<PAGE> 1
As filed with the Securities and Exchange Commission on June 14, 1996
Registration Statement No. 333-____________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
FIRST MANISTIQUE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
MICHIGAN 6711
(State or Other Jurisdiction (Primary Standard Industrial 38-2062816
of Incorporation or Organization) Classification Code Number) (I.R.S. Employer Identification No.)
</TABLE>
130 SOUTH CEDAR
MANISTIQUE, MICHIGAN 49854
(906) 341-8401
(Address and Telephone Number of Principal Executive Offices)
<TABLE>
<S> <C>
RONALD G. FORD COPIES TO:
PRESIDENT AND CHIEF EXECUTIVE OFFICER DONALD L. JOHNSON
130 SOUTH CEDAR VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP
MANISTIQUE, MICHIGAN 49854 333 BRIDGE STREET, P.O. BOX 352
(906) 341-8401 GRAND RAPIDS, MI 49501-0352
(Name, Address and Telephone Number of Agent for Service) (616) 336-6000
</TABLE>
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuing basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED OFFERING PRICE PER UNIT (1) AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
No Par Value . . . . . . . . . . . 400,000 shares $26.67 $10,668,000 $3,678.63
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the offering price to existing shareholders of the Company
and the offering price of the securities that may be offered to the
public, as computed under Rule 457(e).
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
REGISTRATION STATEMENT RELATING
TO
FIRST MANISTIQUE CORPORATION
--------------------------
CROSS REFERENCE SHEET PURSUANT TO ITEM 501 OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-2
ITEM NUMBER AND CAPTION
-----------------------
<S> <C> <C>
1. FOREPART OF THE REGISTRATION STATEMENT AND
OUTSIDE FRONT COVER PAGE OF
PROSPECTUS . . . . . . . . . . . . . . . . FOREPART OF REGISTRATION STATEMENT AND COVER PAGE
2. INSIDE FRONT AND OUTSIDE BACK COVER PAGES OF
PROSPECTUS . . . . . . . . . . . . . . . . INSIDE COVER PAGE; OUTSIDE BACK COVER PAGE;
AVAILABLE INFORMATION
3. SUMMARY INFORMATION, RISK FACTORS AND RATIO
OF EARNINGS TO FIXED CHARGES . . . . . . . PROSPECTUS SUMMARY; RISK FACTORS
4. USE OF PROCEEDS . . . . . . . . . . . . . . . . . USE OF PROCEEDS
5. DETERMINATION OF OFFERING PRICE . . . . . . . . . DETERMINATION OF OFFERING PRICE
6. DILUTION . . . . . . . . . . . . . . . . . . . . . NOT APPLICABLE
7. SELLING SECURITY HOLDERS . . . . . . . . . . . . . NOT APPLICABLE
8. PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . PLAN OF DISTRIBUTION; COVER PAGE
9. DESCRIPTION OF SECURITIES TO BE REGISTERED . . . . DESCRIPTION OF CAPITAL STOCK
10. INTERESTS OF NAMED EXPERTS AND COUNSEL . . . . . . NOT APPLICABLE
11. INFORMATION WITH RESPECT TO THE REGISTRANT . . . . INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE;
PROSPECTUS SUMMARY; SELECTED CONSOLIDATED
FINANCIAL DATA; CAPITALIZATION; MARKET FOR
COMMON STOCK AND DIVIDENDS; BUSINESS;
SELECTED STATISTICAL INFORMATION;
DESCRIPTION OF CAPITAL STOCK; SUPERVISION
AND REGULATION; MANAGEMENT; CERTAIN
TRANSACTIONS; PRINCIPAL SHAREHOLDERS; PRO
FORMA CONSOLIDATED FINANCIAL INFORMATION;
INDEX TO FINANCIAL STATEMENTS
12. INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE . . . . . . . . . . . . . . . . INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
13. DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES . . . . . . . . . . . . . . . NOT APPLICABLE
</TABLE>
<PAGE> 3
PROSPECTUS
400,000 SHARES
FIRST MANISTIQUE CORPORATION
COMMON STOCK
First Manistique Corporation (the "Company") is offering for sale
400,000 shares of its Common Stock ("Common Stock"). Prior to offering shares
of Common Stock to the public, the Company's existing shareholders, who reside
in Michigan, will be entitled to subscribe for shares of Common Stock offered
hereby, whereby each such shareholder of the Company as of the close of
business on _____________________, 1996 (the "Record Date"), is entitled to
purchase .1886 share of Common Stock for each whole share owned on the Record
Date, subject to the purchase of a minimum of 100 shares and a maximum purchase
of 10,000 shares. However, no fractional shares will be issued. (The "Rights
Offering"). The Rights Offering will expire on ______________________________,
1996. See "The Offering" for a discussion of the procedures for subscribing
for shares of Common Stock.
Upon the expiration of the Rights Offering, any remaining shares will
be sold to the public. In general, subscriptions for the purchase of Common
Stock will be accepted on a first come first serve basis. The Company reserves
the right to reject, in whole or in part, any subscription application for
shares of Common Stock, other than those of existing shareholders in the Rights
Offering. The minimum number of shares that may be subscribed for is 100
shares, and except as otherwise agreed to by the Board of Directors of the
Company, the maximum number of shares that may be subscribed for by a person
who is not a shareholder is 10,000 shares. See "Plan of Distribution."
--------------------------
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER
"RISK FACTORS."
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company (2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share (3) . . . . . . . $26.67 $ 0 $26.67
- ---------------------------------------------------------------------------------------------------
Total (4) . . . . . . . . . $10,668,000 $ 0 $10,668,000
===================================================================================================
</TABLE>
(1) This Offering is not underwritten, and the Company has not employed
any brokers or sales persons in connection herewith. No securities
dealers will be compensated for any assistance rendered in connection
with the sale of shares of Common Stock. The Company is offering
shares of its Common Stock to be sold hereby to the public, by
subscription, solely through its officers, directors and employees.
These individuals are not entitled to receive any discounts or
commissions for selling such shares and will receive no special
compensation in connection with the Offering, but may be reimbursed
for any reasonable expenses incurred.
(2) Before deducting expenses of the Offering estimated to be $60,000.00.
(3) The Price Per Share has been established by the Board of Directors,
based on a number of factors described more fully herein. See "Plan
of Distribution."
(4) Assumes the purchase of 400,000 shares of Common Stock.
The date of this Prospectus is ____________________, 1996
<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission ("Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Stop 1-2, Judiciary Plaza, Washington, D.C. 20549, and the
Commissions's regional offices in New York (7 World Trade Center, Suite 1300,
New York, New York 10048), and in Chicago (Northwestern Atrium Center, 500 W.
Madison Street, Suite 1400, Chicago, Illinois 60661-2511). Copies of such
material may also be inspected, without charge, at the offices of the
Commission, or obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Room 1024, Stop 1-2, Washington, D.C., 20549, at
prescribed rates.
The Company has filed with the Commission a Registration Statement on
Form S-2 (under the Securities Act of 1933, as amended), with respect to the
Company's Common Stock to be issued in the Offering contemplated hereby
("Offering"). This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits thereto. Such additional
information may be inspected and copied as set forth above. Statements
contained in this Prospectus, or in any document incorporated in this
Prospectus by reference, as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each
instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement or such other document, each
such statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December
31, 1995 ("1995 10-K"), the Company's Form 10-Q Report for the quarter ended
March 31, 1996, as amended, the Company's Current Report on Form 8-K, dated
January 31, 1996, as amended, and the portions of the Company's Proxy Statement
for its annual meeting of shareholders held April 23, 1996, that have been
incorporated by reference in the 1995 10-K, as heretofore filed by the Company
with the Commission (File No. 2-54663), are incorporated by reference into this
Prospectus. Any statement contained in such documents shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus. Upon written or oral
request, the Company will provide copies of any documents incorporated by
reference herein (other than certain exhibits), without charge. Requests for
such copies should be directed to Ronald G. Ford, President, First Manistique
Corporation, 130 South Cedar, Manistique, Michigan 49854, telephone (906)
341-8401.
-2-
<PAGE> 5
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere
in this Prospectus. As this summary is necessarily incomplete, reference is
made to, and the summary is qualified in its entirety by, the more detailed
information contained or incorporated by reference in this Prospectus.
Prospective investors are urged to read this Prospectus in its entirety.
Certain capitalized terms which are used but not defined in this summary are
defined elsewhere in this Prospectus. All share and per share data in this
Prospectus have been adjusted to reflect a three- for- one stock split effected
as a stock dividend declared April 23, 1996 and to be distributed June ______,
1996 to shareholders of record on April 29, 1996. All references to the
"Company" herein refer to First Manistique Corporation and its subsidiaries,
unless otherwise indicated by the context.
THE COMPANY
First Manistique Corporation is a bank holding company with
approximately $327.5 million in total assets. The Company owns two commercial
bank subsidiaries, First Northern Bank & Trust ("First Northern"),
headquartered in Manistique, Michigan, and South Range State Bank ("South Range
Bank"), headquartered in South Range, Michigan. The Company completed the
acquisition of the South Range Bank on January 31, 1996. The Company's two
commercial banks operate 23 facilities in 20 communities in the Upper Peninsula
of Michigan. The Company also owns three nonbank subsidiaries, First
Manistique Agency, which sells annuities as well as life, accident and health
insurance, and First Rural Relending Company, a nonprofit relending company. A
third subsidiary, First Northern Services Company (a real estate appraisal
company) is currently inactive.
The Company is incorporated under the laws of the state of Michigan.
The executive offices of the Company are located at 130 South Cedar Street,
Manistique, Michigan 49854, and its telephone number is (906) 341-8401.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered . . . . . . . . . . . . . . . . 400,000 shares
Common Stock outstanding before
the Offering (1) . . . . . . . . . . . . . . . . . 2,120,778 shares
Common Stock to be outstanding
after the Offering (2) . . . . . . . . . . . . . . 2,520,778 shares
Expiration of Rights Offering . . . . . . . . . . . . , 1996
-------------------------
Use of proceeds . . . . . . . . . . . . . . . . . . . The net proceeds from the Offering will be used to retire
bank debt of $2.9 million (of which $1.947 million was
incurred to finance the acquisition of the South Range
Bank), for additional working capital needs, and to
generally strengthen the Company's capital position in
anticipation of future growth through acquisitions.
</TABLE>
- ----------------------------
(1) Shares outstanding as of March 31 1996.
(2) Assumes that all shares offered are sold, and does not include 37,350
shares of Common Stock that may be issued pursuant to options
previously granted under the Company's Stock Option Plan.
-3-
<PAGE> 6
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
ended March 31 1995
1996 1995 Pro Forma (1) Historical(4) 1994(4) 1993 1992 1991
---- ---- ------------- ---------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 6,422 $ 5,067 $ 24,990 $ 22,100 $ 13,798 $ 7,942 $ 8,035 $ 8,085
Interest Expense 2,843 2,205 11,001 9,561 6,053 3,543 3,788 4,551
---------- --------- --------- --------- --------- --------- --------- --------
Net Interest Income 3,579 2,862 13,989 12,539 7,745 4,399 4,247 3,534
Security Gains (losses) 27 3 (19) (19) 75 175 191 323
Provision for loan losses 107 69 811 771 330 125 239 232
Other income 301 363 1,587 1,373 1,037 795 577 407
Other expenses 2,476 2,115 11,076 9,368 6,101 3,715 3,277 2,714
---------- --------- --------- --------- --------- --------- --------- --------
Income before tax 1,324 1,044 3,670 3,754 2,426 1,529 1,499 1,318
Cumulative effect of change
in accounting for income
taxes 0 0 0 0 0 13 0 0
Income taxes 395 267 1,047 1,084 458 260 331 321
---------- --------- --------- --------- --------- --------- --------- --------
Net income $ 929 $ 777 $ 2,623 $ 2,670 $ 1,968 $ 1,282 $ 1,168 $ 997
========== ========= ========= ========== ========= ========= ========= ========
Per Share (2):
Earnings $ .44 $ .37 $ 1.25 $ 1.27 $ 1.14 $ 1.05 $ .95 $ .82
Dividends (3) .12 .17 .41 .41 .20 .49 .31 .29
Book Value 11.99 11.05 11.87 11.87 10.72 8.12 7.57 6.92
Ratios Based on Net Income:
Return on average equity 3.68% 3.40% 11.44% 11.65% 14.25% 13.33% 13.25% 12.24%
Return on average assets .29% .31% .87% 1.00% 1.01% 1.13% 1.15% 1.11%
Dividend payout ratio 27.27% 45.95% 32.80% 32.28% 17.54% 46.67% 32.63% 35.37%
Shareholders' equity as a
percent of average assets 7.78% 9.00% 7.58% 8.57% 7.11% 8.45% 8.67% 9.46%
Financial Condition:
Assets $ 327,514 $ 257,143 $ 320,646 $ 282,791 $ 253,098 $ 117,279 $ 106,798 $ 94,237
Loans 255,134 191,305 248,527 221,507 183,168 87,145 73,108 61,958
Securities 28,027 36,321 30,882 27,055 35,795 17,183 21,107 25,005
Deposits 283,069 225,621 277,014 244,407 223,436 103,717 94,257 82,786
Long-term borrowings 15,351 4,773 15,351 10,088 3,553 2,250 2,000 1,000
Shareholders' Equity 25,430 23,193 25,006 25,007 22,483 9,943 9,260 8,467
</TABLE>
(1) Gives effect to the Company's recent acquisition of the South Range
Bank as if such acquisition had occurred on January 1, 1995. See
"Recent Acquisition," South Range State Bank Financial Statements, and
Pro Forma Financial Information.
(2) Per share data has been restated for all periods presented to reflect
all stock dividends and stock splits including the three-for-one-stock
split declared April 23, 1996 and to be distributed June ______, 1996
to shareholders of record as of April 29, 1996.
(3) Historical data as of and for the three months ended March 31, 1996,
includes the South Range Bank on a consolidated basis from the date of
acquisition on January 31, 1996.
(4) During these periods the Company experienced significant growth in
assets due to acquisitions. See "Management's Discussion and
Analysis of Financial COndition and Results of Operations --
Highlights."
-4-
<PAGE> 7
RISK FACTORS
An investment in the securities offered pursuant to this Prospectus
may involve a high degree of risk. The several risk factors discussed below,
along with general investment risks and the other matters discussed in this
Prospectus, should be considered in making an investment decision and in
evaluating the Company's Common Stock.
RECENTLY COMPLETED ACQUISITION, FUTURE ACQUISITIONS AND GROWTH
Effective January 31, 1996, the Company acquired all the outstanding
stock of the South Range State Bank, a Michigan banking corporation, with
assets of approximately $38.9 million at the time of acquisition. The costs of
integrating the operations of this institution may have an adverse impact on
the Company's operations and earnings. In addition, there can be no assurances
that the past performance of this bank combined with the Company's will be
indicative of the financial results to be achieved in the future. See "Recent
Acquisition." The Company has experienced significant growth in assets as a
result of acquisitions, having acquired two banks, one branch, and
substantially all of the banking assets and liabilities of a third bank since
February 1994. The Company is continuing to seek acquisitions in its existing
or adjoining market areas to the extent suitable candidates and acceptable
terms may be identified. The Company recently acquired five percent (5%) of
the outstanding Common Stock of BayBank based in Gladstone, Michigan. The
Company previously made a proposal to the directors of BayBank for the Company
to acquire that bank. This proposal was rejected. The Company is now
considering whether to make another proposal to the directors or whether to
make an offer to acquire additional shares directly from other shareholders or
whether to seek changes in the BayBank board of directors and management of
BayBank. Any additional acquisition of BayBank shares would be subject to
approval of regulatory authorities and there is no assurance that any such
approval could be obtained or that any other shareholders would be willing to
sell their shares to the Company or to join the Company in effecting changes in
the BayBank board of directors. The Company is also currently conducting
acquisition negotiations with another bank located in the Upper Peninsula of
Michigan. This transaction is subject to negotiation of a definitive agreement,
shareholder approval and regulatory approval. There is no assurance that a
definitive agreement will be reached or that necessary approvals will be
obtained. Moreover, there can be no assurance that any other acquisitions
will be made or, if made, will be successful.
LIMITED TRADING IN COMMON STOCK
Prior to this Offering, there has been only limited trading in shares
of Common Stock, and there can be no assurance that an active trading market
will develop or be sustained. Accordingly, no assurance can be given as to the
liquidity of the market for the Common Stock or the price at which any sales
may occur. Also, there are no market makers for the Company's Common Stock.
The future market price of the Company's Common Stock is likely to depend upon
a variety of events, including quarter-to-quarter variations in operating
results, local economic conditions, trading volume, general market trends and
other factors. The Company has no current intention of submitting an
application to have the Common Stock approved for quotation on the NASDAQ Small
Cap System or National Market System or any other established stock exchange or
market. From January 1, 1994, through June 12, 1996, there were, so far as the
Company's management knows, 125 sales of shares of the Company's Common Stock,
involving a total of 18,000 shares.
INTEREST RATE SENSITIVITY
Prevailing economic conditions, particularly changes in market
interest rates, may significantly affect the operations of financial
institutions, such as First Northern and South Range Bank, because the earnings
of a financial institution depend primarily on its net interest income, which
is the difference between the income earned on its loans and investments and
the interest paid on its deposits and borrowings. In addition to affecting
interest income and expense, changes in interest rates also can affect the
value of a financial institution's interest earning assets, which are comprised
of fixed- and adjustable-rate instruments. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. Changes in
interest rates also can affect the average life of, and demand for, loans and
mortgage-related securities. A financial institution is subject to
reinvestment risk to the extent that it is not able to reinvest such
prepayments at rates that are comparable to the rates on the maturing loans or
securities.
-5-
<PAGE> 8
LOCAL ECONOMIC CONDITIONS
The success of the Company is dependent to a significant extent upon
the general economic conditions in the markets served by its subsidiaries. No
assurance can be given that favorable economic conditions will exist in such
markets.
COMPETITION
The banking business is highly competitive. The Company's bank
subsidiaries compete as financial intermediaries with other commercial banks,
saving and loan associations, credit unions, mortgage banking companies,
securities brokerage companies, insurance companies, and money market mutual
funds operated in Michigan, Wisconsin, and elsewhere. Many of these
competitors have substantially greater resources and lending limits than the
Company's bank subsidiaries and offer certain services that the Company's bank
subsidiaries do not currently provide. In addition, nondepository institution
competitors are generally not subject to the extensive regulation applicable to
the Company and its bank subsidiaries.
LENDING OUTSIDE OF LOCAL MARKETS
For nearly twenty (20) years, First Northern has extended credit to
borrowers and equipment lessees located outside its local Michigan Upper
Peninsula markets. Initially, this financing related primarily to municipal
government leases covering fire trucks or other large municipal vehicles or
heavy equipment. More recently, First Northern has purchased or financed a
limited amount of private commercial equipment leases. At March 31, 1996,
municipal and commercial lease financings outside of the Upper Peninsula
totaled approximately $31,000,000 with lessees located in various communities
throughout the continental United States. More recently, First Northern has
purchased participations or financed directly a number of hotels located in
lower Michigan, Wisconsin and Minnesota. At March 31, 1996, these hotel loans
totaled approximately $15,000,000. To date, First Northern's lending and lease
financing for customers outside its local market has been profitable to First
Northern, has not resulted in greater losses than local lending and, in the
opinion of management, has not involved more risk than that associated with
local lending. However, investors should be aware that the lack of knowledge
about customers gained from local community contacts, increased complexity and
cost of enforcing lending documents and other factors could increase the risk
associated with out of market lending. Reference is made to "Selected
Statistical Information - Nonperforming Assets" for a discussion with respect
to pending Chapter 11 bankruptcy proceedings of The Bennett Funding Group,
Inc., a company from which First Northern purchased various packages of
equipment leases.
CERTAIN REGULATORY CONSIDERATIONS
Financial institutions are heavily regulated. The success of the
Company depends not only on competitive factors but also on state and federal
regulations effecting banks and bank holding companies. These regulations are
primarily intended to protect depositors, not stockholders. Regulation of the
financial institution's industry is undergoing continuous change and the
ultimate effect of such changes cannot be predicted. Statutes affecting
financial institutions have been proposed and may be enacted. Regulations now
affecting the Company and its subsidiaries may be modified at any time and new
statutes affecting financial institutions have been proposed and may be
enacted. There is no assurance that such modifications or new statutes will
not adversely effect the business of the Company and its subsidiaries.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS
Certain provisions of the Michigan Business Corporation Act and the
Company's Articles of Incorporation may have the effect of discouraging
transactions involving an actual or potential change in control of the Company.
See "Description of Capital Stock."
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common
Stock offered hereby are estimated to be approximately $10.668 million. The
Company anticipates using approximately $2.9 million of such proceeds to retire
bank debt, of which approximately $1.947 million was incurred to acquire the
South Range Bank. The debt bears
-6-
<PAGE> 9
interest at the lender's prime rate (currently 8.25%) and matures February 1,
1999. See "Recent Acquisition." The balance of any proceeds is expected to be
used for working capital needs and to generally strengthen the Company's
capital position in anticipation of future growth through acquisitions.
Pending application of the net proceeds for the foregoing purposes, the
proceeds will be invested in the short-term, investment grade securities.
RECENT ACQUISITION
Effective January 31, 1996, the Company acquired all the outstanding
stock of the South Range State Bank ("South Range Bank") in consideration for
the payment of $1,947,357 in cash and the issuance of $2,362,851 of three year
installment notes bearing interest at 5.04% per annum. At the time of
acquisition, the South Range Bank had assets of approximately $36.50 million,
including loans in the amount of approximately $26.76 million, and deposits of
approximately $32.87 million. The cash portion of the purchase price was
financed with short-term debt, all of which is intended to be repaid from the
proceeds of this Offering.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to reflect the sale by the Company of 400,000
shares of Common Stock and the application of the estimated net proceeds of
such sale ($10,668,000).
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------
Actual As Adjusted (1)
------ ---------------
(dollars in thousands)
<S> <C> <C>
Short-term debt:
Notes payable and current portion of
long term debt . . . . . . . . . . . . . . . . . . . . . . . . $ 3,076 $ 3,076
======== =======
Long-term debt, net of current portion . . . . . . . . . . . . . . . $ 12,275 $ 9,375
Shareholders' equity:
Preferred Stock, 500,000 shares authorized,
none issued(2) . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common Stock, 6,000,000 shares authorized: 2,120,778
shares issued and outstanding; and 2,520,778
shares issued and outstanding, as adjusted(2) . . . . . . . . . 13,443 24,111
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 12,507 12,507
Net unrealized loss on securities available for sale net of
tax of $266 . . . . . . . . . . . . . . . . . . . . . . . . . . (520) (520)
-------- -------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . 25,430 36,098
-------- -------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . $ 37,705 $45,473
======== =======
</TABLE>
- ---------------------
(1) Reflects the consummation of the Offering and the application of the
estimated net proceeds thereof as described under "Use of Proceeds" as
if the Offering had occurred at March 31, 1996, (assuming that all
shares offered are sold).
(2) Authorized shares have been restated to reflect an increase in
authorized capital approved by the Company's shareholders on April 23,
1996. Outstanding shares have been restated to reflect a
three-for-one stock split effected by a stock dividend declared April
23, 1996 and to be distributed June _____, 1996 to shareholders of
record on April 29, 1996. Outstanding shares exclude 37,350 shares of
Common Stock that may be acquired pursuant to outstanding options.
-7-
<PAGE> 10
MARKET FOR COMMON STOCK AND DIVIDENDS
On February 8, 1994, the Registrant issued 527,337 shares of Common
Stock in acquiring the Bank of Stephenson. The shares were valued at $12.50
per share for purposes of that transaction. During the third and fourth
quarters of 1994, the Registrant offered and sold 324,315 shares of Common
Stock to the public at a per share price of $14.37. There is no active market
for the Company's Common Stock, and there is no published information with
respect to its market price. There are occasional direct sales by shareholders
of which the Company's management is aware. It is the understanding of the
management of the Company that over the last two years, the Company's Common
Stock has sold in shareholder transactions at a premium to book value. From
January 1, 1994, through June 12, 1996, there were, so far as the Company's
management knows, 125 sales of shares of the Company's Common Stock, involving
a total of 18,000 shares. The price was reported to management in most of these
transactions, and management has no way of confirming the prices which were
reported. During this period, the highest price known to be paid was $26.00
per share in the second quarter of 1996, and the lowest price was $13.33 per
share in the first quarter of 1994. The following table sets forth the range
of high and low sales prices of the Company's Common Stock during 1994, 1995
and through June 12, 1996, based on information made available to the
Company, as well as per share cash dividends declared during those periods.
Although management is not aware of any transactions at higher or lower prices,
there may have been transactions at prices outside the ranges listed below.
<TABLE>
<CAPTION>
Cash
Sales Prices Dividends
--------------------- ---------
1994 High Low
---- ------- ---------
<S> <C> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13.37 $ 13.33 $ -0-
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 13.63 13.37 .061
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 14.37 13.63 .067
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 14.37 14.37 .07
<CAPTION>
1994 High Low
---- ------- ---------
<S> <C> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.67 $ 14.37 $ .167
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 19.33 17.67 .077
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 19.33 19.33 .08
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 20.67 19.33 .083
<CAPTION>
1994 High Low
---- ------- ---------
<S> <C> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23.33 $ 20.67 $ .12
Second Quarter (through June 12, 1996) . .. . . . . . . . . . . . 26.00 23.33 .09
</TABLE>
There are 6,000,000 shares of the Company's Common Stock authorized of
which 2,120,778 shares were issued and outstanding as of March 31, 1996. There
were approximately 1,220 shareholders of record, including trusts and shares
jointly owned, as of that date. No warrants or options exist for the purchase
of additional stock of the Company except for options to purchase 37,350 shares
of the Company's Common Stock that have been granted under the Company's Stock
Option Plan.
The holders of the Company's Common Stock are entitled to dividends
when, as and if declared by the Board of Directors of the Company out of funds
legally available for that purpose. Dividends have been paid on a quarterly
basis. In determining cash dividends, the Board of Directors considers the
earnings, capital requirements and financial condition of the Company and its
commercial bank subsidiaries, along with other relevant factors. The Company's
principal source of funds for cash dividends is the dividends paid by its bank
subsidiaries. The ability of the Company and its subsidiary banks to pay
dividends is subject to regulatory restrictions and requirements. See
"Supervision and Regulation" and Note 20 of the Notes to Company Financial
Statements.
In July 1995 , the Company adopted a Dividend Reinvestment Plan which
permits the Company's shareholders to have their cash dividends automatically
reinvested in shares of the Company's Common Stock. 2,250,000 shares were
reserved for issuance under this plan.
-8-
<PAGE> 11
The Company has paid regular cash dividends on its Common Stock since
it commenced operations in 1976. The Company does not expect that the
regulatory restrictions applicable to it or its subsidiary banks will impair
the ability of the Company to continue to pay dividends. (See Note 20 - Capital
Structure and Restrictions on Retained Earnings in First Manistique
Corporation's 1995 consolidated financial statements and Note 11 - Restrictions
on Retained Earnings in South Range State Bank's 1995 financial statements.)
The Company currently expects to continue to pay dividends on its Common Stock
after the Offering. There can be no assurance, however, that any such
dividends will be paid by the Company or that such dividends will not be
reduced or eliminated in the future. The timing and amount of any dividends
will depend upon the earnings, capital requirements and financial condition of
the Company and its subsidiary banks, as well as the general economic
conditions and other relevant factors effecting those entities.
DETERMINATION OF OFFERING PRICE
The offering price of the Common Stock offered pursuant to this
Prospectus was determined by the Company's Board of Directors based upon the
most recent prices paid for shares of Common Stock in the transactions
described in the preceding section "Market for Common Stock and Dividends."
Although there is only limited trading in the Company's Common Stock and the
stock is not traded on an established market, the Board of Directors concluded
that the transactions which have occurred and of which they were aware
represented a fair and appropriate basis for establishing a price for the
shares offered hereby. However, the limited trading is not necessarily a
reliable indicator of the value of the Common Stock.
PLAN OF DISTRIBUTION
The Board of Directors has authorized Michigan residents who were
holders of the Company's Common Stock as of __ ____________, 1996 (the "Record
Date"), to subscribe for additional shares of Common Stock offered by the
Company in proportion to the number of shares owned at the Record Date.
Accordingly, existing Michigan resident shareholders of the Company as of the
Record Date will have the opportunity to purchase .1886 share of Common Stock
offered hereunder for each whole share owned on the Record Date. This
opportunity for existing shareholders to purchase shares to be sold by the
Company in this Offering is referred to as the Rights Offering. No fractional
shares will be issued; consequently, existing shareholders who exercise their
Rights with respect to an odd number of shares will be required to round up to
the next whole share to eliminate the fractional share. Shareholders may
exercise their Rights in full or in part; however, this Right must be exercised
on or before _________________________, 1996 (the "Rights Termination Date").
The minimum and maximum purchase for a shareholder wishing to exercise his or
her Right is 100 and 10,000 shares, respectively. Although not required by
Michigan law or the Company's Articles of Incorporation or Bylaws, the Board of
Directors of the Company has authorized this Rights Offering in order to permit
existing shareholders who reside in Michigan to maintain their proportionate
interest in the Company's outstanding Common Stock.
In the event the Company's existing shareholders fail to exercise
their Rights in full, the remaining shares of Common Stock will be offered to
the public and existing shareholders through the Company's officers, directors
and employees who will solicit subscriptions from prospective shareholders.
These individuals will not receive any special compensation for their services
in selling such shares. No promotional stock (stock sold at a discount or for
services or other non-cash consideration) will be issued. The offering of the
Company's Common Stock to the public will begin immediately following the
Rights Termination Date.
Subscriptions for shares of Common Stock generally will be accepted on
a first-come first-served basis. The minimum purchase requirement is 100
shares. Unless otherwise approved in advance by the Board of Directors of the
Company, the maximum number of shares that may be purchased in this Offering by
any person, including his or her affiliates, is 10,000 shares.
A subscription for Common Stock can be made by completing and signing
the accompanying Subscription Agreement and delivering it to:
First Manistique Corporation
Attn: Fred LaMuth, Secretary
130 South Cedar
Manistique, Michigan 49854
-9-
<PAGE> 12
The Company reserves the right to reject, in whole or in part, in its
sole discretion, any Subscription Agreement, other than with respect to an
existing shareholder's exercise of his or her Right. The full subscription
price for shares of Common Stock must be included with a Subscription
Agreement. The purchase price must be paid in United States currency by check,
bank draft, or money order, payable to First Manistique Corporation. Failure
to include the full subscription price with the Subscription Agreement shall
give the Company the right to disregard it.
The Company will decide which subscriptions to accept (other than with
respect to an existing shareholder's exercise of his or her Rights) and all
appropriate refunds will be mailed no later than the earlier of: (a) ten (10)
days after expiration of the Offering; or (b) thirty (30) days from the date
the Subscription Agreement is received. The Company will not pay interest on
subscription funds that are accepted or returned to subscribers. As soon as
practicable after a Subscription Agreement is accepted, certificates
representing shares of Common Stock will be issued and delivered to each
subscriber whose Subscription Agreement is accepted in whole or in part.
The offering price was established by the Board of Directors on the
basis of the information set forth in the section captioned "Market for Common
Stock and Dividends." This information reflects only limited trading and may
not be a reliable indicator of the value of the Common Stock.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-10-
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated annual financial data of the
Company are derived from the audited consolidated financial statements of the
Company. The data for three month periods ended March 31, 1995 and March 31,
1996, have been derived from unaudited interim financial statements; however,
in the opinion of management of the Company, such unaudited interim statements
include all adjustments (consisting of normal occurring accruals) necessary to
fairly present the data for such periods in accordance with generally accepted
accounting principles. The results of operations for the three-month period
ended March 31, 1996, are not necessarily indicative of financial results to be
achieved for the full year. The historical data presented below are qualified
by reference to the Company's financial statements, included elsewhere in this
Prospectus and should be read in conjunction with such financial statements and
related notes thereto and "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations."
The pro forma data presented gives effect to the Company's recent
acquisition of the South Range State Bank. The pro forma information contained
herein may not be indicative of the financial results or condition that might
have been reported had the acquisition been completed on the date specified
below and may not be indicative of financial results to be achieved in the
future. See "Recent Acquisition," Company Financial Statements, South Range
State Bank Financial Statements, and Pro Forma Financial Information.
<TABLE>
<CAPTION>
Three Months
ended March 31 1995
1996 1995 Pro Forma (1) Historical(4) 1994(4) 1993 1992 1991
---- ---- ------------- ---------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 6,422 $ 5,067 $ 24,990 $ 22,100 $ 13,798 $ 7,942 $ 8,035 $ 8,085
Interest Expense 2,843 2,205 11,001 9,561 6,053 3,543 3,788 4,551
-------- -------- -------- -------- -------- -------- -------- -------
Net Interest Income 3,579 2,862 13,989 12,539 7,745 4,399 4,247 3,534
Security Gains (losses) 27 3 (19) (19) 75 175 191 323
Provision for loan losses 107 69 811 771 330 125 239 232
Other income 301 363 1,587 1,373 1,037 795 577 407
Other expenses 2,476 2,115 11,076 9,368 6,101 3,715 3,277 2,714
-------- -------- -------- -------- -------- -------- -------- -------
Income before tax 1,324 1,044 3,670 3,754 2,426 1,529 1,499 1,318
Cumulative effect of change
in accounting for income
taxes 0 0 0 0 0 13 0 0
Income taxes 395 267 1,047 1,084 458 260 331 321
-------- -------- -------- -------- -------- -------- -------- -------
Net income $ 929 $ 777 $ 2,623 $ 2,670 $ 1,968 $ 1,282 $ 1,168 $ 997
======== ======== ======== ======== ======== ======== ======== =======
Per Share (2):
Earnings $ .44 $ .37 $ 1.25 $ 1.27 $ 1.14 $ 1.05 $ .95 $ .82
Dividends (3) .12 .17 .41 .41 .20 .49 .31 .29
Book Value 11.99 11.05 11.87 11.87 10.72 8.12 7.57 6.92
Ratios Based on Net Income:
Return on average equity 3.68% 3.40% 11.44% 11.65% 14.25% 13.33% 13.25% 12.24%
Return on average assets .29% .31% .87% 1.00% 1.01% 1.13% 1.15% 1.11%
Dividend payout ratio 27.27% 49.95% 32.80% 32.28% 17.54% 46.67% 32.63% 35.37%
Shareholders' equity as a
percent of average assets 7.78% 9.00% 7.58% 8.57% 7.11% 8.45% 8.67% 9.46%
Financial Condition:
Assets $327,514 $257,143 $320,646 $282,791 $253,098 $117,279 $106,798 $94,237
Loans 255,134 191,305 248,527 221,507 183,168 87,145 73,108 61,958
Securities 28,027 36,321 30,882 27,055 35,795 17,183 21,107 25,005
Deposits 283,069 225,621 277,014 244,407 223,436 103,717 94,257 82,786
Long-term borrowings 15,351 4,773 15,351 10,088 3,553 2,250 2,000 1,000
Shareholders' Equity 25,430 23,193 25,006 25,007 22,483 9,943 9,260 8,467
</TABLE>
-11-
<PAGE> 14
(1) Gives effect to the Company's recent acquisition of the South Range
State Bank as if such acquisitions had occurred on January 1, 1995.
See "Recent Acquisition," South Range State Bank Financial Statements,
and Pro Forma Financial Information.
(2) Per share data has been restated for all periods presented to reflect
the three for one stock split effected as a stock dividend declared
April 23, 1996 and to be distributed June ______ , 1996.
(3) Historical data as of and for the three months ended March 31, 1996,
includes the South Range State Bank on a consolidated basis from the
date of acquisition on January 31, 1996.
(4) During these periods the Company experienced significant growth in
assets due to acquisitions. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Highlights."
[THIS SPACE INTENTIONALLY LEFT BLANK]
-12-
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(AT DECEMBER 31, 1995 AND FOR THE THREE YEARS THEN ENDED)
HIGHLIGHTS
For First Manistique Corporation ("the Company"), 1995 was the second
consecutive year of significant growth. During 1995 and 1994, the Company
acquired the Bank of Stephenson ("Stephenson"), substantially all of the
banking assets and liabilities of Newberry State Bank ("Newberry"), and the
Rudyard branch of First of America ("Rudyard"). Further, in 1995 and 1994 the
Company opened four and one new branches, respectively. At December 31, 1993,
the Company had total assets of $117.28 million. Total assets increased to
$253.10 million during 1994 and reached $282.79 million by the end of 1995, an
increase of 141% in two years. While the largest portion of this growth,
approximately $100 million, came through acquisitions, the remaining $65
million was internally generated. During the same two year time period,
outstanding loan balances increased 155%, to $221.51 million, an even greater
rate of growth. Further, on a percentage basis, more loan growth than asset
growth was internally generated. Of the total increase in loans of $134.48
million from the end of 1993 to the end of 1995, only $58.09 million, or 43.2%
came from the acquisitions. The remaining $76.39 million, or 56.8%, was
internally generated.
Earnings also increased significantly from 1993 to 1995. Net income
was $2.67 million, $1.97 million and $1.28 million for 1995, 1994 and 1993.
Net income for 1995 was 110% greater than in 1993. Return on average
shareholders' equity was 11.25%, 11.92%, and 13.3% for 1995, 1994 and 1993.
Earnings per share was $3.81 in 1995, a 12% increase over the $3.41 of 1994,
which in turn was a 9% increase over 1993's $3.14. Earnings per share has not
increased as quickly as net income because of the 175,779 shares issued in
connection with the acquisition of the Bank of Stephenson and the 108,105
shares issued prior to the cash acquisition of the banking assets and
liabilities of Newberry State Bank.
The Company's most significant strength is its lending expertise. The
acquisitions to date have been primarily motivated by a desire to obtain access
to additional lending markets and to obtain additional retail deposits to
finance lending activities. This strategy has continued into 1996, with the
acquisition of South Range State Bank ("South Range") on January 31, 1996.
This acquisition gives the Company a new presence in the northwest corner of
Michigan's Upper Peninsula. At the date of the acquisition, South Range had
total assets of $36.50 million, total loans of $26.76 million, and total
deposits of $32.87 million. A key management objective is to increase the loan
to deposit ratio at South Range to levels consistent with the Company in total.
Growth remains a critical element of the Company's strategy and
selective bank and branch acquisitions may continue to occur. However,
management anticipates the rate of asset growth in the next few years will be
somewhat slower than recently experienced. The Company's banking offices are
located exclusively in Michigan's Upper Peninsula, an area which covers a large
geographic area and has a low population density. Because of the nature of
this market area, the cost of operating the Company's banking network is higher
than the average for banking companies the same size as the Company.
Management's primary focus in the near future is to increase the operating
efficiency of its banking network by increasing the average deposit level per
branch, increasing lending capabilities in each local market, and closely
monitoring and controlling operating costs.
When the Company acquired Stephenson in February 1994, Stephenson was
owned and operated as a separate banking subsidiary from First Northern Bank
and Trust ("First Northern"), the Company's only banking subsidiary at that
time. On October 1, 1995, Stephenson was merged into First Northern.
FINANCIAL CONDITION
LOANS
Loans represented 78.3% of total assets at the end of 1995 compared to
72.4% of total assets at the end of 1994. The loan to deposit ratio also
increased, rising from 82.0% at December 31, 1994 to 90.6% at December 31,
1995. Loans provide the most attractive earning asset yield available to the
Company and management believes that the trained
-13-
<PAGE> 16
personnel and controls are in place to successfully manage a growing loan
portfolio. Accordingly, management intends to continue to maintain loans at
the highest level which is consistent with maintaining adequate liquidity.
Following is a summary of the Company's loan balances at December 31,
1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
Percent
1995 1994 Change
---- ---- ------
<S> <C> <C> <C>
Commercial real estate $ 51,609 $ 32,833 57.2%
Commercial, financial and agricultural 55,445 45,329 22.3
Leases
Commercial 5,806 2,070 180.5
Governmental 18,061 19,165 (5.8)
1-4 family residential real estate 58,433 55,729 4.9
Consumer 29,918 26,785 11.6
Construction 2,235 1,258 77.7
------------ ------------ -----
Total $ 221,507 $ 183,169 21%
============ ============ =====
</TABLE>
The Company has five major categories of lending activities. Four
categories, commercial real estate, commercial, residential real estate and
consumer, are generally with customers in Michigan, primarily in the Upper
Peninsula. The fifth major lending line, commercial and governmental leasing,
takes place on a nationwide basis. As shown in the table above, the amount of
outstanding loans increased in all categories in 1995 when compared to 1994,
except for governmental leases which declined $1.1 million.
Commercial real estate balances increased $18.78 million, or 57.2%
during the year. At December 31, 1995, this category accounted for 23.3% of
total outstanding loans. The most prominent types of properties financed
include hotels, motels and similar properties, which accounted for $15.5
million of the outstanding balance at December 31, 1995. The significant
growth in 1995 was a result of an emphasis on this type of lending.
General commercial lending, consisting of loans to a wide variety of
businesses, also increased significantly. Commercial loans outstanding
increased $10.1 million. The rate of growth, 22.3%, was only slightly greater
than the overall growth rate of the lending portfolio. At the end of 1995 this
category accounts for one-fourth of all outstanding loans. A significant
portion of this growth was in the Stephenson area. Most of the Company's
commercial lending customers are in Michigan's Upper Peninsula.
The Company finances commercial and governmental leases throughout the
country. Over 95% of these leases were acquired from one originator.
Management visits this originator twice a year to review their operations and
credit controls. The Company acquires leases from 3 other originators, and
management is working to diversify its sources of lease paper. Management
closely reviews the credit quality of each proposed lease before entering into
a financing agreement. Such reviews may include visits to major equipment
vendors which produce the equipment to be leased or to the lease customers,
including governmental organizations. The lease agreements are strictly
financing; while the Company has access to the underlying equipment as
collateral, there is no interest in the residual value of the equipment. As
illustrated in the table above, most of the leasing activity is to state and
local governmental units, including Native American organizations. While
Management aggressively pursues leases, the falling rates in 1995 caused
significant refinancing activity, which can be accomplished by high quality
governmental lessors on a cost-effective basis. The makeup of the lease
portfolio at December 31, 1994 was substantially the same as 1995. Interest
income from certain of the governmental leases is exempt from federal income
taxes.
Real estate lending on 1-4 family residences consists of just over
one-fourth of the Company's outstanding loan balances and is the single largest
lending category. Most of these loans (67% at December 31, 1995 and 47% at
December 31, 1994) are written at interest rates which adjust annually. Such
adjustments are generally limited to two percentage points annually and five
percentage points over the life of the loan. The significant increase in the
percentage of variable rate loans is due to the acquisition of Stephenson.
Stephenson's traditional residential mortgage loan products were three and five
year fixed rate balloon loans. As these loans mature, they are being rewritten
as adjustable rate loans.
-14-
<PAGE> 17
Proportionally fewer of the properties in the Company's market area qualify as
collateral for loans to be sold in the secondary market than in Michigan in
general; accordingly relatively few loans are originated for resale. Loans
originated for resale amounted to $3.28 million, $2.74 million and $1.94
million in 1995, 1994 and 1993. Servicing on these loans is retained. The
servicing portfolio has under $8.00 million in loans at December 31, 1995.
The remaining significant loan category ($29.95 million outstanding at
December 31, 1995) is consumer lending. This category consists of loans to
individuals for a wide variety of purposes. Included are indirect auto loans
of $12.69 million, which were acquired from six auto dealers in the Upper
Peninsula. Management first began acquiring indirect paper midway through
1994, and less then one million dollars were on the books at the end of that
year. In the middle of 1995, Management ceased writing such paper after
concluding the yield was not commensurate with the cost and credit risk,
particularly when compared to other alternatives. Management has no current
plans to re-enter the indirect market.
CREDIT QUALITY
The higher yields on loans in comparison to investments are available
because the risk that principal and interest will not be repaid is typically
higher for loans than for investment securities permitted to be held by the
Company under banking laws and regulations. The cornerstone of maintaining
credit quality is effective underwriting. Lending arrangements are generally
structured to provide more than one source of repayment. In commercial real
estate loans the Company generally requires that cash flow from the collateral
property be sufficient to service all related debt.
In spite of effective underwriting, some borrowers become unwilling or
unable to make payments on a timely basis. Management aggressively monitors
delinquencies. Commercial loan officers contact borrowers the day after a
payment is missed. Mortgage and consumer loan customers are contacted 10 days
after a payment is missed by the Company's collection staff. Management is
aggressive in seizing collateral, or initiating foreclosure, in the event late
payments are not quickly resolved.
The Company's success in maintaining excellent credit quality is
demonstrated in the following table (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Allowance to total loans at end of year 1.42% 1.28% 1.05%
Net chargeoffs (recoveries) $ (16) $ 81 $ 42
Net chargeoffs (recoveries) to average
outstanding loans (.01)% .06% .02%
Net chargeoffs (recoveries) to beginning
allowance balance (.7)% 8.84% 5.04%
Nonaccrual loans 579 -- --
Loans 90 days or more delinquent
(excluding nonaccrual loans) $ 1,439 $ 142 $ 116
</TABLE>
Management analyzes the allowance for loan losses in detail on a
monthly basis to ensure that losses inherent in the portfolio are properly
recognized. In addition to the input of lending officers, management uses an
external loan review contractor to examine large commercial real estate, lease
and commercial loans relationships. An internal loan review function is also
in place, with a primary objective of reviewing loans below the scope
established by management for the external contractor.
The Company adopted new accounting guidance for impaired loans in 1995
as described in notes 2 and 6 to the accompanying consolidated financial
statements.
-15-
<PAGE> 18
INVESTMENTS
During 1995, the Company's total investments, including
interest-bearing deposits in banks, decreased $9.49 million, from $38.22
million to $28.73 million. This decrease was primarily the result of an
increase in the Company's outstanding loans. The primary use of the investment
portfolio is to provide a source of liquidity. Accordingly, most of the
portfolio is invested in U.S. Treasury and agency securities which have little
credit risk and are highly liquid. Consistent with the use of the portfolio as
a liquidity source, the Company took advantage of the one-time reclassification
opportunity permitted by the Financial Accounting Standards Board and
reclassified virtually all securities to the available for sale category at the
end of 1995. The only securities now classified as held to maturity are state
and local political subdivision issues from small issuers which have little
liquidity.
DEPOSITS
Deposit growth has been a key element of the Company's expansion
strategy. Total deposits at December 31, 1995 were $244.41 million, compared
to $223.44 million and $103.72 million at the end of 1994 and 1993. The
acquisitions of Stephenson, Newberry and Rudyard accounted for $109.96 million,
or 78.1% of the total increase of $140.69 million from the end of 1993 to the
end of 1995. Further, deposits of $13.25 million were held at December 31, 1995
at branches opened during 1994 and 1995. Deposits over $100,000 consist
primarily of stable, governmental balances and balances from retail customers.
There were no brokered deposits at December 31, 1995, and Management has no
current plans to solicit such deposits.
The Company is constantly looking for stable sources of deposits. One
innovative approach is the premium- based certificate of deposit program.
Customers can elect to receive one of several products in place of cash
payments for interest on term certificates. The Company offers firearms, golf
clubs and grandfather clocks under these programs. The most successful and
long-standing of the programs is the firearm program, which is offered to
sportsmen nationally. Under this program the Company records the cost of the
product given as a discount from the face amount of the certificate of deposit
and recognizes interest expense on the effective interest method over the life
of the certificate. Total certificates of deposits outstanding under this
program were $986,000 and $306,000 at December 31, 1995 and 1994.
Another nontraditional source of deposits is the Company's CANSAVE
program. CANSAVE accounts are savings accounts denominated in Canadian
dollars. These accounts are offered in the Sault Ste. Marie banking offices
and had total balances of US $3.10 million at December 31, 1995. Such accounts
are available only to Canadian citizens who are attracted to such accounts due
to low interest rates paid at domestic Canadian banks.
BORROWINGS
As previously discussed, the Company's branching network is a
relatively high cost network in comparison to peer banking companies.
Accordingly, the Company has begun to use alternative funding sources to
provide funds for lending activities. Other borrowings increased to $10.09
million at the end of 1995 from $3.55 million in 1994. At December 31, 1995,
$8.09 million of the borrowings were from the Federal Home Loan Bank of
Indianapolis. From time-to- time alternative sources of funding can be
obtained at interest rates which are competitive with, or lower than, retail
deposit rates and with inconsequential administrative costs. Management
anticipates that such borrowings will become a more permanent part of the
overall funding makeup of the Company.
LIQUIDITY
The Company's sources of liquidity include principal payments on loans
and investments, sales of securities available for sale, deposits from
customers, borrowings from the Federal Home Loan Bank, other bank borrowings,
and the issuance of Common Stock. The Company has ready access to significant
sources of liquidity on an almost immediate basis. Management anticipates no
difficulty in maintaining liquidity at the levels necessary to conduct the
Company's day-to-day business activities.
-16-
<PAGE> 19
RESULTS OF OPERATIONS
SUMMARY
Earnings increased significantly from 1993 to 1995 as a direct result
of the Company's asset growth. Net income was $2.67 million, $1.97 million and
$1.28 million for 1995, 1994 and 1993. Net income for 1995 was 110% greater
than in 1993. Earnings per share was $1.27 in 1995, a 12% increase over the
$1.14 of 1994, which in turn was a 9% increase over 1993's $1.05. Earnings per
share has not increased as quickly as net income because of the shares issued
in connection with the acquisition of Stephenson and prior to the cash
acquisition of the banking assets and liabilities of Newberry.
Net interest income is the primary source of earnings growth,
increasing to $12.61 million in 1997 from $7.75 million and $4.40 million in
1994 and 1993, for a total two-year increase of 186%. Noninterest income did
not keep pace with the asset growth. Noninterest income of $1.28 million in
1995 was only 32% higher than the 1993 amount of $.97 million. The increase in
noninterest expense to $9.37 million in 1995 from $6.10 million and $3.71
million in 1994 and 1993 was more in proportion to the total asset growth. The
two-year increase in noninterest expense was 153%, compared to total asset
growth of 141%.
NET INTEREST INCOME
The Company's strong lending function is evident in the net interest
income measurement. Net interest income as a percentage of total interest
income was 56.9%, 56.1% and 55.4% in 1995, 1994 and 1993, respectively. Net
interest margin was 5.46%, 4.68% and 4.66% for the same periods.
Interest income from loans represented 90.4% of total interest income
in 1995, compared to approximately 85% in both 1994 and 1993. In all cases,
the total amount of interest income and the yield on total earning assets is
heavily determined by the results from lending activities. The yield on
earning assets was 9.45%, 8.07% and 8.05% in 1995, 1994 and 1993 respectively.
Total interest expense was $9.56 million in 1995, an increase from
$6.05 million and $3.54 million in 1994 and 1993, for an increase of 170% from
1993 to 1995. While other sources of funding are beginning to become an
important part of the Company's funding strategy, interest expense on deposits
still represented over 95% of total interest expense in 1995. The yield on
interest-bearing liabilities was 4.44%, 3.80% and 3.74% in 1995, 1994 and 1993.
PROVISION FOR LOAN LOSSES
The Company maintains the allowance for loan losses at a level
considered adequate to cover losses inherent in the portfolio. The Company
records a provision for loan losses necessary to maintain the allowance at that
level after considering factors such as loan charge-offs and recoveries,
changes in the mix of loans in the portfolio, loan growth, and other economic
factors more fully described in Note 2 to the accompanying consolidated
financial statements. The increase in the provision for loan losses, to
$771,000 in 1995 from $330,000 in 1994 and $125,000 in 1993 is primarily a
result of loan growth, particularly in the commercial real estate portfolio.
NONINTEREST INCOME
Noninterest income was $1.28 million, $1.11 million and $.97 million
in 1995, 1994 and 1993. The principal source of noninterest income is service
charges on deposit accounts. In 1995 such fees were $.56 million, just over
twice the amount recorded in 1993. Fees on deposit accounts have not kept pace
with overall asset growth since the institutions acquired had lower fee
structures than the Company. Management has generally maintained the former fee
levels for competitive purposes.
NONINTEREST EXPENSE
Noninterest expense has steadily increased from 1993 through 1995.
The two-year growth rate was 162% for salaries and benefits, 161% for furniture
and equipment expense and 181% for occupancy expense. As expected, these
increases were all consistent with the Company's asset growth. While the
growth was expected, a primary objective of
-17-
<PAGE> 20
management is to hold the rate of increase in these categories below future
asset growth. Management believes that significant efficiencies can be
obtained and is increasing the level of management emphasis in this area.
The application of purchase accounting to the acquisitions described
above created two intangible assets, the core deposit intangible and goodwill,
which are being amortized as described in the notes to the consolidated
financial statements. This expense did not exist prior to the acquisitions.
The amortization of acquisition intangibles was $.57 million in 1995, compared
to $.19 million in 1994 and zero in 1993.
Somewhat offsetting the intangible amortization is the decrease in
deposit insurance costs. The Company qualifies for the lowest risk-based
insurance premiums available from the Bank Insurance Fund (BIF) of the Federal
Deposit Insurance Company (FDIC). Virtually all of the Company's deposits are
insured by BIF. From 1993 to 1994, deposit insurance costs increased in
proportion to deposits as the insurance rate of 23 basis points for the Company
was unchanged. Effective May 1, 1995, the FDIC reduced the Company's insurance
rate to 4 basis points. That reduction is evident in the decrease in deposit
insurance costs to $.26 million in 1995 compared to $.37 million in 1994,
despite continuing increases in insured deposit balances. The rate has been
further reduced to zero for the first half of 1996.
FEDERAL INCOME TAXES
The provision for income taxes was 28.8% of income before income tax
in 1995, compared to 18.9% in 1994 and 17.0% in 1993. The difference between
these rates and the federal corporate income tax rate of 34% is primarily due
to tax-exempt interest earned on loans and investments. The effective tax rate
has increased from 1993 to 1995 as tax- exempt income has become a smaller
portion of total interest income.
INTEREST RATE AND FOREIGN EXCHANGE RATE RISK MANAGEMENT
Management actively manages the Company's interest rate risk. In the
relatively low interest rate environment which has been in place the last few
years, borrowers have generally tried to extend the maturities and repricing
periods on their loans and place deposits in demand, or very short-term
accounts. Management has taken various actions to offset the imbalance which
those tendencies would otherwise create. In general, management tries to write
commercial and real estate loans at variable rates or, when forced to offer
fixed rates due to competitive pressures, write fixed rate loans for relatively
short terms. Conversely, management has attempted to offer deposit products
designed to steer depositors to longer periods. Management has generally been
successful, with over 63% of loans repricing within one year and almost 30% of
certificates of deposit maturing over one year at December 31, 1995..
Beyond the general efforts to shorten loan pricing periods and extend
deposit maturities, management can manage interest rate risk by the maturity
periods of securities purchased, selling securities available for sale, and
borrowing funds with targeted maturity periods, among others. Also, the rate
of interest rate changes can impact the actions taken since the speed of change
affects various borrowers and depositors differently.
-18-
<PAGE> 21
Presented below is the Company's GAP table at December 31, 1995. For
all accounts other than savings and now accounts, the amounts presented in the
table below are based on contractual repricing periods. Savings and now
accounts are classified based upon management's assessment of the portion of
such balances which are sensitive to withdrawal based on the current interest
rate environment, although such accounts may reprice at earlier dates.
Management considers the GAP acceptable.
<TABLE>
<CAPTION>
GAP Table
(In thousands)
1-90 91-180 181-365 1-2 2-5 Over
days days days years years 5 years Total
------- --------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Federal funds sold $ 4,000 $ 4,000
Interest-bearing
deposits in banks 1,678 1,678
Securities and other 2,995 $ 5,071 $ 3,900 $ 11,514 $ 1,529 $ 1,912 $ 26,921
Loans 74,374 20,986 43,570 28,177 36,635 17,765 $ 221,507
------- --------- --------- -------- -------- -------- ---------
Total earning assets 83,047 26,057 47,470 39,691 38,164 19,677 254,106
COSTING LIABILITIES
Savings and NOW
accounts 51,624 3,509 10,527 17,545 18,943 4,701 106,849
Certificate of deposit 23,890 31,830 22,111 16,478 15,012 562 109,883
Repurchase agreements 700 700
Other borrowed funds 2,000 303 1,397 2,255 4,133 10,088
------- --------- --------- -------- -------- -------- ---------
Total costing liabilities 76,214 37,339 32,941 35,420 36,210 9,396 227,520
------- --------- --------- -------- -------- -------- ---------
GAP $ 6,833 $ (11,282) $ 14,529 $ 4,271 $ 1,954 $ 10,281 $ 26,586
======= ========= ========= ======== ======== ======== =========
Cumulative GAP $ 6,833 $ (4,449) $ 10,008 $ 14,351 $ 16,305 $ 26,586 $ 26,586
======= ========= ========= ======== ======== ======== =========
</TABLE>
The Company provides foreign exchange services, primarily in its
banking offices in Sault Ste. Marie. Income from exchange activities during
1995 was less that $200,000. The Company conducts other business in Canadian
dollars, including the deposit program described above and lending activities
(currently less the US $1 million outstanding). Further, the Company maintains
currency balances and investments in Canadian dollars.
Maintaining assets and liabilities in Canadian dollars exposes the
Company to foreign exchange risk. The Company has adopted detail policies
regarding this exposure. The policy requires the purchase or sale of foreign
exchange futures contracts to hedge the net mismatch in Canadian denominated
assets and liabilities. The policy generally requires management to maintain
the foreign exchange exposure to a $100,000 mismatch, including futures
contracts (contracts are traded in $100,000 increments). Management uses an
outside consultant to assist in managing the risk. At December 31, 1995 the
Company held US $3.91 million in Canadian assets and US $4.22 million in
Canadian liabilities. The net exposure was substantially hedged with futures
contracts.
CAPITAL
It is the policy of the Company to maintain capital at a level
consistent with both safe and sound operations and proper leverage to generate
an appropriate return on shareholders' equity. Capital formation has been key
to the Company's growth. During 1994, the Company raised $11.50 million in
capital through the issuance of Common Stock. Net income exceeded cash
dividends by $1.82 million in 1995 and $1.62 million in 1994. In addition, in
1995 $48,600
-19-
<PAGE> 22
of the $854,000 in cash dividends were reinvested in the Company through the
new dividend reinvestment program. The issuance of shares, retained income, and
the dividend reinvestment program served to increase shareholder's equity, and
regulatory capital, by $15.1 million between the end of 1993 and December
31,1995. Management believes that significant demand for the Company's Common
Stock exists in its market area, and that the capital required to take
advantage of expansion opportunities is available in the local market, to the
extent that such capital cannot be internally generated.
As a banking company, the Company is required to maintain certain
levels of capital under government regulation. There are several measurements
of regulatory capital and the Company is required to meet minimum requirements
under each measurement. The Federal banking regulators have also established
capital classifications beyond the minimum requirements in order to risk-rate
deposit insurance premiums and to provide trigger points for prompt corrective
action in the event an institution becomes financially troubled.
Regulatory capital is not the same as shareholders' equity reported in
the accompanying consolidated financial statements. Certain assets cannot be
considered assets for regulatory purposes. The Company's acquisition
intangibles are examples of such assets.
Presented below is a summary of the Company's consolidated capital
position in comparison to regulatory requirements:
<TABLE>
<CAPTION>
December 31, 1995
Required Actual
$ % $ %
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 risk-adjusted capital ratio $ 8,286 4.00% $20,827 10.05%
Total risk-adjusted capital ratio $16,573 8.00% $23,634 11.41%
Tier 1 leverage ratio $11,085 4.00% $20,827 7.52%
Tier 1 capital $20,827
Tier 2 capital 2,807
Total risk-based capital 23,634
Total risk-weighted assets 207,159
Average total assets 277,120
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Required Actual
$ % $ %
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 risk-adjusted capital ratio $ 6,627 4.00% $18,763 11.33%
Total risk-adjusted capital ratio $ 13,253 8.00% $20,810 12.56%
Tier 1 leverage ratio $ 8,889 4.00% $18,763 8.44%
Tier 1 capital $18,763
Tier 2 capital 2,047
Total risk-based capital 20,810
Total risk-weighted assets 165,666
Average total assets 222,230
</TABLE>
ISSUED BUT NOT YET ADOPTED ACCOUNTING POLICIES
See Note 2 to the accompanying consolidated financial statements for a
discussion of accounting pronouncements issued by the Financial Accounting
Standards Board which the Company is not required to implement until periods
subsequent to December 31, 1995.
-20-
<PAGE> 23
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and results of operations in historical
dollars without considering the change in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Nearly all the assets and
liabilities of the Company are financial, unlike industrial or commercial
companies. As a result, the Company's performance is directly impacted by
changes in interest rates, which are indirectly influenced by inflationary
expectations. The Company's ability to match the interest sensitivity of its
financial assets to the interest sensitivity of it financial liabilities tends
to minimize the effect of changes in interest rates on the Company's
performance. Changes in interest rates do not necessarily move to the same
extent as changes in the price of goods and services.
BUSINESS
The Company is a bank holding company with two wholly-owned subsidiary
banks engaged in the business of retail and commercial banking, and three
non-bank subsidiaries; an insurance agency, a real estate appraisal company and
a nonprofit relending company. The Company and its subsidiaries are located in
the upper peninsula of Michigan. The Company was formed in 1974 and became a
registered bank holding company in 1976 when it acquired First Northern Bank &
Trust (formerly known as First National Bank of Manistique) and Manistique
Lakes Bank. In 1986, First Northern and Manistique Lakes Bank were merged
together under the charter of First Northern. In February 1994, the Company
acquired the Bank of Stephenson as a wholly-owned bank subsidiary. The Bank of
Stephenson was operated as a separate banking subsidiary of the Company until
September 30, 1995, when it was merged into First Northern with First Northern
being the surviving entity. First Northern acquired a substantial portion of
the banking assets and assumed a substantial portion of the banking liabilities
of the Newberry State Bank on December 8, 1994, in exchange for cash. First
Northern also acquired the fixed assets and assumed the deposits of the Rudyard
branch of First of America Bank on September 15, 1995, in exchange for cash.
The Company acquired all of the outstanding stock of the South Range State Bank
on January 31, 1996, in exchange for cash and notes.
First Northern and South Range Bank (the "Banks") collectively operate
23 banking offices in 20 communities. Certain information regarding the Banks
at March 31, 1996, is set forth below:
<TABLE>
<CAPTION>
Total Deposits Total Loans
<S> <C> <C>
First Northern $ 248,683 $ 225,006
South Range Bank $ 34,753 $ 28,175
</TABLE>
The Banks are full service banks which accept demand and time
deposits, issue certificates of deposit, offer mortgages, commercial, consumer,
secured and unsecured financing, and offer safe deposit boxes and charge card
services. First Northern is also authorized to offer trust services but has
not yet begun to engage in the trust business.
FIRST NORTHERN. First Northern, founded in 1934, defines its market
area as the central and eastern portions of the upper peninsula of Michigan.
It is headquartered in Manistique and has branch offices in 9 of the 11
counties in the upper peninsula, namely: Schoolcraft, Luce, Alger, Chippewa,
Mackinac, Delta, Menominee, Dickensian, and Marquette as well as in the Garden
Peninsula and on Mackinac Island. It currently employs approximately 140
full-time employees and 13 part-time employees.
SOUTH RANGE BANK. South Range Bank headquartered in South Range,
defines it market area as Houghton County located in the northwestern portion
of the upper peninsula of Michigan. The South Range Bank was established in
1903 as a Michigan banking corporation. It currently employs approximately 25
employees.
NONBANK SUBSIDIARIES. The Company also owns three nonbank
subsidiaries, First Manistique Agency, which sells annuities as well as life,
accident and health insurance, and First Rural Relending Company, a nonprofit
relending company, which assists qualified borrowers with discounted loan rates
creating cash flow and growth potential for new
-21-
<PAGE> 24
or established businesses. A third subsidiary, First Northern Services Company
(a real estate appraisal company) is currently inactive.
COMPETITION
Because of the rural, sparsely populated nature of the upper peninsula
of Michigan, several of the Banks' offices operate in communities without
significant local bank competition. The financial services industry is a
highly competitive business and becoming increasingly so. The Banks compete
primarily for loans and deposits in the Upper Peninsula of Michigan, where they
have the third largest deposit base, or approximately ten percent of the bank
and savings institution deposit market share. There are 17 banking and savings
institutions and 28 credit unions with offices in the Upper Peninsula of
Michigan. The Banks also compete with mortgage banking companies, securities
brokerage companies, insurance companies and money market mutual funds. Many
of these competitors have substantially greater resources and lending limits
than the Banks and offer certain services that the Banks do not currently
provide. In addition, nondepository institution competitors are generally not
subject to the extensive regulation applicable to the Banks.
The principal methods of competition include loan and deposit pricing,
advertising and marketing programs and the types and quality of services
provided. In order to successfully compete, the Banks have developed a highly
personalized sales and service culture, stress and reward excellent customer
service, and design products tailored to meet specific customer needs.
The primary competitors of First Manistique Agency and First Northern
Services Company are the numerous other insurance agencies and independent
agents and real estate offices, respectively, in the eight county trade area.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-22-
<PAGE> 25
SELECTED STATISTICAL INFORMATION
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
The following table details the key determinants of net interest income: the
average daily balance sheet for each year--including the components of earning
assets and supporting liabilities--the related interest income on a fully
taxable equivalent basis and interest expense, as well as the average rates
earned and paid on these assets and liabilities.
<TABLE>
<CAPTION>
Year Ended December 31,
(fully taxable equivalent, in thousands)
1995 1994
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (domestic) (1) (2) (3) $202,570 $20,540 10.14% $137,444 $12,151 8.84%
Taxable investment securities 25,876 1,398 5.40% 31,618 1,645 5.20%
Tax-exempt investment
securities (2) 2,751 195 7.09% 5,564 438 7.87%
Federal funds sold 5,180 273 5.27% 3,942 167 4.24%
Federal Home Loan Bank 921 83 9.01% 0 0 n/a
Interest-bearing deposits with
other banks 4,127 251 6.08% 415 35 8.43%
-------- ------- ----- -------- ------- -----
Total interest-bearing assets $241,425 $22,740 9.42% $178,983 $14,436 8.07%
Non-interest earning assets:
Cash and due from banks $9,789 $6,787
Premises and equipment, net 10,036 6,543
Other assets 8,860 3,628
Less: allowance for loan losses ($2,561) ($1,863)
-------- --------
TOTAL $267,549 $194,078
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing liabilities:
Savings deposits and interest-
bearing demand deposits $118,162 $4,447 3.76% $71,148 $2,035 2.86%
Time deposits 88,462 4,689 5.30% 82,761 3,713 4.49%
Federal funds purchased,
securities sold under repur-
chase agreements, and other 8,548 425 4.97% 5,306 305 5.75%
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities $215,172 $9,561 4.44% $159,215 $6,053 3.80%
Non-interest bearing liabilities
Domestic demand deposits $25,802 $17,513
Other 3,653 3,546
Shareholders' equity 22,922 13,804
-------- ---------
TOTAL $267,549 $194,078
======== =========
Net interest earnings $13,179 $8,383
======= ======
Net yield on interest-earning assets 5.46% 4.68%
====== =====
<CAPTION>
Year Ended December 31,
(fully taxable equivalent, in thousands)
1993
Average Yield/
Balance Interest Rate
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (domestic) (1) (2) (3) $80,332 $7,168 8.92%
Taxable investment securities 16,501 857 5.19%
Tax-exempt investment
securities (2) 3,736 260 6.96%
Federal funds sold 3,669 108 2.95%
Federal Home Loan Bank 0 0 n/a
Interest-bearing deposits with
other banks 232 20 8.62%
-------- ------ -----
Total interest-bearing assets $104,470 $8,413 8.05%
Non-interest earning assets:
Cash and due from banks $4,272
Premises and equipment, net 3,857
Other assets 2,083
Less: allowance for loan losses ($849)
--------
TOTAL $113,833
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing liabilities:
Savings deposits and interest-
bearing demand deposits $36,358 $1,000 2.75%
Time deposits 55,909 2.437 4.36%
Federal funds purchased,
securities sold under repur-
chase agreements, and other 2,435 106 4.35%
------- ------ -----
Total interest-bearing liabilities $94,702 $3,543 3.74%
Non-interest bearing liabilities
Domestic demand deposits $8,409
Other 1,102
Shareholders' equity 9,620
------
TOTAL $113,833
========
Net interest earnings $4,870
======
Net yield on interest-earning assets 4.66%
=====
</TABLE>
(1) For the purpose of these computations, non-accruing loans are included in
the average loan amounts outstanding.
(2) Total interest income includes the effect of tax-equivalent adjustments
using a 34% tax rate.
(3) Interest income on loans includes loan fees.
-23-
<PAGE> 26
An analysis of the changes in net interest income from period to period is
presented in the following table. This analysis highlights the relative effect
of the changes in interest income or expense due to changes in the average
balances of earning assets and interest-bearing liabilities and changes in
interest rates. Dollars are in thousands and the analysis is presented on a
fully taxable equivalent basis (assuming a marginal tax rate of 34%).
<TABLE>
<CAPTION>
1995 compared to 1994 1994 compared to 1993
Increase (decrease) Due to (1) Increase (decrease) due to (1)
ASSETS Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (domestic) $5,757 $2,632 $8,389 $5,094 ($111) $4,983
Taxable investment securities (299) 52 (247) 785 3 788
Tax-exempt investment securities (222) (21) (243) 127 51 178
Federal funds sold 52 54 106 8 51 59
Federal Home Loan Bank 83 0 83 0 0 0
Interest-bearing deposits with other banks 312 (96) 216 16 (1) 15
Total interest-bearing assets $5,683 $2,621 $8,304 $6,030 ($7) $6,023
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits and interest-bearing
demand deposits $1,345 $1,067 $2,412 $956 $79 $1,035
Time deposits 256 720 976 1,170 106 1,276
Federal funds purchased, securities sold
under repurchase agreements, and other 186 (66) 120 125 74 199
Total interest-bearing liabilities $1,787 $1,721 $3,508 $2,251 $259 $2,510
</TABLE>
<TABLE>
<CAPTION>
1993 compared to 1992
Increase (decrease) Due to (1)
ASSETS Volume Rate Net
<S> <C> <C> <C>
Interest-earning assets:
Loans (domestic) $1,335 ($666) $669
Taxable investment securities (530) (312) (842)
Tax-exempt investment securities 266 (73) 193
Federal funds sold 72 (10) 62
Federal Home Loan Bank 0 0 0
Interest-bearing deposits with other banks (34) 0 (34)
Total interest-bearing assets $1,109 ($1,061) $48
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits and interest-bearing
demand deposits $83 ($481) ($398)
Time deposits 343 (168) 175
Federal funds purchased, securities sold
under repurchase agreements, and other 11 (33) (22)
Total interest-bearing liabilities $437 ($682) ($245)
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
change due to volume and change due to rate in proportion to the
relationship of the absolute dollar amounts of change in each.
-24-
<PAGE> 27
The following table is an analysis of the changes in average balances.
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------
1995 1994 1993
Average Increase (decrease) Average Increase (decrease) Average
ASSETS Balance Amount Percent Balance Amount Percent Balance
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $202,570 $65,126 47.38% $137,444 $57,112 71.09% $80,332
Taxable investment securities 25,876 (5,742) -18.16% 31,618 15,117 91.61% 16,501
Tax-exempt investment securities 2,751 (2,813) -50.56% 5,564 1,828 48.93% 3,736
Federal funds sold 5,180 1,238 31.41% 3,942 273 7.44% 3,669
Federal Home Loan Bank 921 921 N/A 0 0 N/A 0
Interest-bearing deposits with other banks 4,127 3,712 894.46% 415 183 78.88% 232
Total interest-bearing assets 241,425 62,442 34.89% 178,983 74,513 71.32% 104,470
Non-interest earning assets:
Cash and due from other banks 9,789 3,002 44.23% 6,787 2,515 58.87% 4,272
Premises and equipment, net 10,036 3,493 53.39% 6,543 2,686 69.64% 3,857
Other assets 8,860 5,232 144.21% 3,628 1,545 74.17% 2,083
Less: allowance for loan losses (2,651) (788) -42.30% (1,863) (1,014) -119.43% (849)
TOTAL $267,459 $73,381 37.81% $194,078 $80,245 70.49% $113,833
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Savings deposits and interest-bearing
demand deposits $118,162 $47,014 66.08% $71,148 $34,790 95.69% $36,358
Time deposits 88,462 5,701 6.89% 82,761 26,582 48.03% 55,909
Federal funds purchased, securities sold
under repurchase agreements, and other 8,548 3,242 61.10% 5,306 2,871 117.91% 2,435
Total interest-bearing liabilities 215,172 55,957 35.15% 159,215 64,513 68.12% 94,702
Non-interest bearing liabilities
Domestic demand deposits 25,802 8,289 47.33% 17,513 9,104 108.26% 8,409
Other 3,653 107 3.02% 3,546 2,444 221.78% 1,102
Shareholders' Equity 22,922 9,118 66.05% 13,804 4,184 43.49% 9,620
TOTAL $267,549 $73,471 37.86% $194,078 $80,245 70.49% $113,833
</TABLE>
[THIS SPACE INTENTIONALLY LEFT BLANK]
-25-
<PAGE> 28
INVESTMENT PORTFOLIO
The following table sets forth the financial statement balances of
securities at December 31:
<TABLE>
<CAPTION>
Investment Securities as of December 31
------------------------------------------------------------------------------
(in thousands)
Available for Sale
1995 1994 1993 1992 1991
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
U.S treasury and federal agency $20,899 $17,057 $6,211 $0 $0
State and political subdivisions 481 3,130 3,413 0 0
Other securities 4,840 1,742 0 0 0
------- ------- ------ - -
Total $26,220 $21,929 $9,624 $0 $0
======= ======= ====== == ==
Held to Maturity
1995 1994 1993 1992 1991
------- ------- ------ ------- -------
U.S treasury and federal agency $ 0 $ 8,799 $4,531 $19,067 $24,045
State and political subdivisions 835 1,150 1,265 1,599 540
Other securities 0 3,917 1,915 441 420
------- ------- ------ ------- -------
Total $ 835 $13,866 $7,711 $21,107 $25,005
======= ======= ====== ======= =======
</TABLE>
The following table presents the maturity schedule of securities held, and a
weighted average yield (on a fully taxable equivalent basis) of those
securities, as of December 31, 1995.
<TABLE>
<CAPTION>
Weighted
U.S. Treasury State & Political Other Average
& Federal Agency Subdivision Securities Yield
---------------- ----------------- -------------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
One year or less $ 6,749 $ 910 $1,667 5.22%
One through five years 5,874 250 1,537 5.75%
five through 10 years 8,276 156 500 6.66%
Over 10 years 0 0 1,136 8.26%
------- ------ ------ =====
$20,899 $1,316 $4,840
======= ====== ======
</TABLE>
The Company holds no securities with one issuer in which the aggregate book
value and aggregate market value of the securities held with that single issuer
exceeds ten percent of stockholders'equity.
-26-
<PAGE> 29
LOAN PORTFOLIO
The following table sets forth loans outstanding at December 31:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Commercial real estate $ 51,609 $ 32,833 $20,932 $15,285 $13,526
Commercial, financial and
agricultural 55,445 45,329 16,704 18,483 13,925
Leases
Commercial 5,806 2,070 1,608 6,916 5,010
Governmental 18,061 19,165 14,560 2,969 2,752
1-4 family residential real estate 58,433 55,729 25,260 21,886 19,158
Consumer 29,954 26,851 8,081 7,569 7,587
Construction 2,235 1,258 0 0 0
-------- -------- ------- ------- -------
221,543 183,235 87,145 73,108 61,958
Less: unearned income (36) (66) (111) (180) (203)
-------- -------- ------- ------- -------
$221,507 $183,169 $87,034 $72,928 $61,755
</TABLE>
The loan portfolio is periodically and systematically reviewed and the
results of these reviews are reported to the Boards of Directors of the Company
and the Banks. The purpose of these reviews is to assist in assuring proper
loan documentation, to provide for the early identification of potential
problem loans (which enhances collection prospects) and to evaluate the
adequacy of the allowance for loan losses.
The following table sets forth scheduled loan repayments (excluding 1-4
family residential mortgages and installment loans) at December 31, 1995:
<TABLE>
<CAPTION>
Due
Due After One Due
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $84,434 $37,824 $8,663 $130,921
Construction $ 2,012 $ 223 0 $ 2,235
</TABLE>
The following table sets forth loans due after one year which have
predetermined (fixed) interest rates and/or adjustable (variable) interest
rates at December 31, 1995:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
------- ------------ -----
(In thousands)
<S> <C> <C> <C>
Due after one but within five years $1,174 $36,650 $37,824
Due after five years 8,663 0 8,663
------ ------- -------
Total $9,837 $36,650 $46,487
====== ======= =======
</TABLE>
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<PAGE> 30
Nonperforming Assets
The following table presents a summary of non-performing assets at
December 31:
<TABLE>
<CAPTION>
March 31,
1996 1995 1994 1993 1992 1991
---------- ----- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $ 549 $ 579 None None None $20
Accruing loans past-due
90 days or more 1,223 1,439 $142 $116 $175 2
Restructured loans None None None None None None
Interest income that would
have been recorded
under original terms 13 None None None None None
Interest income recorded
during period None None None None None None
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Average Investment in impaired loans $ 687,055 $659,412
Interest income recognized on impaired loans
Including interest income recognized on a
cash basis 3,695 40,856
Income recognized on impaired loans on a cash
basis -0- 40,856
Balance of impaired loans 3,659,447 570,847
Less portion of which no allowance for loan
losses is allocated 3,160,735 22,584
---------- --------
Portion of impaired loan balance for which an
allowance for credit losses is allocated $ 498,712 $548,299
========== ========
Portion of allowance for loan losses allocated to
The impaired loan balance $ 200,000 $200,000
========== ========
</TABLE>
On April 1, 1996, First Northern became aware that The Bennett Funding
Group, Inc. ("BFG") and certain of its affiliates had filed for Chapter 11
bankruptcy protection in the Northern District of New York and had ceased
payments to hundreds of investors throughout the country, including
approximately 250 banks and thrifts. BFG and/or its affiliates are indebted to
First Northern in the amount of $3,028,188, which indebtedness is
collateralized by commercial equipment leases assigned by BFG and/or its
affiliates to First Northern. BFG and its affiliates serviced the assigned
leases and, prior to the Chapter 11 filings, collected the lease proceeds and
remitted them to First Northern. First Northern physically holds a lease
document in connection with each lease. The BFG and related Chapter 11
proceedings were apparently in response to threatened SEC litigation alleging
that at least some part of the BFG operations constituted a "Ponzi" scheme. In
response to a motion by the SEC, the Bankruptcy Court appointed an independent
trustee to operate BFG and its affiliates. Pursuant to orders of the
Bankruptcy Court, the trustee has been collecting the lease payments and
holding them in an escrow account. However, the trustee has not been
distributing the same pending completion of his investigation and further
orders of the Court. First Northern has joined with other financial
institutions to petition the Court to order the trustee to resume distribution
to assignees of leases. The Court has not finally ruled upon that request.
Shortly after the Chapter 11 filings, First Northern investigated the validity
of many of the assigned leases both through a New York state UCC search and
through contacts with equipment lessees. Based on those investigations, it
appears to First Northern that it holds valid equipment leases and that no
other party claims to be an assignee of those leases. However, other financial
institutions have discovered that leases assigned to them have been terminated
or that some or all of the equipment subject to a lease was returned. First
Northern has
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<PAGE> 31
classified these leases as impaired. Based upon its investigation
to date and payment histories, First Northern is still accruing interest on
leases with total outstanding balances of $2,528,189. Due to the recent
acquisition of certain leases with a total balance of $499,999 and
corresponding lack of payment history, these leases were placed on nonaccrual
on April 1, 1996. Should payments not be received by First Northern for more
than ninety (90) days, the accrual of interest on those leases still accruing
interest will be discontinued.
SUMMARY OF LOAN LOSS EXPERIENCE
Additional information relative to the allowance for loan losses is
presented in the following table. This table summarizes loan balances at the
end of each period and daily average balances, changes in the allowance for
loan losses arising from loans charged off, and recoveries on loans previously
charged off by loan category, and addition to the allowance for loan losses
through provisions charged to expense. Factors which influence management's
judgment in determining the provision for loan losses each period include
establishing specific loss allowances for selected loans (including large
loans, nonaccrual loans, and problem and delinquent loans) and consideration of
historical loss information and local economic conditions.
<TABLE>
<CAPTION>
December 31,
March 31, -------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for
possible loan losses at
beginning of period $ 3,137 $ 2,350 $ 917 $ 834 $ 625 $ 452
Loans charged off:
Commercial, financial and
agricultural 29 90 92 45 35 40
Real Estate-construction 0 0 0 0 0 0
Real Estate-mortgage 0 0 34 0 0 0
Consumer 45 252 149 10 22 43
Leases 0 98 0 0 0 0
-------- -------- -------- ------- ------- -------
TOTAL LOANS CHARGED OFF 74 440 275 55 57 83
-------- -------- -------- ------- ------- -------
Recoveries of loans previously
charged off:
Commercial, financial and
agricultural 14 336 118 9 19 14
Real Estate-construction 0 0 0 0 0 0
Real Estate-mortgage 0 22 31 0 0 0
Consumer 6 98 44 4 8 10
-------- -------- -------- ------- ------- -------
TOTAL RECOVERIES 20 456 193 13 27 24
-------- -------- -------- ------- ------- -------
Net Loans Charged Off 54 (16) 82 42 30 59
Provisions charged to expense 107 771 330 125 239 232
Allowance from purchase of:
Bank of Stephenson 0 0 1,185 0 0 0
South Range Bank 285 0 0 0 0 0
-------- -------- -------- ------- ------- -------
BALANCE AT END OF PERIOD $ 3,475 $ 3,137 $ 2,350 $ 917 $ 834 $ 625
======== ======== ======== ======= ======= =======
Total loans outstanding at end
of period $255,134 $221,507 $183,169 $87,145 $73,108 $61,958
======== ======== ======== ======= ======= =======
Average total loans outstanding
for the period. $249,868 $202,570 $137,444 $80,332 $66,639 $57,449
======== ======== ======== ======= ======= =======
Ratio of net charge-offs during
period to average loans outstanding .02% (.01)% 0.06% 0.05% 0.05% 0.10%
======== ======== ======== ======= ======= =======
</TABLE>
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<PAGE> 32
DEPOSITS
The following table sets forth average deposit balances and the
weighted-average rates paid thereon for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ---- ------- ---- ------- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 25,802 -0- $ 17,513 -0- $ 8,409 -0-
Savings and Now 118,162 3.76 71,148 2.86 36,358 2.75
Time deposits 88,462 5.30 82,761 4.49 55,909 4.36
--------- --------- ---------
Total $ 232,426 $ 171,422 $ 100,676
========= ========= =========
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or
more by time remaining until maturity as of December 31, 1995:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Three months of less $ 4,267
Over three through six months 4,506
Over six months through one year 2,302
Over one year 3,949
--------
Total $ 15,024
========
</TABLE>
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<PAGE> 33
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations affecting
the Company and its subsidiaries. This summary is qualified in its entirety by
such statutes and regulations. A change in applicable laws or regulations may
have a material effect on the Company, its subsidiaries and the businesses of
the Company and its subsidiaries.
GENERAL
Financial institutions such as bank holding companies and banks are
extensively regulated under both federal and state law. Such regulations apply
to, among other things, acquisitions, permissible types and amounts of loans,
investments and other activities, capital adequacy, branching, interest rates
on loans and on deposits and the safety and soundness of banking practices.
The policies and regulations of financial institution regulatory
authorities have had significant effects on the operating results of financial
institutions in the past and are expected to have significant effects in the
future. Such policies and regulations may be influenced by many factors,
including inflation, unemployment, short-term and long-term changes in the
international trade balances and fiscal policies of the United States
government.
Periodically legislation is considered and adopted which has resulted in,
or that could result in, further regulation or deregulation of financial
institutions. In addition to the relaxation or elimination of geographic
restrictions on banks and bank holding companies, a number of regulatory and
legislative initiatives have the potential for eliminating many of the product
line barriers presently separating the services offered by commercial banks
from those offered by nonbanking institutions, including mutual funds,
securities brokerage firms and investment banking firms. No assurance can be
given as to whether any additional legislation will be adopted or as to the
effect such legislation would have on the business of the Company and the
Banks.
As a bank holding company, the Company is subject to regulation under the
Bank Holding Company Act of 1956, as amended (the "BHCA") and its examination
and reporting requirements and is subject to the supervision of the Board of
Governors of the Federal Reserve System ("Federal Reserve Board").
Banking laws and regulations restrict transactions by insured banks owned
by a bank holding company, including loans to and certain purchases from the
parent holding company, non-bank and bank subsidiaries of the parent holding
company, principal stockholders, officers, directors, and their affiliates, and
investments by subsidiary banks in the shares or securities of the parent
holding company (or of any other non-bank or bank affiliates), and acceptance
of such shares or securities as collateral security for loans to any borrower.
The regulators also review other payments, such as management fees, made by
subsidiary banks or affiliated companies.
Under the BHCA, a bank holding company is prohibited, with certain limited
exceptions, from engaging in activities other than those of banking or of
managing or controlling banks and from acquiring or retaining direct or
indirect ownership or control of voting shares or assets of any company which
is not a bank or bank holding company, other than subsidiaries furnishing
services to or performing services for its subsidiaries, and other subsidiaries
engaged in activities which the Federal Reserve Board determines to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto.
First Northern and South Range Bank ("Banks") are subject to regulation
and examination by the Financial Institutions Bureau of the State of Michigan
(the "Michigan Financial Institutions Bureau"). As institutions whose deposits
are insured by the FDIC, the Banks are also subject to regulation and
examination by the FDIC.
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its subsidiaries.
Substantially all of the Company's revenues result from dividends paid to it by
the Banks and earnings on investments. There are statutory and regulatory
requirements applicable to the payment of dividends by the Banks as well as by
the Company to its stockholders.
Under Michigan law, neither Bank may declare a cash dividend or a dividend
in kind except out of net profits then on hand after deducting all losses and
bad debts, and then only if it will have a surplus amounting to not less than
20% of its capital after the payment of the dividend. Moreover, neither Bank
may declare or pay any cash dividend or
-31-
<PAGE> 34
dividend in kind until the cumulative dividends on its preferred stock, if any,
have been paid in full. Further, if the surplus of either Bank is at any time
less than the amount of its capital, before the declaration of a cash dividend
or dividend in kind, it must transfer to surplus not less than 10% of its net
profits for the preceding half-year (in the case of quarterly or semi-annual
dividends) or the preceding two consecutive half-year periods (in the case of
annual dividends).
These regulations and restrictions may in the future limit the Company's
ability to obtain funds from its subsidiaries for its cash needs, including
funds for acquisitions, payment of dividends and interest and the payment of
operating expenses.
Other Factors. The payment of dividends by the Company and the Banks may
also be affected or limited by other factors, such as the requirements to
maintain adequate capital above regulatory guidelines. In addition, if, in the
opinion of the applicable regulatory authority, a bank under its jurisdiction
is engaged in or its about to engage in an unsafe or unsound practice (which,
depending on the financial condition of the bank, could include the payment of
dividends), such authority may require, after notice and hearing, that such
bank cease and desist from such practice or prohibit the payment of future
dividends. The Federal Reserve Board has indicated that paying dividends that
deplete a bank's capital base to an inadequate level would be an unsafe and
unsound banking practice. The Federal Reserve Board and the FDIC have issued
policy statements which provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings.
CERTAIN TRANSACTIONS WITH AFFILIATES
There are legal restrictions on the extent to which the Company and its
nonbank subsidiaries can borrow or otherwise obtain credit from the Banks. The
"covered transactions" that an insured bank and its subsidiaries are permitted
to engage in with their nonbank affiliates are limited to the following
amounts: (i) in the case of any one such affiliate, the aggregate amount of
"covered transactions" of the insured bank and its subsidiaries cannot exceed
10% of the capital stock and the surplus of the insured bank; and (ii) in the
case of all affiliates, the aggregate amount of "covered transactions" of the
insured bank and its subsidiaries cannot exceed 20% of the capital stock and
surplus of the insured bank. "Covered transactions" are defined by statute to
include a loan or extension of credit to the affiliate, a purchase of
securities issued by an affiliate, a purchase of assets from the affiliate
(unless otherwise exempted by the Federal Reserve Board), the acceptance of
securities issued by the affiliate as collateral for a loan and the issuance of
a guarantee, acceptance, or letter of credit for the benefit of an affiliate.
Covered transactions must also be collateralized. Further, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
CAPITAL
General. Bank regulators continue to indicate a desire to raise capital
requirements applicable to financial institutions beyond their current levels.
The Federal Reserve Board, FDIC, and state bank regulators require banks and
holding companies to maintain minimum ratios of primary and total capital to
total assets. Regulatory authorities may increase such minimum requirements
for all banks and bank holding companies or for specified banks or bank holding
companies. Increases in the minimum required ratios could adversely affect the
Company and the Banks, including their ability to pay dividends.
The Federal Reserve Board has adopted risk-based capital guidelines for
bank holding companies. When the guidelines became fully phased-in at the end
of 1992, the minimum guidelines for the ratio of total capital ("Total
Capital") to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) increased from 7.25% to 8.00%.
At least half of Total Capital must be composed of Common Stockholders' equity,
minority interests in the equity accounts of consolidated subsidiaries and a
limited amount of perpetual preferred stock, less goodwill ("Tier 1 Capital").
The remainder may consist of subordinated debt, other preferred stock and a
limited amount of loan loss reserves. At March 31, 1996, the Company's ratio
of Tier 1 Capital to risk-based assets was 10.49%. At March 31, 1996, on a pro
forma basis after giving effect to the Offering, the Company's ratio of Tier 1
Capital to risk-based assets would be 14.93%.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies which provide for a minimum
leverage ratio of Tier 1 Capital to total assets, less goodwill (the "Tier 1
Capital leverage ratio"), of 3% for bank holding companies that meet certain
specified criteria, including having the highest
-32-
<PAGE> 35
regulatory rating. All other bank holding companies are required to maintain a
minimum Tier 1 Capital leverage ratio of 3% plus an additional cushion of 100
to 200 basis points. The Company's Tier 1 capital leverage ratio at March 31,
1996, was 7.89%. At March 31, 1996, on a pro forma combined basis after giving
effect to the Offering, the Company's Tier 1 Capital leverage ratio would be
11.23%. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the guidelines
indicate that the Federal Reserve Board will continue to consider a "tangible
Tier 1 Capital leverage ratio" (deducting all intangibles) in evaluating
proposals for expansion or new activities. The Federal Reserve Board has not
advised the Company of any specific minimum Tier 1 Capital leverage ratio
applicable to it.
The Banks are subject to similar requirements adopted by the FDIC. At
March 31, 1996, each Bank had a Tier 1 Capital ratio and a Total Capital ratio
(computed under the 1992 guidelines) in excess of the fully phased-in
requirements and a Tier 1 Capital leverage ratio in excess of 7.5%. No
regulatory agency has advised either Bank of any specific applicable minimum
Tier 1 Capital leverage ratio. Failure to meet capital guidelines could
subject an insured bank to a variety of enforcement remedies, including the
termination of deposit insurance by the FDIC and a prohibition on the
acceptance of brokered deposits.
In December, 1992, the Federal Reserve Board approved a final rule
altering the method of computation of Tier 1 Capital of bank holding companies.
Subject to certain exceptions, in calculating Tier 1 Capital under the revised
rule, bank holding companies would be required to deduct all intangible assets
other than purchased mortgage servicing rights and purchased credit card
relationships, each valued at least quarterly at the lesser of 90% of their
fair market value or 100% of their book value, in an aggregate amount not
exceeding 50% of Tier 1 Capital, with a separate sublimit of 25% of Tier 1
capital for purchased credit card relationships.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal bank regulatory agencies biannually to review
risk-based capital standards to ensure that they adequately address interest
rate risk, concentration of credit risk and risks from non-traditional
activities. On December 31, 1992, capital adequacy regulations adopted by the
FDIC, the Federal Reserve Board and the Office of the Comptroller of the
Currency (the "Comptroller") that incorporated (i) interest rate risk into the
calculation of risk-based capital and (ii) concentration of credit risk and
risk from non-traditional activities into bank capital requirements became
effective.
Failure to meet the capital guidelines described above could subject an
insured financial institution to a variety of sanctions, including asset growth
restrictions and termination of deposit insurance by the FDIC.
SUPPORT OF SUBSIDIARY BANKS
Under Federal Reserve Board policy, the Company is expected to act as a
source of financial strength to each of its subsidiary banks and to commit
resources to support each of such subsidiaries. This support may be required
at times when, absent such Federal Reserve Board policy, the Company would not
otherwise be required to provide it. Any capital loans by a bank holding
company to any subsidiary bank are subordinate in right of payment to deposits
and to certain other indebtedness of such subsidiary bank. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company
to a federal bank regulatory agency to maintain the capital of a subsidiary
bank will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC after August 9, 1989 in connection with (i) the default of a commonly
controlled FDIC-insured depository institution, or (ii) any assistance provided
by the FDIC to any commonly controlled FDIC-insured depository institution "in
danger of default." "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur in
the absence of regulatory assistance. This right of recovery by the FDIC
generally is superior to any claim of the stockholders of the depository
institution that is liable or of any affiliate of such institution. The Banks
are subject to such provisions of FIRREA and such right of recovery by the
FDIC.
Under Michigan law, if the capital of a Michigan-chartered bank is
impaired by losses or otherwise, the Michigan Financial Institutions Bureau is
authorized to require payment of the deficiency by assessment upon the bank's
-33-
<PAGE> 36
stockholders, pro rata, and to the extent necessary, if any such assessment is
not paid by any stockholder after three months notice, to cause the sale of the
stock of such stockholder to make good the deficiency.
FDIC INSURANCE ASSESSMENTS
The deposits of the Banks are currently insured to a maximum of $100,000
per depositor, subject to certain aggregation rules. The FDIC establishes
rates for the payment of premiums by federally insured banks, such as the
Banks, for deposit insurance. Separate insurance funds (the BIF and the SAIF)
are maintained for commercial banks and thrifts, with insurance premiums for
the industry used to offset losses from insurance payouts when banks and
thrifts fail. Due to the high rate of failures in recent years, the FDIC has
adopted a risk-based deposit insurance premium system for all insured
depository institutions, including the Banks, which requires that a depository
institution pay to BIF from $.0 to $.27 per $100, or to SAIF from $.23 to $.31
per $100, of insured deposits depending on its capital levels and risk profile,
as determined by its primary federal regulator on a semiannual basis. FDICA
also defines a reserve ratio at which the BIF and SAIF are to be maintained
through FDIC assessments. Given the designation of the Banks as well-managed
and well-capitalized institutions, the Banks pay the lowest assessment rate
possible to the BIF. Since the BIF reserves reached the legally mandated level
of 1.25% of insured deposits, the Banks, in general, will pay only a membership
fee until the BIF fund again drops below the mandated level.
REGULATION OF PROPOSED ACQUISITIONS
The Riegle-Neal Interstate Banking and Branching Efficiency Act authorizes
adequately capitalized and adequately managed bank holding companies to acquire
banks located outside their respective home state, irrespective of state law.
This legislation also authorizes, effective June 1, 1997, (subject to
individual states rights to accelerate this date or prohibit interstate
branching within their borders) banking organizations to branch nationwide by
acquisition or consolidation of existing banks in other states. Subject to
approval by the Michigan Financial Institutions Bureau, Michigan law authorizes
out-of-state banks to acquire and establish branches in Michigan, provided the
laws of the state of the out-of-state institution permit Michigan financial
institutions to establish branches in that state. It is reasonable to assume
that this legislation could foster further industry consolidation and increase
competition. Interstate acquisitions are subject to the approval of various
federal and state agencies and subject to other conditions.
Any direct or indirect acquisition by the Company of any voting shares of
any bank which would result in the Company's direct or indirect ownership or
control of more than 5% of any class of voting shares of such bank will require
the prior written approval of the Federal Reserve Board under the BHCA. In
reaching its decision on an application for such approval, the Federal Reserve
Board must consider a number of factors, including the effect of the proposed
acquisition on competition in relevant geographic and product markets, the
financial condition of both parties, capital adequacy before and after the
proposed acquisition, the managerial resources and future prospects of the
parties, the convenience and needs of the communities to be served, and the
prior record of both the Company's existing bank subsidiaries and the bank to
be acquired under the Community Reinvestment Act of 1977. Amendments made to
the BHCA by FDICIA further require the Federal Reserve Board (i) to disapprove
any application by a bank holding company which fails to provide the Federal
Reserve Board with adequate assurances that it will furnish to the Federal
Reserve Board information on the operations and activities of such bank holding
company and its affiliates determined by the Federal Reserve Board to be
appropriate to determine and enforce compliance with the statute, and (ii) in
its consideration of managerial resources, to include consideration of the
competence, experience and integrity of the officers, directors, and principal
stockholders of the parties.
With certain limited exceptions, the BHCA prohibits bank holding
companies, such as the Company, from acquiring direct or indirect ownership or
control of voting shares or assets of any company other than a bank, unless the
company involved is engaged solely in one or more activities which the Federal
Reserve Board has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Any such acquisition
will require, except in certain limited cases, the prior approval of the
Federal Reserve Board.
FIRREA amended the BHCA in 1989 to permit the Federal Reserve Board to
approve an application by any bank holding company to acquire and operate a
thrift as a non-bank subsidiary of such bank holding company. A bank holding
company such as the Company may apply to the Federal Reserve Board for
permission to acquire and operate a thrift engaged only in deposit-taking,
lending and other activities that the Federal Reserve Board has determined to
be permissible for bank holding companies.
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<PAGE> 37
RECENT LEGISLATION
Community Development Act. In September 1994, the Riegle Community
Development and Regulatory Improvement Act (the "Community Development Act")
was enacted. The Community Development Act consists of (i) Subtitle A, the
"Community Development and Financial Institutions Act," which establishes the
"Community Development Financial Institutions Fund" to promote economic
revitalization and community development through investment in "Community
Development Financial Institutions," and (ii) Subtitle B, "The Home Ownership
and Equity Protection Act of 1994," which seeks to increase the protections
afforded to individuals most at risk from abusive lending practices,
particularly high-interest mortgages secured by the borrowers' homes.
The Community Development Act provides a number of initiatives to lessen
the regulatory burden placed upon depository institutions and also affects a
number of the consumer compliance laws by allowing streamlined disclosures for
radio advertising of consumer loans, providing consumers with information
necessary to challenge an "adverse characterization" due to a credit reporting
agency report and by clarifying the disclosure requirements under the Real
Estate Settlement Procedures Act regarding the transfer of serviced mortgaged
loans.
The Community Development Act also reforms currency transaction reports to
increase their usefulness to the Federal Government and to various law
enforcement agencies in combating money laundering. The measure also calls for
improvement in the identification of money laundering schemes, better controls
over negotiable instruments drawn on foreign banks by making them subject to
reporting, and uniform licensing and registration of check cashing and money
transmitting businesses, which are often used to facilitate illegal currency
transactions.
Interstate Act. In September 1994, the Riegel-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") was also enacted. The
Interstate Act facilitates the interstate expansion and consolidation of
banking organizations by permitting (i) beginning September 29, 1995, bank
holding companies that are adequately capitalized and managed to acquire banks
located in states outside their home states regardless of whether such
acquisitions are authorized under the law of the host state, (ii) the
interstate merger of banks after June 1, 1997, subject to the right of
individual states to "opt in" or "opt out" of this authority prior to such
date, (iii) banks to establish new branches on an interstate basis provided
that such action is specifically authorized by the law of the host state, (iv)
foreign banks to establish, with approval of the appropriate regulators in the
United States, branches outside their home states to the same extent that
national or state banks located in such state would be authorized to do so and
(v) beginning September 29, 1995, banks to receive deposits, renew time
deposits, close loans, service loans and receive payments on loans and other
obligations as agent for any bank or thrift affiliate, whether the affiliate is
located in the same or different state. The Company does not currently have
any plans to acquire banking subsidiaries or establish branches across state
lines or to take any other actions as a result of this new statute.
FDICIA. The Federal Deposit Insurance Corporation Improvement Act of 1991
substantially revised the bank regulatory and funding provisions of the Federal
Deposit Insurance Act and revised several other federal banking statutes.
FDICIA establishes five capital tiers: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." A depository institution is well capitalized if
it significantly exceeds the minimum level required by regulation for each
relevant capital measure, adequately capitalized if it meets each such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to meet any critical capital level set forth in
regulations. The critical capital level is defined as a ratio of tangible
equity to total assets of two percent or less. An institution may be deemed to
be in a capitalization category that is lower than is indicated by its actual
capital position under certain circumstances.
Among other things, FDICIA requires the federal bank regulatory
authorities to take "prompt corrective action" in respect of any depository
institution which does not meet specified minimum capital requirements. The
scope and degree of regulatory intervention is linked to the extent of the
shortfall of the depository institution's capital from required minimum
standards. In the case of a depository institution which is "critically
undercapitalized" (a term defined to include institutions which still have a
positive net worth), the federal bank regulatory authorities are generally
required to appoint a conservator or receiver. FDICIA also requires the
holding company of any undercapitalized depository institution to guarantee, in
part, such depository institution's capital plan in order for such plan to be
acceptable. FDICIA also prohibits a depository institution that is not
well-capitalized from accepting brokered deposits and paying deposit
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<PAGE> 38
interest rates which significantly exceed the prevailing rate in its own market
or the national rate (as determined by the FDIC) for similar deposits.
Implementing regulations for these provisions of FDICIA have not yet been
adopted by the federal bank regulatory authorities.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized.
MORTGAGE REGULATION
The origination of mortgage loans subjects the Company and its subsidiary
banks to various federal statutes, such as the Equal Credit Opportunity Act,
Fair Credit Reporting Act, Truth in Lending Act, Real Estate Settlement
Procedures Act, and Home Mortgage Disclosure Act, and the regulations
promulgated thereunder, which prohibit discrimination and specify disclosures
to be made to borrowers regarding credit and settlement costs. Such activities
are also subject to applicable usury and other state and federal laws,
including various state licensing statutes.
As sellers and servicers of mortgage loans, the Banks are participants
in the secondary mortgage market with some or all of the following: private
institutional investors, the Federal National Mortgage Association ("FNMA"),
FHLMC, the Government National Mortgage Association, the Veterans'
Administration and the Federal Housing Authority. In their dealings with these
agencies, the Banks are subject to various eligibility requirements prescribed
by the agencies, including but not limited to net worth, quality control,
bonding, financial reporting and compliance reporting requirements. The
mortgage loans which the Banks originate are subject to agency-prescribed
procedures, including (without limitation) inspection and appraisal of
properties, maximum loan-to-value ratios, and obtaining credit reports on
prospective borrowers. On some types of loans, the agencies prescribe maximum
loan amounts, interest rates and fees. When selling mortgage loans to FNMA and
FHLMC, a seller must represent and warrant that all such mortgage loans conform
to the requirements of FNMA and FHLMC. If the mortgage loans sold are found to
be nonconforming mortgage loans, FNMA or FHLMC may require the seller to
repurchase the nonconforming mortgage loans. Additionally, FNMA and FHLMC may
require a seller/servicer to indemnify them against all losses arising from the
seller/servicer's failure to perform its contractual obligations under the
applicable selling or servicing contract.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<PAGE> 39
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Articles of Incorporation provide for the division of the
Board of Directors into three classes of nearly equal size, with the directors
of each class to hold office for staggered three year terms. The terms of
Messrs. Beaulieu, Clark, Ernest King, and Dufina will expire in 1997, the
terms of Messrs. Gerou, Hulsizer, Thomas King, and Lindroth will expire at the
annual meeting of shareholders in 1998; and the terms of Messrs. Ford,
Henricksen, and Miller will expire in 1999.
The following table sets forth information regarding the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ronald G. Ford 48 President; Chief Executive Officer; Director
Sherry Littlejohn 35 Executive Vice President
Richard B. Demers 36 Executive Vice President
Fred LaMuth 48 Treasurer and Secretary
Ernest D. King 72 Chairman of the Board; Director
Charles B. Beaulieu 58 Director
John B. Clark 73 Director
C. Ronald Dufina 51 Director
Stanley J. Gerou, II 47 Director
Michael C. Henricksen 53 Vice Chairman of the Board; Director
Loren F. Hulsizer 64 Director
Thomas G. King 43 Director
John Lindroth 40 Director
John P. Mill 57 Director
</TABLE>
RONALD G. FORD, the President and Chief Executive Officer of the Company,
as well as the President and Chief Executive Officer of First Northern, joined
the Company in 1977 as a loan officer. Mr. Ford, who has served as a director
of the Company since 1987, was first elected President and Chief Executive
Officer in 1987. Mr. Ford also serves as the President and Chief Executive
Officer of the Company's three nonbank subsidiaries, First Manistique Agency,
First Northern Services Company, and First Rural Relending Company.
SHERRY LITTLEJOHN, is the Executive Vice President of First Northern and
has served in that capacity since January 1994. Prior to that time and since
1989, Ms. Littlejohn was the Senior Vice President/Branch Administration
of First Northern.
RICHARD B. DEMERS, is the Executive Vice President of the Company and First
Northern. Mr. Demers was named the Executive Vice President of First
Northern in 1989 and the Executive Vice President of the Company in 1995.
FRED LAMUTH, has been the Treasurer and Secretary of the Company since
January 1, 1990. Mr. LaMuth, who has been employed by First Northern since
1965, also serves as Senior Vice President and Cashier of First Northern.
ERNEST D. KING, the Chairman of the Board, has served as a director of the
Company since 1975. Mr. King, the former President of King Fish Market, Inc.,
is retired. Mr. King is the father of Thomas G. King, another director of the
Company.
CHARLES B. BEAULIEU, has served as a director of the Company since 1984.
Mr. Beaulieu is the owner and director of Beaulieu's Funeral Home, Inc.
JOHN B. CLARK, has been a director of the Company since 1980. Mr. Clark is
the owner of John B. Clark Sales & Service, an equipment sales company, and is
the owner of John B. Clark Forest Products, a timber broker.
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<PAGE> 40
C. RONALD DUFINA, has served as director of the Company since 1993.
Mr. Dufina is the owner and operator of Balsam Shop, Inc., a retail gift
establishment and food and hotel operation, and Village Inn and State Street
Bar & Grill, both of which are restaurants.
STANLEY J. GEROU, II, the owner of Gerou Excavating, Inc., has served
as a director of the Company since 1989.
MICHAEL C. HENRICKSEN, has a been a director of the Company since
1988. Mr. Henricksen is the President of Superior Hiawatha Log Homes, Inc., a
builder of log homes.
LOREN F. HULSIZER, was appointed by the Board as a director on April
19, 1994. Mr. Hulsizer, who has been retired since February 1994, was formerly
an executive officer of the Bank of Stephenson for over ten years.
THOMAS G. KING, is the owner of King's Motel, and has been a director
of the Company since 1987. Mr. King is the son of Ernest D. King, a director
of the Company and Chairman of the Board.
JOHN LINDROTH, has been a director of the Company since 1987. He is
the President of Superior State Agency, Inc., an insurance agency.
JOHN P. MILLER, has been a director of the Company since 1976. Mr.
Miller is the owner of Peoples' Store, Inc., a retail clothing operation.
BOARD COMMITTEES
The Board of Directors of the Company has an Audit Committee comprised
of J. Clark, Chairman, C. Beaulieu, R. Durfina, M. Henricksen, and S. Gerou.
Five meetings of the Committee were held during 1995. This Committee is
responsible for the recommendation of the independent accounting firm to be
engaged for the external audit, directing and supervising investigations into
matters relating to audit functions, reviewing with independent auditors the
plan and results of the external audit, the establishment and continued
supervision of internal auditing procedures, reviewing the degree of
independence of the auditors and reviewing the adequacy of internal accounting
controls.
The Personnel Committee is comprised of J. Lindroth (Chairman), T.
King and S. Gerou, which performs functions similar to those of a compensation
committee. Five meetings of this Committee were held in 1995. This Committee
is responsible for recommending annually to the Board the salary of the
President and CEO. This Committee additionally reviews with management the
annual projected salary ranges and recommends those for Board approval. This
Committee also annually reviews the written Personnel Policy and audits the
employee benefit package annually.
The Nominating Committee of the Board, comprised of T. King
(Chairman), M. Henricksen, J. Miller, L. Hulsizer, and J. Lindroth, held two
meetings during the year. The Board also has an Executive Committee comprised
of E. King, Chairman, M. Henricksen, and R. Ford. This Committee handles
strategic planning for the Company and its subsidiaries.
BOARD ATTENDANCE
The Board of Directors of the Company held a total of four meetings
and two special meetings during 1995. No director attended less than 75
percent of the aggregate number of meetings of the Board of Directors and the
Committees on which he served. There are no family relationships between or
among any of the directors, nominees or executive officers of the Company,
other than Ernest and Thomas King, who are father and son.
DIRECTOR COMPENSATION
The directors of the Company each receive an annual fee of $1,250.
Directors are not paid for attendance at meetings of the Board or committees on
which they serve. All of the directors, except Hulsizer, also serve on the
Board of Directors of First Northern, for which they are paid an annual fee of
$7,200, except for the Chairman who receives an annual fee of $9,600. No
compensation is paid for attendance at First Northern Board or Committee
meetings. In November 1984, the Company adopted a deferred compensation plan
for certain senior management employees and directors that provides for benefit
payments to the participant and his or her family upon retirement or death.
Among
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<PAGE> 41
the current directors and officers, Messrs. Ernest King, John Clark, Charles
Beaulieu, John Miller, and Ronald Ford are the only participants in this plan.
This plan was closed to additional participants in 1986. The plan allows the
deferral of director fees and compensation in return for the payment of certain
defined monthly benefits payable upon termination of one's service as a
director or officer of the Company. Benefits under this plan are funded by
life insurance policies, with the premiums paid for by the Company. Any
benefits payable under this plan are unsecured and payable out of the general
assets of the Company. See Note 13 to Company Financial Statements.
At the 1996 shareholder meeting, the Company's shareholders approved
of the Company's Deferred Compensation, Deferred Stock and Current Stock
Purchase Plan for Non-Employee Directors ("the Plan") to provide an opportunity
for directors of the Company and its subsidiaries to defer payment of all or a
part of their director fees ("Plan Fees") or to receive shares of Company stock
in lieu of cash payment of Plan Fees. Each director, who participates in the
Plan, must elect to have his or her Plan Fees credited quarterly to either (a)
a Current Stock Purchase Account, (b) a Deferred Cash Investment Account, or
(c) a Deferred Stock Account. Plan Fees credited to a Current Stock Purchase
Account are converted to shares of Company Common Stock at market value on the
credit date and distributed to the director in lieu of cash payment of Plan
Fees. Plan Fees credited to a Deferred Cash Investment Account are deferred
for tax purposes and are credited quarterly with an appreciation factor that
may not exceed the prime rate of interest charged by First Northern. Plan Fees
credited to a Deferred Stock Account are also deferred for tax purposes. At
the credit date, the Plan Fees are converted into "Company stock units"
determined by dividing the amount of the Plan Fees credited for the quarter by
the fair market value of the share of Company Common Stock on the credit date.
From the credit date forward, the value of the Company stock units in the
director's account is tied directly to the fair market value of Company Common
Stock, including the impact of paid dividends. Upon termination of a
director's service with the Company, the amount credited to his or her Deferred
Cash Investment Account or Deferred Stock Account is paid out in a lump sum, or
if termination occurs because of retirement, the distribution may be spread
over 5 to 10 years.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the
compensation received by Company 's Chief Executive officer and the Company's
other executive officer whose annual compensation exceeded $100,000, for each
of the three years ended December 31, 1995 during this period.
<TABLE>
<CAPTION>
Annual Compensation
Name and ------------------- All Other
Principal Position Year Salary(1) Bonus(2) Compensation(3)
------------------ ---- --------- --------- ---------------
<S> <C> <C> <C> <C>
Ronald G. Ford 1995 $ 145,000 $ 30,450 $ 29,300
President and CEO 1994 105,000 23,800 25,550
1993 95,200 18,062 11,260
Richard B. Demers(1) 1995 84,000 16,800 7,800
Executive Vice President 1994 80,000 16,800 8,000
1993 57,741 11,798 2,887
</TABLE>
(1) Mr. Demers served as the President and Chief Executive Officer of the
Bank of Stephenson from February 1994 to October 1995.
(2) Includes amounts deferred by employees under the Company's retirement
plan account pursuant to Section 401(k) of the Internal Revenue Code.
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<PAGE> 42
(3) The amounts disclosed in this column include: (a) the amounts
contributed by the Company to the Company's retirement plan, in which
substantially all employees of the Company participate (the Company
made matching contributions equal to 5 percent of each employee's
salary reduction contribution for calendar 1995); (b) director's fees;
and (c) the dollar value of premiums paid by the Company for certain
deferred compensation benefits as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C> <C>
Mr. Ford (a) $ 7,250 $ 5,250 $4,760
(b) 12,050 10,300 6,500
(c) 10,000 10,000 0
Mr. Demers (a) $ 4,200 $ 4,000 $2,887
(b) 3,600 4,000 0
</TABLE>
EMPLOYMENT CONTRACT
Ronald G. Ford entered into an Employment Contract with First
Northern, as President and CEO, effective July 1, 1994. This contract is for a
term of three years with an automatic annual one year extension unless notice
of termination is given six months before the end of the current year. This
contract provides that Mr. Ford's duties, responsibilities and administrative
authority, absent written agreement to the contrary, shall be as President and
CEO, respectively, of the Company and First Northern. If Mr. Ford's employment
is terminated following a change in control of the Company for reasons other
than his death, disability or normal retirement, or for cause or by Ford
without good reason, the contract provides that he will be paid 20 quarter
annual payments each equal to 25% of the average of his aggregate annual base
salary for the three immediately preceding years.
EMPLOYEE STOCK OPTION AND RESTRICTED STOCK PLANS
In 1992, the Company adopted a Stock Option Plan. Participants in the
Plan generally include senior officers and directors of the Company's
subsidiary banks who do not participate in the First Northern's Deferred
Compensation Plan. The Plan authorizes the issuance of 37,350 shares of Common
Stock pursuant to the exercise of options under the Plan, all of which have
been granted. The following table provides information on the exercise of
stock options during 1995 by the executives listed in the Summary Compensation
Table and the value of unexercised options at December 31, 1995. No options
were granted by the Company during 1995.
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
12/31/95 12/31/95(1)
----------- ------------
Shares Acquired
On Exercise Value Realized Exercisable/Unexercisable Exercisable/Unexercisable
------------------ -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Ronald G. Ford 0 $0 0 $0
Richard B. Demers 0 $0 2,250/0 $18,375/0
</TABLE>
(1) Values are based on the difference between the last reported sale
price of the Company's Common Stock prior to December 31, 1995
($20.66) and the exercise prices of the options.
In 1995, the Company adopted a Restricted Stock Plan. Senior officers
and directors of the Company and its subsidiaries are eligible to participate in
the Plan. The Plan permits the grant of up to 90,000 shares of restricted stock
awards which may, among other things, be conditioned on continued employment
with the Company or one of its subsidiaries for a period of time. To date only
one restricted stock grant has been made under the plan. As of May 1, 1996,
Ronald G. Ford was awarded 1,500 shares of restricted stock subject to
forfeiture restrictions which will lapse January 1, 1997.
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<PAGE> 43
INDEMNIFICATION MATTERS AND LIMITATION OF LIABILITY
The Company's Articles of Incorporation and Bylaws require the Company
to indemnify its directors and executive officers to the fullest extent
permitted by law in connection with any actual or threatened proceedings in
which such persons are a witness or which is brought against them in their
capacity as a director, officer, employee, agent, or fiduciary of the Company
or any entity which such persons serve at the request of the Company. The
Company's Articles of Incorporation also limit the personal liability of
directors for monetary damages with respect to claims by the Company or its
shareholders resulting from certain negligent acts or omissions. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 (the
"Act") may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
CERTAIN TRANSACTIONS
Certain directors and officers of the Company have had and are
expected to have in the future, transactions with the Company's commercial bank
subsidiaries, or have been directors or officers of corporations, or members of
partnerships, which have had and are expected to have in the future,
transactions with such banks. All such transactions with officers and
directors, either directly or indirectly, have been made in the ordinary course
of business and on substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and these transactions do not involve more than the
normal risk of collectibility or present other unfavorable features. All such
future transactions, including transactions with principal shareholders and
other Company affiliates, will be made in the ordinary course of business, on
terms no less favorable to the Company than with other customers, and will be
subject to approval by a majority of the Company's independent, outside
disinterested directors.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<PAGE> 44
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of May 15, 1996,
as to the Common Stock of the Company owned beneficially by each director, each
executive named in the Summary Compensation Table above, and by all directors
and executive officers of the Company as a group. Mr. Ernest D. King, listed
in the table below, is the only shareholder known to the Company to have been
the beneficial owner of more than five percent (5%) of the Company's
outstanding Common Stock as of May 15, 1996. His mailing address is P.O. Box
216, Naubinway, Michigan 49762.
<TABLE>
<CAPTION>
Shared
Sole Voting Voting and Percent of Class (2)
and Investment Investment ---------------------------------------------
Power(1) Power (1) Prior to Offering After the Offering(3)
------------------- ------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Charles B. Beaulieu 1,670.67 12,306.15 0.65% 0.55%
John B. Clark 25,194.00 -- 1.17% 0.99%
C. Ronald Dufina 1,990.17 4,983.66 0.32% 0.27%
Ronald G. Ford 4,379.04 15,776.85(4) 0.94% 0.79%
Stanley Gerou 32,579.01 1.52% 1.28%
Michael Henricksen 46,304.79 2.15% 1.82%
Loren Hulsizer 36,150.00 1.68% 1.42%
Ernest D. King 195,228.00 9.08% 7.66%
Thomas G. King 22,195.11 1.03% 0.87%
John Lindroth 15,682.08 0.73% 0.61%
John P. Miller 35,232.21 1.64% 1.38%
Richard B. Demers 4,046.91 --(4) 0.19% 0.16%
All Directors and Executive
Officers as a group (15
Persons) 42,189.30 418,945.86 21.44% 18.08%
</TABLE>
(1) Includes shares with respect to which executive officers and directors
have the right to acquire beneficial ownership under stock options
exercisable in 60 days. At May 15, 1996, there were a total of 29,550
such shares.
(2) Calculated on the basis of the amount of shares outstanding as of
March 31, 1996 plus 29,550 shares acquirable upon exercise of options
described in the preceding footnote.
(3) Does not include shares that may be acquired in the Offering and
assumes the sale of 400,000 shares.
(4) Messrs. Ford and Demers, together with two other officers of the
Company, share voting and investment power with respect to 14,764.29
shares. These shares are included in the shares shown as owned by
Mr. Ford
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<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Articles of Incorporation, which are filed as an
exhibit to the Registration Statement of which this Prospectus forms a part and
are incorporated herein by reference.
Under its Articles of Incorporation, as amended, the Company's
authorized capital stock consists of 500,000 shares of Preferred Stock, no par
value ("Preferred Stock"), none of which is outstanding, and 6,000,000 shares
of Common Stock, of which 2,120,778 shares are outstanding and held of record
by approximately 1,220 persons as of the date of this Prospectus.
PREFERRED STOCK
The Board of Directors of the Company is authorized to issue Preferred
Stock in one or more series, from time to time, and to fix the particular
designations and terms thereof, including voting rights, dividend rates,
redemption rights, liquidation value, conversion rights and other matters,
without further approval of the Company's shareholders. The issuance of such
Preferred Stock could adversely affect the holders of Common Stock. No series
of Preferred Stock has been authorized or is presently contemplated.
COMMON STOCK
Subject to the rights of the holders of Preferred Stock then
outstanding, if any, all voting rights are vested in the holders of shares of
Common Stock, with each share entitling the holder to one vote. The shares of
Common Stock do not have cumulative voting rights, and holders have no
preemptive right to subscribe for additional securities issuable by the
Company.
In the event of the liquidation of the Company, the holders of Common
Stock are entitled to receive, pro rata, any assets distributable to
shareholders in respect of shares held by them after satisfaction of the
liquidation preferences of any outstanding Preferred Stock. Subject to any
prior rights of the holders of Preferred Stock then outstanding, holders of the
Company's Common Stock are entitled to receive such dividends as are declared
by the Board of Directors out of funds legally available for that purpose. The
outstanding shares of Common Stock are, and the shares issuable by the Company
in this Offering will be, fully paid and nonassessable.
The Board of Directors of the Company believes that the availability
for issuance of a substantial number of shares of the Company's Common Stock at
the discretion of the Board of Directors is advisable to provide the Company
with the flexibility to take advantage of opportunities to issue such stock in
order to obtain capital, as consideration for possible acquisitions and for
other purposes (including, without limitation, the issuance of additional
shares through stock splits and stock dividends in appropriate circumstances).
There are, at present, no plans, understandings, agreements or arrangements
concerning the issuance of additional shares of the Company's Common Stock,
except for (i) the shares of Company Common Stock offered hereby and (ii)
shares of the Company's Common Stock presently reserved for issuance under the
Company's Stock Option, Restricted Stock and Dividend Reinvestment Plans.
Uncommitted authorized but unissued shares of the Company's Common
Stock may be issued from time to time to such persons and for such
consideration as the Board of Directors of the Company may determine and
holders of the then outstanding shares of Company Common Stock may or may not
be given the opportunity to vote thereon, depending upon the nature of any such
transactions, applicable law and the judgment of the Board of Directors of the
Company regarding the submission of such issuance to the Company's
stockholders. As noted, the Company's stockholders have no preemptive rights
to subscribe to newly issued shares.
Moreover, it is possible that additional shares of the Company's
Common Stock would be issued for the purpose of making an acquisition by an
unwanted suitor of a controlling interest in the Company more difficult, time
consuming or costly or would otherwise discourage an attempt to acquire control
of the Company. Under such circumstances, the availability of authorized and
unissued shares of the Company's capital stock may make it more difficult for
stockholders to obtain a premium for their shares. Such authorized and
unissued shares could be used to create voting or other impediments or to
frustrate a person seeking to obtain control of the Company by means of a
merger, tender offer, proxy contest or other means. Such shares could be
privately placed with purchasers who might cooperate with the Board of
Directors of the Company in opposing such an attempt by a third party to gain
control of the Company. The issuance
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<PAGE> 46
of new shares of the Company's capital stock could also be used to dilute
ownership of a person or entity seeking to obtain control of the Company.
Although the Company does not currently contemplate taking any such action,
shares of the Company's capital stock could be issued for the purposes and
effects described above and the Board of Directors reserves its rights (if
consistent with its fiduciary responsibilities) to issue such stock for such
purposes.
ANTI-TAKEOVER PROVISIONS
In addition to the utilization of authorized but unissued shares as
described above, the Company's Articles of Incorporation and the Michigan
Business Corporation Act ("MBCA") contain other provisions which could be
utilized by the Company to impede certain efforts to acquire control of the
Company. Those provisions include the following:
ANTI-TAKEOVER LEGISLATION. The MBCA contains provisions intended to
protect shareholders and prohibit or discourage certain types of hostile
takeover activities. These provisions regulate the acquisition of "control
shares" of large public Michigan corporations (the "Control Share Act").
The Control Share Act establishes procedures governing "control share
acquisitions." A control share acquisition is defined as an acquisition of
shares by an acquirer which, when combined with other shares held by that
person or entity, would give the acquirer voting power at or above any of the
following thresholds: 20%, 33-1/3% or 50%. Under the Control Share Act, an
acquirer may not vote "control shares" unless the corporation's disinterested
shareholders vote to confer voting rights on the control shares. The acquiring
person, officers of the target corporation, and directors of the target
corporation who are also employees of the corporation are precluded from voting
on the issue of whether the control shares shall be accorded voting rights.
The Control Share Act does not affect the voting rights of shares owned by an
acquiring person prior to the control share acquisition.
The Control Share Act entitles corporations to redeem control shares
from the acquiring person under certain circumstances. In other cases, the
Control Share Act confers dissenters' rights upon all of a corporation's
shareholders except the acquiring person.
The Control Share Act applies only to an "issuing public corporation."
The Company falls within the statutory definition of an "issuing public
corporation." The Control Share Act automatically applies to any "issuing
public corporation" unless the corporation "opts out" of the statute by so
providing in its articles of incorporation or bylaws. The Company has not
"opted out" of the Control Share Act.
FAIR PRICE ACT. Certain provisions of the MBCA (the "Fair Price Act")
establish a statutory scheme similar to the supermajority and fair price
provisions found in many corporate charters. The Fair Price Act provides that
a supermajority vote of 90% of the shareholders and no less than two-thirds of
the votes of non-interested shareholders must approve a "business combination."
The Fair Price Act defines a "business combination" to encompass any merger,
consolidation, share exchange, sale of assets, stock issue, liquidation, or
reclassification of securities involving an "interested shareholder" or certain
"affiliates." An "interested shareholder" is generally any person who owns 10%
or more of the outstanding voting shares of the Company. An "affiliate" is a
person who directly or indirectly controls, is controlled by, or is under
common control with a specified person.
The supermajority vote required by the Fair Price Act does not apply
to business combinations that satisfy certain conditions. These conditions
include, among others, that: (i) the purchase price to be paid for the shares
of the Company is at least equal to the highest of either (a) the market value
of the shares or (b) the highest per share price paid by the interested
shareholder within the preceding two-year period or in the transaction in which
the shareholder became an interested shareholder, whichever is higher; and (ii)
once a person has become an interested shareholder, the person must not become
the beneficial owner of any additional shares of the Company except as part of
the transaction which resulted in the interested shareholder becoming an
interested shareholder or by virtue of proportionate stock splits or stock
dividends.
The requirements of the Fair Price Act do not apply to business
combinations with an interested shareholder that the Board of Directors has
approved or exempted from the requirements of the Fair Price Act by resolution
at any time prior to the time that the interested shareholder first became an
interested shareholder.
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<PAGE> 47
CLASSIFIED BOARD. The Board of Directors of the Company is classified
into three classes, with each class serving a staggered, three-year term.
Classification of the Board could have the effect of extending the time during
which the existing Board of Directors could control the operating policies of
the Company even though opposed by the holders of a majority of the outstanding
shares of the Company's Common Stock.
Under the Company's Articles, all nominations for directors by a
stockholder must be delivered to the Company in writing at least 60 days prior
to the annual meeting of the shareholders. A nomination that is not received
prior to this deadline will not be placed on the ballot. The Board believes
that advance notice of nominations by shareholders will afford a meaningful
opportunity to consider the qualifications of the proposed nominees and, to the
extent deemed necessary or desirable by the Board of Directors, will provide an
opportunity to inform shareholders about such qualifications. Although this
nomination procedure does not give the Board of Directors any power to approve
or disapprove of shareholder nominations for the election of directors, this
nomination procedure may have the effect of precluding a nomination for the
election of directors at a particular annual meeting if the proper procedures
are not followed.
The Company's Articles provide that any one or more directors may be
removed at any time, with or without cause, but only by either (i) the
affirmative vote of a majority of "Continuing Directors" and at least 80% of
the directors; or (ii) the affirmative vote, at a meeting of the shareholders
called for that purpose, of the holders of at least 80% of the voting power of
the then-outstanding shares of capital stock of the Company entitled to vote
generally in the election of directors, voting together as a single class. A
"Continuing Director" is generally defined in the Articles as any member of the
Board who is unaffiliated with any "interested shareholder" (generally, an
owner of 10% or more of the Company's outstanding voting shares) and was a
member of the Board prior to the time an interested shareholder became an
interested shareholder, and any successor of a Continuing Director who is
unaffiliated with an interested shareholder and is recommended to succeed a
Continuing Director by a majority of the Continuing Directors then on the
Board.
Any vacancies in the Board of Directors for any reason, and any newly
created directorships resulting from any increase in the number of directors,
may be filled only by the Board of Directors, acting by an affirmative vote of
a majority of the Continuing Directors and an 80% majority of all of the
directors then in office, although less than a quorum. Any directors so chosen
shall hold office until the next annual meeting of shareholders at which
directors are elected to the class to which such a director was named and until
their respective successors shall be duly elected and qualified or their
resignation or removal. No decrease in the number of directors may shorten the
term of any incumbent director.
NOTICE OF SHAREHOLDER PROPOSALS. Under the Company's Articles, the
only business that may be conducted at an annual meeting of shareholders is
business that has been brought before the meeting by or at the direction of the
majority of the directors or by a shareholders of the Company (a) who provides
timely notice of the proposal in writing to the secretary of the Company and
the proposal is a proper subject for action by shareholders under Michigan law
or (b) whose proposal is included in the Company's proxy materials in
compliance with all the requirements set forth in the applicable rules and
regulations of the Securities & Exchange Commission. To be timely, a
shareholder's notice of proposal must be delivered to, or mailed to and
received at the principal executive offices of the Company not less than thirty
(30) days prior to the date of the originally scheduled meeting regardless of
any postponements, deferrals or adjournments of that meeting to a later date.
The shareholder's notice of proposal must set forth in writing each matter the
shareholder proposes to bring before the meeting including: the name and
address of the shareholder submitting the proposal, as it appears on the
Company's books and records; a representation that the shareholder (i) is a
holder of record of stock of the Company entitled to vote at the meeting, (ii)
will continue to hold to such stock through the date on which the meeting is
held, and (iii) intends to vote in person or by proxy at the meeting and to
submit the proposal for shareholder vote; a brief description of the proposal
desired to be submitted to the meeting for shareholder vote and the reasons for
conducting such business at the meeting; and the description of any financial
or other interest of the shareholder in the proposal. This procedure may limit
to some degree the ability of shareholders to initiate discussions at annual
shareholders meetings. It may also preclude the conducting of business at a
particular meeting if the proposed notice procedures have not been followed.
AMENDMENT OR REPEAL OF CERTAIN PROVISIONS OF THE ARTICLES. Under
Michigan law, the Board of Directors needs not adopt a resolution setting forth
an amendment to the Articles of Incorporation before the shareholders may vote
on it. Unless the Articles of Incorporation provide otherwise, amendments of
the Articles of Incorporation generally require the approval of the holders of
a majority of the outstanding stock entitled to vote thereon, and if the
amendment
-45-
<PAGE> 48
would increase or decrease the number of authorized shares of any class or
series, or the par value of such shares, or would adversely affect the rights,
powers, or preferences of such class or series, a majority of the outstanding
stock of such class or series also would be required to approve the amendment.
The Company's Articles require that in order to amend, repeal or adopt
any provision inconsistent with Article VII relating to the Board of Directors
or Article VIII relating to shareholder proposals, the affirmative vote of at
least 80% of the issued and outstanding shares of the Company's capital stock
entitled to vote in the election of directors, voting as a single class;
provided, however, that such amendment or repeal or inconsistent provision may
be made by a majority vote of such shareholders at any meeting of the
shareholders duly called and held where such amendment has been recommended for
approval by at least 80% of all directors then holding office and by a majority
of the "continuing directors." These amendment provisions could render it more
difficult to remove management or for a person seeking to effect a merger or
otherwise gain control of the Company. These amendment requirements could,
thus, adversely affect the potential realizable value of shareholders'
investments.
BOARD EVALUATION OF CERTAIN OFFERS Article X of the Company's
Articles provides that the Board of Directors shall not approve, adopt or
recommend any offer of any person or entity (other than the Company) to make a
tender or exchange offer for any Company Common Stock, to merge or consolidate
the Company with any other entity, or to purchase or acquire all or
substantially all of Company's assets, unless and until the Board has evaluated
the offer and determined that it would be in compliance with all applicable
laws and that the offer is in the best interests of the Company. In doing so,
the Board may rely on an opinion of legal counsel who is independent from the
offeror, and/or any test such legal compliance in front of any court or agency
that may have appropriate jurisdiction over the matter.
In making its determination, the Board must consider all factors it
deems relevant, including but not limited to: (i) the adequacy and fairness of
the consideration to be received by the Company and/or its shareholders,
considering historical trading prices of the Company's Common Stock, the price
that could be achieved in a negotiated sale of the Company as a whole, past
offers, and the future prospects of the Company; (ii) the potential social and
economic impact of the proposed transaction on the Company, its employees,
customers and vendors; (iii) the potential social and economic impact of the
proposed transaction on the communities in which the Company and its
subsidiaries operate or are located; (iv) the business and financial condition
and earnings prospects of the proposed acquiring person or entity; and (v) the
competence, experience and integrity of the proposed acquiring person or entity
and its or their management.
In order to amend, repeal, or adopt any provision that is inconsistent
with Article X, at least 80% of the shareholders, voting together as a single
class, must approve the change, unless the change has been recommended for
approval by at least 80% of the directors, in which case a majority of the
voting stock could approve the action.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Varnum, Riddering, Schmidt & Howlett LLP, Grand Rapids,
Michigan.
EXPERTS
The consolidated financial statements of the Company as of and for the
year ended December 31, 1995, included in this Prospectus, have been audited by
Crowe, Chizek and Company LLP, independent certified public accountants, as
indicated in their report thereon included herein. The financial statements of
the Company included herein and audited by Crowe, Chizek and Company LLP have
been included herein in reliance upon such report given upon the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of the Company as of December 31,
1994, and for each of the two years in the period ended December 31, 1994,
included herein have been audited by Schneider, Larche, Haapala & Co.,
independent certified public accountants, as indicated in their report thereon,
which is included herein. The financial statements of the Company included
herein and audited by Schneider, Larche, Haapala & Co. have been included
herein in reliance upon such report given upon the authority of such firm as
experts in auditing and accounting.
-46-
<PAGE> 49
The financial statements of the South Range State Bank as of and for
the year ended December 31, 1995, included in this Prospectus, have been
audited by Crowe, Chizek and Company LLP, independent certified public
accountants, as indicated in their report thereon included herein. The
financial statements of the South Range State Bank for such period, included
herein and audited by Crowe, Chizek and Company LLP have been included herein
in reliance upon such report given upon the authority of said firm as experts
in auditing and accounting.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-47-
<PAGE> 50
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
FIRST MANISTIQUE CORPORATION AND SOUTH RANGE STATE BANK
The following unaudited pro forma condensed consolidated balance sheet
as of December 31, 1995, and the pro forma condensed consolidated statement of
income for the year ended December 31, 1995, give effect to the acquisition of
South Range State Bank ("South Range Bank") based on the historical
consolidated financial statements of the Company and South Range Bank and their
subsidiaries under the assumptions and adjustments set forth below and in the
accompanying notes to the pro forma financial statements.
The acquisition of South Range Bank was accounted for as a purchase
transaction and, therefore, is included in the pro forma condensed consolidated
balance sheet as of December 31, 1995, as if the transaction had become
effective on such date, and in the pro forma condensed consolidated statement
of income for the year ended December 31, 1995, as if the transaction had
become effective at the beginning of the year, giving effect to the pro forma
adjustments described therein. The purchase accounting adjustments reflected
in the pro forma financial statements are based on management estimates of the
fair value of South Range Bank assets and liabilities.
The pro forma financial statements have been prepared by the
management of the Company. These pro forma financial statements may not be
indicative of the results that actually would have occurred if the acquisition
of South Range Bank had been in effect on the dates indicated or which may be
obtained in the future. The pro forma financial statements should be read in
conjunction with the historical consolidated financial statements and notes
thereto of the Company and South Range.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-48-
<PAGE> 51
FIRST MANISTIQUE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
First South
Manistique Range Acquisition Pro Forma
Corporation State Bank Adjustments Consolidated
----------- ---------- ----------- ------------
ASSETS
------
<S> <C> <C> <C> <C>
Cash and due from banks $ 10,492 $ 1,542 $ 12,034
Federal funds sold 4,000 700 4,700
----------- ---------- -----------
Total cash and cash equivalent 14,492 2,242 16,734
Interest-bearing deposits
with banks 1,678 1,187 2,865
Securities available for sale 26,220 3,827 30,047
Securities held to maturity 835 -- 835
Investment in subsidiary $ 4,310 (a)
(4,310) (c)
Loans receivable (net) 218,370 26,740 245,110
Premises and equipment (net) 11,788 863 126 (b) 13,210
433 (b)
Acquisition intangibles 4,261 -- 576 (b) 5,934
1,097 (b)
Other assets 5,147 764 -- 3,528
----------- ---------- ------- -----------
Total assets $ 282,791 $ 35,623 $ 2,232 $ 320,646
=========== ========== ======= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits $ 244,407 $ 32,607 $ 277,014
Securities sold under agreement
to repurchase 700 -- 700
Other borrowings 10,088 -- $ 1,947 (a) 12,035
Installment notes -- -- 2,363 (a) 2,363
Accrued expenses and other
liabilities 2,590 553 385 (b) 3,528
----------- ---------- ------- -----------
Total liabilities 257,785 33,160 4,695 295,640
Common stock 13,195 390 (390) (c) 13,195
Additional paid in capital -- 1,150 (1,150) (c)
Retained earnings 11,831 876 (876) (c) 11,831
1,847 (b)
(1,847) (c)
Net unrealized loss on securities
Available for sale net of tax (20) 47 (47) (c) (20)
----------- ---------- ------- -----------
Total shareholders' equity 25,006 2,463 (2,463) 25,006
----------- ---------- ------- -----------
Total liabilities and
Shareholders' equity $ 282,791 $ 35,623 $ 2,232 $ 320,646
=========== ========== ======= ===========
</TABLE>
-49-
<PAGE> 52
FIRST MANISTIQUE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the year ended December 31, 1995
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
First South
Manistique Range Acquisition Pro Forma
Corporation State Bank Adjustments Consolidated
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Interest Income
Loans $ 19,966 $ 2,504 $ 22,470
Interest on investment securities 1,527 224 1,751
Other interest and dividend income 607 162 769
---------- ---------- -----------
Total interest income 22,100 2,890 24,990
Interest Expense
Interest on deposits 9,136 1,156 10,292
Other interest expense 425 -- 161 (g)
-- -- 123 (g) 709
---------- ---------- ---- -----------
Total interest expense 9,561 1,156 284 11,001
Net interest income 12,539 1,734 (284) 13,989
Provision for loan losses 771 40 811
---------- ---------- ---- -----------
Net interest income after provision
for loan losses 11,768 1,694 13,178
Non-interest income 1,354 214 1,568
Non-interest expense 9,368 1,563 3 (d) 11,076
69 (e)
-- -- 73 (f) --
---------- ---------- ---- -----------
Income before income tax 3,754 345 (429) 3,670
Income tax expense 1,084 84 (121) (h) 1,047
---------- ---------- ---- -----------
Net Income $ 2,670 $ 261 $ 308 $ 2,623
========== ========= ===== ===========
Net income per share $ 1.27 $ 1.25
========== ===========
Weighted average number of shares
outstanding 2,099,880 2,099,880
</TABLE>
-50-
<PAGE> 53
NOTES TO THE PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
General:
The pro forma financial statements reflect the merger of South Range State Bank
into First Manistique Corporation assuming the use of the purchase method of
accounting. The purchase price for South Range is calculated assuming that cash
paid to South Range State Bank shareholders is provided by a draw on a line of
credit from Associated Bank at an interest rate of 8.25% (prime rate). The
purchase price is calculated as follows:
Cash paid:
($66.31 x 15,271 shares and $221.04 x 4,229 shares) $ 1,947
Installment Notes Issued:
($154.73 x 15,271 shares) 2,363
--------
Total purchase price $ 4,310
========
(a) To record the purchase of South Range shares, the draw on the line of
credit from Associated Bank, and to record the installment notes
issued.
(b) To adjust the assets and liabilities of South Range to fair value and
allocate the excess of purchase price over fair value of assets and
liabilities acquired. The market adjustments are based on current
market information as of December 31, 1995. The following table sets
forth the estimated purchase accounting adjustments as of December 31,
1995:
DEBIT/(CREDIT)
--------------
Premises and equipment $ 126
Land 433
Core deposit intangible 576
Goodwill 1,097
Deferred tax liability arising from
purchase accounting adjustments (385)
(c) To eliminate the investment in South Range State Bank
(d) Amortization of the premises market value adjustment over 40 years
straight-line
(e) Amortization of core deposit intangible over 10 years using an accelerated
method
(f) Amortization of goodwill over 15 years straight-line
(g) Interest expense on the installment notes assuming a 5.20% interest rate
based on the terms of the notes and interest expense of the line of credit
from Associated Bank assuming an interest rate of 8.25% (prime rate)
(h) The tax rate assumed for the pro forma adjustments is 34% and is not
applied to goodwill in accordance with SFAS No. 109.
-51-
<PAGE> 54
FIRST MANISTIQUE CORPORATION
Manistique, Michigan
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
CONTENTS
<TABLE>
<S> <C>
REPORTS OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . F-2 & F-2A
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . F-3
CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . . . . . . . . . F-4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY . . . . . F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . F-8
</TABLE>
F-1
<PAGE> 55
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
First Manistique Corporation
Manistique, Michigan
We have audited the accompanying consolidated balance sheet of First
Manistique Corporation as of December 31, 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of
First Manistique Corporation as of December 31, 1994 and for each of the two
years in the period ended December 31, 1994 were audited by other auditors
whose report dated March 10, 1995, expressed an unqualified opinion on those
statements and noted that the Corporation changed its method of accounting for
securities in 1994.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Manistique Corporation as of December 31, 1995, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Corporation changed its method of accounting for impaired loans in 1995 to
conform to new accounting guidance.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 9, 1996
F-2
<PAGE> 56
March 10, 1995
To the Shareholders and
Board of Directors
First Manistique Corporation
Manistique, Michigan
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of First
Manistique Corporation and Subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended December 31, 1994, 1993 and 1992. 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 discloures 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
Manistique Corporation and Subsidiaries as of December 31, 1994 and 1993, and
the results of its operations, changes in stockholders' equity, and cash flows
for the years ended December 31, 1994, 1993 and 1992 in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Corporation
changed its method of accounting for investment securities effective January 1,
1994 to conform with Statement of Financial Accounting Standards No. 115.
Schneider, Larche, Haapala & Company
Escanaba, Michigan
F-2A
<PAGE> 57
FIRST MANISTIQUE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,492,357 $ 10,219,409
Federal funds sold 4,000,000 4,100,000
--------- ---------
Total cash and cash equivalents 14,492,357 14,319,409
Interest-bearing deposits with banks 1,678,080 2,421,909
Securities available for sale (Note 4) 26,220,378 21,929,198
Securities held to maturity (fair value of
$836,753 in 1995 and $13,198,295 in 1994) (Note 4) 835,049 13,865,925
Loans (Note 5) 221,507,410 183,168,825
Allowance for loan losses (Note 6) (3,137,315) (2,349,957)
---------- ----------
Net loans 218,370,095 180,818,868
Bank premises and equipment - net (Note 7) 11,787,365 9,802,577
Accrued interest receivable 2,194,968 1,859,121
Acquisition intangibles (Notes 3 and 8) 4,261,255 4,234,048
Other assets 2,951,827 3,847,569
--------- ---------
$ 282,791,374 $ 253,098,624
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 27,674,414 $ 24,272,032
Interest-bearing (Note 9) 216,732,281 199,163,534
----------- -----------
244,406,695 223,435,566
Securities sold under agreement to repurchase 700,000 700,000
Other borrowings (Note 10) 10,087,735 3,552,531
Accrued interest payable 1,418,547 1,069,793
Other liabilities (Note 13) 1,171,520 1,857,307
--------- ---------
257,784,497 230,615,197
Commitments and contingencies (Note 12 and 16)
Shareholders' equity (Notes 15 and 20)
Preferred stock, no par value, 25,000 shares
authorized; none outstanding
Common stock, no par value, 2,000,000 shares
authorized; outstanding: 702,299 in 1995 and
699,024 in 1994 13,195,269 13,037,296
Retained earnings 11,831,455 10,014,844
Net unrealized loss on securities available for sale,
net of tax of $9,081 and $297,108 in 1995 and 1994,
respectively
(19,847) (568,713)
------- --------
25,006,877 22,483,427
---------- ----------
$ 282,791,374 $ 253,098,624
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 58
FIRST MANISTIQUE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans, including fees $ 19,966,340 $ 11,667,088 $ 6,788,026
Securities:
Taxable 1,397,953 1,625,314 856,378
Exempt from federal taxation 128,776 284,881 169,170
Other 606,906 221,266 128,599
------- ------- -------
22,099,975 13,798,549 7,942,173
Interest expense
Deposits 9,136,243 5,748,404 3,437,055
Other borrowed funds and
securities sold under agreements
to repurchase 425,105 304,997 106,074
------- ------- -------
9,561,348 6,053,401 3,543,129
--------- --------- ---------
NET INTEREST INCOME 12,538,627 7,745,148 4,399,044
Provision for loan losses (Note 6) 771,000 330,000 125,000
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,767,627 7,415,148 4,274,044
Noninterest income
Service charges on deposit accounts 562,806 406,262 262,355
Late charges and collection fees 108,711 84,042 58,396
Loan sales and servicing 40,370 34,091 30,873
Securities gains (losses) (Note 4) (19,083) 75,438 175,372
Other 661,290 512,464 442,765
------- ------- -------
1,354,094 1,112,297 969,761
Noninterest expense
Salaries and employee benefits
(Notes 13 and 14) 4,049,844 2,488,694 1,547,161
Furniture and equipment expense 904,189 603,010 345,942
Occupancy expense 705,551 409,813 251,107
Other (Note 18) 3,707,929 2,600,386 1,570,478
--------- --------- ---------
9,367,513 6,101,903 3,714,688
--------- --------- ---------
INCOME BEFORE INCOME TAX 3,754,208 2,425,542 1,529,117
Provision for income tax (Note 11) 1,083,893 458,000 260,174
--------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 2,670,315 1,967,542 1,268,943
Cumulative effect of change in
accounting for income taxes (Note 11) 13,002
------
NET INCOME $ 2,670,315 $ 1,967,542 $ 1,281,945
= ========= = ========= = =========
Earnings per share (Note 2)
Income before cumulative effect
of accounting change $ 1.27 $ 1.14 $ 1.04
Cumulative effect of accounting change .01
-----
Net income $ 1.27 $ 1.14 $ 1.05
= ==== = ==== = ====
Average common shares outstanding(Notes 2 & 21) 2,099,880 1,727,130 1,224,000
========= =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 59
FIRST MANISTIQUE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
Shares of on Securities
Common Common Retained Available
Stock Stock Earnings for Sale Total
------------- ------------- -------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 408,000 $ 1,546,565 $ 7,713,332 $ 9,259,897
Net income 1,281,945 1,281,945
Cash dividends - ($.49 per share) (598,400) (598,400)
---------------- ---------------- -------------- -------------
Balance at December 31, 1993 408,000 1,546,565 8,396,877 9,943,442
Effect of initial application of
SFAS No. 115 at January 1, 1994,
net of tax of ($51,553) $ 100,075 100,075
Net income 1,967,542 1,967,542
Shares issued in the acquisition
of the Bank of Stephenson 175,779 6,591,712 6,591,712
Issuance of common stock 115,545 4,911,284 4,911,284
Cash dividends - ($.20 per share) (349,575) (349,575)
Purchase of outstanding shares (300) (12,265) (12,265)
Changes in unrealized gain (loss)
on securities available for
sale, net of tax of $348,661 (668,788) (668,788)
---------------- ---------------- ------------- ------------- --------------
Balance at December 31, 1994 669,024 13,037,296 10,014,844 (568,713) 22,483,427
Net income 2,670,315 2,670,315
Cash dividends - ($.41 per share) (853,704) (853,704)
Issuance of common stock 3,275 157,973 157,973
Change in unrealized loss on
securities available for sale,
net of tax of ($288,027) 548,866 548,866
---------------- ---------------- ------------- -------------- -------------
Balance at December 31, 1995 702,299 $13,195,269 $11,831,455 $ (19,847) $25,006,877
================ ================ ============= ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 60
FIRST MANISTIQUE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,670,315 $ 1,967,542 $ 1,281,945
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 771,000 330,000 125,000
Deferred taxes 325,650 (169,301) (25,186)
Depreciation 816,720 565,075 311,802
Amortization 640,365 374,991 85,211
Proceeds from sale of mortgage loans 3,307,457 2,773,213 1,971,316
Origination of mortgage loans for sale (3,275,010) (2,742,021) (1,939,000)
Effect of change in accounting for
income taxes (13,002)
(Gains) losses on sale
Loans held for sale (32,447) (31,192) (32,316)
Securities 19,083 (75,438) (175,372)
Premises and equipment (29,050) (19,584) (7,752)
Other real estate (1,000) 2,441
Changes in assets and liabilities
Interest receivable and other assets 568,322 (922,632) (666,549)
Interest payable and other liabilities (662,220) 558,073 (102,056)
-------- ------- --------
Net cash from operating
activities 5,119,185 2,611,167 814,041
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits
with banks 743,829 (2,226,909) 280,000
Purchase of securities available for sale (6,114,932) (4,563,979)
Purchase of securities held to maturity (500,000) (7,677,780)
Securities purchased (22,266,140)
Proceeds from sales of securities 25,380,822
Proceeds from sale of securities
available for sale 10,821,380 9,199,024
Proceeds from maturing securities 907,790
Proceeds from maturities, calls, or
paydowns of securities available for sale 3,702,740 6,391,486
Proceeds from maturity and calls of
securities held to maturity 1,495,677 1,301,563
Net increase in loans (38,338,850) (60,287,160) (14,148,678)
Purchase of other assets (2,490,000)
Proceeds from sale of premises
and equipment 153,976 (33,267) 49,158
Purchase of premises and equipment (2,811,612) (4,632,129) (1,277,292)
Proceeds from sale of other real estate 20,000 92,196
Net cash provided from acquisitions 8,006,430 2,915,646
--------- ---------
Net cash from investing activities (22,821,362) (62,011,309) (11,074,340)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 61
FIRST MANISTIQUE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $12,035,652 $61,085,578 $ 9,460,829
Proceeds from notes payable 6,634,125 1,315,875 250,000
Payment on notes payable (98,921) (20,344) (7,000)
Proceeds from issuance of common stock 157,973 4,911,284
Repurchase of common stock (12,265)
Payment of dividends (853,704) (542,697) (405,280)
----------- ----------- ------------
Net cash from investing activities 17,875,125 66,737,431 9,298,549
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents 172,948 7,337,289 (961,750)
Cash and cash equivalents at
beginning of year 14,319,409 6,982,120 7,943,870
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $14,492,357 $14,319,409 $ 6,982,120
=========== =========== ============
Supplemental disclosures of cash flow
information
Cash paid during the period for
Interest $ 9,212,594 $ 5,783,912 $ 4,092,493
Income taxes 1,397,394 521,000 300,860
Supplemental disclosure of noncash investing
activities
Transfer from securities held to maturity
to securities available for sale (Note 2) 11,944,338
Transfer of foreclosures from loans
to other real estate owned 16,623
Fair value of shares exchanged for Bank
acquisition 6,591,712
Assets and liabilities acquired in acquisitions
(Note 3)
Premises and equipment 439,310 1,360,778
Acquisitions intangibles 514,902 4,175,000
Other assets and accrued interest receivable 11,994 647,775
Loans, net 0 34,633,411
Investment securities 0 24,846,498
Deposits (8,935,477) (59,332,539)
Other liabilities and accrued
interest payable (37,159) (2,654,857)
</TABLE>
(Continued)
F-7
<PAGE> 62
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 1 - NATURE OF OPERATIONS
The consolidated financial statements include the accounts of First Manistique
Corporation ("Corporation") and its wholly-owned subsidiaries, First Northern
Bank & Trust, Rural Relending, and other minor subsidiaries, after elimination
of intercompany transactions and accounts. The Corporation is engaged in the
business of commercial and retail banking, with operations conducted throughout
Michigan's Upper Peninsula. In addition, a significant portion of its
commercial loan portfolio consists of leases to commercial government entities
which are secured by equipment and vehicles. These leases are disbursed
geographically throughout the country.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements: The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates. The primary estimates incorporated into the
Corporation's financial statements which are susceptible to change in the near
term include the allowance for loan losses, fair values of certain financial
instruments, the accrued liability associated with the deferred compensation
plan, and the carrying value of impaired loans.
Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks, and federal funds sold. The
Corporation reports net cash flows for interest-bearing deposits with banks,
loans and deposit transactions.
Securities: Securities available for sale consist of those securities not
classified as trading or held to maturity. Such securities might be sold prior
to maturity due to changes in interest rates, prepayment risks, yield and
availability of alternative investments, liquidity needs, or other factors.
Effective January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS No. 115). As required by SFAS No. 115, securities
classified as available for sale on and after January 1,1994 are reported at
their fair value and the related net unrealized holding gain or loss is
reported, net of related income tax effects, as a separate component of
shareholders' equity until realized. Securities for which management has the
positive intent and the Corporation has the ability to hold to maturity are
reported at amortized cost.
In November 1995, the Financial Accounting Standards Board issued its Special
Report, A Guide to Implementation of Statement No. 115 on Accounting for
Certain Investments in Debt and Equity Securities (Guide). As permitted by the
Guide, on December 8, 1995, the Corporation made a one-time reassessment and
transferred securities from the held-to-maturity portfolio to the
available-for-sale portfolio in order to increase management's ability to
manage liquidity requirements and interest rate risk. At the date of transfer,
these securities had an amortized cost of $11,944,338, fair value of
$11,876,979, gross unrealized gains of $522 and gross unrealized losses of
$67,881. The transfer increased the unrealized loss on securities available
for sale in stockholders' equity by approximately $44,000, net of tax.
(Continued)
F-8
<PAGE> 63
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premiums and discounts on securities are recognized in interest income using
the interest method over the estimated life of the security. Gains and losses
on the sale of securities are determined using the specific identification
method.
Loans: Loans for which management has the intent and the Corporation has the
ability to hold for the foreseeable future or payoff are stated at unpaid
principal balances, less the allowance for loan losses, and net of deferred
loan origination fees, costs and discounts. Loans for which management does
not have the intent to hold until payoff are stated at the lower of cost or
fair value and recorded as loans held for sale.
Allowance for Loan Losses: Because some loans are not repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective. The estimates
may change depending on changes in economic conditions, the interest rate
environment or specific situations of individual borrowers. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
losses that are currently anticipated based on past loss experience, general
economic conditions and collateral values, and other factors and estimates
which are subject to change over time. While management may periodically
allocate portions of the allowance for specific problem loan situations, the
whole allowance is available for any loan charge-offs that may occur. A
problem loan is charged-off by management as a loss when deemed uncollectible,
although collection efforts may continue and future recoveries may occur.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan (SFAS No. 114), and later amended by SFAS No. 118. These Standards,
adopted by the Corporation at January 1, 1995, require that impaired loans, as
defined, be measured based on the present value of expected cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or at the fair value of collateral if
the loan is collateral dependent. Under these standards, loans considered to
be impaired are reduced to the present value of expected future cash flows or
to the fair value of collateral, by allocating a portion of the allowance for
loan losses to such loans. If these allocations cause the allowance for loan
losses to increase, such increase is reported as additional provision for loan
losses. The effect of adopting SFAS Nos. 114 and 118 did not have a
significant impact on the consolidated financial position or results of
operations of the Corporation.
Smaller-balance homogeneous loans are residential first mortgage loans secured
by one-to-four family residences, residential construction loans, automobile,
home equity and second mortgage loans and are collectively evaluated for
impairment. Commercial loans and first mortgage loans secured by other
properties are evaluated individually for impairment. Management uses the
Corporation's normal credit analysis information, including delinquency
reports, non-accrual listings and the watch list, to identify loans which
should be evaluated for impairment. A loan is considered impaired when
management concludes it is probable that the borrower will not remit payments
in accordance with the terms of the agreement. Loans, or portions thereof,
are charged off when deemed uncollectible. The nature of disclosures for
impaired loans is considered generally comparable to prior nonaccrual, past
due, trouble debt restructurings and nonperforming asset disclosures.
(Continued)
F-9
<PAGE> 64
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest Income: Interest on loans is accrued over the term of the loans
based upon the principal outstanding. Management reviews loans delinquent 90
days or more to determine if interest accrual should be discontinued based on
the estimated fair market value of the collateral on a present value basis, or
the present value of estimated future cash flows. Under SFAS No. 114 as
amended by SFAS No. 118, the carrying values of impaired loans are
periodically adjusted to reflect cash payments, revised estimates of future
cash flows, and increases in the present value of expected cash flows due to
the passage of time. Cash payments representing interest income are reported
as such. Other cash payments are reported as reductions in carrying value,
while increases or decreases due to changes in estimates of future payments
and due to the passage of time are reported as reductions or increases in the
provision for loan losses.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu
of, loan foreclosure are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the
lower of cost or fair value minus estimated costs to sell.
Premises and Equipment: The Corporation's premises and equipment are stated
at cost less accumulated depreciation. Premises and related components are
depreciated using the straight-line method with useful lives ranging from 5 to
39 years. Furniture and equipment are depreciated using the straight-line
method with useful lives ranging from 3 to 12 years.
Acquisition Intangibles: The Corporation's intangible assets include the
value of ongoing customer relationships (core deposits) and the excess of cost
over the fair value of net assets acquired (goodwill) arising from the
purchase of a financial institution and the acquisition of certain assets and
the assumption of certain liabilities of other financial institutions. Core
deposit intangibles are amortized to income over a ten-year period on an
accelerated basis and goodwill is amortized on a straight-line basis over a
fifteen-year period.
Federal Income Taxes: Effective January 1, 1993, the Corporation adopted SFAS
No. 109, Accounting for Income Taxes. The Corporation records income tax
expense based on the amount of taxes due on its income tax return plus
deferred taxes computed based on differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates. Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized. The effect of the adoption of SFAS No.
109, as of January 1, 1993, is shown as the cumulative effect of a change in
accounting principle in the 1993 consolidated statement of income. Apart from
the cumulative effect adjustment, the impact of the change on net income for
1993 was not material.
The Corporation and its subsidiaries file a consolidated federal income tax
return on a calendar year basis.
(Continued)
F-10
<PAGE> 65
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Per Share Information: Earnings per share is calculated on the weighted
average number of common shares outstanding during the year, retroactively
adjusted to give effect to all stock splits and stock dividends. Other per
share information has also been retroactively adjusted for all stock splits
and stock dividends.
Issued But Not Yet Adopted Accounting Standards: The Financial Accounting
Standards Board has issued Statement of Financial Accounting Standards
No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of (SFAS No. 121). This Statement requires that
long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable, and
establishes criteria for evaluating recoverability. The Statement also
requires that long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair value less
cost to sell, with certain exceptions. The Statement is effective for fiscal
years beginning after December 15, 1995. Management does not expect the
Statement to have a material impact on the consolidated financial condition or
results of operations of the Corporation.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights (SFAS
No. 122). This Statement changes the accounting for mortgage servicing rights
retained by the loan originator. Under the Statement, if the originator sells
or securitizes mortgage loans and retains the related servicing rights, the
total cost of the mortgage loan is allocated between the loan (without the
servicing rights) and the servicing rights, based on their relative fair
values. Under current practice, all such costs are assigned to the loan. The
costs allocated to mortgage servicing rights will be recorded as a separate
asset and amortized in proportion to, and over the life of, the net servicing
income. The carrying value of the mortgage servicing rights will be
periodically evaluated for impairment. Impairment will be recognized using
the fair value of individual stratum of servicing rights based on the
underlying risk characteristics of the serviced loan portfolio, compared to an
aggregate portfolio approach under existing accounting guidance. Based on the
Corporation's historical levels of mortgage originations for sale in the
secondary market, management anticipates that the impact of SFAS 122 on the
Corporation's financial position and results of operations will not be
material.
(Continued)
F-11
<PAGE> 66
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-based Compensation (SFAS
No. 123). The Statement establishes a "fair value-based method" of accounting
for employee stock options and similar equity instruments, such as warrants,
and encourages all companies to adopt that method of accounting for all of
their employee stock compensation plans. However, the Statement allows
companies to continue measuring compensation cost for such plans using
accounting guidance in place prior to SFAS No. 123. Corporations that elect
to remain with the former method of accounting must make pro forma disclosures
of net income and earnings per share as if the fair value method provided for
in SFAS No. 123 has been adopted. The accounting requirements of the
Statement are required for transactions entered into in fiscal years that
begin after December 15, 1995, although early adoption is permitted.
Management has concluded that the Corporation will not adopt the fair value
accounting provisions of SFAS No. 123 and will continue to apply its current
method of accounting. Accordingly, adoption of SFAS No. 123 will have no
impact on the Corporation's consolidated financial condition or results of
operations.
Reclassifications: Certain prior years' amounts have been reclassified to
conform to the current year's presentation.
(Continued)
F-12
<PAGE> 67
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 3 - ACQUISITIONS
Since early 1994, the Corporation has completed four acquisitions which have
resulted in significant asset and earnings growth. The acquisitions have or
will be accounted for under the purchase method of accounting. Accordingly,
for those completed before December 31, 1995, the assets, liabilities, and
results of operations are included in the Corporation's consolidated financial
statements as of, and subsequent to, the acquisition date. The acquisition of
South Range State Bank occurred on January 31, 1996 and is not reflected in
the accompanying consolidated financial statements. Following is a summary of
the acquisitions. Additional information regarding assets acquired and
liabilities assumed is presented supplementally on the accompanying
consolidated statements of cash flows.
<TABLE>
<CAPTION>
Assets
Acquired Resulting
Date of Acquisition (excludes Acquisition
Acquisition Transaction Cost Intangibles) Intangibles
----------- ----------- --------------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
February 8, 1994 Acquired 100% of the
outstanding stock of Bank of
Stephenson in exchange for
cash ($4.49 million) and
common stock (175,779 shares) $ 11,084 $ 70,000 $ 1,584
December 8, 1994 Acquired a substantial portion
of the banking assets and
assumed a substantial portion
of the banking liabilities of
Newberry State Bank in
exchange for cash 4,150 22,000 2,591
September 15, 1995 Acquired the fixed assets and
assumed the deposits of the
Rudyard branch of First of
America in exchange for cash 769 8,935 515
January 31, 1996 Acquired 100% of the
outstanding stock of South
Range State Bank in exchange
for cash and notes 4,310 36,503 1,603
</TABLE>
Following is unaudited, proforma information regarding the acquisition of the
Bank of Stephenson, assuming the bank had been acquired January 1, 1993:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Total revenues $ 15,446,435 $14,491,918
Net income before cumulative effect of accounting change 1,998,467 2,025,943
Net income 1,998,467 2,038,945
Net income before cumulative effect of accounting change
per common and common equivalent share 1.12 1.15
Net income per common and common equivalent share 1.12 1.16
</TABLE>
(Continued)
F-13
<PAGE> 68
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 4 - SECURITIES
The carrying amount of securities and their approximate fair value as of
December 31, were as follows:
AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1995
- ----
U.S. Treasury and federal agency $20,949,728 $ 20,454 $ 70,878 $ 20,899,304
State and political subdivisions 477,035 4,239 751 480,523
Other 4,822,543 24,430 6,422 4,840,551
----------- ----------- ----------- -------------
$26,249,306 $ 49,123 $ 78,051 $ 26,220,378
=========== =========== =========== =============
1994
- ----
U.S. Treasury and federal agency $17,696,243 $ 2,927 $ 642,258 $ 17,056,912
State and political subdivisions 3,347,737 2,087 219,609 3,130,215
Other securities 1,751,039 8,968 1,742,071
----------- ----------- ----------- -------------
$22,795,019 $ 5,014 $ 870,835 $ 21,929,198
=========== =========== =========== =============
HELD TO MATURITY
1995
- ----
State and political subdivisions $ 835,049 $ 1,964 $ 260 $ 836,753
=========== =========== =========== =============
1994
- ----
U.S. Treasury and federal agency $ 8,799,276 $ 476,851 $ 8,322,425
State and political subdivisions 1,150,092 $ 1,986 9,301 1,142,777
Other 3,916,557 183,464 3,733,093
----------- ----------- ----------- -------------
$13,865,925 $ 1,986 $ 669,616 $ 13,198,295
=========== =========== =========== =============
</TABLE>
(Continued)
F-14
<PAGE> 69
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 4 - SECURITIES (Continued)
Proceeds, gains and losses from the sales of securities available for sale for
the years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Gross proceeds $10,821,380 $ 9,199,024 $25,380,822
Gains recognized 14,942 126,337 195,210
Losses recognized 34,025 50,899 19,838
</TABLE>
The amortized cost and estimated fair value of securities at December 31, 1995,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
<TABLE>
<CAPTION>
Securities Securities
. . Available for Sale . . . . . Held to Maturity . .
Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 8,516,862 $ 8,491,561 $ 835,049 $ 836,753
Due after one year through
five years 7,655,058 7,660,825
Due after five years through
ten years 8,963,369 8,932,021
Due after ten years 1,114,017 1,135,971
------------- ------------
$ 6,249,306 $ 26,220,378 $ 835,049 $ 836,753
============= ============ ============ ============
</TABLE>
The carrying value of securities pledged to secure public deposits and treasury
deposits was $2,278,048 as of December 31, 1995.
(Continued)
F-15
<PAGE> 70
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 5 - LOANS
Loans presented in the consolidated balance sheet are comprised of the
following classifications:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Loans:
Commercial, financial and agricultural $ 130,921,057 $ 99,397,306
1-4 family residential real estate 58,433,457 55,728,439
Consumer 29,954,025 26,851,376
Construction 2,235,030 1,258,000
-------------- --------------
221,543,569 183,235,121
Less: unearned income (36,159) (66,296)
-------------- --------------
$ 221,507,410 $ 183,168,825
============== ==============
</TABLE>
Included in the loan portfolio are loans made to certain executive officers,
directors, principal shareholders and companies in which they have an interest.
The following is a summary of such loans:
<TABLE>
<S> <C>
Balance - January 1 $ 4,249,119
New Loans 5,467,891
Repayments (3,113,808)
--------------
Balance - December 31 $ 6,603,202
==============
</TABLE>
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ending December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 2,349,957 $ 916,633 $ 833,907
Add:
Allowance from acquisitions
and purchased loans 1,184,666
Provision for loan losses 771,000 330,000 125,000
Loan recoveries 456,702 193,660 13,385
Loans charged off (440,344) (275,002) (55,659)
------------- ----------- ----------
Balance at end of year $ 3,137,315 $ 2,349,957 $ 916,633
============= =========== ==========
</TABLE>
(Continued)
F-16
<PAGE> 71
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 6 - ALLOWANCE FOR LOAN LOSSES (Continued)
Information regarding impaired loans is as follows for the year ended December
31, 1995:
<TABLE>
<S> <C>
Average investment in impaired loans $ 659,412
Interest income recognized on impaired loans including
interest income recognized on cash basis 40,856
Interest income recognized on impaired loans on cash basis 40,856
Information regarding impaired loans at December 31, 1995 was as follows:
Balance of impaired loans $ 570,847
Less portion for which no allowance for loan losses is allocated 22,548
------------
Portion of impaired loan balance for which an allowance
for credit losses is allocated $ 548,299
============
Portion of allowance for loan losses allocated to the impaired
loan balance $ 200,000
============
</TABLE>
There are no significant nonaccrual or restructured loans included in loans
outstanding as of December 31, 1995 and 1994. In addition, there was no
material effect on interest income due to nonaccrual or restructured loans for
1994 and 1993.
NOTE 7 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of December 31 consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 828,713 $ 696,636
Buildings and improvements 9,435,229 6,885,538
Furniture, fixtures and equipment 4,659,299 3,823,961
Construction in progress 850,222
----------- -------
14,923,241 12,256,357
Allowance for depreciation (3,135,876) (2,453,780)
----------- -----------
$11,787,365 $ 9,802,577
=========== ===========
</TABLE>
(Continued)
F-17
<PAGE> 72
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 8 - ACQUISITION INTANGIBLES
Intangible assets, which were principally acquired through the acquisitions
described in Note 3, consist of the following as of December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Goodwill $ 1,403,232 $ 1,104,930
Core deposit intangible 3,427,023 3,319,737
------------- ------------
4,830,255 4,424,667
Less accumulated amortization 569,000 190,619
------------- ------------
$ 4,261,255 $ 4,234,048
============= ============
</TABLE>
Amortization expense related to the acquisition intangibles was $378,381,
$177,638 and $3,080 for each year ended December 31, 1995, 1994 and 1993,
respectively.
NOTE 9 - INTEREST-BEARING DEPOSITS
The following is an analysis of interest-bearing deposits as of December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Savings and interest-bearing checking $ 118,956,109 $ 103,326,164
Time: In denominations under $100,000 82,752,399 84,157,370
In denominations of $100,000 or more 15,023,773 11,680,000
------------- -------------
$ 216,732,281 $ 199,163,534
============= =============
</TABLE>
Interest expense on time deposits issued in denominations of $100,000 or more
was $513,114, $506,298 and $373,213 for the year ended December 31, 1995, 1994
and 1993, respectively.
At December 31, 1995, scheduled maturities of the Bank's time deposits are as
follows:
<TABLE>
<S> <C>
1996 $ 71,426,922
1997 14,050,622
1998 7,884,928
1999 1,123,925
2000 2,727,507
Thereafter 562,268
-------------
$ 97,776,172
=============
</TABLE>
(Continued)
F-18
<PAGE> 73
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 10 - OTHER BORROWINGS
Other borrowings consist of the following at December 31,
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Federal Home Loan Bank
- ----------------------
Adjustable rate advance, maturing November 21, 1996:
5.65% interest rate at December 31, 1995, adjusting
period is semi-annually. $ 2,000,000 $ 2,000,000
Fixed-rate advance at 5.86%, maturing December 15, 2003. 213,907 236,656
Fixed-rate advance at 7.37%, maturing April 15, 2004. 237,440 250,000
Fixed-rate advance at 7.59%, maturing May 17, 2004. 436,388 500,000
Fixed-rate advance at 5.79%, maturing June 2, 1997. 1,000,000
Fixed-rate advance at 6.13% maturing June 2, 2000. 1,000,000
Fixed-rate advance at 6.5%, maturing October 17, 2005. 3,200,000
------------- ------------
8,087,735 2,986,656
Farmer's Home Administration
- ----------------------------
$2,000,000 fixed-rate line agreement with Farmers
Home Administration maturing August 24, 2024:
interest payable at 1% 2,000,000 565,875
------------- ------------
$ 10,087,735 $ 3,552,531
============= ============
</TABLE>
Maturities of other borrowings outstanding at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 $ 2,302,820
1997 1,397,459
1998 402,142
1999 417,148
2000 1,435,587
Thereafter 4,132,579
-------------
$ 10,087,735
=============
</TABLE>
The Federal Home Loan Bank borrowings are collateralized by a blanket
collateral agreement on the Corporation's residential mortgage loans.
Prepayment of the advances is subject to the provisions and conditions of the
credit policy of the Federal Home Loan Bank of Indianapolis in effect as of
December 31, 1995.
(Continued)
F-19
<PAGE> 74
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 11 - INCOME TAXES
The components of federal income taxes for the years ending December 31, 1995,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current tax expense $ 1,409,543 $ 627,300 $ 285,360
Deferred tax expense (benefit) (325,650) (169,300) (25,186)
------------ ------------ ----------
$ 1,083,893 $ 458,000 $ 260,174
============ ============ ==========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets
Allowance for loan loss $ 689,982 $ 488,739
Nonaccrual loan interest 9,957
Deferred compensation 171,533 147,969
Unrealized loss on securities available for sale 9,081 297,108
----------- -----------
880,553 933,816
Deferred tax liabilities
Bank premises and equipment 384,308 390,191
Core deposit intangible 418,302 503,305
----------- -----------
Net deferred tax asset $ 77,943 $ 40,320
=========== ===========
</TABLE>
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits related to
such assets will not be realized. Management has determined that no such
allowance was required at December 31, 1995, 1994 or 1993.
The reasons for the difference between income tax expense and the amount
computed by applying the statutory federal income tax rate to income before tax
are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal income tax computed at the
statutory rate of 34% $ 1,276,431 $ 824,684 $ 519,900
Add (deduct) effect of:
Tax-exempt interest income (372,381) (363,978) (269,780)
Other items, net 179,843 (2,706) 10,054
------------ ----------- -----------
$ 1,083,893 $ 458,000 $ 260,174
============ =========== ===========
</TABLE>
(Continued)
F-20
<PAGE> 75
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 12- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet financing needs of its customers.
These financial instruments include commitments to make loans, unused lines of
credit, and standby letters of credit. The Corporation's exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument is represented by the contractual amount of those instruments. The
Corporation follows the same credit policy to make such commitments as it uses
for on-balance-sheet items.
The Corporation has the following fixed and variable rate commitments
outstanding at December 31 (in thousands):
<TABLE>
<CAPTION>
. . . . 1995 . . . . . . . . 1994 . . . .
---- ----
Fixed Variable Fixed Variable
----- -------- ----- --------
<S> <C> <C> <C> <C>
Outstanding letters of credit $ 1,288 $ 1,741
Unused lines of credit $ 3,474 8,556 $ 2,707 6,204
Loan commitments outstanding 6,882 400 6,957
---------- ---------- ---------- --------
$ 3,474 $ 16,726 $ 3,107 $ 14,902
========== ========== ========== ========
</TABLE>
Fixed rates on unused lines of credit range from 9.5% to 10.5% at December 31,
1995.
Since many commitments to make loans expire without being used, the amount does
not necessarily represent future cash commitments. Collateral obtained upon
exercise of the commitment is determined using management's credit evaluation
of the borrower and may include real estate, vehicles, business assets,
deposits and other items.
NOTE 13 - DEFERRED COMPENSATION PLAN
As an incentive to retain key members of management and directors, the
Corporation has a deferred compensation plan. Benefits are based on the number
of years the key members have served in the Corporation and a vested percentage
of the monthly benefit received upon retirement. A liability is recorded on a
present value basis and discounted using current market rates. This liability
may change depending upon changes in long-term interest rates. Deferred
compensation expense included in salaries and wages was approximately $89,955
and $82,284 for the years ended December 31, 1995 and 1994, respectively. The
liability at December 31, 1995 and 1994, for vested benefits was approximately
$471,075 and $409,284, respectively. It is anticipated that the death benefits
received from the life insurance policies on the plan's participants will
reimburse the Corporation for the obligations under the plan. The cash
surrender value of these policies was $689,918 and $559,508 at December 31,
1995 and 1994, respectively, and is included in other assets in the
accompanying financial statements.
(Continued)
F-21
<PAGE> 76
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 14 - PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation has established a 401(k) profit sharing and deferred
compensation plan. Employees who have completed one year of service and
attained the age of 18 are eligible to participate in the plan. Eligible
employees can elect to have a portion, not to exceed 15%, of their annual
compensation paid into the plan. In addition, the Corporation may make
discretionary contributions into the plan. The total discretionary
contributions to the plan for the years ended December 31, 1995, 1994 and 1993
were $120,722, $68,453 and $59,627, respectively.
Effective January 1, 1993, sponsorship of the then existing profit sharing plan
was transferred to the Corporation and the plan was amended and restated to
include employee stock ownership plan features. Effective December 28, 1993,
the Corporation registered 100,000 shares of currently authorized common stock
for use in the profit sharing and employee stock ownership plan. Effective
December 21, 1994, the Corporation approved the termination of the existing
profit sharing/employee stock ownership plan and the distribution of employer
stock in the plan to plan participants. Other assets in the plan were merged
into the current 401(k) plan. The Corporation's request from the Internal
Revenue Service for a determination letter on the termination of the former
plan is pending.
NOTE 15 - STOCK OPTION PLAN
The Corporation adopted a stock option plan during 1992. Participants of the
plan generally include senior officers and directors who do not participate in
the subsidiary banks' deferred compensation plan discussed in Note 13.
Under the terms of the plan, 49,500 shares of the Corporation's common stock
were reserved for awards. The options issued have a ten year life but cannot
be exercised until a minimum of two years after their issue date.
(Continued)
F-22
<PAGE> 77
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 15 - STOCK OPTION PLAN (Continued)
The following is a summary of stock options, granted and exercised, for the
years presented, restated for any stock splits or stock dividends, including
retroactive restatements.
<TABLE>
<CAPTION>
Exercise
Number Price Range
------ -----------
<S> <C> <C>
Outstanding - January 1, 1993 12,600 $ 11.00
Granted 15,750 12.33
--------
Outstanding - December 31, 1993 28,350 11-12.33
Granted 21,150 12.67
Exercised (6,300) 11.00
--------
Outstanding December 31, 1994 43,200 11-12.67
Exercised (5,850) 11-12.33
-------- --------
Outstanding - December 31, 1995 37,350 $11-12.67
======== ==========
</TABLE>
At December 31, 1995, 16,200 of the above options were exercisable. No
additional shares are available to be granted under the plan. At December 31,
1995, 37,350 shares of common stock were reserved for outstanding options.
NOTE 16 - CONTINGENCIES
From time to time certain claims are made against the Corporation in the normal
course of business. At December 31, 1995, there were no outstanding matters
which in management's opinion could have a material impact on the Corporation's
consolidated financial condition or results of operations.
(Continued)
F-23
<PAGE> 78
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure is made in accordance with the requirements of
Statement of Financial Accounting Standards No. 107, Disclosure About Fair
Value of Financial Instruments (SFAS No. 107). Where quoted market prices are
not available, as is the case for a significant portion of the Corporation's
financial instruments, the fair values are based on estimates using present
value of expected cash flows or other valuation techniques. These techniques
are significantly affected by the assumptions used, including the discount rate
and the timing of estimated cash payments and receipts. Accordingly, certain
of the fair value estimates presented herein cannot be substantiated by
comparison to independent markets and are not necessarily indicative of the
amounts the Corporation could realize in a current market exchange.
In addition, the fair value estimates are limited to existing on and off
balance sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. Other significant assets and liabilities
that are not considered financial assets or liabilities include the
Corporation's premises and equipment, goodwill, and deposit-based intangible
assets. In addition, tax ramifications related to the realization of
unrealized gains and losses such as those within the investment securities
portfolio can also have a significant effect on fair values and have not been
considered in the estimates. Accordingly, the aggregate fair value amounts do
not represent the underlying value of the Corporation.
The carrying amounts and estimated fair values of the Corporation's financial
instruments were as follows:
<TABLE>
<CAPTION>
1 9 9 5
-------
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 14,492,357 $ 14,492,357
Interest-bearing deposits with banks 1,678,080 1,678,080
Securities available for sale 26,220,378 26,220,378
Securities held to maturity 835,049 836,753
Loans receivable, net of allowance for loan losses 218,370,095 218,106,381
Accrued interest receivable 2,194,968 2,194,968
Financial liabilities:
Deposits (244,406,695) (244,723,891)
Securities sold under agreement to repurchase (700,000) (700,000)
Other borrowed funds (10,087,735) (9,471,893)
Accrued interest payable (1,418,547) (1,418,547)
</TABLE>
(Continued)
F-24
<PAGE> 79
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The Bank's loan commitments, standby letters of credit and undisbursed loans
have been estimated to have no material fair value, as such commitments are
generally fulfilled at current market rates.
The carrying amounts of the following financial instruments are a reasonable
approximation of their fair values:
- Cash and cash equivalents
- Accrued interest receivable
- Securities sold under agreement to repurchase
- Accrued interest payable
NOTE 18 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Details of other expense in the consolidated statements of income are as
follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Forms and supplies $ 438,123 $ 283,003 $ 182,637
Amortization of acquisition intangibles 434,397 151,948
Legal and consulting fees 344,971 274,980 89,183
FDIC assessment 261,941 374,263 218,466
Telephone 206,495 133,975 84,673
Postage 200,366 136,933 90,357
Directors' fees 161,184 101,116 82,300
Business promotion 150,426 120,427 91,456
Advertising 140,275 141,858 69,000
Audit and examination fees 125,051 101,855 84,252
State taxes 96,000 95,849 87,121
Other 1,148,700 684,179 491,033
---------- --------- ----------
$3,707,929 $2,600,386 $1,570,478
========== ========== ==========
</TABLE>
(Continued)
F-25
<PAGE> 80
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 19 - FIRST MANISTIQUE CORPORATION (PARENT CORPORATION ONLY)
FINANCIAL INFORMATION
The following summarizes parent corporation financial information as of
December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and
1993:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Assets
Cash $ 269,221 $ 1,379,373
Investment in subsidiaries 24,311,172 20,865,699
Other assets 426,484 238,355
------------ -------------
$ 25,006,877 $ 22,483,427
============ =============
Stockholders' equity $ 25,006,877 $ 22,483,427
============ =============
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income
Dividends from subsidiaries $ 6,272,000 $ 770,000
Expenses
Salaries and wages $ 102,699 36,393 16,840
Professional fees 177,270 59,755 38,935
Interest expense 95,942
Other expenses 62,377 54,118 28,522
------------ ------------ -----------
Income before income tax and equity in
undistributed net income of subsidiaries (342,346) 6,025,792 685,703
Income tax benefit 116,398 (80,000) (28,690)
------------ ------------ -----------
(225,948) 6,105,792 714,393
Equity in undistributed net income of
subsidiaries 2,896,263 (4,138,250) 567,552
------------ ------------ -----------
NET INCOME $ 2,670,315 $ 1,967,542 $ 1,281,945
============ ============ ===========
</TABLE>
(Continued)
F-26
<PAGE> 81
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 19 - FIRST MANISTIQUE CORPORATION (PARENT CORPORATION ONLY)
FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,670,315 $ 1,967,542 $ 1,281,945
Adjustments to reconcile net income to
net cash from operating activities
Undistributed earnings of subsidiaries (2,896,263) 4,138,250 (567,552)
Loss on investment security 25,000
Change in other assets (116,083) (124,775) (81,157)
Depreciation and amortization 7,610 7,220
------------- ------------- -------------
Net cash from operating activities (334,421) 6,013,237 633,236
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries (9,193,538)
Securities purchased (10,000) (25,000)
Purchase of equipment (80,000)
------------- ------------- -------------
Net cash from investing activities (80,000) (9,203,538) (25,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 157,973 4,911,284
Repurchase of common stock (12,265)
Dividends paid (853,704) (542,697) (405,280)
------------- ------------- -------------
Net cash from financing activities (695,731) 4,356,322 (405,280)
------------- ------------- -------------
Increase (decrease) in cash (1,110,152) 1,166,021 202,956
Cash at beginning of year 1,379,373 213,352 10,396
------------- ------------- -------------
CASH AT END OF YEAR $ 269,221 $ 1,379,373 $ 213,352
============= ============= =============
</TABLE>
(Continued)
F-27
<PAGE> 82
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE 20 - CAPITAL STRUCTURE AND RESTRICTIONS ON RETAINED EARNINGS
Effective May 1, 1994, the Corporation's articles of incorporation were amended
to increase authorized shares from 500,000 shares of $2.50 par value common
stock to 2,000,000 shares of no par value common stock. Concurrent with the
increase of authorized common shares, the Corporation also authorized a 3 for 1
stock split for shares outstanding on May 1, 1994 which resulted in the
issuance of an additional 392,444 shares. All share and per share amounts have
been adjusted for the stock split. Subsequent to April 30, 1994, the proceeds
from the issuance of common stock are fully recorded in the common stock
account.
The Corporation has authorized 2,250,000 shares for use in its dividend
reinvestment plan. At December 31, 1995, 2,247,375 shares remain unissued
under this plan.
Federal and state banking laws and regulations place certain restrictions on
the amount of dividends a bank can pay and capital levels that must be
maintained. Under the most restrictive of these regulations, the Bank could
pay approximately $6,300,000 in dividends plus current year earnings without
prior regulatory approval.
NOTE 21 - SUBSEQUENT EVENTS (UNAUDITED)
On April 23, 1996, the Corporation's shareholders approved an amendment to its
Articles of Incorporation to increase its authorized shares from 2,000,000
shares of no par value common stock to 6,000,000 shares of no par value common
stock. Concurrent with the increase of authorized shares, the Corporation also
authorized a 3 for 1 stock split for shareholders of record on April 29, 1996.
These shares are expected to be distributed to shareholders in early June.
In addition, the Articles of Incorporation were also amended to increase the
Corporation's authorized no par series preferred stock from 25,000 to 500,000
shares.
F-28
<PAGE> 83
SOUTH RANGE STATE BANK
South Range, Michigan
FINANCIAL STATEMENTS
December 31, 1995
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . F-30
FINANCIAL STATEMENTS
BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . F-31
STATEMENTS OF INCOME . . . . . . . . . . . . . . . . . . . . . F-32
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY . . . . . . . . . F-33
STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . F-34
NOTES TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . F-35
</TABLE>
F-29
<PAGE> 84
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
South Range State Bank
South Range, Michigan
We have audited the accompanying balance sheet of South Range State Bank as of
December 31, 1995, and the related statements of income, changes in
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of South Range State Bank as of
December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, the Bank changed its
method of accounting for impaired loans in 1995 to conform to new accounting
guidance.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 5, 1996
F-30
<PAGE> 85
SOUTH RANGE STATE BANK
BALANCE SHEET
December 31, 1995
<TABLE>
<S> <C>
ASSETS
Cash and due from banks $ 1,541,959
Federal funds sold 700,000
-------
Total cash and cash equivalents 2,241,959
Interest-bearing deposits with banks 1,187,000
Securities available for sale (Note 4)
Investment securities 3,087,798
Mortgage-backed securities 739,601
-------
3,827,399
Loans (Note 5) 27,020,438
Allowance for loan losses (Note 6) 280,000
-------
26,740,438
Bank premises and equipment - net (Note 7) 862,451
Accrued interest receivable 239,518
Other assets 523,824
-------
$ 35,622,589
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Noninterest-bearing deposits $ 4,008,379
Interest-bearing deposits (Note 8) 28,599,048
----------
32,607,427
Accrued interest payable 92,513
Other liabilities 459,673
-------
Total liabilities 33,159,613
Commitments and contingencies (Note 12)
Shareholders' equity
Common stock, $20 par value: 19,500 shares
authorized and outstanding 390,000
Surplus 1,150,000
Retained earnings (Note 11) 876,236
Net unrealized appreciation on securities
available for sale, net of income tax of $24,079
(Notes 4 and 9) 46,740
------
2,462,976
---------
$ 35,622,589
==============
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 86
SOUTH RANGE STATE BANK
STATEMENT OF INCOME
Year ended December 31, 1995
<TABLE>
<S> <C>
Interest income
Loans, including fees $ 2,504,123
Investment securities available for sale 223,645
Federal funds sold 56,773
Deposits with banks 105,152
-------
2,889,693
Interest expense on deposits 1,155,610
---------
NET INTEREST INCOME 1,734,083
Provision for loan losses (Note 6) 39,945
------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,694,138
Other income
Service charges on deposit accounts 104,980
Safe-deposit box fees 45,747
Other 63,512
------
214,239
Other expense
Salaries and employee benefits (Note 10) 813,639
Occupancy 226,388
Supplies 72,117
Examination, audit and legal fees 68,040
Advertising 52,291
FDIC insurance 35,991
Postage 32,266
Other 262,834
-------
1,563,566
---------
INCOME BEFORE INCOME TAX EXPENSE 344,811
Income tax expense (Note 9) 83,592
------
NET INCOME $ 261,219
============
Earnings per share (Note 2) $ 13.40
========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 87
SOUTH RANGE STATE BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Year ended December 31, 1995
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
(Depreciation)
on Securities Total
Common Retained Available Shareholders'
Stock Surplus Earnings for Sale Equity
----------- ------- -------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1995 $390,000 $1,150,000 $693,017 $ (100,442) $ 2,132,575
Net Income for 1995 261,219 261,219
Cash dividends - $4.00
per share (78,000) (78,000)
Net change in unrealized
appreciation(depreciation)
on securities available
for sale, net of tax 147,812 147,812
-------- ---------- -------- -------------- ------------
BALANCE, DECEMBER 31,
1995 $390,000 $1,150,000 $876,236 $ 46,740 $ 2,462,976
======== ========== ======== ============== ============
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 88
SOUTH RANGE STATE BANK
STATEMENT OF CASH FLOWS
Year ended December 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $261,219
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 133,412
Provision for loan losses 39,945
Increase in interest receivable and other assets (55,232)
Increase in interest payable and other accrued expenses 7,845
-----
Net cash from operating activities 387,189
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on mortgage-backed securities 157,417
Net decrease in interest-bearing deposits with bank 496,000
Purchases of investment securities available for sale (115,233)
Proceeds from maturities of investment securities available for sale 50,000
Net increase in customer loans (2,098,553)
Premises and equipment expenditures, net (119,052)
--------
Net cash from investing activities (1,629,421)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 752,134
Dividends paid (78,000)
-------
Net cash from financing activities 674,134
-------
Net change in cash and cash equivalents (568,098)
Cash and cash equivalents at beginning of year 2,810,057
---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,241,959
============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 1,131,860
Income taxes 135,966
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 89
SOUTH RANGE STATE BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE 1 - NATURE OF OPERATIONS
South Range State Bank ("Bank") is a Michigan banking corporation engaged in
the general commercial banking business. The Bank generates deposits and makes
loans primarily in Houghton County, in Michigan's upper peninsula, an area
partially dependent on the forestry, tourism and recreational industries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements: The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amount of revenues and expenses during the reporting period. Areas where
estimates are used in the accompanying financial statements include the
allowance for loan losses, fair values of financial instruments, the accrued
liability associated with the deferred compensation plan, the carrying value of
impaired loans, deferred tax assets, the estimated life of loans and securities
and the carrying value of other real estate. Estimates associated with the
allowance for loan losses, fair values of financial instruments and the
deferred compensation plan are particularly susceptible to material changes in
the near term. Future results could differ from current estimates.
Statement of Cash Flows: Cash and cash equivalents are defined to include the
Bank's cash on hand, noninterest-bearing deposits in other institutions, and
federal funds sold. The Bank reports customer loan transactions and deposit
transactions on a net cash flow basis.
Securities: Investment securities available for sale consist of those
securities not classified as trading or held to maturity. Such securities
might be sold prior to maturity due to changes in interest rates, prepayment
risks, yield and availability of alternative investments, liquidity needs, or
other factors. Securities classified as available for sale are reported at
their fair value and the related net unrealized holding gain or loss is
reported, net of related income tax effects, as a separate component of
shareholders' equity, until realized. Securities for which the Bank has the
positive intent and ability to hold to maturity are reported at amortized cost.
Premiums and discounts on securities are recognized in interest income using
the interest method over the period to maturity. Gains and losses on the sale
of securities available for sale are determined using the specific
identification method.
(CONTINUED)
F-35
<PAGE> 90
SOUTH RANGE STATE BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for possible loan losses charged to expense. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective. The
estimates may change depending on changes in economic conditions, the interest
rate environment or specific situations of individual borrowers. Accordingly,
the allowance is maintained by management at a level considered adequate to
cover possible losses that are currently anticipated based on past loss
experience, general economic conditions and collateral values, and other
factors and estimates which are subject to change over time. While management
may periodically allocate portions of the allowance for specific problem loan
situations, the whole allowance is available for any loan charge-offs that
occur. A problem loan is charged- off by management as a loss when deemed
uncollectible, although collection efforts may continue and future recoveries
may occur.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan - (SFAS No. 114). SFAS No. 114, effective for the Bank at January 1,
1995, requires that impaired loans, as defined, by measured based on the
present value of expected cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or at the fair value of collateral if the loan is collateral dependent.
SFAS No. 114 as amended by SFAS No. 118 was adopted at January 1, 1995. Under
these statements, loans considered to be impaired are reduced to the present
value of expected future cash flows or to the fair value of collateral, by
allocating a portion of the allowance for loan losses to such loans. If these
allocations cause the allowance for loan losses to increase, such increase is
reported as bad debt expense. The effect of adopting SFAS Nos. 114 and 118 is
reported as bad debt expense, and is not material for 1995.
Smaller-balance homogeneous loans are residential first mortgage loans secured
by one-to-four family residences, residential construction loans, automobile,
home equity and second mortgage loans and are collectively evaluated for
impairment. Commercial loans and first mortgage loans secured by other
properties are evaluated individually for impairment. When credit analysis of
borrower operating results and financial condition indicates the underlying
ability of the borrower's business activity is not sufficient to generate
adequate cash flow to service the business' cash needs, including the Bank's
loans to the borrower, the loan is evaluated for impairment. Often this is
associated with a delay or shortfall in payments of 90 days or less. Commercial
credits are rated on a scale of 1 to 5, with grades 1 and 2 being pass grades,
3 substandard, 4 doubtful and 5 loss. Loans graded 4 and 5 are considered
impaired. Loans are generally moved to nonaccrual status when 90 days or more
past due. These loans are often not impaired. Once a loan is evaluated as
impaired, a loss is considered to have been identified, and a chargeoff is
taken.
(Continued)
F-36
<PAGE> 91
SOUTH RANGE STATE BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest Income: Interest on loans is accrued over the term of the loans based
upon the principal outstanding. Management reviews loans delinquent 90 days or
more to determine if interest accrual should be discontinued based on the
estimated fair market value of the collateral. Under SFAS No. 114 as amended
by SFAS No. 118, the carrying values of impaired loans are periodically
adjusted to reflect cash payments, revised estimates of future cash flows, and
increases in the present value of expected cash flows due to the passage of
time. Cash payments representing interest income are reported as such. Other
cash payments are reported as reductions in carrying value, while increases or
decreases due to changes in estimates of future payments and due to the passage
of time are reported as bad debt expense, if reductions, or as reductions in
bad debt expense.
Accounting Statements Issued, not yet Adopted: The Financial Accounting
Standards Board has recently issued the following Statements which have not
been adopted by the Bank at December 31, 1995.
SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of, requires the Bank to periodically consider
whether an impairment loss should be recognized on long-lived assets and other
certain identifiable intangible assets based on an estimate of future cash
flows.
SFAS No. 122, Accounting for Mortgage Servicing Rights, requires the Bank to
recognize mortgage servicing rights on loans it purchases or originates with
the intent to sell as an asset. It also requires that these capitalized
mortgage servicing rights be evaluated for impairment based on the fair value
of those rights.
SFAS No. 123, Accounting for Stock-based Compensation, encourages but does not
require, the Bank to use a "fair value based method" to account for stock-based
compensation plans. If the fair value accounting encouraged by SFAS No. 123 is
not adopted, entities must disclose the proforma effect on net income and
earnings per share had the accounting been adopted.
The Statements discussed above are required to be implemented for years
beginning after December 15, 1995. Management believes the impact of their
adoption will not be material to the Bank's operations.
Bank Premises and Equipment: Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur, and major improvements are capitalized.
Federal Income Taxes: The Bank records income tax expense based on the amount
of taxes due on its income tax return plus deferred taxes computed based on
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or refundable
for the period plus or minus the change during the period in deferred tax
assets and liabilities.
Earnings Per Share: Earnings per share are computed using the weighted average
number of shares outstanding. The number of shares used in the computation of
earnings per share was 19,500 for 1995.
(Continued)
F-37
<PAGE> 92
SOUTH RANGE STATE BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE 3 - AFFILIATION AGREEMENT
On August 30, 1995, the Bank and First Manistique Corporation ("FMC"), entered
into an Affiliation Agreement and Plan of Reorganization ("Agreement"). Upon
the receipt of two-thirds affirmative approval by the shareholders of the Bank,
FMC will acquire the outstanding shares of the Bank by exchanging cash, single
installment notes, or a combination thereof. The Agreement specifies that the
exchange will be for a multiple of book value per share at December 31, 1995
which equates to $221.04 per share.
NOTE 4 - SECURITIES AVAILABLE FOR SALE
The amortized cost and fair values of securities available for sale at December
31 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,006,426 $ 7,155 $ (6,909) $2,006,672
State and municipal securities 1,022,515 58,611 1,081,126
--------- ------ ---------
3,028,941 65,766 (6,909) 3,087,798
Mortgage-backed securities 727,639 11,962 739,601
------- ------ -------
$ 3,756,580 $ 77,728 $ (6,909) $3,827,399
============ ======== ========= ==========
</TABLE>
The amortized cost and fair values of investment securities available for sale
at December 31, 1995, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
---- ----------
<S> <C> <C>
Due in one year or less $ 885,000 $ 879,985
Due after one year through five years 1,339,753 1,358,888
Due after five years through ten years 804,188 848,925
------- -------
3,028,941 3,087,798
Mortgage-backed securities 727,639 739,601
------- -------
$ 3,756,580 $ 3,827,399
============ ===========
</TABLE>
There were no investment securities pledged at December 31, 1995.
There were no sales of investment securities available for sale during 1995.
(Continued)
F-38
<PAGE> 93
SOUTH RANGE STATE BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE 5 - LOANS
Loans presented in the balance sheet are comprised of the following
classifications:
<TABLE>
<S> <C>
Commercial $ 6,899,820
Agricultural 1,294,877
Real estate 14,007,619
Installment 4,818,122
---------
$ 27,020,438
=============
</TABLE>
Included in the loan portfolio are loans made to certain executive officers,
directors, principal shareholders and companies in which they have an interest.
The following is a summary of loans exceeding $60,000 in the aggregate to these
individuals and their associates.
<TABLE>
<S> <C>
Balance - January 1 $ 869,374
New loans 697,317
Repayments (662,082)
---------
Balance - December 31 $ 904,609
============
</TABLE>
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses for the year ended
December 31 is as follows:
<TABLE>
<S> <C>
Balance at beginning of year $ 260,000
Additions (deductions)
Provision charged to expense 39,945
Recoveries credited to allowance 23,125
Loans charged-off (43,070)
--------
Balance at end of year $ 280,000
============
</TABLE>
Loans on nonaccrual status, past due more than 90 days or restructured, totaled
$34,554 at December 31, 1995. The difference between the interest that would
have accrued based on the original terms of nonaccrual loans and the interest
that was actually recorded approximated $2,386 for 1995.
<TABLE>
<S> <C>
Information regarding impaired loans is as follows for 1995:
Average investment in impaired loans $ 34,553
Interest income recognized on impaired loans on cash basis 0
Information regarding impaired loans at year end is as follows:
Total impaired loans 34,553
Less loans for which no allowance for loan losses is allocated 34,553
------
Impaired loans for which an allowance for loan losses is allocated $ 0
=========
</TABLE>
(Continued)
F-39
<PAGE> 94
SOUTH RANGE STATE BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE 7 - BANK PREMISES AND EQUIPMENT - NET
The following is a summary of premises and equipment by major category at
December 31:
<TABLE>
<S> <C>
Land $ 64,500
Bank building and improvements 533,481
Furniture and equipment 898,080
-------
1,496,061
Accumulated depreciation and amortization 633,610
-------
$ 862,451
============
</TABLE>
NOTE 8 - INTEREST-BEARING DEPOSITS
Interest-bearing deposits are comprised of the following at December 31:
<TABLE>
<S> <C>
Interest-bearing demand $ 5,133,100
Savings 10,385,512
Time 13,080,436
----------
$ 28,599,048
===============
</TABLE>
The Bank had approximately $1,532,339 in certificates of deposit issued in
denominations of $100,000 or more as of December 31, 1995. Interest expense on
these deposits was $91,393 in 1995.
NOTE 9 - INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<S> <C>
Current expense $ 92,108
Deferred expense (8,516)
-------
$ 83,592
============
</TABLE>
The net deferred tax asset at December 31 is comprised of the following:
<TABLE>
<S> <C>
Deferred tax assets
Deferred compensation $ 85,508
Allowance for loan losses 52,351
------
137,859
Deferred tax liabilities
Fixed assets 75,950
Unrealized appreciation on securities available for sale 24,079
------
100,029
-------
Net deferred tax asset $ 37,830
===========
</TABLE>
A valuation allowance related to deferred tax assets is required when it is
considered more likely than not that all or part of the benefits related to
such assets will not be realized. Management has determined that no such
allowance is required.
(Continued)
F-40
<PAGE> 95
SOUTH RANGE STATE BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE 9 - INCOME TAXES (Continued)
The difference between the financial statement tax expense and amounts computed
by applying the statutory federal tax rate of 34% to pretax income is
reconciled as follows:
<TABLE>
<S> <C>
Statutory rate applied to income before taxes $ 117,236
Add (deduct)
Effect of tax-exempt interest (28,980)
Effect of life insurance policy
cash surrender value increases (5,181)
Other 517
-----------
Income tax expense $ 83,592
===========
</TABLE>
NOTE 10 - BENEFIT PLANS
The Bank sponsors a defined contribution plan which meets the requirements of
Section 401(k) of the Internal Revenue Code. The plan covers substantially all
full-time employees. Contributions by the Bank under the plan are made at the
discretion of the Board of Directors. In 1995, the Bank matched $.50 on the
dollar of an employee contribution up to 2 1/2% of their respective annual
salary. Employee benefits expense for 1995 includes $20,539 of contributions
to the plan.
As an incentive to retain key members of management and directors, the Bank has
a deferred compensation plan. Benefits are based on salary and length of
service and vest as service is provided from the date of participation through
age 65. A liability is recorded on a present value basis and discounted at
current interest rates. This liability may change depending upon changes in
long-term interest rates. Deferred compensation expense included in salaries
and wages was approximately $51,000 for the year ended December 31, 1995. The
liability at December 31, 1995 for vested benefits was approximately $251,000.
The Bank has funded this liability by obtaining life insurance contracts on the
plan's participants. The cash surrender value of these policies was $316,000
which is included in other assets in the accompanying financial statements.
NOTE 11 - RESTRICTIONS ON RETAINED EARNINGS
Federal and state banking laws and regulations place certain restrictions on
the amount of dividends a bank can pay and capital levels that must be
maintained. Under the most restrictive of these regulations, the Bank could
pay approximately $800,000 in dividends without prior regulatory approval. In
addition, the Agreement (Note 3) sets forth certain restrictions and
requirements in connection with the acquisition of the Bank by FMC. As a
result, the Bank will not pay any dividends between December 31, 1995 and the
closing date.
(Continued)
F-41
<PAGE> 96
SOUTH RANGE STATE BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE 12 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to make loans, unused lines of credit
and standby letters of credit. The Bank's exposure to credit loss in the event
of nonperformance by the other party to the financial instrument is represented
by the contractual amount of those instruments. The Bank follows the same
credit policy to make such commitments as is followed for those loans and
investments recorded in the financial statements. As many commitments to make
loans expire without being used, the amount does not necessarily represent
future cash commitments.
The Bank had the following off-balance sheet commitments at December 31:
<TABLE>
<S> <C>
Commitments to make loans $ 1,336,620
Unused lines of credit 959,031
Standby letters of credit 148,565
</TABLE>
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements.
Approximately $530,000 of the loan commitments are at fixed rates ranging from
5.0% (qualified tax exempt) to 11.75% with maturities ranging from 9 months to
10 years.
[THIS SPACE INTENTIONALLY LEFT BLANK]
(Continued)
F-42
<PAGE> 97
SOUTH RANGE STATE BANK
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
Carrying amount is a reasonable estimate of fair value for cash and cash
equivalents, interest-bearing deposits in financial institutions, FHLB and
Federal Reserve stock, accrued interest receivable and payable, the allowance
for loan losses, demand deposits, savings accounts and money market deposits.
Fair value of other financial instruments is estimated as follows:
The fair values for securities are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar instruments.
The fair value of fixed and variable rate loans is principally estimated by
discounting future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
The fair value of fixed-maturity certificates of deposit is estimated by
discounting future cash flows using the rates currently offered for deposits of
similar remaining maturities.
The fair value of commitments is estimated using the fees currently charged to
enter similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date. The fair values of commitments
to extend credit and standby letters of credit were immaterial at the reporting
date presented.
The carrying values and fair values of the Bank's financial instruments are as
follows at December 31, 1995:
<TABLE>
<CAPTION>
Carrying Values Fair Values
--------------- -----------
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 2,241,959 $ 2,241,959
Interest-bearing deposits in financial institutions 1,187,000 1,187,000
Securities available for sale 3,827,399 3,827,399
Loans, net 26,740,438 26,583,010
Accrued interest receivable 239,518 239,518
Financial liabilities
Deposits (32,607,427) (32,674,754)
Accrued interest payable (92,513) (92,513)
</TABLE>
F-43
<PAGE> 98
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1996 Commission file number: 2-54663
FIRST MANISTIQUE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
130 S. CEDAR STREET, MANISTIQUE, MI 49854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (906) 341-8401
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter periods 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
------- -------
As of April 23, 1996, there were outstanding 2,120,778 shares of the
registrant's common stock, no par value.
The registrant hereby amends the following items, financial statements,
exhibits or other portions of its Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996. (List all such items, financial
statements or other portions amended.)
Part I - Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule
F-44
<PAGE> 99
PART I - FINANCIAL INFORMATION (unaudited)
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Condensed Balance Sheets
(In thousands of dollars)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $8,837 $10,492
Federal funds sold 12,000 4,000
--------- ---------
Total cash and cash equivalents 20,837 14,492
Interest-bearing deposits with banks 1,698 1,678
Securities available for sale 27,317 26,220
Securities held to maturity (fair value of $711
at 3/31/96 and $837 at 12/31/95) 710 835
Loans 255,134 221,507
Allowance for loan losses (3,475) (3,137)
---------- ----------
Net Loans 251,659 218,370
Bank premises and equipment 13,168 11,787
Other assets 12,510 9,409
--------- ---------
TOTAL ASSETS $327,899 $282,791
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $26,083 $27,674
Interest-bearing 256,986 216,733
---------- ----------
283,069 244,407
Securities sold under agreement to repurchase 700 700
Other borrowings 15,351 10,088
Other liabilities 3,349 2,589
-------- --------
TOTAL LIABILITIES 302,469 257,784
Shareholders' equity
Preferred stock, no par value, 500,000 shares
authorized, no shares outstanding
Common stock, no par value, 6,000,000 shares
authorized; outstanding: 2,120,778 at 3/31/96 and
2,106,897 at 12/31/95 13,443 13,195
Retained earnings 12,507 11,832
Net unrealized loss on securities available for sale,
net of tax of $266 at 3/31/96 and $9 at 12/31/95 (520) (20)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 25,430 25,007
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $327,899 $282,791
========== ==========
</TABLE>
F-45
<PAGE> 100
Consolidated Condensed Statements of Income (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---------------- ---------------
<S> <C> <C>
Interest income
Loans, including fees $5,840 $4,430
Securities
Taxable 399 429
Exempt from federal taxation 24 52
Other 159 156
---------- ----------
Total interest income 6,422 5,067
Interest expense
Deposits 2,701 2,142
Borrowed Funds 142 63
--------- -----------
Total interest expense 2,843 2,205
-------- ---------
Net interest income 3,579 2,862
Provision for loan losses 107 69
---------- -----------
Net interest income after provision for loan losses 3,472 2,793
Noninterest income
Service charges on deposit accounts 163 140
Gains on sale of loans 18 6
Securities gains 27 3
Other 120 217
---------- ----------
Total noninterest income 328 366
Noninterest expense
Salaries and employee benefits 1,107 921
Furniture and equipment expense 198 198
Occupancy expense 236 151
Other 935 845
---------- ----------
Total noninterest expense 2,476 2,115
---------- ----------
Income before income tax 1,324 1,044
Provision for income tax 395 267
---------- ----------
Net income $929 $777
========== ==========
Weighted average common shares outstanding 2,109,363 2,097,072
========= =========
Earnings per common share $ .44 $0.37
========== ==========
</TABLE>
F-46
<PAGE> 101
Consolidated Condensed Statement of Changes in Shareholders' Equity (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, 1996 March 31, 1995
Shares Equity Total Shares Equity Total
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Balance-beginning of period 2,106,897 $25,007 2,097,072 $22,484
Net Income YTD 929 777
Cash dividends (254) (350)
Issuance of common stock 13,881 248
Net change in unrealized gain (loss)
on securities available for sale (500) 282
------------------------------- ------------------------------
2,120,778 $25,430 2,097,072 $23,193
=============================== ==============================
</TABLE>
F-47
<PAGE> 102
Consolidated Statements of Cash Flows (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
March 31, March 31,
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995
-------------- -------------
<S> <C> <C>
Net income $929 $777
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 107 69
Deferred taxes (1) 68
Depreciation 201 190
Amortization 182 30
Proceeds from sale of mortgage loans 1,505 384
Origination of mortgage loans for sale (1,487) (378)
(Gains) losses on sale
Loans held for sale (18) (6)
Securities (27) (3)
Premises and equipment 21 (3)
Changes in assets and liabilities
Interest receivable and other assets (833) (253)
Interest payable and other liabilities 64 561
------------------ ---------------
Net cash from operating
activities 643 1,436
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits
with banks 1,068 419
Purchase of securities available for sale (6,149) (974)
Purchase of securities held to maturity (1,511)
Proceeds from sales of securities
available for sale 3,043 599
Proceeds from maturities, calls, or
paydowns of securities available for sale 5,033 1,928
Proceeds from maturity and calls of securities
held to maturity 125 413
Net increase in loans (6,635) (8,206)
Proceeds from sale of premises and equipment 42 40
Purchase of premises and equipment (236) (668)
Net cash provided in acquisition of
South Range State Bank 724
---------------- -------------------
Net cash provided from investing activities (2,985) (7,960)
</TABLE>
F-48
<PAGE> 103
Consolidated Statements of Cash Flows - continued (unaudited)
(In thousands of dollars)
<TABLE>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,793 1,485
Proceeds from notes payable 2,900 1,221
Proceeds from issuance of common stock 248
Payment of dividends (254) (350)
---------------- --------------
Net cash from investing activities 8,687 2,356
---------------- --------------
Net increase (decrease) in cash and cash
equivalents 6,345 (4,168)
Cash and cash equivalents at beginning of period 14,492 14,319
--------------- --------------
Cash and cash equivalents at end of period $20,837 $10,151
=============== ==============
Supplemental disclosures of cash flow
information
Cash paid during the period for
Interest $2,913 $2,205
Income taxes 408 541
Supplemental disclosures of noncash activities
Issuance of notes payable to South Range
State Bank's former shareholders' 2,363
Assets and liabilities acquired in acquisition
(refer to Note 3)
Interest-bearing deposits 1,088
Premises and equipment 1,409
Acquisition intangibles 1,630
Other assets and accrued interest receivable 774
Loans, net 26,761
Securities available for sale 3,800
Deposits 32,869
Other liabilities and accrued interest payable 954
</TABLE>
F-49
<PAGE> 104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of First Manistique
Corporation (the "Registrant") have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ending March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights (SFAS
No. 122), adopted by the Registrant on January 1, 1996. This Statement changes
the accounting for mortgage servicing rights retained by the loan originator.
Under the Statement, if the originator sells or securitizes mortgage loans and
retains the related servicing rights, the total costs of the mortgage loan are
allocated between the loan (without the servicing rights) and the servicing
rights, based on their relative fair values. The costs allocated to mortgage
servicing rights will be recorded as a separate asset and amortized in
proportion to, and over the life of, the net servicing income. The carrying
value of the mortgage servicing rights will be periodically evaluated for
impairment. Impairment will be recognized using the fair value of individual
stratum of servicing rights based on the underlying risk characteristics of the
serviced loan portfolio, compared to an aggregate portfolio approach under
existing accounting guidance. The impact on the Registrant's financial
position and results of operation for the first quarter of 1996 was
insignificant. Based on the Registrant's historical level of mortgage
originations for sale in the secondary market, management believes that the
impact for the year will also be immaterial.
A resolution for a 3-for-1 stock split, for shareholder's of record on April
29, 1996, was approved by the Board of Directors on April 23, 1996. All share
and per share amounts in this filing have been adjusted to reflect the 3-for-1
stock split.
NOTE 3 - ACQUISITION OF SOUTH RANGE STATE BANK
The Registrant acquired 100% of the outstanding stock of South Range State Bank
(with assets of $36,503,000, liabilities of $33,823,000, total deposits of
$32,869,000, and net loans of $26,761,000) on January 31, 1996. The total
purchase price was $4,310,000 with $1,947,000 paid in cash and the remaining
$2,363,000 financed through the issuance of notes payable.
F-50
<PAGE> 105
NOTE 4 - SECURITIES
The amortized cost and fair value of securities at March 31, 1996 are shown
below: (In thousands of dollars)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
- ---------------------------------
U.S. Treasury and federal agency $23,158 $4 $754 $22,408
State and political subdivisions 1,507 1 17 1,491
Other 3,438 1 21 3,418
------------------------------------------------------------------
Total $28,103 $6 $792 $27,317
==================================================================
Securities Held To Maturity
- -------------------------------
State and political subdivisions $710 $1 $711
===================================================================
</TABLE>
The amortized cost and fair value of securities by contractual maturity at
March 31, 1996, are shown below, in thousands of dollars
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------ ------------------
<S> <C> <C> <C> <C>
Due in one year or less $10,399 $10,082 $710 $711
Due after one year through five years 4,743 4,730
Due after five years through ten years 9,790 9,543
Due after ten years 3,171 2,962
------------------- --------------------
$28,103 $27,317 $710 $711
=================== ====================
</TABLE>
F-51
<PAGE> 106
NOTE 5 - LOANS
Loans presented in the consolidated condensed balance sheet are comprised of
the following classifications at March 31, 1996 and December 31, 1995: (In
thousands of dollars)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------------- ------------------
<S> <C> <C>
Loans:
Commercial, financial and agricultural $142,813 $130,921
1-4 family residential real estate 72,795 58,433
Consumer 36,389 29,954
Construction 3,162 2,235
------------- --------------
Total 255,159 221,543
Less: unearned income (25) (36)
------------- --------------
$255,134 $221,507
============= ==============
</TABLE>
Included in the loan portfolio are loans made to certain executive officers,
directors, principal shareholders and companies in which they have an interest.
The following is a summary of such loans, in thousands of dollars:
<TABLE>
<S> <C>
Balance - January 1, 1996 $6,603
New Loans 457
Repayments (570)
Officer loans acquired with
purchase of South Range 916
-----------
Balance - March 31, 1996 $7,406
===========
</TABLE>
F-52
<PAGE> 107
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the three months ended March 31,
1996 and 1995, and the twelve months ended December 31, 1995, are summarized as
follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
March 31, December 31, March 31,
1996 1995 1995
--------------------- --------------------- --------------------
<S> <C> <C> <C>
Balance at beginning of period $3,137 $2,350 $2,350
Charge offs (74) (440) (105)
Recoveries 20 456 41
Adjustment from loans put back to Newberry
State Bank (6)
Allowance transferred from purchase of
South Range State Bank 285
Provision for loan loss 107 771 69
------------------- -------------------- ------------------
Balance at end of period $3,475 $3,137 $2,349
=================== ==================== ==================
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
March 31 December 31,
1996 1995
--------------- ------------------
<S> <C> <C>
Average investment in impaired loans $687,055 $659,412
Interest income recognized on impaired loans
including interest income recognized on
cash basis 3,695 40,856
Interest income recognized on impaired loans on
cash basis 40,856
Balance of impaired loans 3,659,447 570,847
Less portion for which no allowance for loan
loss is allocated 3,160,735 22,548
------------ ------------
Portion of impaired loan balance for which
an allowance for credit losses is
allocated $498,712 $548,299
============ ============
Portion of allowance for loan losses
allocated to the impaired loan balance $200,000 $200,000
============ ============
</TABLE>
F-53
<PAGE> 108
On April 1, 1996, the Registrant became aware that The Bennett Funding Group,
Inc. ("BFG") and certain of its affiliates had filed for Chapter 11 bankruptcy
protection in the Northern District of New York and had ceased payments to
hundreds of investors throughout the country, including approximately 250 banks
and thrifts. BFG and/or its affiliates were indebted to the Registrant in the
amount of $2,792,651 at December 31, 1995 and in the amount of $3,028,188 at
March 31, 1996, which indebtedness is collateralized by commercial equipment
leases assigned by BFG and/or its affiliates to the Registrant. BFG and its
affiliates serviced the assigned leases and, prior to the Chapter 11 filings,
collected the lease proceeds and remitted them to Registrant. Registrant
physically holds a lease document in connection with each lease. The BFG and
related Chapter 11 proceedings were apparently in response to threatened SEC
litigation alleging that at least some part of the BFG operations constituted a
"Ponzi" scheme. In response to a motion by the SEC, the Bankruptcy Court
appointed an independent trustee to operate BFG and its affiliates. Pursuant
to orders of the Bankruptcy Court, the trustee has been collecting the lease
payments and holding them in an escrow account. However, the trustee has not
been distributing the same pending completion of his investigation and further
orders of the Court. Registrant has joined with other financial institutions
to petition the Court to order the trustee to resume distribution to assignees
of leases. The Court has not finally ruled upon that request. Shortly after
the Chapter 11 filings, Registrant investigated the validity of many of the
assigned leases both through a New York state UCC search and through contacts
with equipment lessees. Based on those investigations, it appears to
Registrant that it holds valid equipment leases and that no other party claims
to be an assignee of those leases. However, other financial institutions have
discovered that leases assigned to them have been terminated or that some or
all of the equipment subject to a lease was returned. Registrant has
classified these leases as impaired. Based upon its investigation to date and
payment histories, Registrant is still accruing interest on leases with total
outstanding balances of $2,528,189. Due to the recent acquisition of certain
leases with a total balance of $499,999 and corresponding lack of payment
history, these leases were placed on nonaccrual on April 1, 1996. Should
payments not be received by Registrant for more than ninety (90) days, the
accrual of interest on these leases still accruing interest will be
discontinued.
NOTE 7 - DEPOSITS
The following is an analysis of interest-bearing deposits as of March 31, 1996
and December 31, 1995.
(In thousands of dollars)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
Savings and interest-bearing checking $145,172 $118,957
Time: In denominations under $100,000 95,265 82,752
In denomination of $100,000 or more 16,549 15,024
--------------- ---------------
$256,986 $216,733
=============== ===============
</TABLE>
F-54
<PAGE> 109
NOTE 8 - OTHER BORROWINGS
Other borrowings consists of the following at March 31, 1996 and December 31,
1995: (In thousands of dollars)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- ----------------
<S> <C> <C>
Federal Home Loan bank advances (7), at
various rates with various maturities (see
annual financial statements). $8,088 $8,088
Farmer's Home Administration, $2,000,000
fixed rate line agreement maturing August 24, 2024:
interest payable at 1% 2,000 2,000
Associated Bank Green Bay, $4,000,000 variable
rate line agreement maturing February 1, 1999:
interest payable at Associated's prime rate - 8.25%
at March 31, 1996. 2,900
Notes Payable to South Range State Bank's former
stockholders, $2,362,852 maturing in three equal
annual installments beginning February 1, 1997:
interest payable at 5.20%. 2,363
-------------- -------------
$15,351 $10,088
============== =============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and results of
operations provides additional information to assess the consolidated condensed
financial statements of the Registrant and its wholly-owned subsidiaries for
the first quarter of 1996. The discussion should be read in conjunction with
those statements, and with management's discussion and analysis accompanying
the 1995 annual financial statements, included herewith.
The Registrant is not aware of any market or institutional trends, events, or
circumstances that will have or are reasonably likely to have a material effect
on liquidity, capital resources, or results of operations except as discussed
herein. Also, the Registrant is not aware of any current recommendations by
regulatory authorities which will have such effect if implemented.
HIGHLIGHTS
The Registrant acquired 100% of the outstanding stock of South Range State Bank
(with assets of $36,503,000, liabilities of $33,823,000, total deposits of
$32,869,000, and net loans of $26,761,000)
F-55
<PAGE> 110
on January 31, 1996. The total purchase price was $4,310,000 with $1,947,000
paid in cash and the remaining $2,363,000 financed through the issuance of
notes payable.
Year to date consolidated net income was $929,000 for the period ending March
31, 1996 compared to $777,000 for the same period in 1995. Improved interest
income, combined with acquisitions and careful control of operating expenses
have contributed to this improvement. Net income for the year is 20% above the
same period last year. Return on consolidated average assets for the quarter
was 1.13% compared to 1.22% for the first quarter period in 1995. Earnings per
share increased from $0.37 for the period ending March 31, 1995, to $0.44 for
the same period in 1996. The increase is due to increased earnings and no
significant change in outstanding shares.
FINANCIAL CONDITION
LOANS
During the first quarter of 1996, loan balances increased by $33.6 million. The
acquisition of South Range State Bank accounted for $26.8 million of this
increase and the remainder was due to loan growth. The loan to deposit ratio
has decreased from 90.6% at December 31, 1995, to 90.1% at March 31, 1996.
Management believes loans provide the most attractive earning asset yield
available to the Registrant and that trained personnel and controls are in
place to successfully manage a growing portfolio. Accordingly, management
intends to continue to maintain loans at the highest level which is consistent
with maintaining adequate liquidity.
Management is aware of the risk associated with an increase in average balances
of loans but feels that the current level in the allowance for loan losses is
adequate. At March 31, 1996 the allowance for loan losses was equal to 1.36%
of total loans outstanding compared to 1.42% at December 31, 1995.
The majority of the increase in nonaccrual loans from December 31, 1995 to
March 31, 1996 consisted of credit extended to one used car dealer. The loan
loss reserve allocated to this loan is adequate to meet the estimated exposure
to loss.
Commercial real estate loans have increased by $2.5 million during the first
quarter of 1996 to $54,150,000 at March 31, 1996, mainly due to the acquisition
of South Range State Bank. During the first quarter of 1996, loans to general
commercial businesses increased $2.4 million to $57,803,000 due mainly to the
acquisition of South Range State Bank. Commercial leases increased $1.6
million to $7,395,000 at March 31, 1996 and governmental leases increased $5.4
million to $23,465,000. No leases were obtained with the purchase of South
Range State Bank. The increases are due to the Registrant's efforts to build
this area of the loan portfolio. Growth in the classification of 1-4 family
residential loans in the amount of $14.5 million has occurred mainly due to the
acquisition of South Range State Bank. Consumer loans have increased $6.4
million during the first quarter of 1996 due mainly to the acquisition of South
Range State Bank. Construction loans have increased $.9 million due mainly to
the purchase of South Range State Bank. The table below shows total portfolio
loans outstanding, in thousands of dollars, at March 31, 1996, and December 31,
1995, and their percentage of the total loan portfolio.
F-56
<PAGE> 111
<TABLE>
<CAPTION>
March 31, December 31,
1996 % of total 1995 % of total
------------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Loans:
Commercial real estate $54,150 21.23% $51,609 23.30%
Commercial, financial and agricultural 57,803 22.66% 55,445 25.03%
Leases
Commercial 7,395 2.90% 5,806 2.62%
Governmental 23,465 9.20% 18,061 8.15%
1-4 family residential real estate 72,795 28.53% 58,433 26.38%
Consumer 36,364 14.25% 29,918 13.51%
Construction 3,162 1.24% 2,235 1.01%
--------- ----------
Total $255,134 $221,507
========= ==========
</TABLE>
CREDIT QUALITY
Management analyzes the allowance for loan losses in detail on a monthly basis
to ensure that the losses inherent in the portfolio are properly recognized.
The Registrant's success in maintaining excellent credit quality is
demonstrated in the table presented in Note 6 to the first quarter financial
statements above. Chargeoffs for the period ending March 31, 1996 have
decreased $31,000 from the same period in 1995. The majority is a result of a
$23,000 decrease in commercial loan chargeoffs. The provision for loan loss
has increased from the period ending March 31, 1995 to the same period in 1996
as a result of the Registrant's increased loan portfolio. See Note 6 to the
first quarter financial statements for a discussion of certain lease
receivables.
The table presented below shows the balances of nonaccrual loans, loans 90 or
more days past due, and renegotiated loans as of March 31, 1996 and 1995, and
December 31, 1995. The majority of the increase in nonaccrual loans from
December 31, 1995 to March 31, 1996 consisted of credit extended to one used
car dealer. The loan loss reserve allocated to this loan is adequate to meet
the estimated exposure.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1996 1995 1995
------------ ----------------- ------------
<S> <C> <C> <C>
Nonaccrual loans $ 549 $ 579 $102
Loans 90 or more days past due 1,223 1,439 194
Renegotiated loans 0 0 0
</TABLE>
Management is aware of the risk associated with an increase in average balances
of loans and feel that the current level in the allowance for loan losses is
adequate. At March 31, 1996 the allowance for loan losses was equal to 1.36%
of total loans outstanding compared to 1.42% at December 31, 1995.
F-57
<PAGE> 112
INVESTMENTS
Available for sale securities increased during the first quarter of 1996 while
hold to maturity securities decreased. The increase in available for sale
securities is due primarily to the acquisition of South Range State Bank. The
mix of the portfolio remained relatively unchanged from December 31, 1995. The
primary use of the portfolio is to provide a source of liquidity. Most of the
portfolio is invested in U.S. Treasury and agency securities which have little
credit risk and are highly liquid. The only securities now classified as held
to maturity are state and local political subdivision issues from small issuers
whose bonds have little liquidity.
DEPOSITS
Total deposits increased this quarter by $38.7 million. A substantial portion,
$32.9 million, of the increase came from the acquisition of South Range State
Bank. Interest bearing deposit balances increased during the first quarter of
1996, continuing a trend from last fiscal year. The bulk of the increase in
interest bearing deposits came from savings and interest-bearing checking with
time deposits less than $100,000 making up the remainder of the increase (refer
to the table presented in Note 7 to the first quarter financial statements
above). The time deposits of $100,000 or more consist of stable, government
balances and balances from retail customers.
BORROWINGS
The Registrant's branching network is a relatively high cost network in
comparison to peers. Accordingly, the Registrant has begun to use alternative
funding sources to provide funds for lending activities. Other borrowings
increased by $5.3 million during the first quarter (refer to the table
presented in Note 8 to the first quarter financial statements above for the
composition of the increase), the majority of which was used in the acquisition
of South Range State Bank. At March 31, 1996, $8.1 of the total borrowings
were from the Federal Home Loan Bank of Indianapolis. Alternative sources of
funding can be obtained at interest rates which are competitive with, or lower
than, retail deposit rates and with inconsequential administrative costs.
LIQUIDITY
The Registrant's sources of liquidity include principal payments on loans and
investments, sales of securities available for sale, deposits from customers,
borrowings from the Federal Home Loan Bank, other bank borrowings, and the
issuance of common stock. The Registrant has ready access to significant
sources of liquidity on an almost immediate basis. Management anticipates no
difficulty in maintaining liquidity at the levels necessary to conduct the
Registrant's day-to-day business activities.
F-58
<PAGE> 113
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased by 25% compared to March 31, 1995. The net
interest margin at March 31, 1996 was 4.82%, compared to 4.92% for all of 1995.
The net yield on interest earning assets remained relatively constant. At year
ended December 31, 1995, the net yield on earning assets was 9.13% and at March
31, 1996 it was 9.06%. Interest income from loans represented 90.9% of total
interest income for the first quarter of 1996 compared to 90.4% for all of 1995
and 87.4% for the first quarter of 1995. In all cases, the total amount of
interest income and the yield on total earning assets is strongly influenced by
lending activities.
The increase in income from sales and servicing of loans reflects the growing
demand for residential real estate mortgages, following the unprecedented
origination volume throughout the country in 1993 and 1992. Management expects
continued growth in interest income due to continued expansion of the
Corporation.
NONINTEREST INCOME
Service charges on deposit accounts increase $23,000 during the first quarter
of 1996 vs. the first quarter of 1995 mainly due to the acquisition of South
Range State Bank. Gains on sales of loans has increased due to the larger
volume of loans being originated and sold in the first quarter of 1996 vs. the
first quarter of 1995. Securities gains has increased due to additional sale
activity in the investment portfolio, the proceeds of which were used to fund
the increase in loans. Other noninterest income decreased $97,000 during the
first quarter of 1996 vs. the first quarter of 1995 due mainly to a reduction
of Canadian discount income.
PROVISION FOR LOAN LOSSES
The Registrant maintains the allowance for loan losses at a level adequate to
cover losses inherent in the portfolio. The Registrant records a provision for
loan losses necessary to maintain the allowance at that level after considering
factors such as loan charge-offs and recoveries, changes in the mix of loans in
the portfolio, loan growth, and other economic factors. The increase in the
provision for loan losses from $69,000 from March 31, 1995 to $107,000 for
quarter ended March 31, 1996 is due to loan growth, particularly in the
commercial real estate portfolio.
NONINTEREST EXPENSES
Noninterest expense showed an increase of 17% over the first quarter of 1995.
The increase is consistent with the Registrant's asset growth. The majority of
the increase is due to an increase in salary and occupancy expense. Salary
expense increased mainly due to an increase in full-time equivalent employees
at March 31, 1996 vs. March 31, 1995, due to the Registrant's purchase of the
Rudyard branch and South Range State Bank and the opening of additional
branches. Occupancy expense increased due to the purchases of the Rudyard
branch and South Range State Bank, as well
F-59
<PAGE> 114
as the opening of additional branches. While the growth was expected, a
primary objective of management is to hold the rate of increase in this
category below future asset growth. Management believes that significant
efficiencies can be obtained and is increasing the level of management emphasis
in this area.
FEDERAL INCOME TAX
The provision for income taxes was 29.8% of income before income tax at March
31, 1996 compared to 25.6% at March 31, 1995. The difference between these
rates and the federal corporate income tax rate of 34% is primarily due to
tax-exempt interest earned on loans and investments. The effective tax rate
has increased as tax-exempt income has become a smaller portion of total
interest income.
INTEREST RATE RISK
Management actively manages the Registrant's interest rate risk. In relatively
low interest rate environments which have been in place the last few years,
borrowers have generally tried to extend the maturities and repricing periods
on their loans and place deposits in demand or very short term accounts.
Management has taken various actions to offset the imbalance which those
tendencies would otherwise create. Management writes commercial and real
estate loans at variable rates or, if necessary, fixed rate loans for
relatively short terms. Management has also offered products that give
customers an incentive to accept longer term deposits.
Management can also manage interest rate risk with the maturity periods of
securities purchased, selling securities available for sale, and borrowing
funds with targeted maturity periods.
The Registrant has experienced a slight shift in the cumulative net asset
(liability) funding gap for 1 - 365 days since December 31, 1995, to being
liability sensitive. The shift was mainly due to an increase in CD's less than
$100,000 maturing within one year and an increase in IMM accounts which are
placed entirely in the 1 - 90 days maturity category.
F-60
<PAGE> 115
CAPITAL RESOURCES
It is the policy of the Registrant to maintain capital at a level consistent
with both safe and sound operations and proper leverage to generate an
appropriate return on shareholders' equity. The capital ratios of the
Registrant exceed the regulatory guidelines for well capitalized institutions.
The table below shows the Registrant's capital, in thousands of dollars, and
capital ratio's at March 31, 1996 and 1995.
<TABLE>
<CAPTION>
March 31, 1996
Required Actual
$ % $ %
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Tier 1 risk-adjusted capital ratio $9,622 4.00% $25,229 10.49%
Total risk-adjusted capital ratio $19,243 8.00% $28,162 11.71%
Tier 1 leverage ratio $12,680 4.00% $25,229 7.96%
Tier 1 capital $25,229
Tier 2 capital 2,933
Total risk-based capital 28,162
Total risk-weighted assets 240,542
Average total assets 316,999
</TABLE>
<TABLE>
<CAPTION>
March 31, 1995
Required Actual
$ % $ %
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Tier 1 risk-adjusted capital ratio $7,276 4.00% $19,359 10.64%
Total risk-adjusted capital ratio $14,552 8.00% $21,287 11.70%
Tier 1 leverage ratio $10,311 4.00% $19,359 7.51%
Tier 1 capital $19,359
Tier 2 capital 1,928
Total risk-based capital 21,287
Total risk-weighted assets 181,905
Average total assets 257,776
</TABLE>
F-61
<PAGE> 116
' SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment to Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST MANISTIQUE CORPORATION
----------------------------
(Registrant)
June 11, 1996 /s/Ronald G. Ford
- ------------------------ -----------------------------
Date RONALD G. FORD, President & CEO
June 11, 1996 /s/Richard B. Demers
- ------------------------ -----------------------------
Date RICHARD B. DEMERS, Chief
Accounting Officer
F-62
<PAGE> 117
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE
SPECIFICALLY OFFERED HEREBY OR OF ANY SECURITIES OFFERED HEREBY BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
UNTIL _____________ (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Recent Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Market for Common Stock and Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Determination of Offering Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Management's Discussion and Analysis
of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Selected Statistical Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Supervision and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Pro Forma Consolidated Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Index to First Manistique Corporation
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Index to South Range State Bank
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-29
First Manistique Amendment to Report on
Form 10-Q/A for the Quarterly Period Ended
March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-44
</TABLE>
- -------------------------------------------------------------------------------
400,000 Shares
FIRST MANISTIQUE CORPORATION
Common Stock
---------------
PROSPECTUS
---------------
_______________, 1996
<PAGE> 118
PART III
Information Not Required in Prospectus
ITEM 4. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the issuance and distribution of the
securities being registered are estimated as follows, all of which are to be
borne by the Company:
<TABLE>
<S> <C>
SEC Registration Fee ................................................. $ 3,679
Printing and Engraving Expense ....................................... 6,000
Accountant's Fees and Expenses ....................................... 15,000
Legal Fees and Expenses .............................................. 25,000
Blue Sky Fees and Expenses ........................................... 7,500
Miscellaneous ........................................................ 2,821
---------
$ 60,000
=========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 561-571 of the Michigan Business Corporation Act, as amended (the
"Act"), grant the Registrant broad powers to indemnify any person in connection
with legal proceedings brought against him by reason of his present or past
status as an officer or director of the Registrant, provided that the person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Registrant, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The Act also gives the Registrant broad powers to indemnify any
such person against expenses and reasonable settlement payments in connection
with any action by or in the right of the Registrant, provided the person acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Registrant, except that no indemnification may be
made if such person is adjudged to be liable to the Registrant unless and only
to the extent the court in which such action was brought determines upon
application that, despite such adjudication, but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for reasonable expenses as the court deems proper. In addition, to
the extent that any such person is successful in the defense of any such legal
proceeding, the Registrant is required by the Act to indemnify him against
expenses, including attorneys' fees that are actually and reasonably incurred
by him in connection therewith.
The Registrant's Articles of Incorporation, as amended, contain provisions
entitling directors and executive officers of the Registrant to indemnification
against certain liabilities and expenses. In addition to the available
indemnification, Registrant's Articles of Incorporation, as amended, limit the
personal liability of the members of its Board of Directors, subject to certain
exceptions, for monetary damages with respect to claims by Registrant or its
shareholders.
Under an insurance policy maintained by the Registrant, the directors and
officers of the Registrant are insured within the limits and subject to the
limitations of the policy, against certain expenses in connection with the
defense of certain claims, actions, suits, or proceedings, and certain
liabilities which might be imposed as a result of such claims, actions, suits
or proceedings, which may be brought against them by reason of being or having
been such directors and officers.
ITEM 16. EXHIBITS.
Reference is made to the Exhibit Index which appears at page II-4 of this
Registration Statement.
S-1
<PAGE> 119
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities under the Securities Exchange
Act of 1933, as amended (the "Act") may be permitted to directors, officers,
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission such indemnification is against the public
policy as expressed in the Act and is, therefore, unenforceable.
S-2
<PAGE> 120
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing of Form S-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Manistique, State of Michigan on the 12th day of
June, 1996.
FIRST MANISTIQUE CORPORATION
BY /s/ RONALD G. FORD
-------------------------------------
RONALD G. FORD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ronald G. Ford and Richard B. Demers, and each of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could to in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or his substitute may lawfully do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on June 14, 1996, by the
following persons in the capacities indicated.
<TABLE>
<S> <C>
/S/ RONALD G. FORD /S/ RICHARD B. DEMERS
- -------------------------------------------- ------------------------------------------------
RONALD G. FORD, PRESIDENT AND CHIEF EXECUTIVE RICHARD B. DEMERS, PRINCIPAL FINANCIAL AND
OFFICER AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER) ACCOUNTING OFFICER
/S/ ERNEST D. KING
- -------------------------------------------- ------------------------------------------------
ERNEST D. KING, DIRECTOR AND CHAIRMAN CHARLES F. BEAULIEU, DIRECTOR
OF THE BOARD
- -------------------------------------------- ------------------------------------------------
JOHN B. CLARK, DIRECTOR C. RONALD DUFINA, DIRECTOR
/S/ STANLEY J. GEROU II /S/ MICHAEL C. HENDRICKSEN
- -------------------------------------------- ------------------------------------------------
STANLEY J. GEROU II, DIRECTOR MICHAEL C. HENRICKSEN, DIRECTOR AND VICE
CHAIRMAN OF THE BOARD
/S/ THOMAS G. KING
- -------------------------------------------- ------------------------------------------------
LOREN F. HULSIZER, DIRECTOR THOMAS G. KING, DIRECTOR
/S/ JOHN D. LINDROTH /S/ JOHN P. MILLER
- -------------------------------------------- ------------------------------------------------
JOHN D. LINDROTH, DIRECTOR JOHN P. MILLER, DIRECTOR
</TABLE>
S-3
<PAGE> 121
EXHIBIT INDEX
Number Exhibit
- ------ -------
2 Affiliation Agreement and Plan of Reorganization between First
Manistique Corporation and South Range State Bank and the
related Consolidation Agreement, as amended through January 30,
1996. Previously filed as an exhibit to Registrant's Report on
Form 8-K dated January 31, 1996.
3(a) Amendment to Restated Articles of Incorporation. Filed
herewith.
3(b) Restated Articles of Incorporation. Previously field as an
exhibit to registrant's Report on Form 10-K for the year ended
December 31, 1995. Here incorporated by reference.
3(c) Amended and restated Bylaws. Previously field as an exhibit
to registrant's Report on Form 10-K for the year ended December
31, 1995. Here incorporated by reference.
4(a) Dividend Reinvestment Plan. Previously filed as an exhibit to
the Registrant's Registration Statement on Form S-3
(Registration No. 033-61533) filed on August 1, 1995. Here
incorporated by reference.
4(b) A specimen stock certificate of the Registrant's Common Stock
filed herewith.
5 Opinion of Varnum, Riddering, Schmidt & Howlett LLP as to the
validity of the issuance of the securities being registered.
Filed herewith.
10(a) Stock Option Plan. Previously filed in the Registrant's
definitive proxy statement for its annual meeting of
shareholders held April 21, 1994. Here incorporated by
reference.
10(b) First Manistique Corporation Executive and Board Member
Restricted Stock Plan. Previously filed in the Registrant's
definitive proxy statement for its's annual meeting of
shareholders held April 18, 1995. Here incorporated by
reference.
10(c) Employment Contract between First Northern Bank & Trust and
Ronald G. Ford. Previously field as an exhibit to
registrant's Report on Form 10-K for the year ended December
31, 1995. Here incorporated by reference.
10(d) Deferred Compensation, Deferred Stock and Current Stock
Purchase Plan for Non-Employee Directors. Previously filed in
the Registrant's definitive proxy statement for it's annual
meeting of shareholders held April 23, 1996. Here incorporated
by reference.
21 Subsidiaries of the Registrant. Previously filed as an
exhibit to registrant's Report on Form 10-K for the year ended
December 31, 1995. Here incorporated by reference.
23(a) Consent of Schneider, Larche, Haapala & Co. Filed herewith.
23(b) Consents of Crowe, Chizek and Company LLP. Filed herewith
23(c) Consent of Varnum, Riddering, Schmidt & Howlett LLP. Included
in Exhibit 5.
24 Power of Attorney. Included as a part of the Signature Page.
27(a) Financial Data Schedule - year ended December 31, 1995. Filed
herewith.
27(b) Financial Data Schedule - quarter ended March 31, 1996. Filed
herewith.
S-4
<PAGE> 1
EXHIBIT 3(a)
CERTIFICATE OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
Pursuant to the provisions of Act 284, Public Acts of 1972, as amended,
the undersigned corporation executes the following Certificate:
1. The present name of the corporation is:
First Manistique Corporation
2. The identification number assigned by the Bureau is: 063 316
3. The location of the registered office is:
130 South Cedar
P.O. Box 369
Manistique, MI 49854
4. The following amendments to the Articles of Incorporation were duly
adopted on the 23rd day of April, 1996. The amendments were duly adopted in
accordance with Section 611(2) of the Act by the vote of the shareholders. The
necessary votes were cast in favor of the amendments.
Article III of the Corporation's Articles of Incorporation is
hereby amended to read as follows:
ARTICLE III
The total number of shares of all classes of stock which the
corporation shall have authority to issue is 6,500,000 shares, of
which 6,000,000 shares shall be of a single class of common stock
and 500,000 shares shall be series preferred stock.
The authorized shares of common stock are all of one class
with equal voting power, and each such share shall be equal to
every other such share. The Board of Directors of the corporation
may cause the corporation to issue preferred shares in one or more
series, each series to bear a distinctive designation and to have
such relative rights and preferences as shall be prescribed by
resolution of the Board. Such resolutions, when filed, shall
constitute amendments to these Articles of Incorporation.
A new Article VII is added to the Corporation's Articles of Incorporation
and reads as follows:
ARTICLE VII
BOARD OF DIRECTORS
Section 1. Authority and Size of Board. The business and
affairs of the corporation shall be managed by or under the
direction of the Board of Directors. The number of directors of
the corporation that shall constitute the Board of Directors shall
be determined from time to time by resolution adopted by the
affirmative vote of:
A. At least eighty percent (80%) of the Board of
Directors, and
B. A majority of the Continuing Directors (as
hereinafter defined).
Section 2. Classification of Board and Filling of Vacancies.
Subject to applicable law, the directors shall be divided into
three (3) classes, each class to be as nearly equal in number as
possible.
Exhibit 3(a) Page 1
<PAGE> 2
At each annual meeting of shareholders, the successors to the class of
directors whose term shall then expire shall be elected to hold office for
a term expiring at the third succeeding annual meeting and until their
successors shall be duly elected and qualified or their resignation or
removal. Any vacancies in the Board of Directors for any reason, and any
newly created directorships resulting from any increase in the number of
directors, may be filled only by the Board of Directors, acting by an
affirmative vote of a majority of the Continuing Directors (as hereinafter
defined) and an eighty percent (80%) majority of all of the directors then
in office, although less than a quorum, and any director so chosen shall
hold office until the next election of the class for which the director
was chosen and until his successor shall be duly elected and qualified or
his resignation or removal. No decrease in the number of directors shall
shorten the term of any incumbent director.
Section 3. Removal of Directors. Notwithstanding any other
provisions of these Articles of Incorporation or the Bylaws of the
corporation (and notwithstanding the fact that some lesser
percentage may be specified by law or by these Articles of
Incorporation or the Bylaws of the corporation), any one or more
directors of the corporation may be removed at any time, with or
without cause, but only by either (i) the affirmative vote of a
majority of the Continuing Directors and at least eighty percent
(80%) of the Board of Directors or (ii) the affirmative vote, at a
meeting of the shareholders called for that purpose, of the
holders of at least eighty percent (80%) of the voting power of
the then outstanding shares of capital stock of the corporation
entitled to vote generally in the election of directors (the
"Voting Stock") voting together as a single class.
Section 4. Certain Definitions. For the purposes of this
Article VII:
A. A "person" shall mean any individual, firm,
corporation or other entity.
B. "Interested Shareholder" shall mean any person,
other than the corporation or any Subsidiary, who or which:
(i) is the beneficial owner, directly or
indirectly, of ten percent (10%) or more of the voting
power of the outstanding Voting Stock; or
(ii) is an Affiliate of the corporation and at
any time within the two (2) year period immediately
prior to the date in question was the beneficial
owner, directly or indirectly, of ten percent (10%) or
more of the voting power of the then outstanding
Voting Stock; or
(iii) is an assignee of or has otherwise
succeeded to any shares of Voting Stock which were at
any time within the two (2) year period immediately
prior to the date in question beneficially owned by
any Interested Shareholder, if such assignment or
succession shall have occurred in the course of a
transaction or series of transactions not involving a
public offering within the meaning of the Securities
Act of 1933.
C. A person shall be a "beneficial owner" of any Voting
Stock:
(i) which such person or any of its Affiliates
or Associates (as hereinafter defined) beneficially
owns, directly or indirectly; or
(ii) which such person or any of its Affiliates
or Associates has (a) the right to acquire (whether
such right is exercisable immediately or only after
the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or
options, or otherwise, or (b) the right to vote
pursuant to any agreement, arrangement or
understanding; or
(iii) which are beneficially owned, directly or
indirectly, by any other person with which such person
or any of its Affiliates or Associates has any
Exhibit 3(a) Page 2
<PAGE> 3
agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of
Voting Stock.
D. For the purposes of determining whether a person is
an Interested Shareholder pursuant to paragraph B of this
Section 4, the number of shares of Voting Stock deemed to be
outstanding shall include shares deemed owned through
application of paragraph C of this Section 4 but shall not
include any other shares of Voting Stock which may be
issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
E. "Affiliate" or "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of
1934, as in effect on the date this Article of the Articles
of Incorporation is filed with the Corporation Division of
the Michigan Department of Commerce.
F. "Subsidiary" means any corporation of which a
majority of any class of equity security is owned, directly
or indirectly, by the corporation; provided, however, that
for the purposes of the definition of Interested Shareholder
set forth in paragraph B of this Section 4, the term
"Subsidiary" shall mean only a corporation of which a
majority of each class of equity security is owned, directly
or indirectly, by the corporation.
G. "Continuing Director" means any member of the Board
of Directors of the corporation (the "Board") who is
unaffiliated with the Interested Shareholder and was a
member of the Board prior to the time that the Interested
Shareholder became an Interested Shareholder, and any
successor of a Continuing Director who is unaffiliated with
the Interested Shareholder and is recommended to succeed a
Continuing Director by a majority of Continuing Directors
then on the Board.
Section 5. Powers of Continuing Directors. A majority of
the Continuing Directors of the corporation shall have the power
and duty to determine, on the basis of information known to them
after reasonable inquiry, all facts necessary to determine
compliance with this Article VII, including without limitation (i)
whether a person is an Interested Shareholder, (ii) the number of
shares of Voting Stock beneficially owned by any person and (iii)
whether a person is an Affiliate or Associate of another; and the
good faith determination of a majority of the Continuing Directors
on such matters shall be conclusive and binding for all the
purposes of this Article VII.
Section 6. Nominations for Board. Nominations for the
election of directors may be made by the Board of Directors or by
a shareholder entitled to vote in the election of directors. A
shareholder entitled to vote in the election of directors,
however, may make such a nomination only if written notice of such
shareholder's intent to do so has been given, either by personal
delivery or by United States mail, postage prepaid, and received
by the corporation (a) with respect to an election to be held at
an annual meeting of shareholders, not later than sixty (60) nor
more than ninety (90) days prior to the first anniversary of the
preceding year's annual meeting (or, if the date of the annual
meeting is changed by more than twenty (20) days from such
anniversary date, within ten (10) days after the date the
corporation mails or otherwise gives notice of the date of such
meeting), and (b) with respect to an election to be held at a
special meeting of shareholders called for that purpose, not later
than the close of business on the tenth (10th) day following the
date on which notice of the special meeting was first mailed to
the shareholders by the corporation.
Each shareholder's notice of intent to make a nomination
shall set forth: (i) the name(s) and address(es) of the
shareholder who intends to make the nomination and of the person
or persons to be nominated; (ii) a representation that the
shareholder (a) is a holder of record of stock of the corporation
entitled to vote at such meeting, (b) will continue to hold such
stock through the date on which the meeting is held, and (c)
intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; (iii) a description
of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination is to be made by the
shareholder; (iv) such other information
Exhibit 3(a) Page 3
<PAGE> 4
regarding each nominee proposed by such shareholder as would be required
to be included in a proxy statement filed pursuant to Regulation 14A
promulgated under Section 14 of the Securities Exchange Act of 1934, as
amended, as now in effect or hereafter modified; and (v) the consent of
each nominee to serve as a director of the corporation if so elected.
The corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the corporation to determine
the qualifications of such proposed nominee to serve as a director.
No person shall be eligible for election as a director unless
nominated (i) by a shareholder in accordance with the foregoing
procedure or (ii) by the Board of Directors.
A new Article VIII is added to the Corporation's Articles of Incorporation
and reads as follows:
ARTICLE VIII
NOTIFICATION OF SHAREHOLDER PROPOSALS
The Board of Directors of the corporation shall submit for
consideration and vote by the shareholders, at annual meetings of
the shareholders, only those proposals that are first brought
before the meeting by or at the direction of the Board of
Directors, or by any shareholder entitled to vote at such meeting
(a) who submits to the corporation a timely Notice of Proposal in
accordance with the requirements of this Article VIII and the
proposal is a proper subject for action by shareholders under
Michigan law, or (b) whose proposal is included in the
corporation's proxy materials in compliance with all the
requirements set forth in the applicable rules and regulations in
the Securities and Exchange Commission.
Each shareholder's Notice of Proposal shall set forth:
(a) The name and address of the shareholder submitting
the proposal, as they appear on the corporation's books and
records;
(b) A representation that the shareholder (i) is a
holder of record of stock of the corporation entitled to
vote at such meeting, (ii) will continue to hold such stock
through the date on which the meeting is held, and (iii)
intends to appear in person or by proxy at the meeting to
submit the proposal for shareholder vote;
(c) A brief description of the proposal desired to be
submitted to the meeting for shareholder vote and the
reasons for conducting such business at the meeting; and
(d) A description of any financial or other interest of
such shareholder in the proposal.
A Notice of Proposal must be given, either by personal
delivery or by United States mail, postage prepaid, and received
by the corporation not less than thirty (30) days prior to the
date of the originally scheduled meeting, regardless of any
adjournments thereof to a later date; provided that, if less than
forty (40) days' notice of the meeting of shareholders is given by
the corporation, the Notice of Proposal must be received by the
corporation not later than the close of business on the tenth
(10th) day following the date on which the notice of the scheduled
meeting was first mailed to the shareholders.
The secretary of the corporation shall notify a shareholder
in writing whether his or her Notice of Proposal has been made in
accordance with all the requirements of this Article VIII. The
chairman of the meeting may refuse to acknowledge the proposal of
any shareholder not made in compliance with all such requirements.
A new Article IX is added to the Corporation's Articles of Incorporation
and reads as follows:
Exhibit 3(a) Page 4
<PAGE> 5
ARTICLE IX
AMENDMENT OF ARTICLES VII, VIII OR IX
Notwithstanding anything contained in these Articles of
Incorporation to the contrary, the affirmative vote of at least
80% of the outstanding shares of voting stock of the corporation,
voting as a single class, shall be required to amend or repeal
Article VII, Article VIII or Article IX of these Articles of
Incorporation or to adopt any provision inconsistent therewith,
unless, such amendment or repeal or inconsistent provision has
been recommended for approval by at least 80% of all directors
then holding office and by a majority of the Continuing Directors.
The term "Continuing Directors" is defined in Article VII.
A new Article X is added to the Corporation's Articles of Incorporation
and reads as follows:
ARTICLE X
BOARD EVALUATION OF CERTAIN OFFERS
Section 1. Matters to be Evaluated. The Board of Directors
of this corporation shall not approve, adopt or recommend any
offer of any person or entity, other than the corporation, to make
a tender or exchange offer for any capital stock of the
corporation, to merge or consolidate the corporation with any
other entity or to purchase or otherwise acquire all or
substantially all of the assets or business of the corporation
unless and until the Board of Directors shall have first evaluated
the offer and determined that the offer would be in compliance
with all applicable laws and that the offer is in the best
interests of the corporation and its shareholders. In connection
with its evaluation as to compliance with laws, the Board of
Directors may seek and rely upon an opinion of legal counsel
independent from the offeror and it may test such compliance with
laws in any state or federal court or before any state or federal
administrative agency which may have appropriate jurisdiction. In
connection with its evaluation as to the best interests of the
corporation and its shareholders, the Board of Directors shall
consider all factors which it deems relevant, including without
limitation: (i) the adequacy and fairness of the consideration to
be received by the corporation and/or its shareholders under the
offer considering historical trading prices of the corporation's
stock, the price that might be achieved in a negotiated sale of
the corporation as a whole, premiums over trading prices which
have been proposed or offered with respect to the securities of
other companies in the past in connection with similar offers and
the future prospects for this corporation and its business; (ii)
the potential social and economic impact of the offer and its
consummation on this corporation, and its subsidiaries and their
respective employees, depositors and other customers and vendors;
(iii) the potential social and economic impact of the offer and
its consummation on the communities in which the corporation and
any subsidiaries operate or are located; (iv) the business and
financial condition and earnings prospects of the proposed
acquiror or acquirors; and (v) the competence, experience and
integrity of the proposed acquiror or acquirors and its or their
management.
Section 2. Amendment, Repeal, etc. Notwithstanding any
other provision of these Articles of Incorporation or the Bylaws
of the corporation to the contrary (and notwithstanding the fact
that a lesser percentage may be specified by law, these Articles
of Incorporation or the Bylaws of the corporation), the
affirmative vote of the holders of eighty percent (80%) or more of
the outstanding shares of capital stock entitled to vote for the
election of directors, voting together as a single class, shall be
required to amend, repeal or adopt any provision inconsistent with
this Article X; provided, however, that this Section 2 of Article
X shall be of no force or effect if the proposed amendment, repeal
or other action has been recommended for approval by at least
eighty percent (80%) of all directors then holding office.
Signed this 25th day of April, 1996.
By: /s/Ronald G. Ford
-----------------------------------
Ronald G. Ford, President and
Chief Executive Officer
Exhibit 3(a) Page 5
<PAGE> 1
EXHIBIT 4(b)
INCORPORATED UNDER THE LAWS OF THE STATE OF MICHIGAN
NUMBER FIRST MANISTIQUE SHARES
FM CORPORATION
COMMON STOCK COMMON STOCK
THIS CERTIFIES THAT
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$0.00 PAR VALUE PER SHARE, OF
FIRST MANISTIQUE CORPORATION
Manistique, Michigan (the "Corporation"), incorporated under the laws of the
State of Michigan.
The shares evidenced by this Certificate are transferable only on the stock
transfer books of the Corporation by the holder hereof, in person or by duly
authorized attorney or legal representative, upon surrender of this Certificate
properly endorsed. This security is not a deposit or account and is non
federaly insured or guaranteed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused its facsimile and seal to be affixed hereto.
Dated:
[FIRST MANISTIQUE CORPORATION CORPORATE SEAL]
Fred LaMuth MICHIGAN Ronald G. Ford
Secretary President
COUNTERSIGNED AND REGISTERED:
REGISTRAR AND TRANSFER COMPANY,
CRANFORD, NEW JERSEY
TRANSFER AGENT AND REGISTRAR
BY:
AUTHORIZED SIGNATURE
<PAGE> 1
EXHIBIT 5
June 11, 1996
First Manistique Corporation
130 South Cedar
Manistique, MI 49854
Ladies and Gentlemen:
We have acted as your counsel in connection with the Registration
Statement under the Securities Act of 1933 on Form S-2 ("Registration
Statement") to be filed with the Securities and Exchange Commission for the
purpose of registering 400,000 shares of common stock, without par value, of
First Manistique Corporation, a Michigan corporation ("Company"). We are
familiar with the corporate action taken by the Board of Directors of the
Company authorizing the registration and offering of such shares and have
examined such documents and questions of law as we consider necessary or
appropriate for the purpose of furnishing this opinion.
It is our opinion that the 400,000 authorized and unissued shares of
common stock of the Company, to be sold by the Company as described in the
Registration Statement, upon delivery thereof and payment therefor in
accordance with the terms stated in the Registration Statement at the time it
becomes effective, will be legally and validly authorized, issued and
outstanding and will be fully paid and unassessable.
We hereby consent to the filing of this opinion and consent as an exhibit
to the Registration Statement and the reference to our firm under the caption
"Legal Matters" in the prospectus forming a part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or under the rules and regulations of the Securities
and Exchange Commission relating thereto.
Very truly yours,
VARNUM, RIDDERING,
SCHMIDT & HOWLETT LLP
Exhibit 5
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Registration Statement of First Manistique
Corporation on Form S-2 of our report dated March 10, 1995, included herein on
the 1994 and 1993 consolidated financial statements of First Manistique
Corporation, included herein. We also consent to the reference to us under the
heading "Experts" in the Prospectus, which is part of this Registration
Statement.
SCHNEIDER, LARCHE, HAAPALA & CO.
/s/ SCHNEIDER, LARCHE, HAAPALA & CO.
Escanda, Michigan
June 12, 1996
Exhibit 23(a)
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Registration Statement of First Manistique
Corporation on Form S-2 of our report dated February 9, 1996, included herein
on the 1995 consolidated financial statements of First Manistique Corporation,
included herein. We also consent to the reference to us under the heading
"Experts" in the Prospectus, which is part of this Registration Statement.
CROWE, CHIZEK AND COMPANY LLP
/s/ CROWE, CHIZEK AND COMPANY LLP
Grand Rapids, Michigan
June 12, 1996
Exhibit 23(b) - Page 1
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Registration Statement of First Manistique
Corporation on Form S-2 of our report dated January 5, 1996, included herein
on the 1995 financial statements of South Range State Bank included herein.
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
CROWE, CHIZEK AND COMPANY LLP
/s/ CROWE, CHIZEK AND COMPANY LLP
Grand Rapids, Michigan
June 12, 1996
Exhibit 23(b) - Page 2
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