<PAGE> 1
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, 1996
[ ] 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
---------------------------------------
(Name of Small Business Issuer charter)
Michigan 38-2583843
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 Michigan Avenue, Detroit, Michigan 48226
--------------------------------------------------
(Address of principal executive offices)(Zip Code)
(313)256-8400
-------------
(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 ( )
<PAGE> 2
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. [X]
State issuer's revenues for its most recent fiscal year.
Total revenues for the year ended December 31, 1996 were $8,672,359.
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, 1996 was $860,845 based on appraised value of shares determined as
of December 31, 1996, 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 March 28, 1997.
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, 1996):
Portions of the definitive proxy statement for the registrant's annual
shareholders meeting to be held in June 1997, are incorporated by reference in
Part III.
<PAGE> 3
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.
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
2
<PAGE> 4
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 Card
Inter-Bank charge card system. It maintains a correspondent relationship with
First Chicago NBD and Comerica 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 and under "Item 6. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Capital
Resources and Dividends" at page 29.
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.
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.
3
<PAGE> 5
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")
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 and in "Item 6. Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Capital Resources
and Dividends" at page 28.
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
4
<PAGE> 6
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, 1996 11.66% 10.40% 5.64%
- -------------------------------------------------------------
</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."
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 1996 with an equity capital ratio of 5.64% at December 31, 1996) ;
(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.
The Comptroller determined in the last annual examination of the Bank that it
was not yet fully in compliance with all provisions of the Comptroller
Agreement. This was caused primarily because of unauthorized loan activity
which took place, and does not reflect the recent progress of the bank. Bank
management is striving to ensure compliance with each article and believes that
the bank is in compliance with the terms of the Comptroller Agreement.
However, certain provisions require subjective and qualitative (in addition to
quantitative) judgments by representatives of the Comptroller with which
management may not always agree. Certain articles also require a period of
sustained performance before they are considered fully in compliance.
Therefore it is not certain at this time as to when the Comptroller Agreement
will be terminated. The annual Comptroller examination is expected to be
concluded in the first half of 1997.
5
<PAGE> 7
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. During 1996 the Bank
charged-off $1,563,000, in loans, of this amount approximately $898,000 were
attributable to unauthorized loans made in late 1995 and January 1996 by a
consumer loan officer who had no lending authority (acting in apparent collusion
with one or more customers) . As a result of the high charge-offs in 1996 the
Bank's provision for loan losses increased by $141,750, or 16.46% to $1,002,750
in 1996 from $861,000 in 1995. Despite the increase in the provision, the
Corporation had net income of $92,860 in 1996 (the Bank had net income of
$143,397) as compared to a net loss of ($57,000) in 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview" at page 13 for a detailed discussion of the effects of the
unauthorized loan activity.
The Bank's management believes that stronger underwriting, in addition to the
revised loan administration and controls implemented since January, 1996, is
improving credit quality. Thus, strict adherence to credit criteria for new
loans, thorough analysis of prospective borrowers' ability to repay, and
careful evaluation of collateral are all required in considering new loan
requests.
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. Most of the Bank's directors also are 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.
6
<PAGE> 8
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. The Bank 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
7
<PAGE> 9
business. Thus, factors affecting the general level of economic activity are
more likely to affect the Bank indirectly.
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, 1996 the Bank employed 65 full-time equivalent employees, seven
of which are commission employees in the mortgage brokerage operation and are
compensated based solely on their performance. 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.
OTHER TRENDS, EVENTS, UNCERTAINTIES
On February 21, 1997 the Bank received $1,444,721.37 from its fidelity
insurance underwriters in settlement of the Bank's claims related to the
fictitious "loans" made by a consumer loan officer with no lending authority.
As a result, the Bank has recorded a recovery of $1,139,796.83 for the amounts
8
<PAGE> 10
previously charged off. The remaining balance of the insurance proceeds were
used to pay down the value of the fictitious "loans" that were not charged off
(see footnote 17 of the Annual Report). Also, the judgement for wrongful
termination, entered against the Corporation in October 1994, in the amount of
$320,000, has been reversed by the Michigan Court of Appeals holding that there
was no liability by the Corporation or by the Bank's subsidiary. While it is
possible that the plaintiff will appeal, counsel for the Corporation are of the
opinion that such an appeal would be without merit (see footnote 13 of the
Annual Report). Management is not aware of any other significant trends, events
or uncertainties, or recommendations by regulatory authorities, 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 onsolidated 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 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.
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 9 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 non-operating
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 non-operating 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 was recorded in 1994 and
is reflected in the consolidated financial statements and attorney fees and
other litigation costs have been expensed as they were incurred. The
Corporation appealed the judgment to the Michigan Court of Appeals and on March
14, 1997, the judgment was reversed by the Court of Appeals holding that there
was no liability by the Corporation or by the Bank's subsidiary. While it is
possible that the
9
<PAGE> 11
plaintiff will appeal, counsel for the Corporation are of the opinion that such
an appeal would be without merit.
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
On October 21, 1996, the Corporation held its annual meeting at which the
following nine directors were elected by the votes shown below:
NAME FOR AGAINST ABSTAIN
- ---- --- ------- -------
Don Davis 257,853 0 3,046
Dr. Charles E. Morton 257,944 0 2,955
Dennis H. Silber 257,768 0 3,131
Gerald Van Wyke 257,860 0 3,039
Eloise C. Whitten 257,843 0 3,056
Alan Young 257,871 0 3,028
Barry Clay 257,988 0 2,911
Georigis Garmo 257,740 0 3,159
Jamal Shallal 257,860 0 3,039
10
<PAGE> 12
Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 1996, 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 1995-1996, 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, 1996 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 1997. The Bank 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 and 1997 dividends on
the Class A and B Preferred Stock, the interest on the Senior Notes, and 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 ($222,000) so that it may not pay dividends
until subsequent net earnings exceed $222,000, 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 1996
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. 29).
11
<PAGE> 13
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>
1996 1995
---- ----
<S> <C> <C>
Interest income $7,025 $6,427
Interest expense 2,072 1,826
------ ------
Net interest income 4,953 4,601
Provision for loan losses 1,003 861
Non interest income 1,648 1,922
Non interest expense 5,506 5,719
------ ------
Income (loss) before
federal income tax $ 92 $ (57)
Federal income tax
expense (credits) 0 0
------ ------
Net Income (Loss) $ 92 $ (57)
Preferred stock dividend 34 34
------ ------
requirements Income (loss
attributable to common
stock) $ 58 $ (91)
====== ======
Net income (loss) per share
of common stock $ .17 $ (.27)
====== ======
</TABLE>
12
<PAGE> 14
RESULTS OF OPERATIONS
OVERVIEW
The operating results of 1996 and 1995 must be understood in the context of a
substantial one-time loss realized during both fiscal periods which arose out
of unauthorized loan activity primarily during the second half of 1995. In
1996, the Corporation had net income of $92,000 compared to a net loss of
($57,000) in 1995. This improvement was the result of an increase of $352,000
in net interest income with both higher levels of earning assets and higher
yields earned. This higher revenue was partially offset by an increase of
$142,000 in 1996 for the provision for loan losses (total $1,002,750) than was
provided in 1995. The increased provision in 1996 resulted from unauthorized
loan activity engaged in by an employee of the Bank near the end of 1995, and
January 1996.
During the Bank's 1995 year end audit and examinations, the Bank identified
approximately $937,000 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 one or more customers) who
circumvented the Bank's internal control system. In addition, about $180,000
of such loans were booked by this employee in January 1996. It also was
discovered that this same individual had made and booked $390,000 of fictitious
unauthorized "loans" in 1995 and $138,000 in January 1996. This person is no
longer employed by the Bank. After the close of 1996, On February 21, 1997,
the Bank received $1,444,721.37 from its fidelity insurance underwriters in
settlement of the Bank's claims related to these
13
<PAGE> 15
unauthorized transactions. As a result, the Bank has recorded, in the first
quarter of 1997, a recovery of $1,139,796.83 by a credit to the loan loss
provision for the amounts previously charged off relating to fictitious "loan"
activity. The Bank is giving up $307,942.54 in recorded assets as part of the
settlement.
In response to the unauthorized loan activity, and the resulting loss, the Bank
took 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
hired a new consumer loan officer and two new loan administrators; an
experienced senior auditor and an assistant auditor have been brought into the
internal audit department; a loan review officer has been hired to conduct file
reviews, check documentation and identfy developing problem loans at an early
stage.
The following table sets forth a consolidating condensed statement of
operations for the ended December 31, 1996.
Condensed Statement of Operations
For the year ended December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
First First
Independence Independence
Corporation National Bank Elimination Consolidated
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Interest income $ 3 $7,022 $7,025
Interest expense 54 2,018 2,072
---- ------ ------
Net interest income (51) 5,004 4,953
Provision for
loan losses - 1,003 1,003
Other operating income 1,648 1,648
Other operating expenses 5,506 5,506
Gain/(Loss) before ---- ------ ------
federal income tax and
income from subsidiary (51) 143 92
Federal income tax expense
(credit) ---- ------ ---- ------
Income/(Loss) before
income from subsidiary (51) 143 $143 92
Income/(Loss) from
subsidiary $143 $143
---- ------ ---- ------
Net Income/(Loss): $ 92 $ 143 $143 $ 92
==== ====== ==== ======
</TABLE>
14
<PAGE> 16
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.
<TABLE>
<CAPTION>
Rate/Volume Analysis
1996 COMPARED TO 1995 1995 COMPARED 1994
--------------------- ------------------
INCREASE/(DECREASE) DUE INCREASE/(DECREASE) DUE
----------------------- -----------------------
(IN THOUSANDS) TO TO
-- --
CHANGE IN: CHANGE IN:
---------- ----------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans $559 $ 20 $579 $271 $256 $527
Taxable investment
securities 8 42 50 485 107 592
Nontaxable investment
securities (9) -- (9) (4) -- (4)
Federal funds sold and
securities purchased
underagreements to resell 38 (60) (22) -- 158 158
Interest-bearing bank
deposits -- -- -- (28) -- (28)
---- ---- ---- ---- ---- ----
Total Interest Income 596 2 598 724 521 1,245
---- ---- ---- ---- ---- ----
Interest Expense
Deposits:
Money Market Accounts 6 (4) 2 30 (19) 11
Savings (12) (37) (49) (3) (61) (64)
NOW Accounts 29 5 34 (4) (4)
Cert. of Deposit
100,000 or more 93 89 182 218 (79) 139
Time deposits 38 39 77 33 171 204
Short-term borrowing (18) (9) (27) 85 91 176
Long-term borrowing -- 27 27 -- (54) (54)
---- ---- ---- ---- ---- ----
Total Interest Expense 136 110 246 359 49 408
---- ---- ---- ---- ---- ----
Net Interest Income 460 (108) 352 365 472 837
==== ==== ==== ==== ==== ====
</TABLE>
Net interest income increased 7.65% or $352,000, to $4,953,000 in 1996 from
$4,601,000 in 1995. This increase was primarily the result of an increase in
average loans. Net average loans in 1996 increased $5,417,000 to $45,294,000
compared to $39,877,000 in 1995. 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.
The increases in earning assets were funded through an average $3,662,000
increase in certificates of deposits of $100,000 or more and an average
increase of $1,430,000 in NOW accounts. Rates on the higher level of total
interest bearing liabilities increased an average of 13 basis points to 3.32%
in 1996 compared to 3.19% in 1995.
15
<PAGE> 17
The following table sets forth for the periods indicated the Corporation's
average balances of assets and liabilities and interest earned or paid thereon,
expressed both in dollars and rates.
<TABLE>
<CAPTION>
Years ending December 31 1996 1995
(in thousands)
INTEREST RATE INTEREST RATE
AVERAGE INCOME EARNED AVERAGE INCOME EARNED
BALANCE EXPENSE PAID BALANCE EXPENSE PAID
------- ------ ----- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Assets
Investment Securities:
U.S. Treasury & Government
Agencies $30,777 $1,822 5.92 $30,642 $1,772 5.78
State & Municipal Securities -- -- -- 147 9 6.12
Other 167 10 5.99 167 10 5.99
--- -- --- --
Total Investment Securities 30,944 1,832 5.92 30,956 1,791 5.79
Federal funds sold 10,159 546 5.37 9,517 568 5.97
Inter bank deposit
Loans (net) 45,294 4,647 10.26 39,877 4,068 10.21
------- ------ ----- ------- ------ -----
Total Earning Assets 86,397 80,350
Total Interest Income $7,025 $6,427
------ ------
8.13 8.00
---- ----
Other assets 8,211 8,672
----- -----
Total Assets $94,608 $89,022
======= =======
Liabilities and Shareholders'
Equity
Deposits:
Money Market Accts $ 1,016 $ 23 2.26 $ 792 $ 21 2.65
Savings 15,035 300 2.00 15,555 350 2.25
NOW Accounts 5,371 113 2.10 3,941 79 2.00
Certificates of Deposit
$100,00 or more 19,263 579 3.01 15,601 398 2.55
Time deposits 14,992 725 4.84 14,156 647 4.57
Short-term borrowings 5,842 278 4.76 6,214 304 4.89
Notes payable 900 54 6.00 900 27 3.00
Total Interest-bearing --- -- ---- --- -- ----
Liabilities 62,419 57,159
Total Interest Expense $2,072 $1,826
------ ------
3.32 3.19
Other liabilities 28,028 ---- 27,763 ----
Shareholders' equity 4,193 4,100
----- -----
Total Liabilities and
Shareholder Equity $94,640 $89,022
======= =======
Net interest income $4,953 $4,601
Interest spread (avg. rate ====== ======
earned minus avg. rate paid) 4.81% 4.81%
Net interest margin (net ==== ====
interest income/total
earning assets) 5.73% 5.73%
Asset utilization (earning ==== ====
assets/total assets minus
assets held under agency
agreement) 91.32% 90.26%
===== =====
</TABLE>
16
<PAGE> 18
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
is required to review 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, 1996.
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 Standards
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". 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 $765,561 at December 31, 1996 compared to
the 1995 year end balance of $1,163,835. The allowance for loan losses
represented 1.66% of loans compared with 2.60% in 1995. The decrease in the
ratio for 1996 is the result of a significant increase in charge-offs in 1996
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,
1995 which were
17
<PAGE> 19
inadequately collateralized or unsecured. The provision for loan losses,
charged against income in 1996 and 1995 totaled $1,002,750 and $861,000
respectively, compared to $270,000 in 1994 prior to the one-time loss resulting
from the unauthorized loan activity. The 1996 increase was primarily due to
the unauthorized activities of the consumer loan officer.
The allowance for loan losses was 36.1% of the aggregate of non-accrual loans
and loans delinquent 90 days or more at December 31, 1996. At December 31,
1995, the allowance was 40.1% of such loans. The 1996 percentage is lower than
in 1995 because management charged-off $1,562,813 of loans. This decision
resulted in a significant decrease in non-accrual loans in 1996. The
allowance for loan losses is maintained at a level believed adequate by
management to absorb losses from specific assets identified as having greater
than 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 flow
positions, industry concentrations, delinquencies and other relevant factors.,
Also see the discussion about "Non-performing Loans" at page 26 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. Loans charged off in 1996 aggregated $1,562,813 compared with $763,069
in 1995. Of this amount, $998,114 was attributed to unauthorized loans. The
remaining $564,699 charged off was as a result of a continuing effort to
address problem loans in the loan portfolio. In addition, collection efforts
resulted in recoveries of $161,790 in 1996 on loans previously charged off
compared to $261,064 in 1995. Management expects improved collections and
recoveries as a result of recent strengthening of the collection department.
On February 21, 1997, the Bank received $1,444,721, from its fidelity insurance
underwriters in settlement of the Bank's claims related to the fictitious
"loans" made by a consumer loan officer with no lending authority. As a result,
the Bank has recorded a recovery of $1,139,797 for the amounts previously
charged off. The remaining balance of the insurance proceeds were used to pay
down the value of the fictitious "loans" that were not charged off.
18
<PAGE> 20
The table listed below presents management's allocation of the allowance for
loan losses for the last two years.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1996 1995
---- ----
ALLOWANCE (A) ALLOWANCE (A)
--------- --- --------- ---
<S> <C> <C> <C> <C>
Commercial $487 48% $ 483 40%
Real estate mortgage 36 33 100 34
Consumer 216 19 360 26
Unallocated 27 - 221 -
---- --- ------ ---
$766 100% $1,164 100%
==== === ====== ===
</TABLE>
(A) Percent of loans in each category to total loans.
The following table summarizes, for the periods indicated, average loans
outstanding, loans charged off, recoveries and provision charged to operations.
Charge offs in 1996 and 1995 were heavily concentrated in the consumer loan
category, due to the unauthorized loan activity in late 1995 and January 1996.
The allocation of the allowance for loan losses at year end reflect
management's assessment and allocation of risk at year end after those charge
offs had occurred. After making those charge offs, management believes the
allowance at December 31, 1996 properly reflects the risks identified among the
parts of the portfolio.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
1996 1995
---- ----
<S> <C> <C>
Average loans outstanding
during the period $45,294,000 $40,852,000
=========== ===========
Allowance for loan losses 1,163,834 804,839
Beginning balance
Provision for credit losses 1,002,750 861,000
Charge-offs (1,562,813) (763,069)
Recoveries 161,790 261,064
----------- -----------
Balance at end of year 765,561 1,163,834
=========== ===========
Charge offs by category:
Commercial (193,624) (149,228)
Consumer (1,140,609) (573,841)
Real estate mortgages (228,580) (40,000)
----------- -----------
TOTAL LOANS CHARGED OFF (1,562,813) (763,069)
=========== ===========
Recoveries by category:
Commercial 93,532 146,391
Consumer 53,472 54,814
Real estate mortgages 14,786 59,860
----------- -----------
161,790 261,065
=========== ===========
NET LOANS CHARGED OFF (1,401,023) (502,004)
=========== ===========
Provision for loan
losses/ average loans 2.21% 2.10%
Net loans charged
off/average loans 3.09% 1.22%
Total loans charged off/
average loans 3.45% 1.86%
</TABLE>
19
<PAGE> 21
OTHER OPERATING INCOME
Other operating income decreased by $274,000 or 14.26% to $1,648,000 in 1996
from $1,922,000 in 1995. This decrease was primarily the result of the decline
of revenues in the mortgage brokerage operation to $602,000 in 1996 compared to
$900,000 of revenues in 1995.
OTHER OPERATING EXPENSES
Total other operating expenses decreased by $213,000 or 3.72% to $5,506,000 in
1996 from $5,719,000 in 1995. This decrease was primarily the result of
decreases in agency help of $55,000, marketing of $29,000, and property and
intangible tax expense of $22,000. Other operating expenses were lower in
1996 as compared to 1995 due to an $86,000 writedown of other assets in 1995
while other real estate expenses decreased $28,000 in 1996. These 1996
decreases were offset by an increase in employment recruitment costs of
$50,000.
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 1996 or 1995.
20
<PAGE> 22
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 taking into account 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 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.
21
<PAGE> 23
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 continually seeks to increase and
retain retail deposits. The Bank has substantial deposits from local
governments and governmental agencies. It has approximately $8.1 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>
1996 1995
---- ----
(IN THOUSANDS) AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
<S> <C> <C> <C> <C>
Noninterest bearing
demand deposits $26,837 N/A $25,852 N/A
U.S. Treasury, tax
and loan deposits* 198 N/A 976 N/A
Interest bearing
demand deposits 6,387 2.13 4,733 2.11
Savings deposits 15,035 2.00 15,555 2.25
Time deposits:
$100,000 or more** 19,263 3.01 15,606 2.55
Other time deposits 14,992 4.84 14,151 4.57
------- -------
Total 82,712 76,873
======= =======
- ---------------------------------------------------------
</TABLE>
* Represents non-retail deposits held overnight and remitted to the federal
government the following day.
**Includes approximately $8,000,000 of non-interest bearing time deposits from
the U.S. Treasury.
22
<PAGE> 24
The maturities of time deposits of $100,000 or more outstanding at December 31,
1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
---- ----
<S> <C> <C>
Three months or less $10,991 $11,087
Over three through six
months 1,973 1,177
Over six through twelve
months 2,554 3,323
Over twelve months 8,175 5,149
------- -------
Total $23,693 $20,736
======= =======
</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, 1996 and 1995 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.
<TABLE>
<CAPTION>
(in thousands) 1996 1995
---- ----
<S> <C> <C>
Securities sold under retail
repurchase agreement $4,285 $3,775
Weighted average interest rate 4.70% 4.66%
</TABLE>
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:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
---- ----
<S> <C> <C>
Maximum amount outstanding
at any month end $9,183 $7,556
Average amount outstanding 5,842 6,214
Average rate during the year 4.74% 4.89%
</TABLE>
23
<PAGE> 25
INVESTMENTS
The investment securities portfolio is a source of earnings with relatively
minimal principal risk. As the Bank's portfolio is principally comprised
of 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, 1996. Yields are not calculated on a tax
equivalent basis:
<TABLE>
<CAPTION>
AFTER AFTER
ONE FIVE
(in thousands) BUT BUT
WITHIN WITHIN WITHIN AFTER
ONE FIVE TEN TEN
YEAR YEARS YEARS YEARS TOTAL
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury and
Government Agencies $2,010 $ 8,387 - 73 $10,470
Other - - - 167 167
------ ------- ---- ---- -------
TOTAL: $2,010 $ 8,387 - 240 $10,637
====== ======= ==== ==== =======
Weighted Average 6.49% 5.94% - 5.94% 6.06%
Yield
Held to Maturity
U.S. Treasury and
Government Agencies $5,494 $13,045 - - $18,539
Other - - - - -
------ ------- ---- ---- -------
TOTAL: $5,494 $13,045 - - $18,539
====== ======= ==== ==== =======
Weighted
Average Yield 6.20% 5.86% - - 5.96%
</TABLE>
At December 31, 1996, $10,637,000 of the total investment securities were held
for sale; $18,539,000 were being held to maturity. At year end 1995, 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, 1996 and 1995 is shown in Note 3 to the
Consolidated Financial Statements on page 47 and 48.
24
<PAGE> 26
LOANS
Maturities and sensitivity to changes in interest rates of certain loan
categories as of December 31, 1996 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 $ 6,843 $ 3,961 $ 704 $ 11,508
Commercial Real estate 1,466 7,906 1,089 10,461
Residential Real Estate 1,490 3,975 9,711 15,176
Consumer 340 3,175 5,386 8,901
------- ----- ----- -----
Total Loans $10,139 $19,017 $16,890 $ 46,046
====== ====== ====== ======
Loans maturing after one year with:
Fixed interest rates $17,778 $16,324
Variable interest rates 1,239 566
------- -------
Total $19,017 $16,890
====== =======
</TABLE>
Only 22% of the Bank's loans mature within one year. The remaining 78% of the
loan portfolio matures after one year, with 41.3% maturing after one year but
within five years. About 35.1% of the loan portfolio will mature after five
years; approximately 74.1% of the loan portfolio is comprised of fixed rate
loans maturing after one year. These loans, which amount to approximately
39.5% 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 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 16-18.
Commercial loans increased by $3,570,000 from the end of 1995 to December 31,
1996, commercial real estate loans increased by $468,000 and residential real
estate loans decreased $378,000 over the same period. Consumer loans declined
by $2,328,000. The increase in the commercial portfolio was due to the bank's
concerted effort to increase the portfolio. The real estate portfolio
remained relatively steady with runoff and maturity of loans being balanced by
new loan origination's. The decrease in the consumer loan portfolio was due to
heavy charge-offs and tightening of the underwriting guidelines.
25
<PAGE> 27
The following table sets forth the composition of the Corporation's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
(IN THOUSANDS) 1996 1995
---- ----
<S> <C> <C> <C> <C>
Commercial $ 11,508 24.99% $ 7,938 17.75%
Commercial Real Estate 10,461 22.72 9,994 22.35
Residential Real Estate 15,176 32.96 15,553 34.79
Consumer 8.901 19.33 11,229 25.11
------- ----- ------ -----
$46,046 100.00% $44,714 100.00%
======= ====== ======= ======
</TABLE>
Commercial loans are generally secured by accounts receivable, inventory and
machinery and equipment. In most 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 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. Commercial real estate loans
to churches comprise 12% of the Bank's total loans at December 31, 1996.
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 loans are primarily 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.
26
<PAGE> 28
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.
In addition, at December 31, 1996, there were $1,156,000 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, 1996, total nonperforming and impaired loans amounted to 7.12% of
the total year end loans as compared with 7.01% at December 31, 1995.
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) 1996 1995
---- ----
<S> <C> <C>
Non-accrual loans $ 864 $ 1,958
Other impaired loans 1,156 236
Loans past due 90 days or more 1,259 943
----- ---
$ 3,279 $ 3,137
===== =====
Nonperforming and impaired loans/
year end loans 7.12% 7.01%
</TABLE>
The amount of interest income that would have been accrued on the loans on
non-accrual status at December 31, 1996, had those loans remained current was
approximately $106,000. Interest actually accrued on those loans before they
were placed on non-accrual status was insignificant. At December 31, 1996,
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
27
<PAGE> 29
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, 1996, the Corporation had a gap position that ranged from
approximately 2.9% positive to 9.6% negative 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.
28
<PAGE> 30
The following table reflects the Corporation's interest rate sensitivity at
December 31, 1996, 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 OVER
THREE MONTHS THROUGH THROUGH ONE
OR LESS SIX MONTHS ONE YEAR YEAR TOTAL
<S> <C> <C> <C> <C> <C>
Assets:
Mortgages Avail.for Sale $ 874 $ - $ - $ - $ 874
Loans 9,759 653 1,695 32,299 44,406
Federal Funds Sold 11,445 - - - 11,445
Investment Securities 2,509 - 5,015 21,652 29,176
Other Assets - - - 7,961 7,961
------ --- ----- ------ ------
Total Assets 24,587 653 6,710 61,912 93,862
====== === ===== ====== ======
Liabilities:
Interest bearing Deposits
Time Deposits 5,412 3,756 3,756 1,642 14,566
Jumbo 6,959 5,283 5,284 6,050 23,576
Savings 3,655 - - 10,964 14,619
Money Market 407 - - 407 814
NOW Accounts 1,367 - - 4,101 5,468
------ ----- ----- ------ ------
Total Deposits 17,800 9,039 9,040 23,164 59,043
Short-Term Borrowings 4,285 - - - 4,285
Long-Term Borrowings - - - 900 900
Other Liabilities - - - 25,471 25,471
Stockholders' Equity - - - 4,163 4,163
------ ----- ----- ------ ------
Total Liabilities 22,085 9,039 9,040 53,698 93,862
------ ----- ----- ------ ------
Rate Sensitive Gap $ 2,502 $ (8,386) $ (2,330) $ 8,214
===== ======= ======= =====
Cumulative Rate
Sensitive Gap $ 2,502 $ (5,884) $ (8,214)
===== ======= =======
Percentage of Total
Earning Assets 2.91% (6.85%) (9.56%)
</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, 1996, the Corporation's shareholders' equity was $4,162,523
compared to $4,261,186 at the end of 1995.
At December 31, 1996, the Bank's ratio of equity capital to assets was 5.64%,
which is above the 5.5% ratio required by the Comptroller Agreement. This
compared to an equity ratio of 5.49% at December 31, 1995. The higher ratio in
1996 was due to (i) decrease in assets from from 1995 to 1996 (ii) net income
of $143,000 in 1996 compared to a net loss of ($31,000) in 1995. The
unauthorized consumer loan activity committed in the loan department by an
employee who circumvented internal controls and the resulting losses had a
negative impact on capital. 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
29
<PAGE> 31
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, 1996, the Bank had a retained
deficit of approximately ($222,000). Thus, it may not pay cash dividends
legally from current net income until it has realized earnings which exceed
$222,000. 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 6.00% 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 1996, the Board of Directors
of the Corporation approved issuance of approximately 91 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 of the additional capital will
be subject to regulatory approval.
30
<PAGE> 32
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, 1996, the Bank had a total risk-based capital ratio of 11.06%, a
tier 1 risk-based capital ratio of 10.40% and a tier 1 leverage ratio of 5.64%.
(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
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(1) Return on assets (net income/(loss)
divided by average total assets) .09% (.06)% .15% (.04)%
(2) Return on equity (net income/(loss)
divided by average equity) 2.22% (1.39)% 2.63% (.59)%
(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) 4.43% 4.61% 5.77% 6.01%
</TABLE>
*Dividends on common stock were not declared or paid in 1996 and 1995.
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 a more
significant impact on the Corporation's performance than does the general level
of inflation.
NEW ACCOUNTING STANDARDS
In March, 1997, the Financial Accounting Standards Board (FASB) issued SFAS
128, "Earnings per Share" which revises the accounting requirements for
calculating earnings per share. Basic earnings per share for 1997 and later
will be calculated solely on average common shares
31
<PAGE> 33
outstanding. Diluted earnings per share will reflect the potential dilution of
stock options and other common stock equivalents. All prior calculations will
be restated to be comparable to the new methods. As the Corporation has not
had significant dilution from stock options, the new calculation methods will
not significantly affect future basic earnings per share and diluted earnings
per share.
In June 1997, the Financial Accounting Standards Board (FASB) issued statement
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities". This statement provides authoritative guidance
as to the accounting and financial reporting for transfers and servicing of
financial assets and extinguishment of liabilities. Example transactions
covered by SFAS No. 125 include asset securitizations, repurchase agreements,
wash sales, loan participations, transfers of loans with recourse and servicing
of loans. The standard is based on a consistent application of a
financial-components approach that focuses on control. The Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. Tha Statement also requires
measuring instruments that have a substantial prepayment risk at fair value,
much like debt instruments classified as available for sale or trading. While
SFAS No. 115 supercedes SFAS No. 122, Accounting for Mortgage Servicing Rights,
it only marginally modifies the accounting and disclosure requirements of SFAS
122. SFAS 125, as amended By SFAS 127, is effective on a prospective basis for
some transactions in 1997 and others in 1998. Management does not believe that
SFAS No. 125 will have a material impact on the Corporation's consolidated
results of operations or financial position.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is on pages 33 through 60 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
A report on Form 8-K was filed on October 25, 1996.
32
<PAGE> 34
REPORT OF MANAGEMENT
Management of First Independence Corporation is responsible for the consolidated
financial statements and related financial information in this annual report.
The consolidated 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
consolidated 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 consolidated financial statements have been audited by Crowe, Chizek and
Company LLP, 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.
/s/ Don Davis
Don Davis
Chairman and
Chief Executive Officer
/s/ Rose Ann Lacy
Rose Ann Lacy
Senior Vice President,
Treasurer and Chief
Financial Officer
33
<PAGE> 35
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
34
<PAGE> 36
FIRST INDEPENDENCE CORPORATION
Detroit, Michigan
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
CONTENTS
REPORT OF INDEPENDENT AUDITORS ......................................... 36-37
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS .................................... 38
CONSOLIDATED STATEMENTS OF INCOME .............................. 39
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ................ 40
CONSOLIDATED STATEMENTS OF CASH FLOWS .......................... 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..................... 42-61
35
<PAGE> 37
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
First Independence Corporation
Detroit, Michigan
We have audited the accompanying consolidated balance sheet of First
Independence Corporation as of December 31, 1996 and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of the
Corporation as of December 31, 1995 were audited by other auditors whose report
dated March 22, 1996, except for Note 2, which was dated June 25, 1996,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Independence Corporation as of December 31, 1996 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
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 an Agreement with the Office of
the Comptroller of the Currency 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% 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. As of December
31, 1996, the Agreement remains in effect.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 7, 1997, except for Note 17, as to which the date is March 14, 1997
36
<PAGE> 38
[COOPERS & LYBRAND LETTERHEAD]
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 the year then ended. 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 audit 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 amount 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 audit provides 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 noncompliance 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 the year then
ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Detroit, Michigan
March 22, 1996, except for Note 2,
as to which the date is June 25, 1996
37
<PAGE> 39
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,876,988 $ 2,809,650
Federal funds sold 11,445,000 14,250,000
----------- -----------
Total cash and cash equivalents 14,321,988 17,059,650
Securities available for sale 10,636,189 12,403,332
Securities held to maturity (fair value of $18,411,605 and
$16,588,945) 18,539,469 16,738,378
----------- -----------
Total securities 29,175,658 29,141,710
Loans
Commercial 11,508,104 7,937,829
Commercial real estate 10,461,654 9,993,535
Residential real estate 15,175,771 15,553,623
Consumer 8,900,702 11,229,447
----------- -----------
46,046,231 44,714,434
Allowance for loan losses (765,561) (1,163,834)
----------- -----------
45,280,670 43,550,600
Premises and equipment, net 3,556,765 3,640,184
Accrued interest receivable and other assets 1,527,105 1,224,851
----------- -----------
Total assets $93,862,186 $94,616,995
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $24,486,322 $26,847,015
Interest-bearing 59,043,372 57,868,909
----------- -----------
83,529,694 84,715,924
Securities sold under retail repurchase agreements 4,284,688 3,774,578
Accrued expenses and other liabilities 985,281 965,307
Long-term debt 900,000 900,000
----------- -----------
Total liabilities 89,699,663 90,355,809
Commitments and contingencies (Notes 2 and 13)
Shareholders' equity
Preferred stock 2,749,508 2,658,908
Common stock, $1 par value; 1,000,000 shares authorized;
336,760 shares issued and outstanding 336,760 336,760
Capital surplus 2,369,782 2,369,782
Accumulated deficit (1,244,954) (1,294,334)
Unrealized gain (loss) on securities available for sale (29,177) 216,083
Unrealized holding loss on securities transferred (19,396) (26,013)
----------- -----------
Total shareholders' equity 4,162,523 4,261,186
----------- -----------
Total liabilities and shareholders' equity $93,862,186 $94,616,995
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 40
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Interest income
Loans, including fees $4,646,689 $4,067,713
Taxable securities 1,831,875 1,781,670
Non-taxable securities -- 8,879
Federal funds sold 546,066 568,088
---------- ----------
Total interest income 7,024,630 6,426,350
Interest expense
Deposits 1,740,111 1,494,357
Other borrowed funds 331,486 331,336
---------- ----------
Total interest expense 2,071,597 1,825,693
---------- ----------
NET INTEREST INCOME 4,953,033 4,600,657
Provision for loan losses 1,002,750 861,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,950,283 3,739,657
Noninterest income
Services charges on deposit accounts 840,030 824,868
Net realized gains on sales of securities available for sale 40,742
Net gains on sales of residential real estate loans 563,514 817,928
Other noninterest income 203,437 279,531
---------- ----------
Total noninterest income 1,647,723 1,922,327
Noninterest expenses
Salaries and employee benefits 2,777,064 2,934,708
Occupancy 1,326,915 1,267,988
Professional services 329,000 241,750
Insurance expense 111,461 95,901
Other noninterest expenses 961,286 1,179,094
---------- ----------
Total noninterest expenses 5,505,726 5,719,441
---------- ----------
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES 92,280 (57,457)
Federal income tax expense
---------- ----------
NET INCOME (LOSS) 92,280 (57,457)
Preferred stock dividend requirements 34,200 34,200
---------- ----------
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK $ 58,080 $ (91,657)
========== ==========
Income (loss) per common and common equivalent share $ 0.17 $ (0.27)
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 41
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Preferred Common Capital Accumulated
Stock Stock Surplus Deficit
---------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 $2,220,000 $336,760 $2,369,782 $(1,067,377)
Net loss (57,457)
Issuance of 269 shares of Class C Preferred
Stock Series 1994-1 in lieu of interest
payments on long-term debt 269,408
Declaration of preferred stock dividends (169,500)
Issuance of 170 shares of Class C Preferred
Stock Series 1994-1 in lieu of dividend
payments 169,500
Changes in value of securities available
for sale, net
Amortization of unrealized holding loss
on securities transferred
---------- -------- ---------- -----------
Balance, December 31, 1995 2,658,908 336,760 2,369,782 (1,294,334)
Net income 92,280
Issuance of 48 shares of Class C Preferred
Stock Series 1994-1 in lieu of interest
payments on long-term debt 47,700
Declaration of preferred stock dividends (42,900)
Issuance of 43 shares of Class C Preferred
Stock Series 1994-1 in lieu of dividend
payments 42,900
Changes in value of securities available
for sale, net
Amortization of unrealized holding loss
on securities transferred
---------- -------- ---------- -----------
Balance, December 31, 1996 $2,749,508 $336,760 $2,369,782 $(1,244,954)
========== ======== ========== ===========
<CAPTION>
Net
Unrealized Net
Gain (Loss) Unrealized
on Gain (Loss)
Securities on Total
Available Securities Shareholders'
for Sale Transferred Equity
----------- ----------- -------------
<S> <C> <C> <C>
Balance, January 1, 1995 $(246,702) $ (32,630) $ 3,579,833
Net loss (57,457)
Issuance of 269 shares of Class C Preferred
Stock Series 1994-1 in lieu of interest
payments on long-term debt 269,408
Declaration of preferred stock dividends (169,500)
Issuance of 170 shares of Class C Preferred
Stock Series 1994-1 in lieu of dividend
payments 169,500
Changes in value of securities available
for sale, net 462,785 462,785
Amortization of unrealized holding loss
on securities transferred 6,617 6,617
--------- ---------- -----------
Balance, December 31, 1995 216,083 (26,013) 4,261,186
Net income 92,280
Issuance of 48 shares of Class C Preferred
Stock Series 1994-1 in lieu of interest
payments on long-term debt 47,700
Declaration of preferred stock dividends (42,900)
Issuance of 43 shares of Class C Preferred
Stock Series 1994-1 in lieu of dividend
payments 42,900
Changes in value of securities available
for sale, net (245,260) (245,260)
Amortization of unrealized holding loss
on securities transferred 6,617 6,617
--------- --------- -----------
Balance, December 31, 1996 $ (29,177) $ (19,396) $ 4,162,523
========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 42
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 92,280 $ (57,457)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation 453,963 362,905
Amortization of premiums and accretion of
discounts, net 49,096 32,612
Provision for loan losses 1,002,750 861,000
Net realized gains on securities available for sale (40,742)
Origination of loans intended for sale (23,923,172) (14,743,000)
Proceeds from loans originated for sale 24,757,686 15,560,928
Net gains on sale of residential real estate loans (563,514) (817,928)
Net change in accrued interest receivable and
other assets (438,685) (85,826)
Net change in accrued expenses and other liabilities 67,674 291,146
------------ ------------
Net cash from operating activities 1,457,336 1,404,380
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 3,692,500
Proceeds from maturities of securities available for sale 6,153,573 6,165,716
Proceeds from maturities of securities held to maturity 6,700,000 5,424,000
Purchases of securities available for sale (8,120,364) (6,059,663)
Purchases of securities held to maturity (8,706,654) (5,966,131)
Net change in loans (2,867,389) (8,134,084)
Purchases of premises and equipment (370,544) (1,237,234)
------------ ------------
Net cash from investing activities (3,518,878) (9,807,396)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (1,186,230) 11,029,023
Net change in securities sold under retail repurchase
agreements 510,110 (1,049,046)
------------ ------------
Net cash from financing activities (676,120) 9,979,977
------------ ------------
Net change in cash and cash equivalents (2,737,662) 1,576,961
Cash and cash equivalents at beginning of year 17,059,650 15,482,689
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,321,988 $ 17,059,650
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 2,048,047 $ 1,794,907
Supplemental disclosure of noncash activities during year:
Transfers of loans to other real estate owned 136,431 77,000
Issuance of Class C preferred stock in lieu of dividend
payments 42,900 169,500
Issuance of Class C preferred stock in lieu of interest
payments 47,700 269,408
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 43
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: 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.
Nature of Operations: The Corporation is engaged in commercial and retail
banking services to individuals, businesses, local, state and federal
government units, and institutional customers. Its services include accepting
demand, savings and time deposits; collections; cash management; night
depositories; and consumer, commercial, and real estate lending.
The Corporation is a minority-owned, community-oriented national bank with its
main office in the central business district of Detroit, Michigan. It also
operates three other branches within the city of Detroit, and a mortgage
origination office in Southfield, Michigan.
Use of Estimates: To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions
based on available information. These estimates and assumptions affect the
amounts reported in the consolidated financial statements and the disclosures
provided, and future results could differ. The collectibility of loans, fair
values of financial instruments, status of contingencies, and valuation
allowance for deferred tax assets are particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents are defined as cash and due
from banks and federal funds sold. For purposes of the consolidated statements
of cash flows, net cash flows are reported for customer loan and deposit
transactions and securities sold under retail repurchase agreements.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might
be sold before maturity. Securities available for sale are carried at fair
value, with unrealized holding gains and losses reported separately in
shareholders' equity. Securities are written down to fair value with a charge
to net income when a decline in fair value is not considered temporary.
Gains and losses on sales of securities are determined using the amortized cost
of the specific security sold. Interest income includes amortization of
purchased premiums and discounts.
(Continued)
42
<PAGE> 44
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Held for Sale: Loans held for sale are included with residential real
estate loans. These loans are reported at the lower of cost or market value in
the aggregate and were approximately $874,000 and $1,145,000 as of December 31,
1996 and 1995.
Loans: Loans are reported at the principal balance outstanding, net of
deferred loan fees and costs, and the allowance for loan losses. Interest
income is reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days (180 days for residential mortgages).
Payments received on such loans are reported as principal reductions.
Mortgage Servicing Rights: The Corporation adopted Statement of Financial
Accounting Standard (SFAS) No. 122 effective January 1, 1996. The Corporation
primarily sells mortgage loans to the secondary market with servicing released,
and therefore the impact of SFAS No. 122 to the 1996 consolidated financial
statements was not material.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance
required based on past loan loss experience, known and inherent risks in the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of
similar nature such as residential mortgage, consumer, and credit card loans,
and on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing rate or
at the fair value of the collateral if the loan is collateral dependent. When
credit analysis of a borrower's operating results and financial condition
indicates that the underlying cash flows of the borrower's business are not
adequate to meet its debt service requirements, including the Bank's loans to
the borrower, the loan is evaluated for impairment. Often this is associated
when payments are delayed, typically 90 days or more, or when the internal
grading system indicates a substandard or doubtful classification. Nonaccrual
loans are often also considered impaired.
(Continued)
43
<PAGE> 45
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Asset cost is reported net of accumulated
depreciation. Depreciation expense is calculated on the straight-line method
over assets' useful lives. These assets are reviewed for impairment under
Financial Accounting Standard No. 121 when events indicate the carrying amount
may not be recoverable.
Other Real Estate: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a
valuation allowance reduces the reported amount to the lower of the initial
amount or fair value less costs to sell. Expenses, gains and losses on
disposition, and changes in the valuation allowance are reported in net loss on
other real estate.
Stock Compensation: Expense for employee compensation under stock option plans
is based on Opinion 25, with expense reported only if options are granted below
market price at grant date. Pro forma disclosures of net income and earnings
per share are provided, if material, as if the fair value method of Financial
Accounting Standard No. 123 were used for stock-based compensation.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized. No
income taxes were paid in 1996 and 1995.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions as discussed
in Note 15. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
Earnings Per Share: Earnings per common and common equivalent share is based
on weighted-average common shares outstanding during the year plus the dilutive
effect of outstanding stock options. The weighted-average number of shares
outstanding was 336,760 for 1996 and 1995.
(Continued)
44
<PAGE> 46
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Standards Issued, But Not Yet Implemented: The Financial Accounting
Standards Board has recently issued the following statements which are
applicable to the Corporation but have not been implemented as of December 31,
1996.
Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
will require the Corporation to recognize financial assets and servicing assets
when they are controlled, to derecognize financial assets when control is
surrendered, and to derecognize liabilities when they are extinguished. SFAS
No. 125 is required to be implemented for fiscal years beginning after December
31, 1996. Although management has not fully analyzed SFAS No. 125, it is
believed that the impact of its implementation will not be material to the
Corporation's consolidated financial position or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
revises the accounting requirements for calculating earnings per share. Basic
earnings per share for fiscal periods ending after December 15, 1997 will be
calculated solely on average common shares outstanding. Diluted earnings per
share will reflect the potential dilution of stock options and other common
stock equivalents. All prior calculations will be restated to be comparable to
the new methods. As the Corporation has not had significant dilution from
stock options, the new calculation methods are believed to not significantly
affect earnings per share and diluted earnings per share.
NOTE 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 (as defined) at least
equal to 5.50% of its total assets. At December 31, 1996 and 1995, the Bank's
equity capital (as defined) to total assets ratio was 5.64% and 5.49%,
respectively.
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.
(Continued)
45
<PAGE> 47
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 2 - CURRENT OPERATING ENVIRONMENT (Continued)
Due to the Bank's agreement with the OCC, it is 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. In addition,
the Corporation's Board of Directors, at the request of the Federal Reserve
Bank of Chicago, 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.
After the close of 1995, the Bank identified approximately $937,000 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 $180,000 of such loans
were written by this employee in January 1996. It also was discovered that
this same individual had written $390,000 of unauthorized fictitious "loans" in
1995 and $138,000 in January 1996. Included in these loans was $308,000 for
which the borrowers acknowledged and were performing. This person is no longer
employed by the Bank.
On February 21, 1997, the Bank received approximately $1,445,000 from its
fidelity insurance underwriters in settlement of the Bank's claims related to
these unauthorized transactions. As a result, the Bank recorded a recovery of
$1,137,000 to the allowance for loan losses for amounts previously charged off
relating to the loans discussed above. The balance of $308,000 was received by
the Bank in exchange for $308,000 in performing loans written by this
individual. Subsequently, the allowance was reduced through a negative
provision in the first quarter of 1997.
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; and a loan review
officer has been hired to conduct file reviews, check documentation and
identify developing problem loans at an early stage.
The OCC determined in its last annual examination of the Bank as of December
31, 1995 that the Bank was not yet fully in compliance with all provisions of
the Agreement. This was caused primarily because of the unauthorized loan
activity which took place. Bank management is striving to ensure compliance
with each provision of the Agreement. Certain provisions require subjective
and qualitative (in addition to quantitative) judgments by representatives of
the OCC. Certain provisions also require a period of sustained performance
before they are considered fully in compliance. Therefore it is questionable
at this time as to when the Agreement will be terminated. The current annual
OCC examination as of December 31, 1996 is expected to be concluded in the
first half of 1997.
(Continued)
46
<PAGE> 48
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 3 - SECURITIES
<TABLE>
<CAPTION>
Year-end securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale 1996
- -----------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 2,038,916 $ 938 $ 1,729 $ 2,038,125
U.S. Government agency 8,039,893 14,637 43,023 8,011,507
Other 167,100 167,100
----------- ---------- ---------- -----------
10,245,909 15,575 44,752 10,216,732
Mortgage-backed 419,457 419,457
----------- ---------- ---------- -----------
$10,665,366 $ 15,575 $ 44,752 $10,636,189
=========== ========== ========== ===========
Available for sale 1995
- -----------------------
U.S. Treasury $ 8,668,546 $ 115,223 $ 3,519 $ 8,780,250
U.S. Government agency 3,024,062 86,282 3,110,344
----------- ---------- ---------- -----------
11,692,608 201,505 3,519 11,890,594
Mortgage-backed 494,641 18,097 512,738
----------- ---------- ---------- -----------
$12,187,249 $ 219,602 $ 3,519 $12,403,332
=========== ========== ========== ===========
Held to maturity 1996
- ---------------------
U.S. Treasury $ 6,984,718 $ 13,189 $ 12,595 $ 6,985,312
U.S. Government agency 11,554,751 2,206 130,664 11,426,293
----------- ---------- ---------- -----------
$18,539,469 $ 15,395 $ 143,259 $18,411,605
=========== ========== ========== ===========
Held to maturity 1995
- ---------------------
U.S. Treasury $6,647,669 $ 68,676 $ 6,716,345
U.S. Government agency 9,923,609 55,600 $ 273,709 9,705,500
Other 167,100 167,100
----------- ---------- ---------- -----------
$16,738,378 $ 124,276 $ 273,709 $16,588,945
=========== ========== ========== ===========
</TABLE>
(Continued)
47
<PAGE> 49
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 3 - SECURITIES (Continued)
The Corporation recognized gross gains of $40,742 upon receiving gross proceeds
of $3,692,500 from the sales of securities available for sale in 1996.
No sales of securities were recorded in 1995.
Contractual maturities of debt securities at year-end 1996 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
<TABLE>
<CAPTION>
Securities Securities
----held to maturity---- ---available for sale---
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 5,494,734 $ 5,487,810 $ 2,001,575 $ 2,009,689
Due from one to five years 13,044,735 12,923,795 8,077,234 8,039,943
Mortgage backed and other 586,557 586,557
----------- ----------- ----------- -----------
$18,539,469 $18,411,605 $10,665,366 $10,636,189
=========== =========== =========== ===========
</TABLE>
Securities with an amortized cost of $20,325,000 and $16,199,000 at year-end
1996 and 1995 were pledged to secure public deposits, including State of
Michigan deposits of $615,000 and $663,000, and for other purposes as required
by law. Securities of $4,924,000 and $5,583,000 at year-end 1996 and 1995 have
been pledged to secure repurchase agreements.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Beginning balance $ 1,163,834 $ 804,839
Provision for loan losses 1,002,750 861,000
Loans charged off (1,562,813) (763,069)
Recoveries of loans previously charged off 161,790 261,064
----------- ----------
Ending balance $ 765,561 $1,163,834
=========== ==========
</TABLE>
(Continued)
48
<PAGE> 50
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 4 - ALLOWANCE FOR LOAN LOSSES (Continued)
At year end 1996 and 1995, the total recorded investment in impaired loans, as
defined by SFAS No. 114, was $2,019,893 and $2,194,000, respectively. Total
allowance for loan losses related to impaired loans was $299,059 and $893,000
at year end 1996 and 1995. The average of impaired loans during 1996 was
$1,890,000. Interest income on impaired loans is recognized primarily on a
cash basis. During 1996, interest income recognized during impairment was
$123,871.
Loans with carrying values of $136,431 and $77,000 were transferred to
foreclosed real estate in 1996 and 1995.
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land and land improvements $ 481,314 $ 481,314
Buildings 2,087,546 2,073,550
Furniture and fixtures 3,742,891 3,401,675
Leasehold improvements 547,977 534,551
----------- -----------
Total cost 6,859,728 6,491,090
Less accumulated depreciation (3,302,963) (2,850,906)
----------- -----------
$ 3,556,765 $ 3,640,184
=========== ===========
NOTE 6 - DEPOSITS
Year-end deposits consisted of the following:
1996 1995
---- ----
Demand deposits $24,486,322 $26,847,015
NOW accounts 6,282,122 6,588,010
Savings deposits 14,619,043 15,942,983
Certificates of deposit 38,142,207 35,337,916
----------- -----------
$83,529,694 $84,715,924
=========== ===========
</TABLE>
Time deposit accounts individually exceeding $100,000 totaled $23,692,111 and
$20,736,611 at year end 1996 and 1995.
(Continued)
49
<PAGE> 51
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 6 - DEPOSITS (Continued)
At year-end 1996, stated maturities of time deposits were:
<TABLE>
<S> <C>
1997 $28,798,706
1998 422,073
1999 8,914,639
2000 0
2001 0
2002 and thereafter 6,789
-----------
$38,142,207
===========
</TABLE>
NOTE 7 - BORROWINGS
As a source of short-term financing, the Corporation sells securities under
agreements to repurchase at a later date. Some securities sold under
repurchase agreements are delivered to broker-dealers who arranged the
transactions, and the broker-dealers have agreed to sell back substantially
identical securities at the maturities of the agreements. Physical control is
maintained for all other securities sold under repurchase agreements.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Average month-end balance during the year $5,058,000 $6,214,000
Average interest rate during the year 4.74% 4.89%
Maximum month-end balance during the year $9,183,000 $7,556,000
</TABLE>
Long-term debt consists entirely of senior notes, with an interest rate of 6%,
and mature in 2002. The notes require semi-annual interest payments and may be
prepaid at any time without penalty provided the Corporation is not in default
for the payment of dividends to preferred stockholders. In 1995, the
Corporation negotiated with the noteholders a reduction in the interest rate
from 9% to 6% retroactive to January 1, 1994.
(Continued)
50
<PAGE> 52
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 7 - BORROWINGS (Continued)
In 1996, the Corporation issued 48 shares of Class C Preferred Stock, Series
1994-1, to the senior noteholders in lieu of the $47,700 of accrued interest
owed as of December 31, 1995 (see Note 8). At December 31, 1996, the
Corporation was in default on the 1996 interest payments due, however, it
expects to pay all accrued interest owed senior noteholders during the second
quarter of 1997.
NOTE 8 - PREFERRED STOCK
Preferred stock at December 31 is comprised of the following:
<TABLE>
<CAPTION>
--------------1996------------- ---------------1995---------------
Issued and Issued and
Authorized Outstanding Authorized Outstanding
Description Shares Shares Amount Shares Shares Amount
----------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock
Class A, par value $100 4,000 4,000 $ 400,000 4,000 4,000 $ 400,000
Class B, par value $100 3,200 3,200 320,000 3,200 3,200 320,000
Class C, no par value (series
1994-1) 100,000 530 529,508 100,000 439 438,908
Class C, no par value (series
MI-1) 1,500 1,500,000 1,500 1,500,000
---------- ----------
$2,749,508 $2,658,908
========== ==========
</TABLE>
Class A and B preferred stockholders are entitled to 4.75% cumulative
semiannual dividends payable March 1 and September 1. In 1995, the Corporation
negotiated a reduction in the dividend rate from 6% to 4.75% retroactive to
January 1, 1994. Class C Preferred Stock is authorized under the Corporation's
Articles of Incorporation, but rights and preferences of this stock are
established by the Board of Directors upon the issuance of a series of Class C
Preferred Stock.
In 1996, the Corporation issued 43 shares of Class C Preferred Stock, Series
1994-1 to Class A and B preferred stockholders in lieu of the $42,900 of
preferred dividends in arrears as of December 31, 1995. As of December 31,
1996, the Corporation had $34,200 of cumulative preferred dividends in arrears
for which the Corporation expects to make payment during the second quarter of
1997. 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.
(Continued)
51
<PAGE> 53
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 8 - PREFERRED STOCK (Continued)
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 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.
The Class C Preferred Stock, Series MI-1, was issued in 1994 to the Michigan
State Housing Development Authority. The Series MI-1 stock is entitled to an
annual, noncumulative 6% dividend. Dividends are payable only from net income
of the Corporation earned in the calendar year for which the dividend is paid.
If earnings are not sufficient to pay the entire 6% dividend, then no dividend
is required to be paid. The Series MI-1 stock is subject to certain
restrictions on transfer, and may be redeemed at the face value at any time by
the Corporation.
The Class C Preferred Stock, Series 1994-1 was issued in 1995 and 1996 to the
Class A and B preferred stockholders and senior noteholders in lieu of
cumulative dividends in arrears and unpaid accrued interest. It 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% 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 may be redeemed by the
Corporation at the face value prior to December 31, 1998. Thereafter
redemption is subject to premiums up to 120% of face value until December 31,
2002. There also are limitations on the transferability of this stock.
NOTE 9 - REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
EARNINGS
The Corporation and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and
other factors, and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate regulatory action
that could have a direct material effect on the consolidated financial
statements.
(Continued)
52
<PAGE> 54
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 9 - REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
EARNINGS (Continued)
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. At December 31,
1996 and 1995, the Bank was considered "adequately capitalized" due to the
formal Agreement with the OCC.
At year end, actual capital levels for the Bank (in millions) and minimum
required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
-------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1996
- -----
Total capital (to risk weighted assets) $ 5.9 11.66% $ 4.1 8% $ 5.1 10%
Tier 1 capital (to risk weighted assets) $ 5.3 10.40% $ 2.0 4% $ 3.1 6%
Tier 1 capital (to average assets) $ 5.3 5.63% $ 3.8 4% $ 4.7 5%
1995
- -----
Total capital (to risk weighted assets) $ 5.8 11.80% $ 4.0 8% $ 5.0 10%
Tier 1 capital (to risk weighted assets) $ 5.2 10.54% $ 2.0 4% $ 3.0 6%
Tier 1 capital (to average assets) $ 5.2 5.43% $ 3.6 4% $ 4.5 5%
</TABLE>
At December 31, 1996, no undistributed earnings of the Bank were available for
distribution to the Corporation as dividends without regulatory approval from
the OCC.
(Continued)
53
<PAGE> 55
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 10 - INCOME TAXES
<TABLE>
Federal income taxes consist of the following:
1996 1995
---- ----
<S> <C> <C>
Current expense $ 0 $ 0
Deferred expense 0 0
---------- -----------
Total $ 0 $ 0
========== ===========
Year-end deferred tax assets and liabilities consist of:
1996 1995
---- ----
Deferred tax assets
Allowance for loan losses $ 82,344 $ 320,189
Net operating loss carryforwards 741,166 660,637
Other 179,719 169,838
---------- -----------
1,003,229 1,150,664
Less valuation allowance (895,102) (1,055,229)
---------- -----------
Net deferred tax assets 108,127 95,435
Deferred tax liabilities - accumulated depreciation 108,127 95,435
---------- -----------
Net deferred tax asset (liability) $ 0 $ 0
========== ===========
</TABLE>
At December 31, 1996, the Corporation had net operating loss carryforwards for
federal income tax purposes of approximately $2,100,000 which, if not used,
will expire beginning in 2005.
The change in the valuation allowance from 1995 to 1996 is primarily due to the
decrease in the deferred tax assets.
The difference between the financial statement tax expense and amounts computed
by applying the statutory federal tax rate of 34% to pretax income at December
31 is reconciled as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Statutory rate applied to income (loss) before taxes $ 31,375 $(20,100)
Add (deduct)
Interest from tax exempt securities (3,200)
Nondeductible expenses 7,766
Net operating losses for which an income tax benefit
is not currently available 23,300
Utilization of net operating loss carryforward (39,141)
-------- --------
Income tax expense $ 0 $ 0
======== ========
</TABLE>
(Continued)
54
<PAGE> 56
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 11 - STOCK OPTIONS
An 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 through the award of stock options 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 be non-qualified options which do not meet the requirements of that
section. Options are exercisable in whole or in part, but only with respect to
whole shares of stock, beginning one year and expiring five years after the
date of grant. The Plan is administered by a stock option committee.
Statement of Financial Accounting Standards (SFAS) No. 123, which became
effective for 1996, requires certain pro forma disclosures for companies that
do not adopt its fair value accounting method for stock-based employee
compensation. The Corporation has elected to continue accounting for its stock
options under Accounting Principles Board Opinion (APB) No. 25 instead of
adopting the new fair value method of SFAS No. 123. Pursuant to APB No. 25,
the Corporation recognized no compensation cost related to these stock option
grants. Had the fair value based method of SFAS No. 123 been applied to the
1995 stock option grant on a pro forma basis, the pro forma effects on the
Corporation's net income and earnings per share for 1996 and 1995 would not be
material.
In future years, the pro forma effects of not applying SFAS No. 123 is expected
to increase as additional options are granted.
At December 31, 1996, there were 55,352 options available for future grant
under the Plan and 12,000 options were outstanding and exercisable at a price
of $5 per share. All outstanding options were granted in 1995 at the fair
value of the stock at the date of grant.
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation maintains an Employee Stock Ownership Plan (ESOP) covering
substantially all salaried employees of the Corporation with at least one year
of service and are at least age 21. The ESOP invests primarily in the stock of
First Independence Corporation, and contributions to the plan are determined by
the Board of Directors. There were no contributions to the plan during 1996
and 1995. At December 31, 1996, the ESOP held 36,363 shares of stock,
allocated to employees and voted by the trustee of the plan. Upon distribution
of shares to a participant, the participant has the right to require the
Corporation to purchase shares at their fair value in accordance with the terms
and conditions of the plan. The fair value of the shares allocated as of
December 31, 1996 was approximately $164,360.
(Continued)
55
<PAGE> 57
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 13 - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT
The Bank leases certain office and branch premises and equipment under
operating lease agreements. Total rental expense for all operating leases
aggregated $163,503 and $257,306 in 1996 and 1995, respectively. Future
minimum rentals under noncancelable operating leases as of December 31, 1996
are as follows:
<TABLE>
<S> <C>
1997 $146,993
1998 102,106
1999 90,000
2000 90,000
2001 90,000
Thereafter 210,000
--------
$729,099
========
</TABLE>
The Bank is a party to financial instruments with off-balance sheet risk used
in the normal course of business to meet the financing needs of customers.
These financial instruments include commitments to extend credit and letters of
credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being used, the total commitments do not necessarily
represent future cash requirements. Letters of credit are conditional
commitments provided to guarantee a customer's performance to a third party.
Financial instruments whose contract amounts represent off-balance-sheet risk
at year-end are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commitments to extend credit $15,497,000 $12,728,000
Letters of credit 547,000 567,500
</TABLE>
Approximately 71% and 20% of these commitments were made at fixed rates at
December 31, 1996 and 1995, respectively. Interest rates on fixed rate
commitments range from 8.25% to 11.25% as of December 31, 1996. Expiration
dates range from 2 to 61 months for loan commitments and 6 days to 8 months for
letters of credit.
(Continued)
56
<PAGE> 58
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 13 - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT
(Continued)
Exposure to credit loss if the other party does not perform is represented by
the contractual amounts for commitments to extend credit and letters of credit.
The same credit policies are used for commitments and conditional obligations
as are used for loans. Collateral or other security is normally not required
to support financial instruments with off-balance-sheet risk.
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. An accrual in the amount of the judgment has been recorded in
the Corporation's consolidated financial statements (see Note 17).
The Corporation and Bank are subject to various other claims and legal actions
arising in the ordinary course of business. In the opinion of management,
after consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material effect on the Corporation's
consolidated financial position or results of operations.
The Bank's loan portfolio is concentrated primarily towards residential and
commercial customers in metropolitan Detroit, Michigan. Commercial real estate
loans to churches comprise 12% of the Bank's total loans at December 31, 1996.
At year-end 1996 and 1995, reserves of $300,000 were required as deposits with
the Federal Reserve Bank of Chicago. These reserves do not earn interest
NOTE 14 - RELATED PARTY TRANSACTIONS
Related parties include directors and executive officers of the Corporation and
Bank (including their affiliated family members and companies). 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 $410,432 and $520,854 at December 31, 1996 and
1995, respectively. During 1996, the Corporation had no new loans and
repayments of $110,422.
Related party deposits totaled $126,619 and $119,240 at year-end 1996 and 1995.
(Continued)
57
<PAGE> 59
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair
value for cash and cash equivalents, demand deposits, securities sold under
retail repurchase agreements, and variable rate loans or deposits that reprice
frequently and fully. Fair values for securities are based on quoted market
prices or from an independent third party broker. For fixed rate loans or
deposits and for variable rate loans or deposits with infrequent repricing or
repricing limits, the fair value is estimated by discounted cash flow analyses
using current market rates for the estimated life and credit risk. The fair
value of long-term debt is based on currently available rates for similar
financing.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial Assets
- ----------------
Cash and cash equivalents $14,321,988 $14,321,988 $17,059,650 $17,059,650
Securities 29,175,658 29,047,794 29,141,710 28,992,277
Loans, net 45,280,670 45,676,631 43,550,600 45,362,142
Accrued interest receivable 934,201 934,201 831,687 831,687
Financial Liabilities
- ---------------------
Deposits:
Demand 24,486,322 24,486,322 26,847,015 26,847,015
NOW 6,282,122 6,282,122 6,588,010 6,588,010
Saving 14,619,043 14,619,043 15,942,983 15,942,983
Certificates of deposit 38,142,207 38,138,696 35,337,916 35,772,000
Securities sold under retail
repurchase agreements 4,284,688 4,284,688 3,774,578 3,774,578
Long-term debt 900,000 814,800 900,000 817,182
Accrued interest payable 276,314 276,314 252,764 252,764
</TABLE>
(Continued)
58
<PAGE> 60
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
The Corporation's condensed balance sheets, statements of income and statements
of cash flows as of December 31, 1996 and 1995 and for the years then ended are
as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash $ 1,666 $ 35,610
Loan receivable, related party 150,000 115,000
Accrued interest 2,639 808
Investment in subsidiary 5,282,468 5,377,718
---------- ----------
$5,436,773 $5,529,136
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Other liabilities $ 374,250 $ 367,950
Long-term debt 900,000 900,000
---------- ----------
1,274,250 1,267,950
Shareholders' equity 4,162,523 4,261,186
---------- ----------
$5,436,773 $5,529,136
========== ==========
</TABLE>
(Continued)
59
<PAGE> 61
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Income
Interest income $ 2,883 $ 1,418
Expense
Interest on borrowings, net of forgiveness in 1995
of $27,000 54,000 27,000
Other operating expenses 99
-------- ---------
54,000 27,099
-------- ---------
INCOME BEFORE FEDERAL INCOME TAX (BENEFIT) AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY (51,117) (25,681)
Federal income taxes (benefit)
-------- ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF
SUBSIDIARY (51,117) (25,681)
Equity in undistributed net income (loss) of subsidiary 143,397 (31,776)
-------- ---------
NET INCOME (LOSS) $ 92,280 $ (57,457)
======== =========
</TABLE>
(Continued)
60
<PAGE> 62
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 92,280 $ (57,457)
Adjustments to reconcile net income (loss) to net cash from
operating activities
Equity in net (income) loss of subsidiary (143,397) 31,776
Increase in other assets (36,827) (115,808)
Increase in other liabilities 54,000 27,000
---------- ----------
Net cash from operating activities (33,944) (114,489)
Cash, beginning of year 35,610 150,099
---------- ----------
CASH, END OF YEAR $ 1,666 $ 35,610
========== ==========
</TABLE>
NOTE 17 - SUBSEQUENT EVENTS
On February 21, 1997, the Bank received an insurance settlement of $1,445,000
as a result of defalcations by one of the Bank's employees in the loan
department (see Note 2).
On March 14, 1997, the State of Michigan Court of Appeals overturned the
judgment against the Corporation for the wrongful termination suit as discussed
in Note 12. The Corporation anticipates the plaintiff will appeal the decision
of the appellate court and therefore, it will continue to carry the $320,000 as
an accrued liability.
61
<PAGE> 63
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
INCORPORATED BY REFERENCE TO REGISTRANTS PROXY STATEMENT DATED APRIL 24.
ITEM 10. EXECUTIVE COMPENSATION
INCORPORATED BY REFERENCE TO REGISTRANTS PROXY STATEMENT DATED APRIL 24.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
INCORPORATED BY REFERENCE TO REGISTRANTS PROXY STATEMENT DATED APRIL 24.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
INCORPORATED BY REFERENCE TO REGISTRANTS PROXY STATEMENT DATED APRIL 24.
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 35 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:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
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.
</TABLE>
62
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
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)-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.
</TABLE>
63
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
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 A report on Form 8-K was filed on October 25, 1996,
which included information on the change in First
Independence's Certifying Accountants from Coopers
and Lybrand LLP to Crowe, Chizek and Company LLP
and is here incorporated by reference.
</TABLE>
64
<PAGE> 66
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: March 31, 1997
/s/ Rose Ann Lacy
- ---------------------------------------
Rose Ann Lacy
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: March 31, 1997
65
<PAGE> 67
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.
/s/ Don Davis
- ------------------------
Don Davis
Chairman of the Board of Directors
of the Corporation and the Bank
Date: March 31, 1997
- ------------------------
Dr. Charles E. Morton
Director
Date: March 31, 1997
- ------------------------
Dennis H. Silber
Director
Date: March 31, 1997
/s/ Gerald Van Wyke
- ------------------------
Gerald Van Wyke
Director
Date: March 31, 1997
- ------------------------
Eloise C. Whitten
Director
Date: March 31, 1997
- ------------------------
Barry Clay
Director
Date: March 31, 1997
66
<PAGE> 68
- -------------------------
Alan Young
Director
Date: March 31, 1997
- -------------------------
Georgis Garmo
Director
Date: March 31, 1997
- -------------------------
Jamal Shallal
Director
Date: March 31, 1997
*By: /s/ Rose Ann Lacy
---------------------
Rose Ann Lacy
Attorney-in-Fact
Date: March 31, 1997
67
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,876,988
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,445,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,636,189
<INVESTMENTS-CARRYING> 18,539,469
<INVESTMENTS-MARKET> 18,411,605
<LOANS> 46,046,231
<ALLOWANCE> 765,561
<TOTAL-ASSETS> 93,862,186
<DEPOSITS> 83,529,694
<SHORT-TERM> 4,284,688
<LIABILITIES-OTHER> 985,281
<LONG-TERM> 900,000
0
2,749,508
<COMMON> 336,760
<OTHER-SE> 1,076,255
<TOTAL-LIABILITIES-AND-EQUITY> 93,862,186
<INTEREST-LOAN> 4,646,689
<INTEREST-INVEST> 1,831,875
<INTEREST-OTHER> 546,066
<INTEREST-TOTAL> 7,024,630
<INTEREST-DEPOSIT> 1,740,111
<INTEREST-EXPENSE> 2,071,597
<INTEREST-INCOME-NET> 3,950,283
<LOAN-LOSSES> 1,002,750
<SECURITIES-GAINS> 40,742
<EXPENSE-OTHER> 5,505,726
<INCOME-PRETAX> 92,280
<INCOME-PRE-EXTRAORDINARY> 92,280
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,280
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
<YIELD-ACTUAL> 5.73
<LOANS-NON> 864,000
<LOANS-PAST> 1,259,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,156,000
<ALLOWANCE-OPEN> 1,163,834
<CHARGE-OFFS> 1,562,813
<RECOVERIES> 161,790
<ALLOWANCE-CLOSE> 765,561
<ALLOWANCE-DOMESTIC> 739,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 27,000
</TABLE>
