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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[x] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1997
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission file number: 0-15777
FIRST INDEPENDENCE CORPORATION
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(Name of Small Business Issuer charter)
Michigan 38-2583843
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 Michigan Avenue, Detroit, Michigan 48226
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(Address of principal executive offices)(Zip Code)
(313)256-8400
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common stock, par
value $1.00 per share
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes (x) No ( )
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year.
Total revenues for the year ended December 31, 1997 were $8,338,606.
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 be
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, 1998.
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, 1997):
Portions of the definitive proxy statement for the registrant's annual
shareholders meeting to be held in May 1998, are incorporated by reference in
Part III.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
First Independence Corporation (the "Corporation") is a Michigan corporation
organized in March 1984. The Corporation was organized in order to engage in the
acquisition, operation, and management of banks and banking related businesses
and to engage in such other activities as are permitted and authorized to bank
holding companies under the Bank Holding Company Act of 1956, as amended. On
January 13, 1986, the Corporation consummated a reorganization and merger
pursuant to which the Corporation became the parent bank holding company of
First Independence National Bank of Detroit, Detroit, Michigan (the "Bank").
The Bank was organized in 1969 under the laws of the United States as a
minority-owned, community-oriented national bank. The Bank's principal office is
in the central business district of Detroit at 44 Michigan Avenue, Detroit,
Michigan 48226. It also operates branches in Detroit at 12200 Livernois Avenue,
and at 7020 West Seven Mile Road at Livernois Avenue.
The Bank provides banking services to individuals, businesses, local, state, and
federal governmental units, and institutional customers. Its services include
demand deposits, savings and time deposits, collections, cash management, night
depositories, and consumer, commercial, and real estate loans.
Consumer loans are made to individuals for a variety of personal purposes such
as home improvements, home equity lines of credit, car and boat purchases,
student loans, and credit cards. The Bank usually obtains collateral for these
loans but sometimes makes such loans on an unsecured basis. Character of the
borrower, credit history, amount of total indebtedness compared to total income,
nature and value of collateral and ratio of loan amount to collateral value all
are factors taken into account in making such loans. In connection with home
improvement loans and home equity loans, the Bank frequently lends on the
security of second mortgages. Such loans normally do not exceed 80% of the value
of real estate collateral. The aggregate of first and second mortgages must meet
this collateral value requirement. Customers' credit ratings must justify second
mortgage loans.
Commercial loans are made to businesses and to individuals for business
purposes. They include a wide variety of financing transactions such as working
capital lines of credit, receivable financing, commercial real estate loans,
equipment loans and equipment leasing transactions. The history and strength of
the borrower, type of business, cash flow compared to debt service requirements,
type and nature of collateral, collateral values, credit history, and ratios of
loan amounts to collateral value are among the principal considerations in
making these loans. These loans do not usually exceed 80% of the value of the
collateral, and cash flow available for debt service must be at least 1.25 times
the debt service requirement.
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Real estate loans are made to finance the purchase or construction of
residential real estate and commercial real estate. In the case of single family
residential real estate (usually considered 1-4 units), the cash flow and credit
history of the borrower and value of the real estate are among the principal
factors in evaluating loans. Normally, the Bank will lend up to 80% of the
appraised value of residential real estate used as a residence of the borrower.
The Bank also will lend up to 80% of the appraised value of commercial real
estate which includes apartment buildings of more than four units, retail
structures, warehouse and factory buildings and office structures. Cash flow
from the building, borrower's credit history, value of the collateral and ratio
of the loan to value as well as the ratio of the debt service requirements to
the cash flow of the property are all factors considered in making these loans.
The Bank offers a credit card program affiliated with the Master 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" on page
26. On January 16, 1998, the Comptroller of the Currency terminated the formal
agreement with the Bank.
The following is a summary of certain statutes and regulations affecting the
Corporation and the Bank. This summary is qualified in its entirety by such
statutes and regulations.
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The Corporation is a bank holding company under the Bank Holding Company Act of
1956, and as such, it is subject to supervision, regulation and periodic
examination by the Federal Reserve Board. As a bank holding company, the
Corporation is required to file with the Federal Reserve Board annual reports
and other information regarding its business operations and those of the Bank.
The Bank Holding Company Act requires the Corporation to obtain the prior
approval of the Federal Reserve Board before acquiring substantially all the
assets of any bank or bank holding company or ownership or control of any voting
shares of any bank or bank holding company, if, after such acquisition, it would
own or control, directly or indirectly, more than 5 percent of the voting shares
of such bank or bank holding company. The Bank Holding Company Act also requires
the Corporation to obtain the prior approval of the Federal Reserve Board before
engaging in or acquiring more than 5 percent of the voting shares of any company
engaged in non-banking activities.
As a bank holding company, the Corporation is also prohibited from acquiring
shares of any bank located outside the state of Michigan unless such an
acquisition is specifically authorized by statute of the state of the bank whose
shares are to be acquired. Under a Michigan statute applicable to the
Corporation, it may acquire a bank located in any state in the United States if
the laws of the other state permit ownership of banks located in that state by a
Michigan-based bank holding company. Under the same Michigan statute, the
Corporation or the Bank may be acquired by a bank holding company located in any
state in the United States subject to approval of the Financial Institutions
Bureau of the State of Michigan and the existence of a reciprocal law in such
other state.
The Bank is a national banking association under the National Bank Act, and as
such, it is subject to supervision, regulation and periodic examination by the
Comptroller. It is required to file with the Comptroller periodic reports
regarding its business operations.
Like all national banks, the Bank is a member of the Federal Reserve System and
is therefore subject to applicable provisions of the Federal Reserve Act and
regulations of the Federal Reserve Board promulgated thereunder. Deposits of the
Bank are insured to the extent provided by law by the Bank Insurance Fund
administered by the Federal Deposit Insurance Corporation ("FDIC"). Thus, the
FDIC also has certain regulatory authority over the Bank.
The National Bank Act, Federal Reserve Act, other federal (and in some
instances, state) laws and regulations govern, among other things, the scope of
the Bank's business, the investments the Bank may make, the amount of loans the
Bank may make and the interest it may charge on loans, transactions between the
Bank and the Corporation and the Bank's and Corporation's directors and
executive officers and other affiliates of the Bank, reserves the Bank must
maintain against deposits, and the Bank's activities with respect to business
combinations and branching. Federal regulations also require the Corporation and
the Bank to fulfill certain minimum capital requirements and restrict dividends
payable to the Corporation by the Bank.
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The FDIC Improvement Act of 1991 (the "FDIC Improvement Act") establishes
deposit insurance premiums, regulatory compliance costs, and emphasizes capital
maintenance. The FDIC Improvement Act covers such matters as the following: (1)
bank regulators, including the Comptroller and the Federal Reserve Board, are
required to take prompt corrective action with respect to deterioration in the
capital of an institution; (2) regulators are required to intervene early and
undertake expedited resolution of troubled financial institutions; (3) the FDIC
is required to establish a system of risk-based deposit insurance with premiums
for an institution based on the probability that the Bank Insurance Fund ("BIF")
will incur a loss related to such institution, the likely amount of the loss and
the reserve needs of the BIF.
Under the FDIC Improvement Act regulations, five capital categories are
established to define the relevant capital levels. The following table
summarizes the risk-based capital levels for each category and the Bank's
capital ratios in each category shown:
<TABLE>
<CAPTION>
TOTAL TIER 1 TIER 1 UNDER A
RISK-BASED RISK-BASED LEVERAGE CAPITAL ORDER OR
CAPITAL CATEGORY RATIO (B) RATIO (B) RATIO DIRECTIVE (A)
---------------- ---------- ---------- -------- ----------------
<S> <C> <C> <C> <C>
Well Capitalized >= 10.0% >= 6.0% >= 5.0% NO
Adequately Capitalized >= 8.0% >= 4.0% >= 4.0%
Undercapitalized < 8.0% < 4.0% < 4.0%
Significantly < 6.0% < 3.0% < 3.0%
Under-Capitalized
Critically Undercapitalized:
tangible equity <= 2.0%.
Bank's ratio at December 13.20% 11.95% 6.08%
31, 1997
</TABLE>
(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.
(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 1997 with an equity capital ratio of 6.08%; (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
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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, after examining the Bank, determined that the Bank was in
substantial compliance with the Formal Agreement. Therefore, on January 16,
1998, the Comptroller of the Currency terminated the Comptroller Agreement with
First Independence National Bank of Detroit.
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.
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.
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COMPETITION AND MARKET
The Bank is a community bank primarily serving Wayne County, Michigan. It also
provides some services in Oakland and Macomb Counties. 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 two branches are all located in the City of Detroit.
The Bank closed its Millender branch in November 1997. Although the Detroit area
economy is affected by the cycle of the automobile industry, it has become more
diverse in the past decade. Nevertheless, when that industry is strong,
employment and wages are high and stable. When the automobile industry is
performing weakly, employment is lower and many businesses which serve the
automobile companies tend to slow down. This could impact business and retail
customers' ability to repay their loans if their business declines or if they
lose their jobs. Management believes that, in this way, the business of the Bank
is indirectly affected by the automobile industry. Deposits and business
activity of governmental units are affected by tax revenues which vary with the
overall levels of activity in the automobile industry. However, the volume of
business which is done with the Bank by governmental units, large companies and
community service agencies is small in relation to their total banking business.
Thus, factors affecting the general level of economic activity are more likely
to affect the Bank indirectly. In 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.
The Bank's mortgage division was moved to the main office in February 1998. 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
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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, 1997, the Bank employed 58 full-time equivalent employees, two
of which are commissioned 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 approximately $1,445,000 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 $1,137,000 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 (see Note 2 of the financial statements). 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. The plaintiff
sought leave of the Michigan Supreme Court to appeal the reversal by the
Michigan Court of Appeals. On March 17, 1998, the Michigan Supreme Court denied
the appeal holding that the questions presented should not be reviewed by the
Court (see Note 13 of the financial statements). 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 consolidated financial statements and notes to
financial statements which are filed as part of this report.
ITEM 2. DESCRIPTION OF PROPERTIES
The 28,500 square foot headquarters of the Corporation and the Bank, located at
44 Michigan Avenue, Detroit, Michigan, was purchased by the Bank in March 1987.
The Bank also owns the land and a 4,000 square foot branch at 12200 Livernois in
Detroit. The Bank leases the premises at 7020 West Seven Mile Road. 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
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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) terminated 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 5 persons who originate and process mortgages in
southern Oakland County. In February 1998, the mortgage division moved out of
the Southfield office and into the main branch on 44 Michigan Avenue.
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. 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. The plaintiff sought leave of the Michigan Supreme Court to appeal
the reversal by the Michigan Court of Appeals. On March 17, 1998, the Michigan
Supreme Court denied the appeal holding that the questions presented should not
be reviewed by the Court.
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
None
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Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 1997, 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 1996-1997, 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, 1997 for the Corporation's Employee Stock Ownership Plan has been used.
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. Due to the Formal Agreement
the Bank could not pay any dividends without prior approval of the Comptroller
of the Currency (before the agreement was terminated on January 16, 1998) and
the Federal Reserve Bank of Chicago.
The Bank requested and received the approval of the Comptroller of the Currency
and the FDIC to pay dividends to the Corporation in an amount sufficient for the
Corporation to pay the 1996 and 1997 dividends on Class A and B Preferred Stock,
interest on the Senior Notes, and dividends on the Class C Preferred Stock,
Series MI-1 and Series 1994-1. The Bank is current on all long-term debt
interest obligations and Class A and Class B Preferred stock dividends. An
accrual in the amount of $87,296 for the 1997 Class C Series MI-1 and Class C
Series 1994-1 Preferred Stock dividend has been established. The Class C
Preferred Stock dividends have been paid in 1998. Cash dividends on common stock
were not declared or paid in 1989 through 1997 (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. 25).
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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>
1997 1996
------- ------
<S> <C> <C>
Interest income $ 6,784 $7,025
Interest expense 2,182 2,072
------- ------
Net interest income 4,602 4,953
Provision for loan losses (291) 1,003
Non interest income 1,555 1,648
Non interest expense 5,584 5,506
------- ------
Income before federal income $ 864 $ 92
tax
Federal income tax expense 0 0
------- ------
Net Income $ 864 $ 92
Preferred stock dividends 121 34
------- ------
Income attributable to common $ 743 $ 58
======= ======
stock
Basic and diluted earnings per share $ 2.20 $ 0.17
======= ======
</TABLE>
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RESULTS OF OPERATIONS
OVERVIEW
Net income for 1997 was $864,000 compared to $92,000 in 1996. The increase in
net income can be primarily attributable to the following. The Bank received
$1,445,000 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. The Bank recorded a recovery of $1,137,000 for loan 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.
As a result of the recovery, the Bank was able to reduce the allowance for loan
losses through a negative provision of $290,879 for 1997, compared to a
provision of $1,002,750 in 1996. Another reason was the Michigan Supreme Court's
decision not to hear the appeal of a former officer of the Bank who had sued the
Corporation for wrongful termination (see Note 13 in the financial statements).
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. 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. The plaintiff
sought leave of the Michigan Supreme Court to appeal the reversal by the
Michigan Court of Appeals. On March 17, 1998, the Michigan Supreme Court denied
the appeal holding that the questions presented should not be reviewed by the
Court. As a result, the Corporation reversed the accrual and recorded other
income of $320,000 in 1997. The Bank's loan portfolio decreased approximately
$5.4 million dollars in 1997 due primarily to paydowns in the consumer and
residential real estate loan portfolio. The decrease in loan portfolio caused
interest income to decrease $241,000 in 1997, from 1996. Noninterest income
decreased $93,000 in 1997, primarily because of a decrease in gains on sales of
residential real estate loans caused by a decline in mortgage originations by
the Bank's mortgage division.
The settlement with the Bank's fidelity insurance underwriters marks the end of
the unauthorized loan activity that began in the last half of 1995 through the
first quarter of 1996. Management can now concentrate on building consistent
earnings and providing good returns to the shareholders. Management is committed
to increasing the loan portfolio with quality, high yielding assets which will
in turn strengthen the balance sheet. Management is continually looking at
various methods of increasing noninterest income while reducing noninterest
expense.
12
<PAGE> 14
NET INTEREST INCOME
Net interest income is the amount of income generated by interest earning assets
reduced by the total interest expense.
The following table demonstrates the effect of changes in the average volume and
rate, of rate sensitive assets and liabilities, for the periods indicated.
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS
1997 COMPARED TO 1996 1996 COMPARED TO 1995
--------------------- ---------------------
INCREASE/(DECREASE) DUE INCREASE/(DECREASE) DUE
----------------------- -----------------------
TO TO
-- --
(IN THOUSANDS) CHANGE IN: CHANGE IN:
---------- ----------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------ ------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans $ (387) $ (167) $ (554) $ 559 $ 20 $ 579
Taxable investment
securities 145 (6) 139 8 42 50
Nontaxable investment
securities - - - (9) - (9)
Federal funds sold 162 11 173 38 (60) (22)
-------- ------ ------- ------ ----- -----
Total Interest Income (80) (162) (242) 596 2 598
-------- ------ ------- ------ ----- -----
Interest expense
Deposits:
Money market accounts (7) 1 (6) 6 (4) 2
Savings (9) 53 44 (12) (37) (49)
NOW accounts - 3 3 29 5 34
Certificate of
deposit
100,000 or more (43) 87 44 93 89 182
Time deposits (6) 14 8 38 39 77
Short-term borrowing 16 - 16 (18) (9) (27)
Long-term borrowing - - - - 27 27
-------- ------ ------- ------ ----- -----
Total interest expense (49) 158 109 136 110 246
-------- ------ ------- ------ ----- -----
Net interest income (31) (320) (351) 460 (108) 352
======== ====== ======= ====== ===== =====
</TABLE>
Net interest income decreased 7.09% or $351,000, to $4,602,000 in 1997 from
$4,953,000 in 1996, despite average earning assets increasing $1,695,000 in
1997. The decrease in net interest income was primarily the result of a decrease
in average loans. Net average loans in 1997, decreased $3,773,000 to $41,521,000
compared to $45,294,000 in 1996. The Bank experienced significant payoffs in
consumer installment and residential real estate loans. The shift in earning
assets from higher yielding loans to lower yielding federal funds and investment
securities resulted in the average rate on earning assets to drop from 8.13% in
1996, to 7.70% in 1997. Interest expense increased $109,000 despite average
interest-bearing liabilities dropping $1,986,000. The increase in interest
expense was due to the average rate paid for interest-bearing liabilities
increasing from 3.32% in 1996, to 3.61% in 1997. As a result of the decrease in
higher yielding earning assets and an increase in rates on interest-bearing
liabilities, net interest margin decreased 50 basis points from 5.73% in 1996,
to 5.23% in 1997. Non-accruing loans are included in loan totals when
calculating interest rates earned on loans in the average balance sheet shown on
the next page.
13
<PAGE> 15
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 1997 1996
(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 $ 33,234 $ 1,961 5.90 $30,777 $ 1,822 5.92
Other 167 10 5.99 167 10 5.99
---------- --------- ------- --------
Total investment securities 33,401 1,971 5.90 30,944 1,832 5.92
Federal funds sold 13,170 719 5.47 10,159 546 5.37
Loans (net) 41,521 4,093 9.86 45,294 4,647 10.26
---------- --------- ----- ------- -------- ------
Total earning assets 88,092 86,397
Total interest income $ 6,783 $ 7,025
--------- --------
7.70 8.13
----- ------
Other assets 8,691 8,211
---------- -------
Total assets $ 96,783 $94,608
========== =======
Liabilities and
shareholders' equity
Deposits:
Money market accountts $ 695 $ 17 2.45 $ 1,016 $ 23 2.26
Savings 14,599 344 2.36 15,035 300 2.00
NOW accounts 5,357 116 2.17 5,371 113 2.10
Certificates of deposit
$100,00 or more 17,833 623 3.49 19,263 579 3.01
Time deposits 14,871 733 4.93 14,992 725 4.84
Short-term borrowings 6,178 294 4.76 5,842 278 4.76
Notes payable 900 54 6.00 900 54 6.00
---------- --------- ----- ------- -------- ------
Total Interest-bearing
liabilities 60,433 62,419
Total interest expense $ 2,181 $ 2,072
--------- --------
3.61 3.32
----- ------
Other liabilities 30,432 27,996
Shareholders' equity 5,918 4,193
---------- -------
Total liabilities and
shareholder equity $ 96,783 $94,608
========== =======
Net interest income $ 4,602 $ 4,953
========= ========
Interest spread (avg. rate
earned minus avg. rate paid) 4.09% 4.81%
===== ======
Net interest margin (net interest
income/total earning assets) 5.23% 5.73%
===== ======
Asset utilization (earning
assets/total assets minus
assets held under agency
agreement) 91.02% 91.32%
===== ======
</TABLE>
14
<PAGE> 16
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Banking practice as well as the Comptroller Agreement (which was terminated
January 16, 1998) 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 losses from
specific assets identidied as having greater than normal risk of loss as well as
losses from the remainder of the portfolio. 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.
The Bank's loan review system is an integral part of determining an adequate
allowance. 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.
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 $936,090 at December 31, 1997 compared to
the 1996 year end balance of $765,561. The allowance for loan losses represented
2.30% of loans at December 31, 1997 compared with 1.66% at December 31, 1996.
The increase in the ratio is attributable to two factors. An increase in
impaired loans of $453,000 in 1997, from 1996, for which an allowance was
established, and the decrease in the overall loan portfolio. The provision for
loan losses in 1997, was a credit $290,879 compared to $1,002,750 charged to
expense in 1996. The negative provision in 1997 was due to the insurance
recovery discussed above.
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,
15
<PAGE> 17
generally result in lower losses. Loans charged off in 1997, aggregated $771,444
compared with $1,562,813 in 1996. Of the $1,562,813 charged off in 1996,
$998,114 was attributed to unauthorized loans. The 1997 charged-offs were a
result of continuing efforts to address problem loans in the loan portfolio.
Recoveries in 1997 were $1,232,852, of this amount, $1,139,797 was attributable
to the insurance recovery discussed above. Recoveries in 1996 were $161,790.
The table listed below presents management's allocation of the allowance for
loan losses for the years indicated.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
---------- ---------
ALLOWANCE (A) ALLOWANCE (A)
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Commercial $ 776 53% $ 487 48%
Real estate mortgage 19 33 36 33
Consumer 90 14 216 19
Unallocated 51 - 27 -
---------- --------- --------- --------
$ 936 100% $ 766 100%
========== ========= ========= ========
</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.
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, 1997 properly reflects the risks identified among the parts of the
portfolio.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
1997 1996
------------ ------------
<S> <C> <C>
Average loans outstanding $ 42,436,000 $ 46,392,000
============ ============
Allowance for loan losses
Beginning balance 765,561 1,163,834
Provision for loan losses (290,879) 1,002,750
Charge-offs (771,444) (1,562,813)
Recoveries 1,232,852 161,790
------------ ------------
Ending balance 936,090 765,561
============ ============
Charge offs by category:
Commercial (338,498) (193,624)
Consumer (339,657) (1,140,609)
Real estate mortgages (93,289) (228,580)
------------ ------------
Total loans charged off (771,444) (1,562,813)
============ ============
Recoveries by category:
Commercial 27,924 93,532
Consumer 1,190,043 53,472
Real estate mortgages 14,885 14,786
------------ ------------
Total recoveries 1,232,852 161,790
============ ============
Net loans charged off 461,408 (1,401,023)
============ ============
Provision for loan losses/ average loans (0.69)% 2.16%
Net loans charged off/average loans (1.09)% 3.02%
Total loans charged off/ average loans 1.82% 3.37%
</TABLE>
16
<PAGE> 18
NONINTEREST INCOME
Noninterest income decreased $93,000 or 25.1% to $1,555,000 in 1997, from
$1,648,000 in 1996. The decrease was primarily the result of a decline in
revenues generated from the Bank's mortgage brokerage operation of $353,000, and
a decrease in service charges on deposit accounts of $54,000. The decrease in
mortgage brokerage revenues was due to a decline in mortgage originations in
1997. The decrease in mortgage brokerage revenues was offset by the reversal of
the accrual on the Corporation's books of $320,000 for the wrongful termination
lawsuit (see Note 13 of the financial statements).
NONINTEREST EXPENSES
Noninterest expense increased $78,000 or 1.4% to $5,584,000 in 1997, from
$5,506,000 in 1996. The increase was primarily the result of increases in other
noninterest expense of $262,000. Increases in other noninterest expense include
$88,000 writedown of other assets, other real estate expenses $27,000,
Comptroller and FDIC assessment expense $60,000, advertising and marketing
expense $30,000, and employment recruitment costs of $58,000. Increases in other
noninterest expenses were offset by decreases in salary and wages expense of
$110,000 and professional services of $84,000.
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 federal income taxes were paid or accrued in 1997 or 1996. At December 31,
1997, the Corporation had net operating loss carryforwards for federal income
tax purposes of approximately $1,998,000 which, if not used, will expire
beginning in 2005 (see Note 10 of the financial statements).
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.
17
<PAGE> 19
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 Bank maintains 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. 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. Maintaining high liquidity assures
the Bank that it can fund withdrawals of those deposits as required by
customers. In addition, the Bank maintains its liquidity to fund various
fluctuations between customer withdrawals and deposits. Liquidity also is
managed so the Bank will have cash resources available for making loans as and
when required. Although the Bank's cash flows may fluctuate widely 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.
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 $6.1 million of non-interest bearing
certificates of deposit which were received in December 1994, from the United
States Treasury which will decline by approximately 33% each year for the next
three years. 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 periods, the Bank receives
large deposits from large corporations or governmental agencies for very short
terms. 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 or tax revenue receipts. 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.
18
<PAGE> 20
The average amounts of deposits and the average rates paid on deposits for the
years indicated are summarized in the following table:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS) AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Noninterest bearing
demand deposits 29,800 $ 27,035
Interest bearing
demand deposits 6,052 2.20 6,387 2.13
Savings deposits 14,599 2.36 15,035 2.00
Time deposits:
$100,000 or more* 17,833 3.49 19,263 3.01
Other time
deposits 14,871 4.93 14,992 4.84
------- --------
Total 83,155 82,712
======= =========
</TABLE>
*Includes approximately $6,100,000 of non-interest bearing time deposits from
the U.S. Treasury.
The maturities of time deposits of $100,000 or more outstanding at December 31,
1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
---- ----
<S> <C> <C>
Three months or less $ 8,441 $10,991
Over three through six months 1,459 1,973
Over six through twelve months 2,092 2,554
Over twelve months 4,142 8,175
------- -------
Total $16,134 $23,693
======= =======
</TABLE>
Historically, a significant portion of 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.
19
<PAGE> 21
SHORT-TERM BORROWINGS
Short-term borrowings of the Bank at December 31, 1997 and 1996 are summarized
below. These transactions take the form of federal funds purchased and
securities sold under agreements to repurchase. These agreements are a form of
transactions 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.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Federal funds purchased
Outstanding at year end $ 5,000,000
Average interest rate at year end 6.25% -
Average month-end balance during the year $ 1,250,000 -
Average interest rate during the year 5.56% -
Maximum month-end balance during the year $ 5,000,000 -
Securities sold under repurchase agreements
Outstanding at year end $ 7,117,616 $ 4,284,688
Average interest rate at year end 4.75% 4.25%
Average month-end balance during the year $ 5,052,193 $ 5,058,000
Average interest rate during the year 4.62% 4.74%
Maximum month-end balance during the year $ 8,369,113 $ 9,183,000
Total short-term borrowings
Outstanding at year end $12,117,616 $ 4,284,688
Average interest rate at year end 5.37% 4.25%
Average month-end balance during the year $ 6,302,193 $ 5,058,000
Average interest rate during the year 4.75% 4.74%
Maximum month-end balance during the year $12,117,616 $ 9,183,000
</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.
INVESTMENTS
The investment securities portfolio is a source of earnings with relatively
minimal principal risk. 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.
20
<PAGE> 22
The following table shows the maturities and weighted average yields from the
investment portfolio at December 31, 1997. 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 $ - $ 4,071 - - $ 4,071
U.S.Government Agencies 1,041 18,302 1,015 - 20,358
Mortgage-backed 245 56 - - 301
Other - - - 167 167
-------- ------- ------- ------- -------
TOTAL: $ 1,285 $22,429 1,015 $ 167 $24,897
======== ======= ======= ======= =======
Weighted Average Yield 6.04% 6.14% 6.83% 5.98% 6.16%
Held to Maturity
U.S. Treasury $ 2,984 $ 3,999 - - $ 6,983
U.S. Government Agencies $ 2,392 $ 7,648 - - $10,040
-------- ------- ------- ------- -------
TOTAL: $ 5,376 $11,647 - - $17,023
======== ======= ======= ======= =======
Weighted Average Yield 5.73% 6.14% - - 6.01%
</TABLE>
At December 31, 1997, $24,897,000 of the total investment securities were held
for sale; $17,023,000 were being held to maturity.
A summary of the maturity distribution, carrying value, and market value of
investment securities at December 31, 1997 and 1996 is shown in Note 3 to the
Consolidated Financial Statements on page 39 and 40.
LOANS
Maturities and sensitivity to changes in interest rates of certain loan
categories as of December 31, 1997 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 $ 4,843 $ 3,777 $ 2,060 $10,680
Commercial Real estate 4,516 5,299 943 10,758
Residential Real Estate 983 3,338 8,927 13,248
Consumer 215 2,602 3,139 5,956
------- ------- ------- -------
Total Loans $10,557 $15,016 $15,069 $40,642
======= ======= ======= =======
Loans maturing after one year with:
Fixed interest rates $12,867 $14,571
Variable interest rates 2,149 498
------- -------
Total $15,016 $15,069
======= =======
</TABLE>
21
<PAGE> 23
Only 26% of the Bank's loans mature within one year. The remaining 74% of the
loan portfolio matures after one year, with 37% maturing after one year but
within five years. About 37% of the loan portfolio will mature after five years;
approximately 68% of the loan portfolio is comprised of fixed rate loans
maturing after one year. Loans, which amount to approximately 46% 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
The loan portfolio decreased approximately $5.4 million in 1997, from 1996. The
Corporation's management has placed emphasis on increasing the loan portfolio
for the purpose of enhancing yield on earning assets and increasing the level of
investment by the Corporation in its urban community. Management is implementing
higher credit standards than in the past, designed to improve the performance of
the portfolio while incurring fewer loan losses. See discussion of Provision and
Allowance for Loan Losses on pages 15-16. Commercial loans decreased $828,000
from the end of 1996 to December 31, 1997, commercial real estate loans
increased $296,000, and residential real estate loans decreased $1,928,000 over
the same period. Consumer loans declined by $2,945,000. The decline in the
residential real estate and consumer portfolio were caused by increased runoff
and tightening of underwriting guidelines .
The following table sets forth the composition of the Corporation's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
(IN THOUSANDS) 1997 1996
---- ----
<S> <C> <C> <C> <C>
Commercial $ 10,680 26.28% $11,508 24.99%
Commercial Real Estate 10,758 26.47 10,461 22.72
Residential Real Estate 13,248 32.60 15,176 32.96
Consumer 5,956 14.65 8,901 19.33
--------- ------ ------- ------
$ 40,642 100.00% $46,046 100.00%
========= ====== ======= ======
</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. These loans are subject to the risks of the industries in which they do
business, such as auto supply, restaurants, retail sales, 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 religious
organizations comprise 10.9% of the Bank's total loans at December
22
<PAGE> 24
31, 1997. Commercial loans to apartment building operators comprise 9.6% of the
Bank's total loans at December 31, 1997.
Residential real estate is the largest single loan category and depends upon the
cash flow of individual owners. Their cash flow usually depends on employment
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
Bank's portfolio. 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, 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.
NONPERFORMING LOANS
Nonperforming loans include loans with principal or interest past due 90 days or
more; loans placed on nonaccrual, and other impaired loans. 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, 1997, there were $1,235,000 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
considered impaired loans.
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) 1997 1996
-------------- ---- ----
<S> <C> <C>
Non-accrual loans $1,240 $ 864
Other impaired loans 1,235 1,156
Loans past due 90 days or more 1,659 1,259
------ ------
$4,134 $3,279
====== ======
Nonperforming and impaired loans/year
end loan 10.17% 7.12%
</TABLE>
23
<PAGE> 25
The amount of interest income that would have been accrued on loans on
non-accrual status at December 31, 1997, had those loans remained current was
approximately $88,000. Interest actually accrued on those loans before they were
placed on non-accrual status was insignificant. At December 31, 1997, 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. The Bank's loan
recovery department is aggressively pursuing delinquent borrower's and
instituting legal actions to obtain payment and reduce past due loans. The
resolution of several large problem loans anticipated in 1998 should have a
significant favorable impact on nonperforming loans.
RATE SENSITIVITY ANALYSIS
Net interest income can fluctuate with changes in market interest rates.
Interest rate sensitivity is the relationship between market interest rate
fluctuations and net interest income derived from the repricing characteristics
of assets and liabilities. Management of interest rate sensitivity enables the
Corporation to maximize interest income with prudent interest rate risk. It
incorporates not only what is known, but also future projections. It attempts to
specify how possible interest rate fluctuations may affect both income and
costs. Interest rate sensitivity is measured by analyzing the maturity and
timing of interest rate changes on assets and liabilities. The net difference
between the amount of assets and funding sources repricing within a cumulative
calendar period is referred to as the rate sensitive position. A cumulative
one-year gap position indicates more assets than liabilities are anticipated to
reprice over the next twelve month period. Such a position implies that,
assuming no management action, the Corporation's net interest income would be
positively affected by rising interest rates and negatively affected by falling
interest rates.
24
<PAGE> 26
The following table reflects the Corporation's interest rate sensitivity at
December 31, 1997, and is not necessarily indicative of the Corporation's
position at any other date.
PERIOD WITHIN WHICH REPRICING OCCURS
<TABLE>
<CAPTION>
THREE MONTHS OR LESS OVER THREE MONTHS OVER SIX MONTHS OVER ONE YEAR TOTAL
THROUGH SIX THROUGH ONE
MONTHS YEAR
<S> <C> <C> <C> <C> <C>
Assets:
Net loans 7,008 775 2,586 29,337 39,706
Federal funds sold 11,175 - - - 11,175
Investment securities 15,432 - 6,019 20,469 41,920
Other assets - - - 6,931 6,931
------- ------- ------ -------- ------
Total assets 33,615 775 8,605 56,737 99,732
======= ======= ====== ======== ======
Liabilities:
Interest bearing
deposits
Time Deposits 5,099 4,832 2,987 1,867 14,785
Jumbo 8,441 1,459 2,092 4,032 16,024
Savings 3,447 - - 10,340 13,787
Money Market 302 - - 302 604
NOW Accounts 1,149 - - 3,446 4,595
------- ------- ------ -------- ------
Total Deposits 18,438 6,291 5,079 19,987 49,795
Short-Term Borrowings 12,118 - - - 12,118
Long-Term Borrowings - - - 900 900
Other Liabilities - - - 31,936 31,936
Stockholders' Equity - - - 4,983 4,983
------- ------- ------ -------- ------
Total Liabilities 30,556 6,291 5,079 57,806 99,732
------- ------- ------ -------- ------
Rate Sensitive Gap $ 3,059 $(5,516) $3,526 $ (1,069)
======= ======= ====== ========
Cumulative Rate
Sensitive Gap $ 3,059 $(2,457) $1,069
======= ======= ======
Percentage of Total
Earning Assets 3.26% (2.62)% 1.14%
</TABLE>
At December 31, 1997, the Corporation's cumulative gap position was 1.14% of
total earning assets. Management will continue to monitor and manage interest
rate sensitivity to reduce risk of interest rate fluctuations to the Bank.
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, 1997 the Corporation's shareholders' equity was $4,982,808
compared to $4,162,523 at the end of 1996.
At December 31, 1997, the Bank's ratio of equity capital to assets was 5.90%,
which is above the 5.5% ratio required by the Comptroller Agreement. This
compared to an equity ratio of 5.64% at December 31, 1996. 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,
25
<PAGE> 27
minus any required transfers to surplus (12 U.S.C. Section 60). The term "net
profits" means the remainder of all earnings from current operations plus actual
recoveries on loans and investments and other assets, after deducting all
current operating expenses, actual losses, accrued dividends on preferred stock,
if any, and all federal and state taxes. 12 U.S.C. Section 56 provides in effect
that dividends may be paid only out of net income and retained earnings, not
from capital. In addition to the statutory limitations, the Comptroller
Agreement prohibited the Bank from paying dividends to the Corporation without
the prior written consent of the Comptroller. This prohibition was eliminated
with the termination of the Comptroller Agreement on January 16, 1998.
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. The
Corporation has requested that the Federal Reserve Bank remove their restiction
in view of the Bank's improved condition.
During 1997, the Bank requested and received permission from the Comptroller of
the Currency and the Federal Reserve Bank to pay dividends to the Corporation.
The Corporation then paid all interest and dividends due the Senior noteholders
and the Class A and Class B Preferred Stock holders. At December 31, 1997, the
Corporation was current on all interest and dividend payments.
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.
All banks are required to have and maintain a minimum total risk-based capital
ratio of 10% 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, 1997, the Bank had a total risk-based capital ratio of 13.20%, a
tier 1 risk-based capital ratio of 11.95% and a tier 1 leverage ratio of 6.08%.
(For purposes of the risk-based capital computation,
26
<PAGE> 28
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
Bank for the years indicated:
<TABLE>
<CAPTION>
CORPORATION BANK
----------- ----
YEARS ENDED DECEMBER 31 YEARS ENDED DECEMBER 31
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(1) Return on assets (net income
divided by average total assets) .89% .09% .78% .15%
(2) Return on equity (net income
divided by average equity) 18.89% 2.22% 12.69% 2.63%
(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 4.72% 4.43% 6.17% 5.77%
</TABLE>
*Dividends on common stock were not declared or paid in 1997 or 1996.
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
The Financial Accounting Standards Board issued SFAS No. 130, Reporting
Comprehensive Income, which is effective for both interim and year-end financial
statements for fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. Comprehensive income is defined as all
changes in equity other than those resulting from investments by owners or
distributions by owners. Net income is, therefore, a component of comprehensive
income. The most common items of other comprehensive income include unrealized
gains or losses on securities available for sale, gains and losses on certain
foreign currency transactions, and minimum pension liability adjustments. While
full
27
<PAGE> 29
disclosure for each reported period is required in year-end financial
statements, interim financial statements need only disclose total comprehensive
income for each reported period. No disclosure is required if the Company has no
items of other comprehensive income in any reported period included in the
financial statements.
The Statement does not mandate a specific format for reporting comprehensive
income, but it does require that all items that are required to be recognized as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Companies will
generally choose between adding the items of other comprehensive income to the
Income Statement, adding them to the Statement of Changes in Shareholders'
Equity or displaying a new financial statement, which could be titled Statement
of Comprehensive Income.
The Financial Accounting Standards Board issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information which is effective for
reported periods included in year-end financial statements for fiscal years
beginning after December 15, 1997 and for all reported periods in interim
financial statements for reporting periods following the first required full
fiscal year disclosure. SFAS No. 131 establishes new guidance for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable operating segments in interim financial reports
issued to shareholders. SFAS No. 131 supersedes the industry approach to segment
disclosure previously required by SFAS No. 14, Financial Reporting for Segments
of a Business Enterprise, replacing it with a method of segment reporting which
is based on the structure of an enterprise's internal organization reporting.
The Statement also establishes standards for related disclosures about products
and services, geographic areas and major customers.
YEAR 2000 COMPLIANCE
A significant issue has emerged in the banking industry anf for the economy
overall regarding how existing application software programs and operating
systems can accomodate the date value for the year 2000. The financial impact to
the Company to ensure year 2000 compliance is not anticipated by management to
be material to the financial position, results of operations or cash flow of the
Company.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is on pages 31 through 52 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.
28
<PAGE> 30
FIRST INDEPENDENCE CORPORATION
Detroit, Michigan
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
CONTENTS
REPORT OF INDEPENDENT AUDITORS ........................................... 30
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS ............................................. 31
CONSOLIDATED STATEMENTS OF INCOME ....................................... 32
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY.......................... 33
CONSOLIDATED STATEMENTS OF CASH FLOWS ................................... 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................ 35-52
29
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
First Independence Corporation
Detroit, Michigan
We have audited the accompanying consolidated balance sheets of First
Independence Corporation as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Independence
Corporation as of December 31, 1997 and 1996, the results of its operations and
its cash flows for the years 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 required 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. On January 16, 1998, the
Comptroller of the Currency determined that the Bank was in substantial
compliance and terminated the Agreement.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 13, 1998, except for Note 17, as to which the date is March 23, 1998
30
<PAGE> 32
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,517,380 $ 2,876,988
Federal funds sold 11,175,000 11,445,000
------------ ------------
Total cash and cash equivalents 13,692,380 14,321,988
Securities available for sale 24,896,548 10,636,189
Securities held to maturity (fair value of
$17,084,271 and $18,411,605) 17,023,477 18,539,469
------------ ------------
Total securities 41,920,025 29,175,658
Loans
Commercial 10,679,960 11,508,104
Commercial real estate 10,758,430 10,461,654
Residential real estate 13,247,862 15,175,771
Consumer 5,955,727 8,900,702
------------ ------------
40,641,979 46,046,231
Allowance for loan losses (936,090) (765,561)
------------ ------------
39,705,889 45,280,670
Premises and equipment, net 3,245,905 3,556,765
Accrued interest receivable and other assets 1,167,414 1,527,105
------------ ------------
Total assets $ 99,731,613 $ 93,862,186
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 31,304,908 $ 24,486,322
Interest-bearing 49,794,845 59,043,372
------------ ------------
81,099,753 83,529,694
Short term borrowings 12,117,616 4,284,688
Accrued expenses and other liabilities 631,436 985,281
Long-term debt 900,000 900,000
------------ ------------
Total liabilities 94,748,805 89,699,663
Commitments and contingencies (Notes 2 and 13)
Shareholders' equity
Preferred stock 2,749,508 2,749,508
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 (528,126) (1,244,954)
Unrealized gain (loss) on securities available
for sale 59,946 (29,177)
Unrealized holding loss on securities transferred (5,062) (19,396)
------------ ------------
Total shareholders' equity 4,982,808 4,162,523
------------ ------------
Total liabilities and shareholders' equity $ 99,731,613 $ 93,862,186
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 33
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
Interest income
<S> <C> <C>
Loans, including fees $ 4,093,313 $4,646,689
Taxable securities 1,970,994 1,831,875
Federal funds sold 719,485 546,066
----------- ----------
Total interest income 6,783,792 7,024,630
Interest expense
Deposits 1,833,511 1,740,111
Other borrowed funds 347,946 331,486
----------- ----------
Total interest expense 2,181,457 2,071,597
----------- ----------
Net interest income 4,602,335 4,953,033
Provision (credit) for loan losses (290,879) 1,002,750
----------- ----------
Net interest income after provision (credit) for loan 4,893,214 3,950,283
losses
Noninterest income
Services charges on deposit accounts 786,125 840,030
Net realized gains on sales of securities available for sale 32,525 40,742
Net gains on sales of residential real estate loans 210,867 563,514
Other noninterest income 525,297 203,437
----------- ----------
Total noninterest income 1,554,814 1,647,723
Noninterest expenses
Salaries and employee benefits 2,667,088 2,777,064
Occupancy 1,349,960 1,326,915
Professional services 245,000 329,000
Insurance expense 98,618 111,461
Other noninterest expenses 1,223,388 961,286
----------- ----------
Total noninterest expenses 5,584,054 5,505,726
----------- ----------
Income before federal income taxes 863,974 92,280
Federal income tax expense - -
----------- ----------
Net income 863,974 92,280
Preferred stock dividends 121,495 34,200
----------- ----------
Income attributable to common stock $ 742,479 $ 58,080
=========== ==========
Basic and diluted earnings per share
$ 2.20 $ 0.17
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 34
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
NET
UNREALIZED NET
GAIN (LOSS) UNREALIZED
ON GAIN (LOSS)
SECURITIES ON TOTAL
PREFERRED COMMON CAPITAL ACCUMULATED AVAILABLE SECURITIES SHAREHOLDERS'
STOCK STOCK SURPLUS DEFICIT FOR SALE TRANSFERRED EQUITY
----------- ---------- ----------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January1, 1996 $ 2,658,908 $ 336,760 $ 2,369,782 $(1,294,334) $ 216,083 $(26,013) $ 4,261,186
Net income 92,280 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 47,700
Declaration of preferred
stock dividends (42,900) (42,900)
Issuance of 43 shares of
Class C Preferred Stock
Series 1994-1 in lieu of
dividend payments 42,900 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 2,749,508 336,760 2,369,782 (1,244,954) (29,177) (19,396) 4,162,523
Net income 863,974 863,974
Payment of dividends Class (21,181) (21,181)
C Preferred Stock Series
1994-1
Payment of dividends Class C (66,115) (66,115)
Preferred Stock Series MI-1
Payment of dividends Class A (59,850) (59,850)
and Class B Preferred Stock
Changes in value of securities 89,123 89,123
available for sale, net
Amortization of unrealized
holding loss on securities
transferred 14,334 14,334
----------- ---------- ----------- ----------- ---------- -------- ----------
Balance, December 31, 1997 $ 2,749,508 $ 336,760 $ 2,369,782 $ (528,126) $ 59,946 $ (5,062) $4,982,808
=========== ========== =========== =========== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 35
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 863,974 $ 92,280
Reconciling items:
Provision (credit) for loan losses (290,879) 1,002,750
Depreciation 528,283 453,963
Net amortization of premiums and discounts 74,552 49,096
Loss/writedown other assets 88,044 -
Loans originated for sale (2,528,383) (12,236,125)
Proceeds from loans originated for sale 3,613,074 13,070,639
Net gains on sale of residential real estate loans (210,867) (563,514)
Net realized gains on securities available for sale (32,525) (40,742)
Changes in assets and liabilities:
Interest receivable and other assets 318,476 (438,685)
Accrued expenses and other liabilities (332,641) 67,674
------------ ------------
Net cash from operating activities 2,091,108 1,457,336
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Purchases (20,297,593) (8,120,364)
Sales proceeds 2,020,000 3,692,500
Principal payments 4,121,104 6,153,573
Securities held to maturity:
Purchases (6,526,450) (8,706,654)
Maturities 8,000,000 6,700,000
Net change in loans 4,945,009 (2,867,389)
Premises and equipment expenditures, net (217,423) (370,544)
------------ ------------
Net cash from investing activities (7,955,353) (3,518,878)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits (2,429,941) (1,186,230)
Net change in short term borrowings 7,832,928 510,110
Interest on Senior Notes (108,500) -
Dividends on Class A and Class B preferred Stock (59,850) -
------------ ------------
Net cash from financing activities 5,234,637 (676,120)
------------ ------------
Net change in cash and cash equivalents (629,608) (2,737,662)
Cash and cash equivalents at beginning of year 14,321,988 17,059,650
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,692,380 $ 14,321,988
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,219,193 $ 2,048,047
Loans transfered to other real estate 46,829 136,431
Issuance of Class C preferred stock in lieu of dividend payments - 42,900
Issuance of Class C preferred stock in lieu of interest payments - 47,700
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 36
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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 two other branches within the city of Detroit.
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, and the status of contingencies are particularly
sensitive estimates and 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 short-term borrowings.
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.
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. There were no loans held for sale as of December 31, 1997, and
approximately $874,000 as of December 31, 1996.
(continued)
35
<PAGE> 37
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 Bank 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 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.
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.
(continued)
36
<PAGE> 38
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 federal
income taxes were paid in 1997 or 1996.
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: Basic earnings per share is based on weighted-average common
shares outstanding. Diluted earnings per share further assumes issue of any
dilutive potential common shares. The accounting standard for computing earnings
per share was revised for 1997, and all earnings per share previously reported
are restated to follow the new standard.
Future Accounting Changes: New accounting standards have been issued which will
require future reporting of comprehensive income (net income plus changes in
holding gains and losses on available for sale securities) and may require
redetermination of industry segment financial information.
The Financial Accounting Standards Board issued SFAS No. 130, Reporting
Comprehensive Income, which is effective for both interim and year-end financial
statements for fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display
(continued)
37
<PAGE> 39
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
of comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. Comprehensive
income is defined as all changes in equity other than those resulting from
investments by owners or distributions by owners. Net income is, therefore, a
component of comprehensive income. The most common items of other comprehensive
income are unrealized gains or losses on securities available for sale. While
full disclosure for each reported period is required in year-end financial
statements, interim financial statements need only disclose total comprehensive
income for each reported period. No disclosure is required if the Company has no
items of other comprehensive income in any reported period included in the
financial statements.
The Statement does not mandate a specific format for reporting comprehensive
income, but it does require that all items that are required to be recognized as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Companies will
generally choose between adding the items of other comprehensive income to the
Income Statement, adding them to the Statement of Shareholders' Equity or
displaying a new financial statement, which could be titled Statement of
Comprehensive Income.
The Financial Accounting Standards Board issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, which is effective for
reported periods included in year-end financial statements for fiscal years
beginning after December 15, 1997 and for all reported periods in interim
financial statements for reporting periods following the first required full
fiscal year disclosure. SFAS No. 131 establishes new guidance for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable operating segments in interim financial reports
issued to shareholders. SFAS No. 131 supersedes the industry approach to segment
disclosure previously required by SFAS No. 14, Financial Reporting for Segments
of a Business Enterprise, replacing it with a method of segment reporting which
is based on the structure of an enterprise's internal organization reporting.
The Statement also establishes standards for related disclosures about products
and services, geographic areas and major customers.
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
(continued)
38
<PAGE> 40
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 2 - CURRENT OPERATING ENVIRONMENT (continued)
of Comptroller of the Currency (the "OCC") which required 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, 1997 and 1996, the Bank's equity capital (as
defined) to total assets ratio was 5.90% and 5.64%, respectively.
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
unauthorized loan 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 unauthorized performing loans.
Subsequently, the allowance was reduced through a negative provision in the
first quarter of 1997.
On January 16, 1998, the OCC, after examining the Bank, determined that the Bank
was in substantial compliance with the Agreement. Therefore, the OCC, terminated
the Agreement with First Independence National Bank of Detroit.
NOTE 3 - SECURITIES
<TABLE>
<CAPTION>
Year-end seurities were as follows: Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Available for sale 1997
U.S. Treasury $ 4,038,161 $ 32,710 $ 103 $ 4,070,768
U.S. Government agency 20,332,988 42,400 17,340 20,358,048
Other 167,100 - - 167,100
----------- -------- ----------- -----------
24,538,249 75,110 17,443 24,595,916
Mortgage-backed 298,353 2,279 - 300,632
----------- -------- ----------- -----------
$24,836,602 $ 77,389 $ 17,443 $24,896,548
=========== ======== =========== ===========
Available for sale 1996
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
=========== ======== =========== ===========
Held to maturity 1997
U.S. Treasury $ 6,983,184 $ 39,890 $ - $ 7,023,074
U.S. Government agency 10,040,293 52,725 31,821 10,061,197
----------- -------- ----------- -----------
$17,023,477 $ 92,615 $ 31,821 $17,084,271
=========== ======== =========== ===========
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
=========== ======== =========== ===========
</TABLE>
The Corporation realized gross gains of $32,525 and $40,742 upon receiving
proceeds of $2,020,000 and $3,692,500 from the sales of securities available for
sale in 1997 and 1996.
(continued)
39
<PAGE> 41
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 3 - SECURITIES (continued)
Contractual maturities of debt securities at year-end 1997 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 $ 5,376,432 $ 5,383,812 $ 1,039,797 $ 1,040,650
Due from one to five years 11,647,045 11,700,459 22,321,899 22,373,166
Due from five to ten years - - 1,009,453 1,015,000
Mortgage backed and other - - 465,453 467,732
----------- ----------- ------------ -----------
$17,023,477 $17,084,271 $ 24,836,602 $24,896,548
=========== =========== ============ ===========
</TABLE>
Securities with an amortized cost of $19,403,000 and $20,325,000 at year-end
1997 and 1996 were pledged to secure public deposits and repurchase agreements.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Beginning balance $ 765,561 $ 1,163,834
Provision (credit) for loan losses (290,879) 1,002,750
Loans charged off (771,444) (1,562,813)
Recoveries of loans previously charged off 1,232,852 161,790
----------- -----------
Ending balance $ 936,090 $ 765,561
=========== ===========
</TABLE>
As discussed in Note 2, the Bank recorded a recovery of $1,137,000 to the
allowance in February 1997.
At year end 1997 and 1996, the total recorded investment in impaired loans, as
defined by SFAS No. 114, was $2,475,336 and $2,019,893, respectively. Total
allowance for loan losses related to impaired loans was $583,458 and $299,059 at
year end 1997 and 1996. The average of impaired loans during 1997 was $2,247,615
and $1,890,000 during 1996. Impaired loans for which an allowance for loan
losses was allocated is $1,768,691 at year end 1997. The balance of impaired
loans for which there was no allocation was $706,645 at year end 1997. Interest
income on impaired loans is recognized primarily on a cash basis. Interest
income recognized during impairment was $163,021 and $123,871 during 1997 and
1996.
(continued)
40
<PAGE> 42
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and land improvements $ 481,814 $ 481,314
Buildings 2,133,155 2,087,546
Furniture and fixtures 2,536,320 3,742,891
Leasehold improvements 442,750 547,977
----------- ----------
Total cost 5,594,039 6,859,728
Less accumulated depreciation (2,348,134) (3,302,963)
----------- ----------
$ 3,245,905 $3,556,765
=========== ==========
</TABLE>
NOTE 6 - DEPOSITS
Year-end deposits consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Demand deposits $31,304,908 $24,486,322
NOW accounts 5,198,539 6,282,122
Savings deposits 13,787,459 14,619,043
Certificates of deposit 30,808,847 38,142,207
----------- -----------
$81,099,753 $83,529,694
=========== ===========
</TABLE>
Time deposit accounts individually exceeding $100,000 totaled $16,134,140 and
$23,692,111 at year end 1997 and 1996.
At year-end 1997, stated maturities of time deposits were:
<TABLE>
<CAPTION>
<S> <C>
1998 $24,909,205
1999 3,472,353
2000 2,235,155
2001 161,678
2002 30,456
-----------
$30,808,847
===========
</TABLE>
(continued)
41
<PAGE> 43
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 7 - BORROWINGS
As a source of short-term financing, the Corporation purchases Federal funds and
sells securities under agreements to repurchase at a later date. Information
concerning short term borrowings is summarized below.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Federal funds purchased
Outstanding at year end $ 5,000,000 -
Average interest rate at year end 6.25%
Average month-end balance during the year $ 1,250,000 -
Average interest rate during the year 5.56% -
Maximum month-end balance during the year $ 5,000,000 -
Securities sold under repurchase agreements
Outstanding at year end $ 7,117,616 $4,284,688
Average interest rate at year end 4.75% 4.25%
Average month-end balance during the year $ 5,052,193 $5,058,000
Average interest rate during the year 4.62% 4.74%
Maximum month-end balance during the year $ 8,369,113 $9,183,000
Total short-term borrowings
Outstanding at year end $12,117,616 $4,284,688
Average interest rate at year end 5.37% 4.25%
Average month-end balance during the year $ 6,302,193 $5,058,000
Average interest rate during the year 4.75% 4.74%
Maximum month-end balance during the year $12,117,616 $9,183,000
</TABLE>
Long-term debt consists entirely of senior notes, with an interest rate of 6%,
and matures 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 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).
NOTE 8 - PREFERRED STOCK
Preferred stock at December 31, 1997 and 1996 is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
AUTHORIZED ISSUED AND OUTSTANDING AUTHORIZED ISSUED AND 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) 100,000 530 529,508 100,000 530 529,508
Class C, no par value
(series MI-1) - 1,500 1,500,000 1,500 1,500,000
------------ -----------
- - $ 2,749,508 $ 2,749,508
============ ===========
</TABLE>
(continued)
42
<PAGE> 44
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 8 - PREFERRED STOCK (continued)
Class A and B preferred stockholders are entitled to 4.75% cumulative semiannual
dividends payable March 1 and September 1. 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. In the event the
Corporation shall be in default of the payment of four consecutive semiannual
preferred dividends, Class A preferred stockholders will be entitled to elect
three additional members to the Corporation's Board of Directors until such time
that the cumulative dividends are paid in full.
The 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 for $120 per share. 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 (MSHDA). 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. Dividends may be waived, partially or in their entirety, if the
Bank achieves certain mutually agreed upon goals established by MSHDA. These
goals relate primarily to the origination of MSHDA guaranteed loan products.
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.
(continued)
43
<PAGE> 45
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 9 - REGULATORY MATTERS AND RESTRICTIONS ON RETAINED EARNINGS
The Corporation and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Since the Corporation is a one-bank
holding company and has consolidated assets of less than $150 million,
regulatory minimum capital tests are applied primarily to the subsidiary bank.
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.
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, 1997
and 1996, 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
ACTUL ADEQUACY PURPOSES ACTION REGULATIONS
----- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
Total capital (to risk weighted
assets) $6.4 13.20% $ 3.9 8% $ 4.9 10%
Tier 1 capital (to risk
weighted assets) $5.8 11.95% $ 2.0 4% $ 2.9 6%
Tier 1 capital (to average
assets) $5.8 6.08% $ 3.8 4% $ 4.8 5%
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%
</TABLE>
At December 31, 1997, no undistributed earnings of the Bank were available for
distribution to the Corporation as dividends without regulatory approval from
the OCC.
(continued)
44
<PAGE> 46
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 10 - INCOME TAXES
Federal income taxes consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current expense $ 0 $ 0
Deferred expense 0 0
--------- --------
Total $ 0 $ 0
========= ========
</TABLE>
Year-end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ - $ 82,344
Net operating loss carryforwards 679,389 741,166
Other 132,164 179,719
----------- -----------
811,553 1,003,229
Less valuation allowance (592,629) (895,102)
----------- -----------
Net deferred tax assets 218,924 108,127
Deferred tax liabilities
Accumulated depreciation 95,435 108,127
Allowance for loan losses 105,847 -
Other 17,642 -
----------- -----------
Net deferred tax asset (liability) $ 0 $ 0
=========== ===========
</TABLE>
At December 31, 1996 and 1997, the Corporation had net operating loss
carryforwards for federal income tax purposes of approximately $2,180,000 and
$1,998,000 respectively, which, if not used, will expire beginning in 2005.
The change in the valuation allowance from 1996 to 1997 is primarily due to the
decrease in the net operating loss carryforward and change in other 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>
1997 1996
---- ----
<S> <C> <C>
Statutory rate applied to income before taxes $ 293,750 $ 31,375
Add (deduct)
Nondeductible expenses 8,723 7,766
Change in valuation allowance (302,473) (39,141)
--------- --------
Income tax expense $ 0 0
========= ========
</TABLE>
(continued)
45
<PAGE> 47
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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 1997 and 1996 would not be
material.
At December 31, 1997, there were 64,352 options available for future grant under
the Plan and 3,000 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. The ESOP plan was frozen December 31, 1996, and no
further contributions to the ESOP plan will be made. 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)
46
<PAGE> 48
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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
$170,905 and $163,503 in 1997 and 1996, respectively. Future minimum rentals
under noncancelable operating leases as of December 31, 1997 are as follows:
1998 $ 132,727
1999 134,400
2000 134,400
2001 134,400
2002 134,400
Thereafter 123,700
-----------
$ 794,027
===========
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>
1997 1996
---- ----
<S> <C> <C>
Commitments to extend credit $ 16,124,000 $ 15,497,000
Letters of credit 1,223,000 547,000
</TABLE>
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.
continued
47
<PAGE> 49
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 13 - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT
(continued)
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 religious organizations comprise 10.9% of the Bank's total loans at
December 31, 1997. Commercial loans to apartment building operators comprise
9.6% of the Bank's total loans at December 31, 1997.
At year-end 1997 and 1996, 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 $83,219 and $240,086 at December 31, 1997 and 1996. During
1997, the Corporation had no new loans, repayments of $6,867, and other changes
of $150,000.
Related party deposits totaled $155,499 and $126,619 at year-end 1997 and 1996.
(continued)
48
<PAGE> 50
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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, 1997 DECEMBER 31, 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $13,692,380 $ 13,692,380 $ 14,321,988 $ 14,321,988
Securities 41,920,025 41,980,819 29,175,658 29,047,794
Loans, net 39,705,889 39,717,185 45,280,670 45,676,631
Accrued interest receivable 898,186 898,186 934,201 934,201
Financial Liabilities
Deposits:
Demand 31,304,908 31,304,908 24,486,322 24,486,322
NOW 5,198,539 5,198,539 6,282,122 6,282,122
Saving 13,787,459 13,787,459 14,619,043 14,619,043
Certificates of deposit 30,808,847 30,819,378 38,142,207 38,138,696
Short- term borrowings 12,117,616 12,117,616 4,284,688 4,284,688
Long-term debt 900,000 795,724 900,000 814,800
Accrued interest payable 264,544 264,544 276,314 276,314
</TABLE>
(continued)
49
<PAGE> 51
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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, 1997 and 1996 and for the years then ended are
as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash $ 1,666 $ 1,666
Loan receivable, related party - 150,000
Accrued interest - 2,639
Dividend receivable from bank 87,296 -
Investment in subsidiary 5,881,142 5,282,468
---------- ----------
$5,970,104 $5,436,773
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Other liabilities $ - $ 374,250
Dividend payable 87,296 -
Long-term debt 900,000 900,000
---------- ----------
987,296 1,274,250
Shareholders' equity 4,982,808 4,162,523
---------- ----------
$5,970,104 $5,436,773
========== ==========
</TABLE>
(continued)
50
<PAGE> 52
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (continued)
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Income
Interest income $ - $ 2,883
Other income 320,000 -
Expense
Interest on senior notes 54,250 54,000
Provision for loan loss 152,639 -
---------- ---------
Income/(loss) before federal income tax (benefit) and equity in
undistributed earnings of bank subsidiary 113,111 (51,117)
Federal income taxes - -
---------- ---------
Income/(loss) before equity in undistributed earnings of bank
subsidiary 113,111 (51,117)
Equity in undistributed net income of subsidiary 750,863 143,397
---------- ---------
Net Income $ 863,974 $ 92,280
========== =========
</TABLE>
(continued)
51
<PAGE> 53
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 863,974 $ 92,280
Reconciling items:
Provision for loan losses 152,639 -
Equity in net income of subsidiary
(750,863) (143,397)
Changes in assets and liabilities:
Interest receivable and other assets - (36,827)
Accrued expenses and other liabilities (374,250) 54,000
--------- ---------
Net cash from operating activities (108,500) (33,944)
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received subsidiary 168,350 -
--------- ---------
Net cash from investing activities 168,350 -
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (59,850) -
--------- ---------
Net cash from financing activities (59,850) -
--------- ---------
Net change in cash and cash equivalents - (33,944)
Cash and cash equivalents at beginning of year 1,666 35,610
--------- ---------
Cash and cash equivalents at end of year
$ 1,666 $ 1,666
========= =========
</TABLE>
NOTE 17 - SUBSEQUENT EVENTS
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 employment and retaliatory discharge. After several
post-trial hearings, a judgment was entered on the verdict in October 1994. 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, the Bank's subsidiary, or any of the
individual defendants. The plaintiff sought leave of the Michigan Supreme Court
to appeal the reversal by the Michigan Court of Appeals. On March 17, 1998, the
Michigan Supreme Court denied the appeal holding that the questions presented
should not be reviewed by the Court. Accordingly, the Corporation recorded
other income in the 1997 financial statements in the amount of $320,000 to
reverse an accrued liability previously established for this claim.
52
<PAGE> 54
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:
EXHIBIT NUMBER DESCRIPTION
3 Articles of Incorporation and By-Laws of the
registrant were previously filed as an exhibit to the
Annual Report on Form 10-K for the year ended
December 31, 1992 (File No. 0-15777) and are
incorporated herein by reference. Amendments to
Articles of Incorporation authorizing additional
common stock, authorizing Class C Preferred Stock,
crediting the terms and conditions of Class C
Preferred Stock, Series 1994-1, and Series MI-1, were
set forth as Exhibits to the Proxy Statement dated
September 8, 1994.
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
53
<PAGE> 55
EXHIBIT NUMBER DESCRIPTION
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.
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.
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.
54
<PAGE> 56
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 19, 1998
/s/ Rose Ann Lacy
- -----------------------------------------
Rose Ann Lacy
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: March 19, 1998
55
<PAGE> 57
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 19, 1998
/s/ Dr. Charles Morton
- -----------------------------------------
Dr. Charles E. Morton
Director
Date: March 19, 1998
/s/ Barry Clay
- -----------------------------------------
Barry Clay
Director
Date: March 19, 1998
/s/ Alan Young
- -----------------------------------------
Alan Young
Director
Date: March 19, 1998
/s/ Georgis Garmo
- -----------------------------------------
Georgis Garmo
Director
Date: March 31, 1998
/s/ Jamal Shallal
- -----------------------------------------
Jamal Shallal
Director
Date: March 19, 1998
/s/ Geneva Williams
- -----------------------------------------
Geneva Williams
Director
Date: March 19, 1998
56
<PAGE> 58
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,517,380
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,175,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,896,548
<INVESTMENTS-CARRYING> 17,023,477
<INVESTMENTS-MARKET> 18,411,605
<LOANS> 40,641,979
<ALLOWANCE> 936,090
<TOTAL-ASSETS> 99,731,613
<DEPOSITS> 81,099,753
<SHORT-TERM> 12,117,616
<LIABILITIES-OTHER> 631,436
<LONG-TERM> 900,000
0
2,749,508
<COMMON> 336,760
<OTHER-SE> 1,896,540
<TOTAL-LIABILITIES-AND-EQUITY> 99,731,613
<INTEREST-LOAN> 4,093,313
<INTEREST-INVEST> 1,970,994
<INTEREST-OTHER> 719,485
<INTEREST-TOTAL> 6,783,792
<INTEREST-DEPOSIT> 1,833,511
<INTEREST-EXPENSE> 2,181,457
<INTEREST-INCOME-NET> 4,602,335
<LOAN-LOSSES> (290,879)
<SECURITIES-GAINS> 32,525
<EXPENSE-OTHER> 1,234,814
<INCOME-PRETAX> 863,974
<INCOME-PRE-EXTRAORDINARY> 863,974
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 863,974
<EPS-PRIMARY> 2.20
<EPS-DILUTED> 2.20
<YIELD-ACTUAL> 4.09
<LOANS-NON> 1,240,000
<LOANS-PAST> 1,659,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,235,000
<ALLOWANCE-OPEN> 765,561
<CHARGE-OFFS> 771,444
<RECOVERIES> 1,232,852
<ALLOWANCE-CLOSE> 936,090
<ALLOWANCE-DOMESTIC> 583,458
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 352,632
</TABLE>
