<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-KSB
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998 Commission File No. 0-15777
FIRST INDEPENDENCE CORPORATION
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
MICHIGAN 38-2583843
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
</TABLE>
44 MICHIGAN AVENUE, DETROIT, MICHIGAN 48226
(Address of principal executive offices)
(313) 256-8400
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: NONE
Securities registered under 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 past 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
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenue for its most recent fiscal year was $8,536,425.
The aggregate market value of voting stock of the registrant held by
nonaffiliates was approximately $1,043,914 as of March 31, 1999, based on an
appraisal as of December 31, 1998. There is no trading market for the Issuer's
Common Stock. For purposes of this calculation, 210,225 shares owned by the
members of the Corporation's Board of Directors have been excluded.)
As of March 31, 1999, 336,760 shares of Common Stock of the issuer were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts II and III Portions of 1998 Annual Report to the
Shareholders of the issuer for the year
ended December 31, 1998.
Part III Portions of the Proxy Statement of the
issuer dated .
Transitional Small Business Disclosure Format YES X NO
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1.
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE CORPORATION
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
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.
EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings of the Corporation are affected by domestic economic conditions and
the monetary and fiscal policies of the United States government, its agencies,
and the Federal Reserve Board. The Federal Reserve Board's monetary policies
have had, and will likely continue to have, an important impact on the operating
results of commercial banks through its power to implement national monetary
policy in order to, among other things, curb inflation or avoid a recession. The
policies of the Federal Reserve Board have a major effect upon the levels of
bank loans, investments and deposits through its open market operations in
United States government securities, and through its regulation of, among other
things, the discount rate on borrowings of member banks and the reserve
requirements against member bank deposits. It is not possible to predict the
nature and impact of future changes in monetary and fiscal policies. The Bank
maintains reserves directly with the Federal Reserve Bank of Chicago to the
extent required by law.
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 the 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. On January 16, 1998, the Comptroller of
the Currency terminated the formal agreement with the Bank.
2.
<PAGE> 3
The Corporation, as a bank holding company under the Bank Holding Company Act,
is required to file an annual report with the Federal Reserve Board and such
additional information as the Federal Reserve Board may require pursuant to the
Bank Holding Company Act, and is subject to examination by the Federal Reserve
Board.
The Bank Holding Company Act limits the activities which may be engaged in by
the Corporation and its subsidiary to those of banking and the management of
banking organizations, and to certain non-banking activities, including those
activities which the Federal Reserve Board may find, by order or regulation, to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. The Federal Reserve Board is empowered to differentiate
between activities by a bank holding company, or a subsidiary thereof, and
activities commenced by acquisition of a going concern.
With respect to non-banking activities, the Federal Reserve Board has, by
regulation, determined that certain non-banking activities are closely related
to banking within the meaning of the Bank Holding Company Act. These activities
include, among other things, operating a mortgage company, finance company,
credit card company or factoring company, performing certain data processing
operations, providing certain investment and financial advice, acting as an
insurance agent for certain types of credit related insurance, leasing property
on a full-payout, nonoperating basis; and, subject to certain limitations,
providing discount securities brokerage services for customers. The Corporation
has no current plans to engage in non-banking activities.
The Bank is subject to certain restrictions imposed by federal law on any
extension of credit to the Corporation for investments in stock or other
securities thereof, and on the taking of such stock or securities as collateral
for loans to any borrower. Federal law prevents the Corporation from borrowing
from the Bank unless the loans are secured in designated amounts.
With respect to the acquisition of banking organizations, the Corporation is
required to obtain the prior approval of the Federal Reserve Board before it can
acquire all or substantially all of the assets of any bank, or acquire ownership
or control of any voting shares of any bank, if, after such acquisition, it will
own or control more than 5% of the voting shares of such bank. Acquisitions
across state lines are subject to certain state and Federal Reserve Board
restrictions.
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 plans to open a new branch in Greektown in April 1999. 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 the tax revenues which vary with
the overall levels of activity in the automobile industry. However, the volume
of business which is small in relation to their total banking business.
3.
<PAGE> 4
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.
In the conduct of the commercial banking business by the Bank, there is
significant competition with other federally insured depository institutions,
such as banks, savings associations and credit unions. Additionally, the Bank
faces increasing competition in certain aspects of its business from consumer
finance companies, securities brokerage firms and large national retailers. The
business of the Corporation and the Bank includes several longstanding
relationships with certain customers. The loss of some of these customers could
have a material adverse effect on the Corporation and the Bank, but management
has no reason to believe that there will be any material change in these long
term relationships.
EMPLOYEES
At December 31, 1998, the Bank employed 61 full-time equivalent employees. None
of the employees are unionized. The Corporation has no employees of its own and
no payroll since it engages in no active business. While relationships between
management and other employees are considered good, management is continuing to
build stronger relationships, loyalty, and more efficient work habits.
Techniques used include regular meetings with employees, training opportunities,
and use of consultants form time to time for enhancing communication within the
Bank.
OTHER TRENDS, EVENTS AND 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 the 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. 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
Corporation" liquidity, capital resources or operations.
4.
<PAGE> 5
CONSOLIDATED STATISTICAL INFORMATION
Management's discussion and analysis includes selected statistical information.
SECURITIES PORTFOLIO
Detail for the securities portfolio is included in management's discussion and
analysis as well as in Note 3 to the consolidated financial statements.
LOAN PORTFOLIO
Detail and information relative to the loan portfolio is included in
management's discussion and analysis.
ALLOWANCE FOR LOAN LOSSES
In each accounting period, the allowance for loan and lease losses is adjusted
by management to the amount necessary to maintain the allowance at adequate
levels. Through its credit department, management will attempt to allocate
specific portions of the allowance for loan losses based on specifically
identifiable problem loans. Management's evaluation of the allowance is further
based on consideration of actual loss experience, the present and prospective
financial condition of borrowers, industry concentrations within the portfolio
and general economic conditions. Management believes that the present allowance
is adequate, based on the broad range of considerations listed above.
The primary risk element considered by management with respect to each
installment and residential real estate loan is lack of timely payment.
Management has a reporting system that monitors past due loans and has adopted
policies to pursue its creditor's rights in order to preserve the Bank's
position. The primary risk elements with respect to commercial loans are the
financial condition of the borrower, the sufficiency of collateral, and lack of
timely payment. Management has a policy of requesting and reviewing periodic
financial statements from its commercial loan customers, and periodically
reviews existence of collateral and its value.
Additional detail regarding the allowance for loan losses is included in
management's discussion and analysis and Note 4 in the consolidated financial
statements.
Although management believes that the allowance for loan and lease losses is
adequate to absorb losses as they arise, there can be no assurance that the Bank
will not sustain losses in any given period which could be substantial in
relation to the size of the allowance for loans and lease losses.
RETURN ON EQUITY AND ASSETS
Return on Equity and Asset information is included in management's discussion
and analysis included in the consolidated financial statements.
ITEM 2. DESCRIPTION OF PROPERTIES
The 28,500 square foot headquarters of the Corporation and the Bank, located at
44 Michigan Avenue, Detroit, Michigan, was purchased by the Bank in March 1987.
The Bank also owns the land and a 4,000 square foot branch at 12200 Livernois in
Detroit. The Bank leases the premises at 7020 West Seven Mile Road, and
Greektown branch location which is slated to open in April 1999. These
properties are considered by management to be well maintained and adequate for
the purpose intended.
5.
<PAGE> 6
ITEM 3. LEGAL PROCEEDINGS
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. Management does not currently
anticipate that the ultimate liability, if any, arising out of such litigation
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.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At December 31, 1998, there were 336,760 shares of the Corporation's common
stock issued and outstanding. The stock was held by approximately 2,070. During
1998, 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
values of the Registrant's common stock, the value determined by an independent
appraisal as of December 31, 1998 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 be paid only from net earnings and not
from the Bank's capital. Due to the Formal Agreement the Bank could not pay
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 of the
Corporation to pay the 1996 and 1997 dividends on Class A and B Preferred Stock,
interest on 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. Class C Preferred
Stock dividends were paid in 1998. Cash dividends on common stock were not
declared or paid in 1989 through 1998. 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 Class C Preferred Stock, Series 1994-1 and Series MI-1.
6.
<PAGE> 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This Management's Discussion and Analysis should be read in conjunction with the
consolidated financial statements contained herein. This discussion provides
information about the consolidated financial condition and results of operations
of First Independence Corporation ("Corporation") and its wholly-owned
subsidiary, First Independence National Bank of Detroit ("Bank").
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements that are based on
management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Corporation and Bank. Words such as "anticipates," "believes," "estimates,"
"expects," "forecasts," "intends," "is likely," "plans," "projects," variations
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("Future
Factors") that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecasted in such
forward-looking statements. The Corporation undertakes no obligation to update,
amend, or clarify forward-looking statements, whether as a result of new
information, future events (whether anticipated or unanticipated), or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services: the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of contingencies; trends in customer behavior as well as their ability to repay
loans; and changes in the national and local economy. These are representative
of the Future Factors that could cause a difference between an ultimate actual
outcome and a preceding forward-looking statement.
7.
<PAGE> 8
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in thousands except per share data)
CONSOLIDATED RESULTS OF OPERATIONS:
<S> <C> <C>
Interest income $ 7,463 $ 6,784
Interest expense 2,546 2,182
-------- --------
Net interest income 4,917 4,602
Provision for loan losses 255 (291)
Noninterest income 1,073 1,555
Noninterest expense 4,789 5,584
-------- --------
Income (loss) before income tax expense 946 864
Income tax expense 0 0
-------- --------
Net income (loss) 946 864
CONSOLIDATED BALANCE SHEET DATA:
Total assets 123,623 99,732
Cash and cash equivalents 27,970 13,692
Total securities 52,756 41,920
Loans, net of deferred loan fees 39,557 40,642
Allowance for loan losses 1,175 936
Deposits 94,798 81,100
Securities sold under agreements to repurchase 16,649 7,118
Shareholders' equity 5,777 4,962
CONSOLIDATED FINANCIAL RATIOS:
Return on average assets 0.88% 0.89%
Return on average shareholders' equity 17.32% 14.60%
Nonperforming loans to loans 3.37% 10.17%
Allowance for loan losses to loans 2.97% 2.30%
Tier 1 leverage risk-based capital (Bank only) 12.06% 11.95%
Tier 1 leverage capital (Bank only) 5.75% 6.08%
Total risk-based capital (Bank only) 13.32% 13.20%
PER SHARE DATA:
Net Income:
Basic $ 2.71 $ 2.20
Diluted 2.71 2.20
Book value at end of period 17.26 14.80
</TABLE>
8.
<PAGE> 9
FINANCIAL CONDITION
The Corporation experienced significant asset growth during 1998. Assets of the
Corporation increased from $99.7 million on December 31, 1997 to $123.6 million
on December 31, 1998. This represents an increase in total assets of $23.9
million, which was primarily comprised of a $13 million increase in federal
funds sold and a $10.8 million increase in investment securities. The increase
in assets was primarily funded by a $13.7 million increase in deposits, and a
$9.5 million increase in securities sold under agreements to repurchase
(repurchase agreements).
EARNING ASSETS
The loan portfolio decreased approximately $1.1 million during 1998, compared to
1997. 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. The decline in
the commercial real estate and consumer portfolios is due to runoff and
tightening of underwriting guidelines.
Commercial loans are generally secured by accounts receivable, inventory, and
machinery and equipment. In most cases, these loans are also 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. 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 9.4% of the Bank's total loans
at December 31, 1998. Commercial loans to apartment building operators comprise
10.7% of the Bank's total loans at December 31, 1998.
Residential real estate is the largest loan category as of December 31, 1998,
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 the 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 is the home. Thus, the value of the collateral and the amount
of the first mortgage are important to repayment. Other consumer loans include
automobile, boat loans, and credit card loans. In addition, there are consumer
lines of credit which, in some cases, are secured by the borrower's home equity.
In all of 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.
The following table presents the maturity of total loans outstanding as of
December 31, 1998, according to scheduled repayments of principal. All figures
are stated in thousands of dollars.
9.
<PAGE> 10
<TABLE>
<CAPTION>
0-1 1-5 After 5
Year Years Years Total
---- ----- ----- -----
<S> <C> <C> <C> <C>
Commercial real estate - fixed rate $ 2,687 $ 3,861 $ 851 $ 7,399
Commercial real estate - variable rate 351 667 1,018
Commercial - fixed rate 1,851 3,910 696 6,457
Commercial - variable rate 3,616 744 20 4,380
Real estate - fixed rate 1,037 5,402 7,756 14,195
Real estate - variable rate 16 366 43 425
Installment - fixed rate 1,112 2,843 1,343 5,298
Installment - variable rate 82 303 385
----------- ----------- --------- -----------
$ 10,752 $ 18,096 $ 10,709 $ 39,557
=========== =========== ========= ===========
</TABLE>
The Corporation's credit policies establish guidelines to manage credit risk and
asset quality. These guidelines include loan review and early identification of
problem loans to ensure effective loan portfolio administration. The credit
policies and procedures are meant to minimize the risk and uncertainties
inherent in lending. In following these policies and procedures, the Corporation
must rely on estimates, appraisals and evaluations of loans and the possibility
that changes in these could occur quickly because of changing economic
conditions. Identified problem loans, which exhibit characteristics (financial
or otherwise) that could cause the loans to become nonperforming or require
restructuring in the future, are included on the internal "Watch List." Senior
management reviews this list regularly and adjusts for changing conditions.
Nonperforming loans include loans with principal or interest past due 90 days or
more, loans placed on nonaccrual, and other impaired loans. Nonaccrual loans are
those nonperforming or other impaired loans on which the Bank does not accrue
periodic interest income. Loans are placed on nonaccrual status when principal
or interest is in default for a period of 90 days or more unless the loan is in
the process of collection and is well secured so that delinquent principal and
interest would be expected to be satisfied from the collateral. The following
table details information concerning nonperforming, nonaccrual and other
impaired loans as of December 31 for the year indicated (dollars in thousands).
The improvement in the level of nonperforming loans was the result of
management's increased emphasis on portfolio monitoring and collection efforts.
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Nonaccrual loans $ 889 $1,240
Other impaired loans 287 1,235
Loans past due 90 days or more 158 1,659
------ ------
Total nonperforming loans $1,334 $4,134
====== ======
Allowance for loan losses as a percentage of nonperforming loans 88% 23%
</TABLE>
In each accounting period, the allowance for loan and lease losses is adjusted
by management to the amount necessary to maintain the allowance at adequate
levels. Through its credit department, management will attempt to allocate
specific portions of the allowance for loan losses based on specifically
identifiable problem loans. Management's evaluation of the allowance is further
based on consideration of actual loss experience, the present and prospective
financial condition of borrowers, industry concentrations within the portfolio
and general economic conditions. Management believes that the present allowance
is adequate, based on the broad range of considerations listed above.
The allowance for loan losses was allocated in the amount deemed reasonably
necessary to provide for possible losses within the following loan categories as
of December 31 (dollars in thousands):
10.
<PAGE> 11
<TABLE>
<CAPTION>
1998 1997
--------- ---------
Balance at End of Principal Allocated % of Total Principal Allocated % of Total
Period Allocated to Balance Allowance Loans Balance Allowance Loans
------------------- --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial $19,254 $ 515 49% $21,438 $ 776 53%
Real estate mortgage 14,620 20 37 13,248 19 33
Consumer 5,683 123 14 5,956 90 14
Unallocated 517 51
------- ------- ------- ------- ------- -------
$39,557 $ 1,175 100% $40,642 $ 936 100%
======= ======= ======= ======= ======= =======
</TABLE>
The primary risk element considered by management with respect to each
installment and residential real estate loan is lack of timely payment.
Management has a reporting system that monitors past due loans and has adopted
policies to pursue its creditor's rights in order to preserve the Bank's
position. The primary risk elements with respect to commercial loans are the
financial condition of the borrower, the sufficiency of collateral, and lack of
timely payment. Management has a policy of requesting and reviewing periodic
financial statements from its commercial loan customers, and periodically
reviews existence of collateral and its value.
Although management believes that the allowance for loan and lease losses is
adequate to absorb losses as they arise, there can be no assurance that the Bank
will not sustain losses in any given period which could be substantial in
relation to the size of the allowance for loans and lease losses.
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. 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 portfolio is reduced. The maturity of
the portfolio is generally short to intermediate, with maturities averaging less
than five years.
The investment securities portfolio experienced significant growth during 1998,
increasing from $41.9 million at December 31, 1997 to $52.8 million at December
31, 1998. The Corporation maintains the portfolio at levels to provide adequate
pledging for the repurchase agreement program and secondary liquidity for the
Corporation's daily operations.
The following table shows the maturities and weighted average yields of the
investment portfolio at December 31, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
Carrying Average
Value Yield
----- -----
<S> <C> <C>
Available for sale
U.S. Treasury securities and obligations of U.S
Government agencies
One year or less $ 3,040 5.96%
Over one through five years 15,012 6.07
Over five through ten years 29,911 6.00
------- ----
47,963 6.02
Mortgage backed securities and other 222 6.96
------- ----
48,185 6.02
<CAPTION>
Carrying Average
Value Yield
----- -----
<S> <C> <C>
Held to maturity
U.S. Treasury securities and obligations of U.S
Government agencies
One year or less $ 2,540 5.97%
Over one through five years 2,031 6.11
------- ----
</TABLE>
11.
<PAGE> 12
<TABLE>
<S> <C> <C>
4,571 6.03
$52,756 6.02
======= ====
</TABLE>
As of December 31, 1998, the securities of no issuer except the U.S. Government
had an aggregate carrying value that exceeded 10% of shareholders' equity.
Federal funds sold, consisting of excess funds sold overnight to correspondent
banks, are used to manage daily liquidity needs and interest rate sensitivity.
During 1998, the average balance of these funds equaled 14.1% of average earning
assets.
SOURCE OF FUNDS
The Corporation's major source of funds is from deposits. Total deposits
increased from $81.1 million at December 31, 1997, to $94.8 million at December
31, 1998. A significant increase occurred in demand deposit accounts, and was
due to substantial deposits from local governments and governmental agencies.
Frequently, at the end of a year, the Bank receives large deposits from large
corporations or government agencies for very short terms. Sometimes these are
tax deposits, or tax revenues collected and not ready to be used. Because the
Bank receives a significant amount of these deposits, it maintains a high degree
of liquidity so that withdrawals may be funded easily. These deposits are not
all predictable, but some do follow patterns such as payroll cycles or tax
revenue receipts.
Certificates of deposit increased from $30.8 million at December 31, 1997 to
$32.0 million at December 31, 1998. Time deposits individually exceeding
$100,000 totaled $17.4 million and $16.1 million at December 31, 1998 and 1997.
The maturities of time deposits individually exceeding $100,000 at year-end were
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Three months or less $ 12,092 $ 8,441
Three months through six months 1,589 1,459
Six months through twelve months 1,614 2,092
Greater than twelve months 2,126 4,142
----------- -----------
Total $ 17,421 $ 16,134
=========== ===========
</TABLE>
Repurchase agreements increased $9.5 million from $7.1 million at December 31,
1997 to $16.6 million at December 31, 1998. The securities involved in the
repurchase agreement program are recorded as assets of the Corporation. Although
not considered deposits, and therefore not afforded Federal Deposit Insurance
Corporation insurance, this product enables the Corporation to provide the
equivalent of an interest-bearing checking account to incorporated businesses
that are prohibited by banking regulations from owning such an account. The
repurchase agreement program is designed for businesses that would maintain
relatively large checking account balances. Repurchase agreements as of December
31 were as follows (dollars in thousands):
12.
<PAGE> 13
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Outstanding at year end 16,649 7,118
Average interest rate at year end 4.38% 4.75%
Average month-end balance during the year 7,164 5,052
Average interest rate during the year 4.69% 4.62%
Maximum month-end balance during the year 16,649 8,369
</TABLE>
Shareholders' equity increased from $5.0 million at December 31, 1997 to $5.8
million at December 31, 1998. The increase is directly attributable the
retention of current year earnings. The Corporation did not pay any dividends to
common shareholders during 1998. Preferred dividends in the amount of $34,200
were paid to Class A and B preferred shareholders during 1998. The Corporation's
capital ratios exceeded the minimum levels prescribed by the Federal Reserve
Board, as shown in Note 9 of the consolidated financial statements.
RESULTS OF OPERATIONS
The Corporation reported net income of $946,393 or $2.71 per share for 1998.
This was 9.5% higher than the $863,974, or $2.20 per share, earned in 1997. The
increase in net income was primarily a result of increased net interest income
from $4.6 million to $4.9 million, along with a decrease in noninterest
expenses. The decrease in the loan portfolio caused interest income and fees to
decline approximately $166,000, from 1997. Interest income from investment
securities increased approximately $831,000 due to the $10.8 million increase in
the portfolio during 1998. The decrease in noninterest income is primarily due
to a decrease in gains on sales of residential real estate loans caused by a
decline in mortgage originations by the Bank's mortgage department. The decrease
in salaries and employee benefits accounted for most of the decline in
noninterest expenses. Salaries and employee benefits decreased approximately
$407,000 from 1997, primarily due to employee departures during 1998.
No federal income taxes were paid or accrued in 1997 or 1998. At December 31,
1998, the Corporation had net operating loss carryforwards for federal income
tax purposes of approximately $1,001,000 which, if not used, will expire
beginning in 2005. The Corporation will not record income tax expense until the
net operating losses are recovered. It is anticipated that the Corporation will
be in a taxable position in the future.
The following table shows some of the key equity performance ratios for the year
ended December 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Return on average total assets 0.88% 0.89%
Return on average equity 17.32 14.60
Dividend payout ratio N/A N/A
Average equity to average assets 5.09 6.11
</TABLE>
13.
<PAGE> 14
NET INTEREST INCOME
Net interest income, the difference between revenue generated from earning
assets and the interest cost of funding those assets, is the Corporation's
primary source of earnings. Interest income and interest expense totaled $7.4
million and $2.5 million during 1998, respectively, providing for net interest
income of $4.9 million. The net yield on average earning assets during 1998 was
3.68%. The level of net interest income is primarily a function of asset size,
as the weighted average interest rate received on earning assets is greater than
the weighted average interest cost of funding sources; however, factors such as
types of assets and liabilities, interest rate risk, liquidity, and customer
behavior also impact net interest income as well as the net yield. The following
table depicts the average balance, interest earned and paid, and weighted
average rate of the Corporation's assets, liabilities and shareholders' equity
during 1998 and 1997:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------1998----------------- --------------------1997-----------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Investment securities $ 46,046 $ 2,802 6.09% $ 33,401 $ 1,971 5.90%
Loans, net 39,918 3,928 9.84 41,521 4,093 9.86
Federal funds sold 14,070 733 5.21 13,170 719 5.46
-------------- ------------ -------------- -------------
Total earning assets 100,034 7,463 7.46 88,092 6,783 7.70
Other non-earning assets 7,262 8,691
-------------- --------------
Total assets $ 107,296 $ 96,783
============== ==============
Money market deposits $ 8,627 $ 183 2.12% $ 6,052 $ 133 2.20%
Savings deposits 14,523 327 2.25 14,599 344 2.36
Time deposits 31,218 1,374 4.40 32,704 1,356 4.15
-------------- ------------ -------------- -------------
Total interest-bearing
deposits 54,368 1,884 3.47 53,355 1,833 3.44
Short term borrowings 12,164 608 5.00 6,178 294 4.76
Long term debt 900 54 6.00 900 54 6.00
-------------- ------------ -------------- -------------
Total interest-bearing
liabilities 67,432 2,546 3.78 60,433 2,181 3.61
------------ -------------
Other liabilities 34,402 30,432
-------------- --------------
Total liabilities 101,834 90,865
Average equity 5,462 5,918
-------------- --------------
Total liabilities and
equity $ 107,296 $ 96,783
============== ==============
Net interest income $ 4,917 $ 4,602
============ =============
Rate spread 3.68 4.09
Net interest margin 4.92 5.22
</TABLE>
The following table presents the dollar amount of change in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. For purposes of this table, changes attributable
to both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and change due to rate.
14.
<PAGE> 15
<TABLE>
<CAPTION>
Year ended December 31,
-----------1998 over 1997--------- ----------1997 over 1996----------
Total Volume Rate Total Volume Rate
----- ------ ---- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest income
Loans $ (165) $ (158) $ (7) $ (554) $ (387) $ (167)
Investment securities 831 768 63 139 145 (6)
Federal funds sold 14 48 (34) 173 162 11
---------- ---------- --------- --------- ---------- ----------
Net change in tax-equivalent income 680 658 22 (242) (80) (162)
Increase (decrease) in interest expense
Money market deposits 50 55 (5) (3) (7) 4
Savings deposits (17) (2) (15) 44 (9) 53
Time deposits 18 (63) 81 52 (49) 101
Short term borrowings 314 314 16 16
Long term debt
---------- ---------- --------- --------- ---------- ----------
Net change in interest expense 365 (10) 375 109 (49) 158
---------- ---------- --------- --------- ---------- ----------
Net change in tax-equivalent
net interest income $ 315 $ 668 $ (353) $ (351) $ (31) $ (320)
========== ========== ========= ========= ========== ==========
</TABLE>
Interest income is primarily generated from the loan portfolio, which comprised
37% of average total assets during 1998. The loan portfolio, with an average
yield of 9.84%, earned $3.9 million, or 52.6% of total interest income. The
investment securities portfolio and Federal funds sold equaled 43% and 13% of
average total assets during 1998, respectively. With an average yield of 6.09%,
investment securities contributed $2.8 million, or 37.5% of total interest
income, while Federal funds sold ended 1998 with an average yield of 5.21%, and
earned $0.7 million, or 9.9% of total interest income.
Interest expense is primarily generated from time deposits, which equaled 29.1%
of average total assets during 1998. Time deposits, with an average rate of
4.40%, cost $1.4 million, or 53.4% of total interest expense. Savings deposits
and money market deposits equaled 13.5% and 8.0% of average total assets during
1998, respectively. With an average rate of 2.25% savings deposits cost $0.3
million, or 12.8% of total interest expense, while money market deposits ended
1998 with an average rate of 2.12%, and cost $0.2 million, or 7.2% of total
interest expense. Short term borrowings, comprised primarily of repurchase
agreements but also included Federal funds purchased, had an average rate of
5.00% during 1998. The Corporation paid $0.6 million in short term interest
expense, or 23.9% of total interest expense. Long term debt is comprised solely
of senior notes; with an average rate of 6.00%, senior notes cost $54,000, or
2.1% of total interest expense.
PROVISION 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
considering 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.
15.
<PAGE> 16
The provision for loan losses was $255,000 and $(290,879) for 1998 and 1997. The
negative provision in 1997 was due to the insurance recovery. The provision for
loan losses represents the adjustment to the allowance for loan losses needed to
maintain the allowance at a level determined by management to cover inherent
losses within the Corporation's loan portfolio. The allowance for loan losses is
based on the application of projected loss ratios to the risk-ratings of loans,
both individually and by category. Projected loss ratios incorporate such
factors as recent loss experience, current economic conditions and trends,
trends in past due and impaired loans, and risk characteristics of various
categories and concentrations of loans. The activity in the allowance is
included in Note 4 to the consolidated financial statements.
The allowance for loan losses totaled $1,174,888 at December 31, 1998 compared
to the 1997 year end balance of $936,090. The allowance for loan losses
represented 2.97% of loans at December 31, 1998 compared with 2.30% at December
31, 1997. The primary reason for the increase in the allowance to total loans
ratio is the decrease in the overall loan portfolio.
The loan review system and charge-off policy assist management in identifying
problem loans and credit deterioration earlier than in the past and continuing
implementation of the loan review system will improve this process further.
Effective collection efforts, when implemented early, generally result in lower
losses. Loans charged off in 1998 aggregated $240,627 compared with $771,444 in
1997. The 1997 charge offs were a result of continued efforts to address problem
loans in the loan portfolio. Recoveries in 1998 and 1997 were $224,425 and
$1,232,852. Of the 1997 recoveries, $1,136,797 was attributable to the insurance
recovery.
The following table summarizes, for the periods indicated, average loans
outstanding, loans charged off, recoveries and provision charged to operations
(dollars in thousands).
<TABLE>
<CAPTION>
As of and for the years
ended December 31,
1998 1997
---- ----
<S> <C> <C>
Average loans outstanding $ 41,001 $ 42,436
=========== ===========
Balance at beginning of year $ 936 $ 766
Provision charged to operating expense 255 (291)
Recoveries on loans previously charged to the allowance 225 1,233
Loans charged off (241) (772)
----------- -----------
Net (charge offs)/recoveries (16) 461
----------- -----------
Balance at end of year $ 1,175 $ 936
=========== ===========
Allowance for loan losses as a percentage of
total loans as of year-end 2.97% 2.30%
Ratio of net (charge-offs)/recoveries to average total loans outstanding
during the year (0.04) 1.09
</TABLE>
16.
<PAGE> 17
NONINTEREST INCOME
Noninterest income was $1,073,683 during 1998, compared to $1,554,814 during
1997. The main reason for the decrease was the reversal of the accrual on the
Corporation's books of $320,000 for a wrongful termination lawsuit included in
other noninterest income in 1997. In addition, mortgage brokerage revenues
decreased due to a decline in mortgage originations in 1998. During 1998,
service charges on deposit accounts were $701,674, net gains on sales of
residential real estate loans were $25,753, and ATM surcharge income was
$184,891.
NONINTEREST EXPENSE
Noninterest expense decreased $795,248 or 14.2% to $4,788,806 in 1998, from
$5,584,054 in 1997. The decrease was primarily a result of a decrease in
salaries and employee benefits due to employee departures during 1998. During
1998, occupancy expense was $1.1 million, professional services totaled
$308,896, stationery, printing and supplies were $89,545, and insurance expense
was $54,911.
INCOME TAX EXPENSE
Due to the net operating loss carryforward, no provisions to income tax expense
were necessary during 1998 or 1997. It is anticipated that the Corporation will
be in a taxable position in the future.
CAPITAL RESOURCES
Shareholders' equity is a noninterest-bearing source of funds which provides
support for asset growth. Shareholders' equity was $5.8 million and $5.0 million
at December 31, 1998 and 1997, respectively. The increase is due to the
retention of current year earnings.
The Corporation and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Failure to meet the various capital
requirements can initiate regulatory action that could have a direct material
effect on the financial statements. Both the Corporation and Bank have been
categorized as "Well Capitalized," the highest classification contained within
the banking regulations. The capital ratios of the Bank as of December 31, 1998
and 1997 are disclosed in Note 9 of the Notes to Consolidated Financial
Statements.
The ability of the Corporation to pay cash and stock dividends is subject to
limitations under various laws and regulations and to prudent and sound banking
practices. No cash or stock dividends were paid to common shareholders in 1998
or 1997.
LIQUIDITY
Liquidity is measured by the Corporation's ability to raise funds through
deposits, borrowed funds, capital or cash flow from the repayment of loans and
investment securities. These funds are used to meet deposit withdrawals,
maintain reserve requirements, fund loans and operate the Corporation. Liquidity
is primarily achieved through the growth of deposits and liquid assets such as
securities available for sale, matured securities, and Federal funds sold. Asset
and liability management is the process of managing the balance sheet to achieve
a mix of earning assets and liabilities that maximizes profitability, while
providing adequate liquidity. The Corporation's liquidity strategy is to fund
loan growth with deposits and repurchase agreements and to maintain an adequate
level of short- and medium-term investments to meet typical daily loan and
deposit activity.
17.
<PAGE> 18
The Corporation has the ability to borrow money on a daily basis through
correspondent banks (Federal funds purchased), which it did on several occasions
during 1998; however, this is viewed as only a secondary and temporary source of
funds. During 1998 the Corporation's Federal funds sold position averaged $14.1
million.
In addition to normal loan funding and deposit flow, the Corporation also needs
to maintain liquidity to meet the demands of certain unfunded loan commitments
and standby letters of credit. As of December 31, 1998, the Corporation had a
total of $18.3 million in unfunded loan commitments and $0.9 million in unfunded
standby letters of credit. The Corporation monitors fluctuations in loan
balances and commitment levels, and includes such data in its overall liquidity
management.
MARKET RISK ANALYSIS
The Corporation's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Corporation's transactions are
denominated in U.S. dollars with no specific foreign exchange exposure. The
Corporation has only limited agricultural-related loan assets and therefore has
no significant exposure to changes in commodity prices. Any impacts that changes
in foreign exchange rates and commodity prices would have on interest rates are
assumed to be insignificant.
Interest rate risk is the exposure of the Corporation's financial condition to
adverse movements in interest rates. The Corporation derives its income
primarily from the excess of interest collected on its interest-earning assets
over the interest paid on its interest-bearing liabilities. The rates of
interest the Corporation earns on its assets and owes on its liabilities
generally are established contractually for a period of time. Since market
interest rates change over time, the Corporation is exposed to lower
profitability if it cannot adapt to interest rate changes. Accepting interest
rate risk can be an important source of profitability and shareholder value;
however, excessive levels of interest rate risk could pose a significant threat
to the Corporation's earnings and capital base. Accordingly, effective risk
management that maintains interest rate risk at prudent levels is essential to
the Corporation's safety and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. The Corporation's interest rate risk management process seeks
to ensure that appropriate policies, procedures, management information systems
and internal controls are in place to maintain interest rate risk at prudent
levels with consistency and continuity. In evaluating the quantitative level of
interest rate risk the Corporation assesses the existing and potential future
effects of changes in interest rates on its financial condition, including
capital adequacy, earnings, liquidity and asset quality.
The Corporation uses a GAP analysis to measure interest rate risk. A GAP
analysis measures the difference between the dollar amounts of
interest-sensitive assets and liabilities that will be refinanced or repriced
during a given time period. A significant repricing gap could result in a
negative impact to the Corporation's net interest margin during periods of
changing market interest rates. The following table depicts the Corporation's
GAP position as of December 31, 1998 (dollars in thousands):
18.
<PAGE> 19
<TABLE>
<CAPTION>
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Assets:
Gross loans $ 8,178 $ 3,050 $ 14,999 $ 13,330 $ 39,557
Federal funds sold 24,205 24,205
Investment securities 5,580 17,043 30,133 52,756
Allowance for loan losses (1,175) (1,175)
Cash 3,765 3,765
Other assets 4,514 4,514
----------- ----------- ----------- ----------- -----------
Total Assets 36,148 8,630 32,042 46,802 123,622
----------- ----------- ----------- ----------- -----------
Liabilities:
Demand deposits 41,048 41,048
Savings 15,332 15,332
NOW accounts 6,377 6,377
Time deposits less than $100,000 5,444 7,708 1,467 14,619
Time deposits $100,000 and over 12,091 3,204 2,126 17,421
Repurchase agreements 11,649 5,000 16,649
Short term borrowings 5,000 5,000
Long term debt 900 900
Other liabilities 499 499
----------- ----------- ----------- ----------- -----------
Total Liabilities 96,941 15,912 3,593 1,399 117,845
Shareholders' Equity 5,777 5,777
----------- ----------- ----------- ----------- -----------
Total Sources of Funds 96,941 15,912 3,593 7,176 123,622
----------- ----------- ----------- ----------- -----------
Net asset (liability) GAP $ (60,793) $ (7,282) $ 28,449 $ 39,626
=========== =========== =========== ===========
Cumulative GAP $ (60,793) $ (68,075) $ (39,626)
=========== =========== ===========
Percent of cumulative GAP to
total assets (49)% (55)% (32)%
=========== =========== ===========
</TABLE>
YEAR 2000 ISSUE
The approach of the year 2000 presents potential problems to businesses that
utilize computers in their daily operations. Some computer systems may not be
able to properly interpret dates after December 31, 1999, because they use only
two digits to indicate the year in the date. Therefore, a date using "00" as the
year may recognize the year as 1900 rather than the year 2000.
The Corporation has formed a Year 2000 Committee (the "Committee") to address
the potential problems associated with the Year 2000 computer issue. The
Committee, consisting of directors, officers and employees of the Corporation,
meets on a regular basis and provides regular reports to the Board of Directors
detailing progress with the Year 2000 issue.
19.
<PAGE> 20
Costs to the Corporation related to the Year 2000 issue are estimated to be
approximately $125,000. Costs incurred through December 31, 1998 are $65,000. It
is impossible to predict the exact expenses associated with the Year 2000 issue
and additional funds may be needed for unknown expenses relating to Year 2000
testing, training, and education, as well as system and software replacements.
As with any organization that depends on technology, particularly computer
systems and software, a Year 2000 related failure poses a significant threat to
continued business operations. While the Corporation has developed a plan to
ensure Year 2000 readiness, the Corporation recognizes that the success of its
third party providers is vital to the Corporation's success. Of primary concern
are local utility and telecommunications companies. These, in addition to other
third parties, have been contacted and the Committee is monitoring their
progress towards their own Year 2000 readiness. Additional risks include the
Bank's lending and deposit relationships. The Committee is currently evaluating
these two groups and assessing any potential risks, as well as establishing any
necessary corrective procedures.
Despite careful planning by the Corporation, it is recognized that there may be
circumstances beyond the Corporation's control that may prohibit it from
operating "as usual" after December 31, 1999. The Year 2000 Committee is
currently in process of developing a contingency plan to address potential Year
2000 problems.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements beginning at page 23 of this annual report
are incorporated here by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Incorporated by reference to registrant's proxy statement dated .
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference to registrant's proxy statement dated .
20.
<PAGE> 21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to proxy statement dated.
ITEM 12. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Incorporated by reference to registrant's proxy statement dated.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
3 Articles of Incorporation and By-Laws of the
registrant were previously filed as an exhibit to the
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 0-15777) and are incorporated herein by
reference. Amendments to Articles of Incorporation
authorizing additional common stock, authorizing Class C
Preferred Stock, crediting the terms and conditions of
Class C Preferred Stock, Series 1994-1, and Series MI-1,
were set forth as Exhibits to the Proxy Statement dated
September 8, 1994.
4 Instruments defining the rights of security
holders are the Articles of Incorporation and By-Laws (see
Exhibit 3, above) and certain debt instruments which do not
authorize an amount of debt exceeding 10 percent of the
Corporation's assets. The Corporation agrees to furnish
such instruments to the Commission on request.
10.(i)-1 Agreement by and between First Independence
National Bank and the Office of the Comptroller of the
Currency dated as of April 15, 1991, was previously filed
as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1990 (File No. 0-15777) and is
incorporated herein by reference.
10.(ii)(A)-2 1995 Employee Stock Option Plan of First
Independence Corporation, adopted at annual shareholders
meeting on May 23, 1995, was set forth as Exhibit A to the
Proxy Statement dated April 18, 1995 (File No. 0-15777) and
is incorporated herein by reference.
99(A) Letter of authorization from the Federal Reserve
Bank of Chicago to First Independence Corporation to incur
additional debt, dated August 23, 1991, was previously
filed as an exhibit to the Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 0-15777) and is
incorporated herein by reference.
99(B) Letter from the Federal Reserve Bank of Chicago
dated September 28, 1994, approving terms and conditions of
Class C Preferred Stock, Series MI-1, and Class C Preferred
Stock, Series 1994-1 was previously filed as an exhibit to
the Annual Report on Form 10-K for the year ended December
31, 1994 (File No. 0-15777) and is incorporated herein by
reference.
</TABLE>
21.
<PAGE> 22
<TABLE>
<S> <C>
10.(i)-2 Stipulation and consent to the issuance of a
consent order, and the consent order by and between First
Independence National Bank and the Office of the
Comptroller of the Currency dated October 7, 1992 was
previously filed as an exhibit to the Annual Report on Form
10-K for the year ended December 31, 1992 (File No.
0-15777) and is incorporated herein by reference. 10.(i)-2
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 incorporated herein by
reference. 27 Financial Data Schedule
</TABLE>
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/ William Fuller
- ----------------------------------
William Fuller
President
Date: March 31, 1999
/s/ Rose Ann Lacy
- ----------------------------------
Rose Ann Lacy
Senior Vice President and Chief
Financial Officer
Date: March 31, 1999
<PAGE> 23
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
<PAGE> 24
FIRST INDEPENDENCE CORPORATION
Detroit, Michigan
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS................................................................................ 23
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS.............................................................................. 24
CONSOLIDATED STATEMENTS OF INCOME........................................................................ 25
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME.......................................................... 26
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY.......................................................... 27
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................................... 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................................... 29
</TABLE>
<PAGE> 25
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, 1998 and 1997, and the related
consolidated statements of income, comprehensive 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, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 26, 1999
23.
<PAGE> 26
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,765,361 $ 2,517,380
Federal funds sold 24,205,000 11,175,000
--------------- ----------------
Total cash and cash equivalents 27,970,361 13,692,380
Securities available for sale 48,185,345 24,896,548
Securities held to maturity (fair value of
$4,632,188 and $17,084,271) 4,570,554 17,023,477
--------------- ----------------
Total securities 52,755,899 41,920,025
Loans
Commercial 10,836,714 10,679,960
Commercial real estate 8,416,970 10,758,430
Residential real estate 14,620,041 13,247,862
Consumer 5,683,525 5,955,727
--------------- ----------------
Total loans 39,557,250 40,641,979
Allowance for loan losses (1,174,888) (936,090)
---------------- ----------------
38,382,362 39,705,889
Premises and equipment, net 3,293,035 3,245,905
Accrued interest receivable and other assets 1,220,941 1,167,414
--------------- ----------------
Total assets $ 123,622,598 $ 99,731,613
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 41,048,374 $ 31,304,908
Interest-bearing 53,749,304 49,794,845
--------------- ----------------
Total deposits 94,797,678 81,099,753
Securities sold under agreements to repurchase 16,649,188 7,117,616
Short-term borrowings 5,000,000 5,000,000
Accrued interest payable and other liabilities 499,128 651,818
Long-term debt 900,000 900,000
--------------- ----------------
Total liabilities 117,845,994 94,769,187
Shareholders' equity
Preferred stock 2,615,797 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
Retained earnings (accumulated deficit) 384,067 (528,126)
Unrealized gain on securities available for sale, net of tax 70,198 39,564
Unrealized loss on securities transferred (5,062)
--------------- ----------------
Total shareholders' equity 5,776,604 4,962,426
--------------- ----------------
Total liabilities and shareholders' equity $ 123,622,598 $ 99,731,613
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
24.
<PAGE> 27
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income
Loans, including fees $ 3,927,728 $ 4,093,313
Taxable securities 2,801,849 1,970,994
Federal funds sold 733,165 719,485
-------------- ---------------
Total interest income 7,462,742 6,783,792
Interest expense
Deposits 1,884,038 1,833,511
Securities sold under agreements to repurchase 336,075 245,683
Other borrowed funds 326,113 102,263
-------------- ---------------
Total interest expense 2,546,226 2,181,457
-------------- ---------------
NET INTEREST INCOME 4,916,516 4,602,335
Provision (credit) for loan losses 255,000 (290,879)
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,661,516 4,893,214
Noninterest income
Services charges on deposit accounts 701,674 786,125
Net realized gains on sales of securities available for sale 32,525
Net gains on sales of residential real estate loans 25,753 210,867
ATM surcharge income 184,891 77,267
Reversal of loss accrual 320,000
Other noninterest income 161,365 205,297
-------------- ---------------
Total noninterest income 1,073,683 1,554,814
Noninterest expenses
Salaries and employee benefits 2,388,976 2,795,841
Occupancy 1,124,113 1,349,960
Professional services 308,896 359,596
Stationery, printing and supplies 89,545 118,715
Insurance expense 54,911 98,618
Other noninterest expenses 822,365 861,324
-------------- ---------------
Total noninterest expenses 4,788,806 5,584,054
-------------- ---------------
INCOME BEFORE FEDERAL INCOME TAXES 946,393 863,974
Federal income tax expense
-------------- ---------------
NET INCOME 946,393 863,974
Preferred stock dividends 34,200 121,495
-------------- ---------------
INCOME ATTRIBUTABLE TO COMMON STOCK $ 912,193 $ 742,479
============== ===============
Basic and fully diluted earnings per common share $ 2.71 $ 2.20
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
25.
<PAGE> 28
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
NET INCOME $ 946,393 $ 863,974
Other comprehensive income, net of tax:
Unrealized gain on transfer of securities held to
maturity to securities available for sale 57,341
Unrealized gain (loss) on available for sale securities (8,318) 129,026
Amortization of unrealized loss on securities
transferred 5,062 14,334
Less reclassification adjustments for gains later
recognized in income (32,525)
-------------- ---------------
Net unrealized gains and losses 54,085 110,835
Tax effect (18,389) (37,684)
-------------- ---------------
Other comprehensive income 35,696 73,151
-------------- ---------------
COMPREHENSIVE INCOME $ 982,089 $ 937,125
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
26.
<PAGE> 29
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Retained
Earnings
Preferred Common Capital (Accumulated
Stock Stock Surplus Deficit)
----- ----- ------- --------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 2,749,508 $ 336,760 $ 2,369,782 $ (1,244,954)
Net income 863,974
Dividends declared on Class C Preferred Stock
Series 1994-1 (21,181)
Dividends declared on Class C Preferred Stock
Series MI-1 (66,115)
Dividends declared on Class A and Class B
Preferred Stock (59,850)
Change in unrealized gain/(loss) on
securities available for sale
Amortization of unrealized loss
on securities transferred
-------------- ------------ -------------- ---------------
BALANCE, DECEMBER 31, 1997 2,749,508 336,760 2,369,782 (528,126)
Net income 946,393
Buyback of 134 shares of Class C
Preferred Stock Series 1994-1 (133,711)
Dividends declared on Class A and
Class B Preferred Stock (34,200)
Change in unrealized gain on securities available
for sale
Amortization of unrealized loss
on securities transferred
-------------- ------------ -------------- ---------------
BALANCE, DECEMBER 31, 1998 $ 2,615,797 $ 336,760 $ 2,369,782 $ 384,067
============== ============ ============== ===============
<CAPTION>
Net
Unrealized Net
Gain (Loss) Unrealized
on Loss
Securities on Total
Available Securities Shareholders'
for Sale Transferred Equity
-------- ----------- ------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ (19,253) $ (19,396) $ 4,172,447
Net income 863,974
Dividends declared on Class C Preferred Stock
Series 1994-1 (21,181)
Dividends declared on Class C Preferred Stock
Series MI-1 (66,115)
Dividends declared on Class A and Class B
Preferred Stock (59,850)
Change in unrealized gain/(loss) on
securities available for sale 58,817 58,817
Amortization of unrealized loss
on securities transferred 14,334 14,334
-------------- ------------ --------------
BALANCE, DECEMBER 31, 1997 39,564 (5,062) 4,962,426
Net income 946,393
Buyback of 134 shares of Class C
Preferred Stock Series 1994-1 (133,711)
Dividends declared on Class A and
Class B Preferred Stock (34,200)
Change in unrealized gain on securities available
for sale 30,634 30,634
Amortization of unrealized loss
on securities transferred 5,062 5,062
-------------- ------------ --------------
BALANCE, DECEMBER 31, 1998 $ 70,198 $ $ 5,776,604
============= ============ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
27.
<PAGE> 30
FIRST INDEPENDENCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 946,393 $ 863,974
Adjustments to reconcile net income to
net cash from operating activities
Provision (credit) for loan losses 255,000 (290,879)
Depreciation 494,676 528,283
Net amortization of premiums and discounts 84,920 74,552
Loans originated for sale (1,169,308) (2,528,383)
Proceeds from loans originated for sale 1,195,061 3,613,074
Net gains on sale of residential real estate loans (25,753) (210,867)
Net realized gains on securities available for sale (32,525)
Changes in assets and liabilities:
Accrued interest receivable and other assets (273,482) 406,520
Accrued interest payable and other liabilities (168,471) (332,641)
------------- --------------
Net cash from operating activities 1,339,036 2,091,108
CASH FLOWS FROM INVESTING ACTIVITIES Securities available for sale:
Purchases (46,087,969) (20,297,593)
Sales proceeds 2,020,000
Maturities, calls and principal payments 29,808,652 4,121,104
Securities held to maturity:
Purchases (6,526,450)
Maturities 5,410,000 8,000,000
Net change in loans 1,288,482 4,945,009
Premises and equipment expenditures (541,806) (217,423)
------------- --------------
Net cash from investing activities (10,122,641) (7,955,353)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 13,697,925 (2,429,941)
Net change in securities sold under agreements
to repurchase and other short-term borrowings 9,531,572 7,832,928
Interest on Senior Notes (108,500)
Buyback of Class C Preferred Stock Series 1994-1 (133,711)
Dividends paid on Class A and Class B Preferred Stock (34,200) (59,850)
------------- --------------
Net cash from financing activities 23,061,586 5,234,637
------------- --------------
Net change in cash and cash equivalents 14,277,981 (629,608)
Cash and cash equivalents at beginning of year 13,692,380 14,321,988
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,970,361 $ 13,692,380
============= ==============
Supplemental disclosure of cash flow information
Cash paid for interest $ 2,502,855 $ 2,219,193
Loans transferred to other real estate 219,955 46,829
Securities held to maturity transferred to available for sale 6,995,778
</TABLE>
See accompanying notes to consolidated financial statements.
28.
<PAGE> 31
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of First Independence Corporation (the "Corporation") and its
wholly-owned subsidiary, First Independence National Bank of Detroit (the
"Bank"). All significant intercompany balances and transactions have been
eliminated in consolidation.
Nature of Operations: The Corporation is engaged in commercial and retail
banking services to individuals, businesses, local, state and federal government
units, and institutional customers. Its services include accepting demand,
savings and time deposits; collections; cash management; night depositories; and
consumer, commercial, and real estate lending.
The Corporation is a minority-owned, community-oriented national bank with its
main office in the central business district of Detroit, Michigan. It also
operates three other branches within the city of Detroit.
Since the business of banking accounts for more than 90% of the Corporation's
revenues, and internal financial reporting is primarily reported and aggregated
in the line of business of banking, no segment reporting has been presented.
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 allowance for loan losses and fair values
of financial instruments 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, repurchase agreements 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, net of tax. Securities are written down to fair value with a charge to
net income when a decline in fair value is not considered temporary.
Gains and losses on sales of securities are determined using the amortized cost
of the specific security sold. Interest income includes amortization of
purchased premiums and discounts.
(Continued)
29.
<PAGE> 32
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans Held for Sale: Loans held for sale are included with residential real
estate loans. These loans are reported at the lower of cost or market value in
the aggregate. There were no loans held for sale as of December 31, 1998 and
1997.
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.
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 principally on the straight-line method over
assets' useful lives. These assets are reviewed for impairment when events
indicate the carrying amount may not be recoverable.
Other Real Estate: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Expenses, gains and losses on disposition, and changes
in the valuation allowance are reported in net loss on other real estate.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
401(k) Plan: During 1998, the Bank established a 401(k) plan covering employees
who are at least age 21 and have completed one year and 1,000 hours of service
with the Bank. The Bank's contributions to
(Continued)
30.
<PAGE> 33
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
the plan are based on a percentage of eligible salaries, limited to 50% of the
first 6% of salary contributed. Expense under the plan was $24,337 for 1998.
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. Deferred tax
assets are recognized for net operating losses that expire primarily in 2005
because the benefit is more likely than not to be realized. No federal income
taxes were paid in 1998 or 1997.
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 Common Share: Basic earnings per common share is based on
weighted-average common shares outstanding. Diluted earnings per common share
further assumes issue of any dilutive potential common shares, if any. The
weighted average number of shares used in the computation of basic and diluted
earnings per common share was 336,760 shares for 1998 and 1997.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on transferred securities and unrealized gains and losses on securities
available for sale which are also recognized as separate components of equity.
The accounting standard that requires reporting comprehensive income first
applies for 1998, with prior information restated to be comparable.
(Continued)
31.
<PAGE> 34
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
Mortgage loans originated in mortgage banking can be converted into securities
on occasion, however, the Corporation has never securitized such loans. A new
accounting standard for 1999 will allow classifying these securities as
available for sale, trading, or held to maturity, instead of the current
requirement to classify as trading. This is not expected to have a material
effect but the effect will vary depending on the level and designation of
securitizations as well as on market price movements.
NOTE 2 - CURRENT OPERATING ENVIRONMENT
In 1990, the Bank incurred significant net losses which reduced the Bank's
capital position to a level considered unacceptable by the regulatory
authorities.
On April 15, 1991, the Bank entered into a written agreement (the "Agreement")
with the Office of Comptroller of the Currency (the "OCC") which 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, the Bank's equity
capital (as defined) to total assets ratio was 5.9%.
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 the Bank.
On February 21, 1997, the Bank received approximately $1,445,000 from its
fidelity insurance underwriters in settlement of the Bank's claims related to
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.
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 for loan losses in the first quarter of 1997.
(Continued)
32.
<PAGE> 35
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 2 - CURRENT OPERATING ENVIRONMENT (Continued)
In May 1993, a jury verdict was entered against the Corporation, a nonoperating
subsidiary of the Bank, certain directors and another former officer thereof, in
the amount of $320,000, in a suit filed by a former officer of the Bank alleging
wrongful termination of 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.
NOTE 3 - SECURITIES
Year-end securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale 1998
U.S. Treasury $ 8,016,050 $ 174,575 $ 8,190,625
U.S. Government agency 39,841,135 68,472 $ 136,686 39,772,921
Other 167,100 167,100
Mortgage-backed 54,699 54,699
--------------- ----------- ------------ ----------------
$ 48,078,984 $ 243,047 $ 136,686 $ 48,185,345
=============== =========== ============ ================
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
Mortgage-backed 298,353 2,279 300,632
--------------- ----------- ------------ ----------------
$ 24,836,602 $ 77,389 $ 17,443 $ 24,896,548
=============== =========== ============ ================
</TABLE>
(Continued)
33.
<PAGE> 36
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 3 - SECURITIES (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Held to maturity 1998
U.S. Government agency $ 4,570,554 $ 61,634 $ -- $ 4,632,188
=============== =========== ============ ================
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
=============== =========== ============ ================
</TABLE>
The Corporation realized gross gains of $32,525 upon receiving proceeds of
$2,020,000 from the sales of securities available for sale in 1997. There were
no sales of securities during 1998.
During 1998, the Corporation transferred securities from the held to maturity
portfolio to the available for sale portfolio in accordance with the provisions
of Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." At the date of transfer, these
securities had an amortized cost of $6,995,778 and increased the unrealized gain
on securities available for sale and shareholders' equity by $37,845, net of tax
of $19,496.
Contractual maturities of debt securities at year-end 1998 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 $ 2,539,794 $ 2,586,250 $ 3,015,409 $ 3,040,001
Due from one to five years 2,030,760 2,045,938 14,842,624 15,012,496
Due from five to ten years 29,999,152 29,911,049
Mortgage backed and other 221,799 221,799
--------------- -------------- -------------- ----------------
$ 4,570,554 $ 4,632,188 $ 48,078,984 $ 48,185,345
=============== ============== ============== ================
</TABLE>
Securities with an amortized cost of $23,866,000 and $19,403,000 at year-end
1998 and 1997 were pledged to secure public deposits and repurchase agreements.
(Continued)
34.
<PAGE> 37
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Beginning balance $ 936,090 $ 765,561
Provision (credit) for loan losses 255,000 (290,879)
Loans charged off (240,627) (771,444)
Recoveries of loans previously charged off 224,425 1,232,852
---------------- ---------------
Ending balance $ 1,174,888 $ 936,090
================ ===============
</TABLE>
Information regarding impaired loans is as follows for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Average investment in impaired loans $ 1,310,913 $ 2,247,615
Interest income recognized on impaired loans 134,491 163,021
</TABLE>
Interest income recognized on a cash basis for impaired loans was not
significant in 1998 or 1997.
Information regarding impaired loans at year-end is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Total impaired loans $ 1,175,748 $ 2,475,336
Less loans for which no allowance for loan losses is allocated 39,658 706,645
-------------- ---------------
Impaired loans for which an allowance
for loan losses is allocated $ 1,136,090 $ 1,768,691
============== ===============
Portion of allowance allocated to these loans $ 286,154 $ 583,458
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and land improvements $ 482,565 $ 481,814
Buildings 2,171,748 2,133,155
Furniture and fixtures 2,808,631 2,536,320
Leasehold improvements 439,432 442,750
----------------- ----------------
Total cost 5,902,376 5,594,039
Less accumulated depreciation (2,609,341) (2,348,134)
------------------ ----------------
$ 3,293,035 $ 3,245,905
================= ================
</TABLE>
(Continued)
35.
<PAGE> 38
NOTE 6 - DEPOSITS
Year-end deposits consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Demand deposits $41,048,374 $31,304,908
NOW accounts 6,377,232 5,198,539
Savings deposits 15,332,315 13,787,459
Time deposits 32,039,757 30,808,847
----------- -----------
$94,797,678 $81,099,753
=========== ===========
</TABLE>
Frequently, at the end of the year, the Bank receives large deposits from large
corporations or government agencies for very short terms. Subsequent to December
31, 1998, the City of Detroit withdrew approximately $9.0 million from their
demand deposit account.
Time deposit accounts individually exceeding $100,000 totaled $17,421,344 and
$16,134,140 at year-end 1998 and 1997.
At year-end 1998, stated maturities of time deposits were:
<TABLE>
<S> <C>
1999 $ 28,456,644
2000 2,992,871
2001 371,501
2002 159,024
2003 59,717
-----------------
$ 32,039,757
</TABLE>
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>
1998 1997
---- ----
<S> <C> <C>
Federal funds purchased
Outstanding at year end $ 5,000,000 $ 5,000,000
Average interest rate at year end 4.91% 6.25%
Average month-end balance during the year 5,000,000 1,250,000
Average interest rate during the year 5.44% 5.56%
Maximum month-end balance during the year 5,000,000 5,000,000
</TABLE>
(Continued)
36.
<PAGE> 39
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 7 - BORROWINGS (Continued)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Securities sold under repurchase agreements
Outstanding at year end 16,649,188 7,117,616
Average interest rate at year end 4.38% 4.75%
Average month-end balance during the year 7,164,038 5,052,193
Average interest rate during the year 4.69% 4.62%
Maximum month-end balance during the year 16,649,188 8,369,113
</TABLE>
Long-term debt consists entirely of senior notes, with an interest rate of 6%,
maturing 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.
NOTE 8 - PREFERRED STOCK
Preferred stock at December 31, 1998 and 1997 is comprised of the following:
<TABLE>
<CAPTION>
-----------------1998--------------- --------------1997-----------------
Issued and Issued and
Authorized Outstanding Authorized Outstanding
Description Shares Shares Amount Shares Shares Amount
----------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock
Class A, par value $100 4,000 4,000 $ 400,000 4,000 4,000 $ 400,000
Class B, par value $100 3,200 3,200 320,000 3,200 3,200 320,000
Class C, no par value (series
1994-1) 100,000 396 395,797 100,000 530 529,508
Class C, no par value (series
MI-1) 1,500 1,500,000 1,500 1,500,000
------------ ------------
$ 2,615,797 $ 2,749,508
============ ============
</TABLE>
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 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.
NOTE 8 - PREFERRED STOCK (Continued)
The Corporation, at its option, subject to provisions of applicable law and such
regulatory agency approvals as may be necessary, may redeem the Class A and B
preferred shares for $120 per share. In
(Continued)
37.
<PAGE> 40
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
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.
Because the Bank achieved these goals, the dividends were waived during 1998.
The Class C Preferred Stock, Series 1994-1 was issued in 1995 and 1996 to the
Class A and B preferred stockholders and senior noteholders in lieu of
cumulative dividends in arrears and unpaid accrued interest. It has no voting
rights and is entitled to receive dividends only at the discretion of the Board
of Directors. Its dividend rights are subordinate to those of the holders of the
Series MI-1 Preferred Stock described above. However, a dividend equal to 4% of
the $1,000 face value of the stock must be paid to the holders of the Series
1994-1 Preferred Stock before any dividends may be paid to the common
stockholders in any calendar year. The Series 1994-1 may be redeemed by the
Corporation at the face value prior to December 31, 1998. Thereafter redemption
is subject to premiums up to 120% of face value until December 31, 2002. There
also are limitations on the transferability of this stock.
NOTE 9 - REGULATORY MATTERS AND RESTRICTIONS ON RETAINED EARNINGS
The Corporation and Bank are subject to regulatory capital requirements
administered by federal banking agencies. 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.
(Continued)
38.
<PAGE> 41
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 9 - REGULATORY MATTERS AND RESTRICTIONS ON RETAINED EARNINGS
(Continued)
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. At December 31, 1997,
the Bank was considered "adequately capitalized" due to the formal Agreement
with the OCC. At December 31, 1998, the Bank was considered "well capitalized".
At year end, actual capital levels for the Bank (in millions) and minimum
required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital (to risk weighted assets) $ 7.3 13.32% $ 4.4 8.00% $ 5.5 10.00%
Tier 1 capital (to risk weighted assets) 6.6 12.06 2.2 4.00 3.3 6.00
Tier 1 capital (to average assets) 6.6 5.75 4.6 4.00 5.7 5.00
1997
Total capital (to risk weighted assets) $ 6.4 13.20% $ 3.9 8.00% $ 4.9 10.00%
Tier 1 capital (to risk weighted assets) 5.8 11.95 2.0 4.00 2.9 6.00
Tier 1 capital (to average assets) 5.8 6.08 3.8 4.00 4.8 5.00
</TABLE>
NOTE 10 - INCOME TAXES
Federal income taxes consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current expense $ 0 $ 0
Deferred expense 0 0
-------------- ---------------
$ 0 $ 0
============== ===============
</TABLE>
(Continued)
40.
<PAGE> 42
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 10 - INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 372,988 $ 679,389
Other 9,101 132,164
-------------- ---------------
382,089 811,553
Deferred tax liabilities
Accumulated depreciation 95,435 95,435
Allowance for loan losses 19,147 105,847
Net unrealized appreciation on securities
available for sale 36,163 20,382
Other 7,817 17,642
-------------- ---------------
158,562 239,306
Net deferred tax asset 223,527 572,247
Valuation allowance for deferred tax assets (259,690) (592,629)
-------------- ---------------
Net deferred tax liability after valuation allowance $ 36,163 $ 20,382
============== ===============
</TABLE>
At December 31, 1998 and 1997, the Corporation had net operating loss
carryforwards for federal income tax purposes of approximately $1,100,000 and
$2,000,000, respectively, which, if not used, will expire beginning in 2005.
The change in the valuation allowance from 1997 to 1998 is primarily due to
recording positive taxable income and the resultant decrease in the net
operating loss carryforward in 1998.
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>
1998 1997
---- ----
<S> <C> <C>
Statutory rate applied to income before taxes $ 321,774 $ 293,750
Add (deduct)
Nondeductible expenses 11,165 8,723
Change in valuation allowance (332,939) (302,473)
-------------- ---------------
Income tax expense $ 0 $ 0
============== ===============
</TABLE>
39.
<PAGE> 43
NOTE 11 - 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, therefore 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, 1998 was approximately $299,995.
NOTE 12 - 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.
At December 31, 1998 and 1997, there were 70,352 and 67,352 options available
for future grant under the Plan, and 0 and 3,000 options were outstanding and
exercisable at a price of $5 per share. 3,000 options forfeited during 1998. All
outstanding options were granted in 1995 at the fair value of the stock at the
date of grant.
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
$143,223 and $170,905 in 1998 and 1997. Future minimum rentals under
noncancelable operating leases as of December 31, 1998 are as follows:
41.
<PAGE> 44
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 13 - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT
(Continued)
<TABLE>
<CAPTION>
<S> <C>
1999 $ 134,400
2000 134,400
2001 134,400
2002 134,400
2003 93,700
Thereafter 30,000
------------
$ 661,300
============
</TABLE>
The Bank is a party to financial instruments with off-balance sheet risk used in
the normal course of business to meet the financing needs of customers. These
financial instruments include commitments to extend credit and letters of
credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements. Letters of credit are conditional commitments provided
to guarantee a customer's performance to a third party.
Financial instruments whose contract amounts represent off-balance-sheet risk at
year-end are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commitments to extend credit $ 18,325,000 $ 16,124,000
Letters of credit 868,000 1,223,000
</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.
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.
42.
<PAGE> 45
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 13 - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT
(Continued)
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 9.4% of the Bank's total loans at
December 31, 1998. Commercial loans to apartment building operators comprise
10.7% of the Bank's total loans at December 31, 1998.
At year-end 1998 and 1997, reserves of $818,000 and $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 $143,325 and $120,304 at December 31, 1998 and 1997. During
1998, the Corporation had new loans of $42,179 and repayments of $19,158.
Related party deposits totaled $346,105 and $155,499 at year-end 1998 and 1997.
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.
43.
<PAGE> 46
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 27,970,361 $ 27,970,361 $ 13,692,380 $ 13,692,380
Securities 52,755,899 52,817,533 41,920,025 41,980,819
Loans, net 38,382,362 39,102,943 39,705,889 39,717,185
Accrued interest receivable 929,153 929,153 898,186 898,186
Financial Liabilities
Deposits:
Demand 41,048,374 41,048,374 31,304,908 31,304,908
NOW 6,377,232 6,377,232 5,198,539 5,198,539
Saving 15,332,315 15,332,315 13,787,459 13,787,459
Certificates of deposit 32,039,757 32,085,071 30,808,847 30,819,378
Securities sold under
agreements to repurchase 16,649,188 16,649,188 7,117,616 7,117,616
Short-term borrowings 5,000,000 5,000,000 5,000,000 5,000,000
Long-term debt 900,000 798,057 900,000 795,724
Accrued interest payable 307,047 307,047 264,544 264,544
</TABLE>
44.
<PAGE> 47
FIRST INDEPENDENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
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, 1998 and 1997 and for the years then ended are
as follows:
CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash $ 1,666 $ 1,666
Dividend receivable from bank 87,295
Investment in subsidiary 6,674,938 5,860,310
-------------- ---------------
$ 6,676,604 $ 5,949,271
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Dividend payable $ 87,295
Long-term debt $ 900,000 900,000
-------------- ---------------
900,000 987,295
Total shareholders' equity 5,776,604 4,962,426
-------------- ---------------
$ 6,676,604 $ 5,949,721
============== ===============
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Income
Other income $ 320,000
Dividend income from subsidiary $ 221,911 168,350
Expense
Interest on borrowings 54,000 54,250
Other operating expenses 152,639
------------- --------------
INCOME BEFORE FEDERAL INCOME TAX (BENEFIT) AND
EQUITY IN UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY 167,911 281,461
Federal income tax (benefit)
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF BANK SUBSIDIARY 167,911 281,461
Equity in undistributed earnings of bank subsidiary 778,482 582,513
------------- --------------
NET INCOME $ 946,393 $ 863,974
============= ==============
</TABLE>
45.
<PAGE> 48
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 946,393 $ 863,974
Adjustments to reconcile net income to
net cash from operating activities
Provision for loan losses 152,639
Equity in net income of subsidiary (778,482) (582,513)
Changes in assets and liabilities
Accrued expenses and other liabilities (374,250)
------------- --------------
Net cash from operating activities 167,911 59,850
CASH FLOWS FROM FINANCING ACTIVITIES
Buyback of Class C preferred stock (133,711)
Dividends (34,200) (59,850)
------------- --------------
Net cash from financing activities (167,911) (59,850)
------------- --------------
Net change in cash and cash equivalents 0 0
Cash and cash equivalents at beginning of year 1,666 1,666
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,666 $ 1,666
============= ==============
</TABLE>
46.
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
3 Articles of Incorporation and By-Laws of the
registrant were previously filed as an exhibit to the
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 0-15777) and are incorporated herein by
reference. Amendments to Articles of Incorporation
authorizing additional common stock, authorizing Class C
Preferred Stock, crediting the terms and conditions of
Class C Preferred Stock, Series 1994-1, and Series MI-1,
were set forth as Exhibits to the Proxy Statement dated
September 8, 1994.
4 Instruments defining the rights of security
holders are the Articles of Incorporation and By-Laws (see
Exhibit 3, above) and certain debt instruments which do not
authorize an amount of debt exceeding 10 percent of the
Corporation's assets. The Corporation agrees to furnish
such instruments to the Commission on request.
10.(i)-1 Agreement by and between First Independence
National Bank and the Office of the Comptroller of the
Currency dated as of April 15, 1991, was previously filed
as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1990 (File No. 0-15777) and is
incorporated herein by reference.
10.(ii)(A)-2 1995 Employee Stock Option Plan of First
Independence Corporation, adopted at annual shareholders
meeting on May 23, 1995, was set forth as Exhibit A to the
Proxy Statement dated April 18, 1995 (File No. 0-15777) and
is incorporated herein by reference.
99(A) Letter of authorization from the Federal Reserve
Bank of Chicago to First Independence Corporation to incur
additional debt, dated August 23, 1991, was previously
filed as an exhibit to the Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 0-15777) and is
incorporated herein by reference.
99(B) Letter from the Federal Reserve Bank of Chicago
dated September 28, 1994, approving terms and conditions of
Class C Preferred Stock, Series MI-1, and Class C Preferred
Stock, Series 1994-1 was previously filed as an exhibit to
the Annual Report on Form 10-K for the year ended December
31, 1994 (File No. 0-15777) and is incorporated herein by
reference.
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. 10.(i)-2
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 incorporated herein by
reference. 27 Financial Data Schedule
27 Financial Data Schedule
</TABLE>
47.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,765,361
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 24,205,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,185,345
<INVESTMENTS-CARRYING> 48,185,345
<INVESTMENTS-MARKET> 48,185,345
<LOANS> 39,557,250
<ALLOWANCE> 1,174,888
<TOTAL-ASSETS> 123,622,598
<DEPOSITS> 94,797,678
<SHORT-TERM> 5,000,000
<LIABILITIES-OTHER> 499,128
<LONG-TERM> 900,000
0
2,615,797
<COMMON> 336,760
<OTHER-SE> 2,824,047
<TOTAL-LIABILITIES-AND-EQUITY> 123,622,598
<INTEREST-LOAN> 3,927,728
<INTEREST-INVEST> 2,801,849
<INTEREST-OTHER> 733,165
<INTEREST-TOTAL> 7,462,742
<INTEREST-DEPOSIT> 1,884,038
<INTEREST-EXPENSE> 2,546,226
<INTEREST-INCOME-NET> 4,916,516
<LOAN-LOSSES> 255,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 822,365
<INCOME-PRETAX> 946,393
<INCOME-PRE-EXTRAORDINARY> 946,393
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 946,393
<EPS-PRIMARY> 2.71
<EPS-DILUTED> 2.71
<YIELD-ACTUAL> 4.92
<LOANS-NON> 889,000
<LOANS-PAST> 158,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 287,000
<ALLOWANCE-OPEN> 936,090
<CHARGE-OFFS> 240,627
<RECOVERIES> 224,425
<ALLOWANCE-CLOSE> 1,174,888
<ALLOWANCE-DOMESTIC> 658,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 517,000
</TABLE>
