31, 1995. Interest
income on impaired loans is recognized primarily on a cash basis. During
1995 and 1994, the amount of interest income recognized on impaired loans
was insignificant. The amount of interest income that would have been
accrued on the loans on nonaccrual status of December 31, 1995, had those
loans remained current was approximately $98,000.
5. PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1995 are summarized as follows:
<TABLE>
<S> <C>
Land and land improvements $ 481,314
Buildings 2,073,550
Furniture and fixtures 3,401,675
Leasehold improvements 534,551
----------
6,491,090
Less accumulated depreciation and amortization (2,850,906)
----------
$ 3,640,184
===========
</TABLE>
The total depreciation expense for the years ended December 31, 1995 and
1994 was $362,905 and $257,884, respectively.
53
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. DEPOSITS:
Included in noninterest-bearing deposits at December 31, 1995 are public
fund deposits of $11,293,973.
Interest-bearing deposits include $20,736,611 of time certificates of
deposit of $100,000 or more at December 31, 1995.
Interest paid for the years ended December 31, 1995 and 1994 was
$1,494,357 and $1,223,022, respectively.
Deposits at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Demand deposits $26,847,015
NOW accounts 6,588,010
Savings deposits 15,942,983
Certificates of deposit 35,337,916
-----------
Total $84,715,924
===========
</TABLE>
7. NOTES PAYABLE:
Notes payable outstanding at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Senior notes, 6 percent, due in 2002. In 1995, the Corporation
negotiated a reduction in the interest rate from 9
percent to 6 percent retroactive to January 1, 1994. The
senior notes require semiannual interest payments and
may be prepaid at any time without penalty provided the
Corporation is not in default of payment of dividends to
preferred shareholders $900,000
========
</TABLE>
The Corporation paid interest on the notes through December 31, 1994 by
issuing Class C preferred stock to noteholders. At December 31, 1995, the
Corporation was in default on the 1995 interest payments due on the senior
notes. The Board of Directors, in March 1996, authorized an additional 59
shares of Series 1994-1 Preferred Stock that will be used to pay the
unpaid interest balance as of December 31, 1995.
54
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS:
Preferred stock at December 31, 1995 is comprised of the following:
<TABLE>
<CAPTION> Issued and
Outstanding
Authorized ---------------------
Description Shares Shares Amount
----------- ---------- ------ ----------
<S> <C> <C> <C>
Preferred stock:
Class A, par value $100 4,000 4,000 $ 400,000
Class B, par value $100 3,000 3,200 320,000
Class C, no par value 100,000 1,939 1,938,908
----------
$2,658,908
==========
</TABLE>
Class A and Class B preferred stockholders are entitled to 4.75 percent
cumulative semiannual dividends payable March 1 and September 1. In 1995,
the Corporation negotiated a reduction in the dividend rate from 6 percent
to 4.75 percent retroactive to January 1, 1994. As of December 31, 1995,
aggregate and per share cumulative preferred dividends in arrears were
$31,500 and $4.38 per share of Class A and Class B Preferred Stock,
respectively.
As discussed in Note 2, the Corporation declared and paid dividends to
Class A and Class B preferred stockholders through March 1, 1995 by
issuing them Class C preferred stock. At December 31, 1995, the
Corporation was in default on the September 1, 1995 dividend payment.
All of the holders of Class A and Class B preferred stock waived dividend
payment defaults through December 31, 1995, and agreed to accept
additional Class C preferred stock as payment in lieu of cash dividends
through that date.
In the event the Corporation shall be in default of the payment of four
consecutive semiannual preferred dividends, Class A preferred stockholders
will be entitled to elect three additional members to the Corporation's
Board of Directors until such time that the cumulative dividends are paid
in full.
The Board of Directors, in March 1996, authorized an additional 43 shares
of Series 1994-1 preferred stock that will be used to pay the cumulative
preferred dividends in arrears balance as of December 31, 1995.
The Corporation, at its option, subject to provisions of applicable law and
such regulatory agency approvals as may be necessary, may redeem the Class
A and Class B preferred shares at prices ranging from $110 per share until
December 31, 1997 and $120 per share thereafter. In the event redemption
in excess of par value is prohibited by law, the redemption price of
preferred stock shall be its par value.
55
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS, CONTINUED:
Class C Preferred stock is authorized by the Articles of Incorporation,
but the rights and preferences of this stock are established by the Board
of Directors when it authorizes the issuance of a series of Class C
Preferred Stock. At December 31, 1995, there were two series of such
stock authorized for issuance: 1,500 shares of Series MI-1 Preferred
Stock, which are all issued and outstanding and 588 shares of Series
1994-1 Preferred Stock, of which 439 shares were issued and outstanding at
December 31, 1995.
The Class C Preferred Stock, Series MI-1, was issued to the Michigan State
Housing Development Authority in October 1994 for $1.5 million. The
Series MI-1 stock is entitled to an annual, noncumulative 6 percent
dividend. Dividends are payable only from net income of the Corporation
earned in the calendar year for which the dividend is paid. If there were
no such earnings, no dividend would be required to be paid. The Series
MI-1 stock is subject to certain restrictions on transfer, and it may be
converted in certain circumstances into 136,363 shares of common stock.
It may be redeemed at the face value at any time by the Corporation.
As discussed in Note 2, 439 shares of Class C Preferred Stock, Series
1994-1, were issued in March 1995 to the holders of the Corporation's
Class A and Class B Preferred Stock and its senior capital notes as
payment of dividends and interest. The Series 1994-1 Preferred Stock has
no voting rights and is entitled to receive dividends only at the
discretion of the Board of Directors. Its dividend rights are subordinate
to those of the holders of the Series MI-1 Preferred Stock described
above. However, a dividend equal to 4 percent of the $1,000 face value of
the stock must be paid to the holders of the Series 1994-1 Preferred Stock
before any dividends may be paid to the common stockholders in any
calendar year. The Series 1994-1 Preferred Stock may be redeemed by the
Corporation at the face value prior to December 31, 1998. Thereafter,
until December 31, 2002, the redemption price per share will increase
annually. There also are limitations on the transferability of this
stock.
The Bank is subject to various regulatory capital requirements. As of
December 31, 1995, the Bank complied with all regulatory minimums. In
addition, the Bank is subject to the OCC's regulation regarding prompt
corrective action which categorizes banks according to five capital tiers:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. The rules generally
provide that a financial institution is "well capitalized" if its total
risk-based ratio is 10 percent or greater, its ratio of core capital to
risk-based assets is 6 percent or greater, its core capital (leverage)
ratio is 5 percent or greater. Regardless of a bank's capital level, no
bank is considered "well capitalized" if it is subject to a cease and
desist order, formal agreement, capital directive or any other directives
that require the bank to achieve or maintain a higher level of capital.
56
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS, CONTINUED:
At December 31, 1995, because the Bank is under the 1991 agreement, as
discussed in Note 2, the Bank is considered "adequately capitalized."
9. DIVIDEND LIMITATION:
At December 31, 1995, there were no undistributed earnings of the Bank
available for distribution to the Corporation as dividends without
regulatory approval.
10. INCOME TAXES:
The components of deferred income tax assets and liabilities as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Deferred
Taxes
--------
<S> <C>
Deferred tax assets:
Bad debt reserve $ 320,189
Net operating loss carryforward 660,637
Other 169,838
-----------
Total deferred tax assets 1,150,664
Less valuation allowance (1,055,229)
-----------
Net deferred tax assets 95,435
-----------
Deferred tax liabilities, depreciation 95,435
-----------
Total deferred tax liabilities 95,435
-----------
Total deferred taxes -
===========
</TABLE>
Under SFAS No. 109, a valuation allowance is recorded for the portion of
the deferred tax asset that is not more likely than not to be realized.
57
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES, CONTINUED:
Federal income tax expense consisted of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Federal income taxes computed at the statutory rate $(20,100) $(35,000)
Income from tax-exempt securities and loans (3,200) (4,000)
Operating losses for which an income tax benefit is
not currently available 23,300 39,000
Utilization of net operating loss carryforwards - -
-------- -------
- -
======== =======
</TABLE>
At December 31, 1995, the Corporation had net operating loss carryforwards
for federal income tax purposes of approximately $1,966,000 which, if not
used, will expire beginning in 2005.
11. COMMITMENTS AND CONTINGENCIES:
The Bank leases certain office and branch premises and equipment under
operating lease agreements. Total rental expense for all operating leases
aggregated $257,306 and $318,696 in 1995 and 1994, respectively. Future
minimum rentals under noncancelable operating leases as of December 31,
1995 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996 $180,006
1997 147,843
1998 100,706
1999 90,000
2000 90,000
Later years 292,500
--------
$901,055
========
</TABLE>
The Bank is required to maintain minimum average balances with the Federal
Reserve Bank of Chicago. Included in cash and due from banks in the
accompanying consolidated balance sheet is approximately $300,000 of
balances for the year ended December 31, 1995.
58
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. COMMITMENTS AND CONTINGENCIES, CONTINUED:
In May 1993, a jury verdict was entered against the Corporation, a
nonoperating subsidiary of the Bank, certain directors and another former
officer thereof, in the amount of $320,000, in a suit filed by a former
officer of the Bank alleging wrongful termination of his employment and
retaliatory discharge. After several post-trial hearings, a judgment was
entered on the verdict in October 1994. Although an accrual in the amount
of the judgment has been recorded in the consolidated financial
statements, the Corporation has appealed the judgment and is vigorously
pursuing a reversal.
The Corporation and the Bank are party to various other legal matters at
December 31, 1995. Although the amount of liability, if any, at December
31, 1995, with respect to these pending actions cannot be ascertained, in
the opinion of management, any resulting liability will not materially
affect the consolidated financial statements of the Corporation as of
December 31, 1995.
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK:
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and commercial letters of credit. The instruments involve, to
varying degrees, elements of credit and interest risk in excess of the
amount recognized in the consolidated balance sheet. The Bank uses the
same credit policies in making commitments as it does for on balance sheet
instruments. At December 31, 1995, the Bank had commitments under
commercial letters of credit of $567,500.
Commitments to extend credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Total
commitments to extend credit at December 31, 1995 are $12,728,000. The
amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
customer on a case-by-case basis.
The Bank's lending is concentrated in the local metropolitan Detroit
market.
The Bank sells federal funds and maintains deposits with other banks in
amounts which exceed FDIC insurance coverage. At December 31, 1995,
approximately $15,622,000 of such balances were uninsured.
59
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. RELATED PARTY TRANSACTIONS:
Directors and executive officers of the Corporation and the Bank
(including those persons' affiliates, family members and companies of
which they are principal owners) were loan customers of and had other
transactions with the Bank. It is the Bank's policy that all such loans
and commitments be made on substantially the same terms as those for
comparable transactions with other persons.
Loans to related parties amounted to $520,854 at December 31, 1995.
The Bank paid fees for advisory and legal services of approximately $86,800
in 1995 to Feikens, Vander, Male, Stevens, Bellamy & Gilchrest P.C.
Director Van Wyke is a member of this firm. In 1994, $60,000 was paid for
legal services to a consulting firm owned by Director Van Wyke.
14. FIRST INDEPENDENCE CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN:
In November 1986, the Corporation adopted the First Independence
Corporation Employee Stock Ownership Plan. All salaried employees of the
Corporation and its subsidiary who have at least one year of service and
who are at least age 21 are eligible to participate. There were no
contributions to the plan during 1995 and 1994.
60
<PAGE> 62
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amounts and fair values of
financial instruments at the dates indicated. SFAS 107, "Disclosures
about Fair Value of Financial Instruments", defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in
a forced or liquidation sale.
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------
Carrying Fair
Amount Value
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 17,059,650 $ 17,059,650
Investment securities 29,141,710 28,992,277
Loans:
Commercial 7,937,829 8,483,000
Commercial real estate 9,993,535 10,065,000
Residential real estate 15,553,623 15,974,000
Consumer 11,229,447 12,003,976
Deposits:
Demand 26,847,015 26,847,015
Now 6,588,010 6,588,010
Saving 15,942,983 15,942,983
Certificates of deposit 35,337,916 35,772,000
Securities sold under retail repurchase agreements 3,774,578 3,774,578
Note payable 900,000 817,182
</TABLE>
SFAS 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it
is practicable to estimate that value. In cases where quoted market prices
are not available fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Corporation.
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets fair value.
61
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
Fair values for investment securities and mortgage-backed securities are
based on quoted market prices, where available. If quoted market prices
are not available, fair values are based on quoted market prices of
comparable instruments.
Fair values for the Corporation's loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. The carrying
amount of accrued interest approximates its fair value.
The fair values of checking and NOW accounts, money market accounts and
savings deposits are the amounts payable on demand at the reporting date.
The fair value for fixed-maturity time deposits is estimated using a
discounted cash flow calculation using the rates currently offered for
deposits with similar remaining maturities.
The fair values of the Corporation's debt are estimated using discounted
cash flow analyses, based on the Corporation's current incremental
borrowing rates for debt with similar terms and remaining maturities.
Fair values of the Corporation's off-balance sheet instruments (interest
rate instruments, guarantees and credit commitments) are based on current
settlement or termination values and on fees currently charged to enter
into similar agreements, given the remaining terms of the agreements and
the counterparties' credit standing.
62
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. CONDENSED FINANCIAL STATEMENTS OF THE CORPORATION:
The Corporation's condensed balance sheet as of December 31, 1995, and the
related condensed statements of operations and cash flows for each of the
two years in the period ended December 31, 1995 are as follows:
<TABLE>
BALANCE SHEET
ASSETS
<S> <C>
Cash on deposit with First Independence National Bank of Detroit* $ 35,610
Loan receivable, related party 115,000
Accrued interest 808
Investment in First Independence National Bank of Detroit*Bank of Detroit* 5,377,718
-----------
Total assets $ 5,529,136
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other liabilities $ 367,950
Notes payable 900,000
-----------
Total liabilities 1,267,950
Stockholders' equity 4,261,186
-----------
Total liabilities and stockholders' equity $ 5,529,136
===========
*Eliminated in consolidation.
STATEMENT OF OPERATIONS
1995 1994
Revenue:
Equity in net income of First Independence National Bank of Detroit $ (31,776) $ 393,004
Interest income 1,418 -
--------- ----------
Total revenue (30,358) 393,004
--------- ----------
Expenses:
Interest on borrowings, net of forgiveness in 1995 of $27,000 27,000 81,000
Other operating expenses 99 413,524
--------- ----------
Total expenses 27,099 494,524
--------- ----------
Net loss before income taxes $ (57,457) $ (101,520)
========= ==========
</TABLE>
63
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. CONDENSED FINANCIAL STATEMENTS OF THE CORPORATION, CONTINUED:
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (57,457) $ (101,520)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity in net income of First Independence
National Bank of Detroit 31,776 (393,004)
Increase in loan receivable, related party (115,808) -
Decrease in other liabilities 27,000 401,000
----------- -----------
Net cash used in operating activities (114,489) (93,524)
----------- -----------
Cash flows from financing activities:
Investment in First Independence National Bank - (1,256,476)
Proceeds from issuance of preferred stock - 1,500,000
----------- -----------
Net cash provided by financing activities - 243,524
----------- -----------
Net increase (decrease) in cash (114,489) 150,000
Cash, beginning of year 150,099 99
----------- -----------
Cash, end of year $ 35,610 $ 150,099
=========== ===========
Noncash financing and investing activities:
Issuance of Class C preferred stock in lieu of dividend $ 169,500 -
payments
Issuance of Class C preferred stock in lieu of interest 269,408 -
payments
</TABLE>
64
<PAGE> 66
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information below regarding the persons who were the Corporation's
directors at December 31, 1995 is presented as of April 12, 1996, and is based
on information provided by the persons named.
<TABLE>
<CAPTION>
Name and Principal Bank Shares of Common
Occupation or Employment Director Stock of Corporation Percent of
for Last Five Years (a) Since (b) Age Beneficially Owned (c) Common Stock
------------------------ --------- --- ---------------------- ------------
<S> <C> <C> <C> <C>
Don Davis (d) ............................... 1980 57 198,455(c) 59.01
Interim Chief Executive Officer of
the Bank and the Corporation
(March, 1996 - present);
Chairman of the Board of the
Corporation and of the Bank;
President, United Sound Systems,
Inc. and President, Conquistador/
Groovesville Music, Inc.,
record producers and recording
studios; President, Liberty Risk
Management, Inc., insurance
agency; President Mahogany Investment
Advisors, investment advisory firm.
Dr. Charles E. Morton........................ 1969 70 700(c)(d) *
Emeritus Pastor, Metropolitan Baptist
Church; Adjunct Professor of
Philosophy, Oakland University.
Richard W. Shealey........................... 1991 52 687(c)(d) *
President and Chief Executive
Officer of the Corporation and
the Bank (1992-Feb, 1996); President and
Chief Operating Officer of the Bank
(1991-1992); President and Managing
Director, Sylvanus Corporation,
a privately-owned equipment
leasing and financial services
firm (1988-1991).
Dennis H. Silber............................. 1980 56 2,124(c)(d) *
Vice President and Chief Executive
Officer, Fred Silber Co., distributor
of merchandise for outdoor amusement
</TABLE>
65
<PAGE> 67
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
and promotional industries.
Gerald Van Wyke.............................. 1989 52 334(d) *
Attorney, Feikens, Vander Male, Stevens,
Bellamy & Gilchrist, P.C. (1994-present);
President, Covington Group, Inc.,
business consulting and merchant
banking company (1988-1994);
Eloise C. Whitten............................ 1983 66 334(d) *
Director, Michigan Department
of Social Services
All directors and officers
as a group (8 persons including 203,777 60.51
those named above)
</TABLE>
(a) Each of the persons named in the table currently is a director
of the Corporation and the Bank and is serving a term that will
end at the 1996 Annual Meeting or when a successor is elected and
qualified.
(b) The Corporation was formed in 1986 and all directors have been
directors of the Corporation since its formation except those
persons for which a year after 1986 is shown.
(c) Each director possesses sole voting and investment power with
respect to the shares shown unless indicated otherwise below. The
numbers of shares shown for Mr. Don Davis and Mr. Richard W.
Shealey include 3,845 shares allocated to their respective
accounts under the First Independence Corporation Employee Stock
Ownership Plan for which they each have only sole voting power.
The number of shares shown for Dr. Morton includes 300 shares held
jointly with his wife in which they share voting and investment
power. The number of shares shown for Mr. Silber include 1,790
shares owned jointly with his wife in which they share voting and
investment power.
(d) Excludes option to purchase up to 3,000 shares of Common Stock
at $5 per share for a five-year period ending May 23, 2000. The
options are not exercisable until September 25, 1996. Also
excludes Mr. Shealey's option to purchase up to 37,417 shares at
$5.00 per share until July 9, 1999 beginning September 25, 1996.
Mr. Shealey's option is terminated with his employment on February
23, 1996.
*Less than one percent.
Mr. Shealey's employment by the Corporation and the Bank terminated
February 23, 1996. In addition to Mr. Don Davis and Richard W. Shealey
listed in the table above, executive officers of the Corporation, as of
December 31, 1995, included Rose Ann Lacy, Senior Vice President and
Chief Financial Officer of the Corporation since 1989 and of the Bank
since 1986, John Boudreau, Senior Vice President -Administration of the
Bank since 1994, and Brian Kimball, Senior Vice President - Senior Loan
Officer of the Bank since November, 1995. Prior to joining the Bank,
Mr. Boudreau was Chief Financial Officer at Recall Management
Corporation, Boston, MA (1991-1994); Chief Financial Officer and
Treasurer (1991) and Controller (1989-1991) of Coolidge Bank & Trust,
Boston, MA. Prior to joining the Bank, Mr. Kimball was Senior Vice
66
<PAGE> 68
President and Senior Loan Officer at First National Bank in Macomb
County from 1987-1995.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and certain officers, and persons who own more
than ten percent of the Corporation's Common Stock to file with the SEC
initial reports of beneficial ownership and reports of changes of
beneficial ownership of Common Stock. These officers, directors and
greater than ten-percent shareholders are required by SEC regulation to
furnish the Corporation with copies of these reports. Directors
Morton, Shealey, Silber, Van Wyke and Whitten filed such reports late
with respect to the stock options awarded to them on September 25,
1995. Based solely on review of the copies of such reports furnished
to the Corporation and written representations that no other reports
were required, the Corporation believes that all other Sections 16(a)
filing requirements applicable to its officers, directors and greater
than ten-percent beneficial owners were fulfilled.
ITEM 10. EXECUTIVE COMPENSATION
The following table presents the cash compensation paid to the
Corporation's Chairman of the Board and to the President during
1993-1995. No other executive officer received total annual salary and
bonus exceeding $100,000 in 1993 - 1995 and Mr. Davis' total
compensation in 1993-1994 also was less than that amount.
<TABLE>
<CAPTION>
Principal Relocation
Name Position Year Salary Bonus Allowance
------------------ --------------- ---- -------- ----- ----------
<S> <C> <C> <C> <C> <C>
Don Davis Chairman of the
Board of Directors
of the Corporation
and the Bank 1995 $106,848 - -
Richard W. Shealey President and 1995 129,909 - -
Chief Executive 1994 119,000 - -
Officer and 1993 95,000 - $25,000
Director of the
Corporation and
the Bank
</TABLE>
Richard W. Shealey's employment by the Bank terminated February 23,
1996. Fringe benefits and perquisites paid to Mr. Shealey in 1995 were
less than 10% of his total annual salary plus bonus.
Richard W. Shealey had a three-year contract with the Bank which would
have terminated July 8, 1997, under which he was paid a salary of
$125,000 per year plus a car allowance of $500 per month. The contract
provided that, upon termination, he would receive a severance payment of
three (3) months' base compensation, benefits and outplacement services.
The contract provided for the creation and adoption by the Board of
Directors of a bonus plan. No bonuses were paid
67
<PAGE> 69
in 1995. In addition, the contract provided for a stock option plan
pursuant to which Mr. Shealey would be granted options to purchase new
unregistered shares of common stock equal to a maximum of 10% of the
outstanding common stock at the date of grant. He was granted stock
options as set forth below.
On September 25, 1995, the Board appointed a Stock Option Committee
which granted the stock options summarized below to the named officer
and directors pursuant to the 1995 Employee Stock Option Plan which was
presented to, and approved by, the Corporation's shareholders at the
1995 annual meeting of shareholders. The Plan as proposed and adopted
provided for a grant of options to the directors who had served the
Corporation for at least five years. Mr. Shealey's options expired on
February 23, 1996 when his employment terminated.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options Granted Exercise of Potential Realizable Value at
Underlying to Employees Base Price Assumed Annual Rates of Stock
Name Option Granted in Fiscal Year Per Share Expiration Date Price Appreciation for Option Term
---- -------------- --------------- ----------- --------------- ----------------------------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
Richard W. Shealey 37,417 100% $5/share July 09, 1999 $40,333 $86,841
Rev. C. Morton 3,000 * $5/share May 23, 2000 4,144 9,158
Dennis Silber 3,000 * $5/share May 23, 2000 4,144 9,158
Gerald Van Wyke 3,000 * $5/share May 23, 2000 4,144 9,158
Eloise Whitten 3,000 * $5/share May 23, 2000 4,144 9,158
</TABLE>
_____________________________
*None of the options shown above was exercised by any of the holder
The estimated value at the time of grant was $4.45 per share.
The Corporation and the Bank do not presently have any long-term
incentive compensation plans, except the Corporation's Employee Stoc
Ownership Plan and the 1995 Employee Stock Option Plan which are
described below.
The Corporation's Employee Stock Ownership Plan is qualified under
Section 401(a) of the Internal Revenue Code of 1986. All employees of
the Corporation and the Bank who have at least one year of service and
who are at least age twenty-one are eligible to participate. All
shares of stock in the plan are allocated to the accounts of the
participants. Unvested shares forfeited by terminated employees are
reallocated among all Plan participants as of the last day of the year
of forfeiture in the proportion which each participant's annual
compensation bears to the total annual compensation of all Plan
participants. As of December 31, 1995, there were 3,845 shares
allocated under the Plan to Don Davis' account. No contributions were
made to the plan during 1995. Thus, there was no change in the total
shares held in the Plan.
The Employee Stock Option Plan was adopted in 1995. It authorizes the
issuance of up to 67,352 shares of Common Stock to key salaried
employees and directors of the Corporation as an incentive to such key
employees. Options granted under the Plan may be incentive stock
options within the meaning of Section 422 of the Internal Revenue Code
of 1986 or they may
68
<PAGE> 70
be non-qualified options which do not meet the requirements of that
section. The Plan is administered by a stock option committee. At April
12, 1996, there were 55,352 shares available for option under the Plan
and options were outstanding and unexercised for 12,000 shares.
Directors who were not officers were paid the following fees for Bank
Board of Directors and Committee meetings: a monthly stipend of $200;
a meeting fee of $240 for each Board meeting; and $100 for each
Committee meeting. No fees are paid for attendance at the
Corporation's Board or Committee meetings.
69
<PAGE> 71
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table furnishes information, as of April 12, 1996, with
respect to persons known to the Corporation to be beneficial owners of
more than five percent of the Corporation's common stock, its only
class of voting securities. The table also shows the only management
ownership of other equity securities of the Corporation.
<TABLE>
<CAPTION>
TITLE NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- -------- ---------------- -------------------- -----
<S> <C> <C> <C>
Common Don Davis 198,721 (a) 59.01%
Stock 44 Michigan Avenue
Detroit, Michigan
Common First Independence 36,363 (b) 10.80%
Stock Corporation
Employee Stock Ownership
Trust
44 Michigan Avenue
Detroit, Michigan
Class A Don Davis 3,000 75.00%
Preferred 44 Michigan Avenue
Detroit, Michigan
Class C Don Davis 70.625 16.41%
Preferred 44 Michigan Avenue
(Series Detroit, Michigan
1994-1)
</TABLE>
---------------------
(a) Each owner possesses sole voting and investment power with
respect to the shares shown, except that the number of shares
shown for Mr. Davis includes 3,845 shares allocated to his account
under the First Independence Corporation Employee Stock Ownership
Plan, for which he has sole voting power.
(b) The total shares shown for the First Independence Employee
Stock Ownership Trust are voted by the trustee, except that
participants in the Plan are entitled to direct the trustee as to
the manner of voting shares allocated to their accounts.
Other information about the beneficial ownership of the Corporation's
equity securities by its management is included above in "Item 10.
Directors and Executive Officers of the Registrant."
70
<PAGE> 72
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In the ordinary course of its business, the Bank had during 1995, and
expects to have in the future, transactions with some of its and the
Corporation's directors, officers, and shareholders, and their families
and the companies with which they are associated. All such
transactions, which included commitments for loans and loans by the
Bank, were based on terms, including rates, collateral and repayment
terms, substantially the same as those prevailing at the time for
comparable transactions with other persons, and in the opinion of the
Corporation's Board of Directors and management, such transactions did
not and do not involve more than the normal risk of collectibility or
present other unfavorable features.
During 1995, the Bank paid approximately $86,800 in legal fees to
Feikens, Vander Male, Stevens, Bellamy & Gilchrist, P.C. In 1994, the
Bank paid approximately $60,000 of legal fees to Covington Group for
legal services. Gerald Van Wyke, a director of the Corporation, was a
member of Feikens, Vander Male, Stevens, Bellamy & Gilchrist, P.C. in
1995 and in 1994 he was the President of the Covington Group. The
Board believes that the fees paid were reasonable and competitive for
the services rendered.
ITEM 13. EXHIBIT LIST AND REPORTS ON FORM 8-K
(a)1. The financial statements listed in the accompanying Index to
Consolidated Financial Statements, on page 40 are filed as part of this
report.
(a)2. Schedules to the Consolidated Financial Statements required by
Article 9 of Regulation S-X are not required, inapplicable, or the
required information has been disclosed elsewhere.
(a)3. List of Exhibits:
EXHIBIT NUMBER DESCRIPTION
3 Articles of Incorporation and By-Laws of the
registrant were previously filed as an exhibit
to the Annual Report on Form 10-K for the year
ended December 31, 1992 (File No. 0-15777) and
are incorporated herein by reference. Amendments
to Articles of Incorporation authorizing
additional common stock, authorizing Class C
Preferred Stock, crediting the terms and
conditions of Class C Preferred Stock, Series
1994-1, and Series MI-1, were set forth as
Exhibits to the Proxy Statement dated
September 8, 1994.
71
<PAGE> 73
4 Instruments defining the rights of security
holders are the Articles of Incorporation and
By-Laws (see Exhibit 3, above) and certain debt
instruments which do not authorize an amount of
debt exceeding 10 percent of the Corporation's
assets. The Corporation agrees to furnish such
instruments to the Commission on request.
10.(i)-1 Agreement by and between First Independence
National Bank and the Office of the Comptroller
of the Currency dated as of April 15, 1991, was
previously filed as an exhibit to the Annual
Report on Form 10-K for the year ended December
31, 1990 (File No. 0-15777)and is incorporated
herein by reference.
10.(ii)(A)-1 Agreement by and between First Independence
National Bank and Richard W. Shealey dated as
of July 8, 1994, (P) was previously filed as
Exhibit 10.B. to the Annual Report on Form 10-K
for the year ended December 31, 1994 (File
No. 0-15777) and is incorporated herein by
reference.
10.(ii)(A)-2 1995 Employee stock Option Plan of First
Independence Corporation, adopted at annual
shareholders meeting on May 23, 1995, was set
forth as Exhibit A to the Proxy Statement dated
April 18, 1995 (File No. 0-15777) and is
incorporated herein by reference.
99(A) Letter of authorization from the Federal
Reserve Bank of Chicago to First Independence
Corporation to incur additional debt, dated
August 23, 1991, was previously filed as an
exhibit to the Annual Report on Form 10-K for
the year ended December 31, 1991 (File No.
0-15777) and is incorporated herein by
reference.
99(B) Letter from the Federal Reserve Bank of Chicago
dated September 28, 1994, approving terms and
conditions of Class C Preferred Stock, Series
MI-1, and Class C Preferred Stock, Series
1994-1 was previously filed as an exhibit to
the Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-15777)
and is incorporated herein by reference.
72
<PAGE> 74
10.(i)-2 Stipulation and consent to the issuance of a
consent order, and the consent order by and
between First Independence National Bank and
the Office of the Comptroller of the Currency
dated October 7, 1992 was previously filed as
an exhibit to the Annual Report on Form 10-K
for the year ended December 31, 1992 (File
No. 0-15777) and is incorporated herein by
reference.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the fourth quarter of 1994.
73
<PAGE> 75
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST INDEPENDENCE CORPORATION
/s/ Don Davis
- -----------------------------------------
Don Davis
Chairman of the Board,
Interim President and Chief
Executive Officer of the Corporation
and the Bank
(Principal executive officer)
Date: April 12, 1996
/s/ Rose Ann Lacy
- -----------------------------------------
Rose Ann Lacy
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: April 12, 1996
74
<PAGE> 76
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Don Davis*
- -----------------------------------------
Don Davis
Chairman of the Board of Directors
of the Corporation and the Bank
Date: April 12, 1996
Dr. Charles E. Morton*
- -----------------------------------------
Dr. Charles E. Morton
Director
Date: April 12, 1996
Dennis H. Silber
- -----------------------------------------
Dennis H. Silber
Director
Date: April 12, 1996
Gerald Van Wyke*
- -----------------------------------------
Gerald Van Wyke
Director
Date: April 12, 1996
Eloise C. Whitten*
- -----------------------------------------
Eloise C. Whitten
Director
Date: April 12, 1996
*By:/s/ Rose Ann Lacy
-------------------------------------
Rose Ann Lacy
Attorney-in-Fact
Date: April 12, 1996
75
<PAGE> 77
[ARTICLE] 9
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[CASH] 2,809,650
[INT-BEARING-DEPOSITS] 0
[FED-FUNDS-SOLD] 14,250,000
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 12,403,332
[INVESTMENTS-CARRYING] 16,738,378
[INVESTMENTS-MARKET] 16,588,945
[LOANS] 44,714,434
[ALLOWANCE] 1,163,834
[TOTAL-ASSETS] 94,616,995
[DEPOSITS] 84,715,924
[SHORT-TERM] 3,774,578
[LIABILITIES-OTHER] 965,307
[LONG-TERM] 900,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 2,658,908
[COMMON] 336,760
[OTHER-SE] 1,075,448
[TOTAL-LIABILITIES-AND-EQUITY] 94,616,995
[INTEREST-LOAN] 4,067,713
[INTEREST-INVEST] 1,790,549
[INTEREST-OTHER] 568,088
[INTEREST-TOTAL] 6,431,750
[INTEREST-DEPOSIT] 1,494,357
[INTEREST-EXPENSE] 1,825,693
[INTEREST-INCOME-NET] 4,606,057
[LOAN-LOSSES] 861,000
[SECURITIES-GAINS] 0
[EXPENSE-OTHER] 5,719,441
[INCOME-PRETAX] (57,457)
[INCOME-PRE-EXTRAORDINARY] (57,457)
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (57,457)
[EPS-PRIMARY] (.27)
[EPS-DILUTED] (.27)
[YIELD-ACTUAL] 4.81
[LOANS-NON] 1,958
[LOANS-PAST] 943
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 236
[ALLOWANCE-OPEN] 804,839
[CHARGE-OFFS] 763,069
[RECOVERIES] 261,065
[ALLOWANCE-CLOSE] 1,163,835
[ALLOWANCE-DOMESTIC] 1,163,835
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
<PAGE> 78
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,809,650
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,250,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,403,332
<INVESTMENTS-CARRYING> 16,738,378
<INVESTMENTS-MARKET> 16,588,945
<LOANS> 44,714,434
<ALLOWANCE> 1,163,834
<TOTAL-ASSETS> 94,616,995
<DEPOSITS> 84,715,924
<SHORT-TERM> 3,774,578
<LIABILITIES-OTHER> 965,307
<LONG-TERM> 900,000
0
2,658,908
<COMMON> 336,760
<OTHER-SE> 1,075,448
<TOTAL-LIABILITIES-AND-EQUITY> 94,616,995
<INTEREST-LOAN> 4,067,713
<INTEREST-INVEST> 1,790,549
<INTEREST-OTHER> 568,088
<INTEREST-TOTAL> 6,431,750
<INTEREST-DEPOSIT> 1,494,357
<INTEREST-EXPENSE> 1,825,693
<INTEREST-INCOME-NET> 4,606,057
<LOAN-LOSSES> 861,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,719,441
<INCOME-PRETAX> (57,457)
<INCOME-PRE-EXTRAORDINARY> (57,457)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,457)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
<YIELD-ACTUAL> 481
<LOANS-NON> 1,958
<LOANS-PAST> 943
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 236
<ALLOWANCE-OPEN> 804,839
<CHARGE-OFFS> 763,069
<RECOVERIES> 261,065
<ALLOWANCE-CLOSE> 1,163,835
<ALLOWANCE-DOMESTIC> 1,163,835
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
