<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S><C>
For the quarterly period ended: September 30, 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)
</TABLE>
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 November 6, 1996, there were outstanding 2,304,361 shares of the
registrant's common stock, no par value.
<PAGE> 2
PART I - FINANCIAL INFORMATION (unaudited)
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Condensed Balance Sheets
(In thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,334 $ 10,492
Federal funds sold 5,100 4,000
-------- --------
Total cash and cash equivalents 20,434 14,492
Interest-bearing deposits with banks 1,149 1,678
Securities available for sale 22,339 26,220
Securities held to maturity (fair value of $0
at 9/30/96 and $837 at 12/31/95) 835
Loans 294,464 221,507
Allowance for loan losses (4,278) (3,137)
-------- --------
Net Loans 290,186 218,370
Bank premises and equipment 13,774 11,787
Other assets 10,991 9,409
-------- --------
TOTAL ASSETS $358,873 $282,791
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 38,542 $ 27,674
Interest-bearing 267,398 216,733
-------- --------
305,940 244,407
Federal funds purchased and securities
sold under agreement to repurchase 1,100 700
Other borrowings 17,371 10,088
Other liabilities 3,703 2,589
-------- --------
TOTAL LIABILITIES 328,114 257,784
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: 2,302,944 at 9/30/96 and
2,106,897 at 12/31/95 17,696 13,195
Retained earnings 13,554 11,832
Net unrealized loss on securities available for sale,
net of tax of $252 at 9/30/96 and $9 at 12/31/95 (491) (20)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 30,759 25,007
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $358,873 $282,791
======== ========
</TABLE>
<PAGE> 3
Consolidated Condensed Statements of Income (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 6,897 $ 5,222 $ 19,319 $ 14,589
Securities
Taxable 366 359 1,123 1,153
Exempt from federal taxation 21 17 67 114
Other 132 114 401 383
---------- ---------- ---------- ----------
Total interest income 7,416 5,712 20,910 16,239
Interest expense
Deposits 3,010 2,331 8,565 6,744
Borrowed Funds 221 128 544 311
---------- ---------- ---------- ----------
Total interest expense 3,231 2,459 9,109 7,055
---------- ---------- ---------- ----------
Net interest income 4,185 3,253 11,801 9,184
Provision for loan losses 599 230 1,084 377
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 3,586 3,023 10,717 8,807
Noninterest income
Service charges on deposit accounts 194 151 558 430
Gains on sale of loans 10 0 30 29
Securities gains/(losses) 0 0 17 (19)
Other 149 90 409 517
---------- ---------- ---------- ----------
Total noninterest income 353 241 1,014 957
Noninterest expense
Salaries and employee benefits 1,284 994 3,554 2,829
Furniture and equipment expense 315 213 770 644
Occupancy expense 198 173 669 484
Other 1,267 843 3,334 2,590
---------- ---------- ---------- ----------
Total noninterest expense 3,064 2,223 8,327 6,547
---------- ---------- ---------- ----------
Income before income tax 875 1,041 3,404 3,217
Provision for income tax 270 298 1,025 914
---------- ---------- ---------- ----------
Net income $ 605 $ 743 $ 2,379 $ 2,303
========== ========== ========== ==========
Weighted average common shares outstanding 2,170,360 2,099,322 2,135,876 2,098,053
========== ========== ========== ==========
Earnings per common share $ 0.28 $ 0.35 $ 1.11 $ 1.10
========== ========== ========== ==========
</TABLE>
<PAGE> 4
Consolidated Condensed Statement of Changes in Shareholders' Equity (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Three months Three months
ended ended
September 30, 1996 September 30, 1995
Shares Equity Total Shares Equity Total
------------------------ ----------------------------
<S> <C> <C> <C> <C>
Balance-beginning of period 2,124,827 $26,059 2,099,322 $24,085
Net income for period 605 743
Cash dividends (212) (168)
Issuance of common stock 178,117 4,170 2,780 62
Net change in unrealized gain (loss)
on securities available for sale 137 27
--------- ------- --------- -------
2,302,944 $30,759 2,102,102 $24,749
========= ======= ========= =======
<CAPTION>
Nine months Nine months
ended ended
September 30, 1996 September 30, 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 2,379 2,303
Cash dividends (656) (678)
Issuance of common stock 196,047 4,500 5,030 106
Net change in unrealized gain (loss)
on securities available for sale (471) 534
--------- ------- --------- -------
2,302,944 $30,759 2,102,102 $24,749
========= ======= ========= =======
</TABLE>
<PAGE> 5
Consolidated Statements of Cash Flows (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995
------------- -------------
<S> <C> <C>
Net income $ 2,379 $ 2,303
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 1,084 377
Deferred taxes 563
Depreciation 748 576
Amortization 777 467
Proceeds from sale of mortgage loans 4,869 3,332
Origination of mortgage loans for sale (4,839) (3,303)
(Gains) losses on sale
Loans held for sale (30) (29)
Securities (17) 19
Premises and equipment 14 (41)
Changes in assets and liabilities
Interest receivable and other assets 382 692
Interest payable and other liabilities (160) (47)
-------- --------
Net cash from operating
activities 5,770 4,346
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits
with banks 1,617 2,369
Purchase of securities available for sale (8,478) (974)
Purchase of securities held to maturity (4,248)
Proceeds from sales of securities
available for sale 5,945 9,014
Proceeds from maturities, calls, or
paydowns of securities available for sale 9,180 2,156
Proceeds from maturity and calls of securities
held to maturity 835 1,609
Net increase in loans (46,139) (28,024)
Proceeds from sale of premises and equipment 65 85
Purchase of premises and equipment (1,405) (1,275)
Net cash provided in acquisition of
South Range State Bank 724 8,007
-------- --------
Net cash provided from investing activities (37,656) (11,281)
</TABLE>
<PAGE> 6
Consolidated Statements of Cash Flows - continued (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Net increase in deposits 28,664 3,597
Proceeds from notes payable 7,900 6,014
Payment on notes payable (2,980) (2,700)
Proceeds from issuance of common stock 4,500 105
Purchase of federal funds 400
Payment of dividends (656) (678)
-------- --------
Net cash from investing activities 37,828 6,338
-------- --------
Net increase (decrease) in cash and cash
equivalents 5,942 (597)
Cash and cash equivalents at beginning of period 14,492 14,319
-------- --------
Cash and cash equivalents at end of period $ 20,434 $ 13,722
======== ========
Supplemental disclosures of cash flow
information
Cash paid during the period for
Interest $ 8,997 $ 6,831
Income taxes 1,089 1,016
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 4)
Interest-bearing deposits 1,088
Premises and equipment 1,409 439
Acquisition intangibles 1,630 514
Other assets and accrued interest receivable 774 12
Loans, net 26,761
Securities available for sale 3,800
Deposits 32,869 8,935
Other liabilities and accrued interest payable 954 37
</TABLE>
<PAGE> 7
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 September 30, 1996 and the
nine month period ending September 30, 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 through the third 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.
NOTE 3 - PER SHARE CALCULATIONS
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 retroactively adjusted to
reflect the 3-for-1 stock split.
NOTE 4 - ACQUISITIONS
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.
The Registrant acquired the fixed assets and assumed the deposits of the
Rudyard branch of First of America (with fixed assets of $439,000 and deposits
of $8,935,000) on September 15, 1995. The purchase was paid in cash.
<PAGE> 8
NOTE 5 - SECURITIES
The amortized cost and fair value of securities at September 30, 1996 are shown
below:
(In thousands of dollars)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
---------------------------------------------------
Securities Available for Sale
<S> <C> <C> <C> <C>
U.S. Treasury and federal agency $18,246 $3 $679 $17,570
State and political subdivisions 1,349 3 35 1,317
Other 3,487 35 3,452
------- ---- ----- -------
Total $23,082 $6 $749 $22,339
======= ==== ===== =======
</TABLE>
The amortized cost and fair value of securities by contractual maturity at
September 30, 1996, are shown below, in thousands of dollars
<TABLE>
<CAPTION>
Available for Sale
-----------------------
Amortized Fair
Cost Value
-----------------------
<S> <C> <C>
Due in one year or less $ 6,549 $ 6,362
Due after one year through five years 9,589 9,363
Due after five years through ten years 1,397 1,376
Due after ten years 5,547 5,238
------- -------
$23,082 $22,339
======= =======
</TABLE>
<PAGE> 9
NOTE 6 - LOANS
Loans presented in the consolidated condensed balance sheet are comprised of
the following classifications at September 30, 1996 and December 31, 1995:
(In thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Loans:
Commercial, financial and agricultural $169,319 $130,921
1-4 family residential real estate 81,257 58,433
Consumer 35,098 29,954
Construction 8,802 2,235
-------- --------
Total 294,476 221,543
Less: unearned income (12) (36)
-------- --------
$294,464 $221,507
======== ========
</TABLE>
<PAGE> 10
NOTE 7 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the nine months ended September
30, 1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
September 30, September 30,
1996 1995
---------- ----------
<S> <C> <C>
Balance at beginning of period $ 3,137 $ 2,350
Charge offs (325) (358)
Recoveries 97 327
Adjustment from loans put back to Newberry
State Bank (6)
Allowance transferred from purchase of
South Range State Bank 285
Provision for loan loss 1,084 377
---------- ----------
Balance at end of period $ 4,278 $ 2,690
========== ==========
<CAPTION>
Information regarding impaired loans is as follows:
9/30/96 12/31/95
---------- ----------
<S> <C> <C>
Average investment in impaired loans $2,662,997 $ 659,412
Interest income recognized on impaired loans
including interest income recognized on
cash basis 57,240 40,856
Interest income recognized on impaired loans on
cash basis 40,856
Balance of impaired loans $3,821,401 $ 570,847
Less portion for which no allowance for loan
loss is allocated 0 22,548
---------- ----------
Portion of impaired loan balance for which
an allowance for credit losses is
allocated $3,821,401 $ 548,299
========== ==========
Portion of allowance for loan losses
allocated to the impaired loan balance 1,200,000 $ 200,000
========== ==========
</TABLE>
<PAGE> 11
The Registrant continues as a secured creditor of leases issued by Bennett
Funding Group, Inc. (BFG), and Aloha Capital Corporation (ACC), a subsidiary of
BFG. BFG filed Chapter 11 Bankruptcy on March 29, 1996, and subsequently in
April of 1996, ACC filed involuntary bankruptcy. Since the appointment of the
bankruptcy trustee on April 19, 1996, all payments to creditors for BFG and ACC
were seized. The outstanding balances of leases held by the Registrant was
$2,792,651 on December 31, 1995, and $3,036,586 on September 30, 1996. This
amount is classified as impaired and is on nonaccrual. The Registrant contends
to hold first lien positions on all leases held. In June of 1996, the trustee
provided a list of creditors identified as those holding double pledged paper.
The Registrant did not receive a duplicate lease listing notice from the
trustee which further strengthens the position that the Registrant is the
primary holder of leases held. On October 10, 1996, the Bankruptcy Court
approved an agreement which was reached between the Registrant and the trustee.
According to the terms of this settlement, the trustee will purchase the
Registrant's outstanding loans, together with all notes, security agreements,
and rights to collateral relating to the same. All other claims or disputes
between the trustee and/or BFG and the Registrant will be released, waived, or
settled. The settlement includes the making of a loan in the amount of
$3,682,000 to Resort Funding, Inc. (RFI), of which $1,516,000 are new funds.
RFI is a subsidiary of BFG which is 100% operated by the trustee. This entity
is not in bankruptcy. The primary collateral will be condominium units and
time shares in which the Registrant can select those projects in which it wants
to acquire an interest. This portion of the collateral is to be called the New
Collateral Pool. On the closing date of the new loan to RFI, the trustee will
purchase ten of the Registrant's existing loans including all amounts owing
thereunder and rights of the Registrant related there to (including all of the
Registrant's rights to collateral for such loans), for the purchase price of
$2,166,000. The Registrant will receive interest only for sixty months with a
payment of principal due at maturity. The interest rate will be set at 4.00%
per annum based on a 365-366 day year for actual days elapsed. The payment
stream of the old collateral and RFI pledged properties will collateralize the
loan. Primarily, when payments are received on the old leases, they will be
applied to RFI. The Registrant will build equity in RFI over the term of sixty
months up to the $3,682,000 due at maturity. There will be a separate
settlement agreement for the other BFG block of leases owned by the Registrant
and for the ACC note. Because of a dispute between BFG and lessors from ACC,
the Registrant will charge off approximately $500,000 at consummation.
However, the Registrant will receive approximately 65% of the collections
received on the qualifying leases, and these funds will be paid to the
Registrant as collected by the trustee, but not to exceed the outstanding
principal of this loan on the date of the bankruptcy petition filing. In the
final settlement of the BFG block of leases, the Registrant will charge off
$333,000 at consummation. As the trustee collects payment from the leases, the
Registrant will receive 50% of the outstanding principal collected. Primarily,
on the last two block of loans discussed above, the Registrant will receive
proceeds as the trustee collects the lease payments.
<PAGE> 12
NOTE 8 - DEPOSITS
The following is an analysis of interest-bearing deposits as of
September 30, 1996 and December 31, 1995.
(In thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Savings and interest-bearing checking $148,860 $118,957
Time: In denominations under $100,000 97,096 82,752
In denomination of $100,000 or more 21,442 15,024
-------- --------
$267,398 $216,733
======== ========
</TABLE>
<PAGE> 13
NOTE 9 - OTHER BORROWINGS
Other borrowings consists of the following at September 30, 1996 and December
31, 1995: (In thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Federal Home Loan Bank advances (7), at
various rates with various maturities (see
annual financial statements). $ 8,008 $ 8,088
Federal Home Loan Bank, fixed-rate advance
at 7.06%, matures May 15, 2006. 5,000
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 September 30, 1996.
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
-------- --------
$ 17,371 $ 10,088
======== ========
</TABLE>
The Federal Home Loan Bank borrowings are collateralized by a blanket
collateral agreement on the Registrant'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 and September 30, 1996. Borrowings other than Federal Home
Loan Bank are not subject to prepayment penalties.
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
through the third 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
<PAGE> 14
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) 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.
The Registrant has signed a definitive agreement with U.P. Financial, Inc., a
Michigan bank holding company, to purchase 100% of it's outstanding shares.
The purchase will be entirely with cash. The agreement was signed on July 11,
1996, with the purchase to be completed in February of 1997. U.P. Financial,
Inc. owns 100% of the outstanding stock of First National Bank in Ontonagon, a
Michigan banking institution with approximately $27 million in total assets.
Upon purchase, the assets of U.P. Financial, Inc., will be merged into South
Range State Bank, with South Range State Bank being the survivor. As the
purchase will not be completed until February of 1997, there will be no impact
on the earning of the Registrant during 1996.
Year to date consolidated net income through September 30, 1996 was $2,379,000
compared to $2,303,000 for the same period in 1995. Improved interest income
and careful control of operating expenses combined with acquisitions and
internal growth have contributed to this improvement. Return on consolidated
average assets for the nine months ended September 30, 1996 was .89% compared
to 1.15% for the same period in 1995. Earnings per share increased from $1.10
for the year to date through September 30, 1995, to $1.11 for the same period
in 1996.
The Registrant is offering for sale 400,000 shares of its common stock. Each
shareholder of record on July 23, 1996 is entitled to purchase .1886 share of
common stock for each whole share owned, subject to the purchase minimum of 100
shares and a maximum purchase of 10,000 shares. The offering expired on August
30, 1996 with remaining shares offered to the public. The minimum number of
shares that can be purchased by the public is 100 shares, and the maximum
number of shares except as otherwise agreed to by the Board of Directors of the
Registrant is 10,000 shares. The net proceeds to the Registrant from the sale
of common stock is estimated to be $10.668 million. Through November 6, 1996,
there have been 183,881 shares of stock sold in the offering totaling
$4,904,106. The Registrant has used $2,900,000 to retire debt at Associated
Bank of Green Bay (see Note 9 above). The balance of the funds will be used in
the acquisition of U.P. Financial, Inc., working capital needs, and to
generally strengthen the Registrant's capital position in anticipation of
future growth through acquisitions.
FINANCIAL CONDITION
LOANS
Through September 30, 1996, loan balances increased by $73.0 million. The
acquisition of South Range State Bank accounted for $26.8 million of this
increase and the remainder was due to loan
<PAGE> 15
growth. The loan to deposit ratio has increased from 90.6% at December 31,
1995, to 96.3% at September 30, 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 possible while also 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 September 30, 1996 the allowance for loan losses was equal to
1.45% of total loans outstanding compared to 1.42% at December 31, 1995.
The majority of the increase in impaired loans from December 31, 1995 to
September 30, 1996 consisted of leases to the Bennett Funding Group, Inc. The
loan loss reserve allocated to this loan is adequate to meet the estimated
exposure to loss.
Commercial real estate loans and loans to general commercial businesses have
increased by $10.5 and $7.2 million, respectively, through the third quarter of
1996 to $62,153,000 and $62,678,000, respectively, at September 30, 1996,
mainly due to the acquisition of South Range State Bank and management's desire
to increase the commercial loan portfolio. Commercial leases increased $8.1
million to $13,900,000 at September 30, 1996 and governmental leases increased
$12.5 million to $30,576,000. 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 $22.8 million has occurred due to the
acquisition of South Range State Bank and management's emphasis on this type of
loan. Consumer loans have increased $5.2 million through the third quarter of
1996 due mainly to the acquisition of South Range State Bank. Construction
loans have increased $6.6 million due to the purchase of South Range State Bank
and management's efforts to build this area of the loan portfolio. The table
below shows total portfolio loans outstanding, in thousands of dollars, at
September 30, 1996, and December 31, 1995, and their percentage of the total
loan portfolio.
<TABLE>
<CAPTION>
September 30, December 31,
1996 % of total 1995 % of total
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Loans:
Commercial real estate $ 62,153 21.11% $ 51,609 23.30%
Commercial, financial and agricultural 62,678 21.29% 55,445 25.03%
Leases
Commercial 13,900 4.72% 5,806 2.62%
Governmental 30,576 10.38% 18,061 8.15%
1-4 family residential real estate 81,257 27.59% 58,433 26.38%
Consumer 35,098 11.92% 29,918 13.51%
Construction 8,802 2.99% 2,235 1.01%
-------- --------
Total $294,464 $221,507
======== ========
</TABLE>
CREDIT QUALITY
<PAGE> 16
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 it's historical chargeoff percentage. Chargeoffs through
September 30, 1996 have decreased $33,000 from the same period in 1995. The
majority is a result of a $92,000 increase in installment loan chargeoffs with
a decrease of $41,000 in commercial loan chargeoffs and a decrease of $98,000
in lease receivable chargeoffs. The provision for loan loss has increased
through September 30, 1996 to the same period in 1995 as a result of the
Registrant's increased loan portfolio. See Note 7 to the third 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 September 30, 1996, and
December 31, 1995. The majority of the increase in nonaccrual loans from
December 31, 1995 to September 30, 1996 consisted of leases to the Bennett
Funding Group, Inc. (discussed above). The loan loss reserve allocated to this
loan is adequate to meet the estimated exposure.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------ ------
<S> <C> <C>
Nonaccrual loans $3,115 $ 579
Loans 90 or more days past due 34 1,439
Renegotiated loans 0 0
</TABLE>
INVESTMENTS
Available for sale and hold to maturity securities have decreased through the
period ending September 30, 1996. Although there was an increase in available
for sale securities due to the acquisition of South Range State Bank, the
Registrant's need for funds due to it's emphasis on loan growth has resulted in
an overall decrease in the investment portfolio. 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 which are classified as held to
maturity (of which there are none at September 30, 1996 and $835,000 at
December 31, 1995) are state and local political subdivision issues from small
issuers whose bonds have little market liquidity.
DEPOSITS
Total deposits increased through September 30, 1996 by $61.5 million. A
substantial portion, $32.9 million, of the increase came from the acquisition
of South Range State Bank. The remainder came as a result of internal deposit
growth. Interest bearing deposit balances increased through September 30,
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
<PAGE> 17
in Note 8 to the third quarter financial statements above). The time deposits
of $100,000 or more consist of 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 $7.3 million through September 30, 1996 (refer to the table
presented in Note 9 to the third quarter financial statements above for the
composition of the increase). The borrowing were used in the acquisition of
South Range State Bank and in the funding of one specific loan. At September
30, 1996, $13.0 million 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.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income through September 30, 1996 increased by 28.5% compared to
September 30, 1995. The net interest margin at September 30, 1996 was 5.06%,
compared to 4.92% for all of 1995 and 5.38% at September 30, 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%, at September 30,
1996 it was 9.25%, and at September 30, 1995 it was 9.11%. Interest income
from loans represented 92.4% of total interest income through September 30,
1996 compared to 90.4% for all of 1995 and 89.8% through September 30, 1995.
In all cases, the total amount of interest income and the yield on total
earning assets is strongly influenced by lending activities.
PROVISION FOR LOAN LOSSES
<PAGE> 18
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 $377,000 through September 30, 1995 to
$1,084,000 through September 30, 1996 is due to loan growth, particularly in
the commercial real estate portfolio. Management expects the provision for the
remainder of the year to continue to remain above 1995 levels, totaling
approximately 220% of 1995 provision, due to the increased risk of loss on
Bennett Funding Group (discussed above).
NONINTEREST INCOME
Service charges on deposit accounts increased $128,000 through September 30,
1996 vs. the same period 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 through September 30, 1996 vs. same period of
1995. Income from sale of securities 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 $108,000 through
September 30, 1996 vs. the same period of 1995 due mainly to a reduction of
foreign exchange income.
NONINTEREST EXPENSES
Noninterest expense showed an increase of 27.2% through September 30 of 1996
vs. the same period 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 September 30, 1996 vs. September 30, 1995,
due to the Registrant's purchase of the Rudyard branch and South Range State
Bank and the opening of additional branches. Occupancy expense, furniture and
equipment expense, and other noninterest expenses increased due to the
purchases of the Rudyard branch and South Range State Bank, as well as the
opening of additional branches and overall growth of the Registrant. 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 30.1% of income before income tax at
September 30, 1996 compared to 28.4% at September 30, 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.
<PAGE> 19
INTEREST RATE RISK
Management actively manages the Registrant'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. 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 certificate's
of deposit less than $100,000 maturing within one year and an increase in money
market accounts which are placed entirely in the 1 - 90 days maturity category.
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 September 30, 1996 and 1995.
<TABLE>
<CAPTION>
September 30, 1996
Required Actual
$ % $ %
------- -------- --------- -----
<S> <C> <C> <C> <C>
Tier 1 risk-adjusted capital ratio $10,152 4.00% $ 25,844 10.18%
Total risk-adjusted capital ratio $20,305 8.00% $ 29,030 11.44%
Tier 1 leverage ratio $13,992 4.00% $ 25,844 7.39%
Tier 1 capital $ 25,844
Tier 2 capital 3,186
Total risk-based capital 29,030
Total risk-weighted assets 253,812
Average total assets 349,791
<CAPTION>
September 30, 1995
Required Actual
$ % $ %
------- -------- --------- -----
<S> <C> <C> <C> <C>
Tier 1 risk-adjusted capital ratio $ 7,732 4.00% $ 20,599 10.66%
</TABLE>
<PAGE> 20
<TABLE>
<S> <C> <C> <C> <C>
Total risk-adjusted capital ratio $15,464 8.00% $ 23,019 11.91%
Tier 1 leverage ratio $10,510 4.00% $ 20,599 7.84%
Tier 1 capital $ 20,599
Tier 2 capital 2,420
Total risk-based capital 23,019
Total risk-weighted assets 193,306
Average total assets 262,740
</TABLE>
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
At the date hereof, there were no material pending legal proceedings, other
than routine litigation incidental to the business of banking, to which the
Registrant or any of its subsidiaries is a party of or which any of its
properties is the subject.
ITEM 2. CHANGES IN SECURITIES.
The Registrant's Articles of Incorporation have been amended to increase its
authorized common stock to 6,000,000 shares without par value and to increase
its authorized series preferred stock to 500,000 shares. In addition, the
Articles have been amended to provide (a) for a classified board of directors,
(b) for filling vacancies or new positions on the Board of Directors, ( c)
special vote requirements for removal of directors, (d) procedures shareholders
must follow to nominate directors, (e) notice requirements shareholders must
satisfy to present a proposal for consideration at annual meeting of
shareholders, (f) for required evaluations by the directors of certain
transactions, and (g) increased voting requirements to amend or repeal these
provisions or adopt inconsistent provisions. Any or all of these provisions
may be interpreted as having anti-takeover implications.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There have been no defaults upon senior securities relevant to the requirements
of this section.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the third quarter of fiscal 1996 to a vote of
the Registrant's stockholders.
ITEM 5. OTHER INFORMATION.
None.
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
Number Exhibit
- ------ -------
3(a) Amendments to Articles III, VII, VIII, IX, and X of the Registrant's
Articles of Incorporation. Previously filed as Appendices to the
Registrant's definitive proxy statement for its annual meeting held
April 23, 1996. Here incorporated by reference.
10(a) Deferred compensation, deferred stock and current stock purchase plan
for non-employee directors. Previously filed as an exhibit to the
Registrant's definitive proxy statement for its annual meeting held
April 23, 1996. Here incorporated by reference.
27 Financial Data Schedule. Filed herewith.
The following documents are filed as part of Part I, Item 1 of this report:
Consolidated Balance Sheets - September 30, 1996 (Unaudited) and December
31, 1995 (Audited)
Consolidated Statements of Income - Three months ended September 30, 1996
and 1995 (unaudited) and Nine months ended September 30, 1996 and
1995 (Unaudited)
Consolidated Statement of Changes in Shareholders' Equity - Three months
ended September 30, 1996 and 1995 (Unaudited), and Nine months ended
September 30, 1996 and 1995 (Unaudited)
Consolidated Statement of Cash Flows - Nine months ended September 30,
1996 and 1995 (Unaudited)
Notes to consolidated financial statements - September 30, 1996
(b) Report on Form 8-K. Previously filed on February 14, 1996 (Commission File
Number 2- 54663), and amended on April 8, 1996 . Here incorporated by
reference
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST MANISTIQUE CORPORATION
(Registrant)
November 12, 1996 /s/ Ronald G. Ford
- ----------------- -------------------------------
Date RONALD G. FORD, President & CEO
November 12, 1996 /s/ Richard B. Demers
- ----------------- -------------------------------
Date RICHARD B. DEMERS, Chief
Accounting Officer
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 15,334
<INT-BEARING-DEPOSITS> 1,149
<FED-FUNDS-SOLD> 5,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,339
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 294,464
<ALLOWANCE> 4,278
<TOTAL-ASSETS> 358,873
<DEPOSITS> 305,940
<SHORT-TERM> 3,788
<LIABILITIES-OTHER> 3,703
<LONG-TERM> 13,583
0
0
<COMMON> 17,696
<OTHER-SE> 13,063
<TOTAL-LIABILITIES-AND-EQUITY> 358,873
<INTEREST-LOAN> 19,319
<INTEREST-INVEST> 1,190
<INTEREST-OTHER> 401
<INTEREST-TOTAL> 20,910
<INTEREST-DEPOSIT> 8,565
<INTEREST-EXPENSE> 9,109
<INTEREST-INCOME-NET> 11,801
<LOAN-LOSSES> 1,084
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 8,327
<INCOME-PRETAX> 3,404
<INCOME-PRE-EXTRAORDINARY> 3,404
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,379
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.11
<YIELD-ACTUAL> 5.06
<LOANS-NON> 3,115
<LOANS-PAST> 34
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,137
<CHARGE-OFFS> 325
<RECOVERIES> 97
<ALLOWANCE-CLOSE> 4,278
<ALLOWANCE-DOMESTIC> 800
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,478
</TABLE>
