<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value.
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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ X ].
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 1, 1997: The aggregate market value (based on
limited trading) of the voting stock held by non-affiliates of the Registrant
based on a per share price of $33.00 as of March 1, 1997, was $63,526,848
(common stock, no par value)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date: Common stock, no par value,
2,377,761 shares outstanding, as of March 17, 1997.
Documents incorporated by reference: Portions of the Registrant's proxy
statement for it's annual meeting to be held April 15, 1997, are incorporated
by reference into Part III.
<PAGE> 2
PART I
Item 1. Business
First Manistique Corporation (the "Registrant") was incorporated under the laws
of the state of Michigan on December 16, 1974. The Registrant owns all of the
outstanding stock of its banking subsidiaries, North Country Bank and Trust and
North Country Bank (collectively "Banks"). The Registrant also owns all of the
outstanding stock of three nonbank subsidiaries: First Manistique Agency, an
insurance agency which sells title, life, and health insurance, First Northern
Services Company, a real estate appraisal company which is currently inactive,
and First Rural Relending Company, a non-profit relending company which assists
qualified borrowers with discounted loan rates creating cash flow and growth
potential to new or established businesses. The Banks represent the principal
assets of the Registrant.
The Registrant became a registered bank holding company under the Bank Holding
Company Act of 1956, as amended (the "Act"), on April 1, 1976, when it acquired
First Northern Bank and Trust ("First Northern") and Manistique Lakes Bank.
Manistique Lakes Bank merged with First Northern on May 1, 1986, with the
survivor being First Northern. The Registrant acquired all of the outstanding
stock of the Bank of Stephenson on February 8, 1994, in exchange for cash and
common stock. The Bank of Stephenson was operated as a separate banking
subsidiary of the Registrant until September 30, 1995, when it was merged into
First Northern with First Northern being the survivor. First Northern acquired
a substantial portion of the banking assets and assumed a substantial portion
of the banking liabilities of Newberry State Bank on December 8, 1994, in
exchange for cash. First Northern 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 Registrant acquired all of the outstanding stock of
South Range State Bank ("South Range") on January 31, 1996, in exchange for
cash and notes. South Range operates as a separate banking subsidiary of the
Registrant. On August 12, 1996, First Northern and South Range changed their
names to North Country Bank and Trust and North Country Bank, respectively.
The Registrant acquired all of the outstanding stock of U.P. Financial, Inc.
("U.P. Financial") on February 4, 1997, in exchange for cash. U.P. Financial
owned 100% of the outstanding stock of First National Bank in Ontonagon
("Ontonagon"), a Michigan banking institution. Upon acquisition, Ontonagon was
merged into North Country Bank, with North Country Bank being the survivor.
The Banks are engaged in the general commercial banking business, providing a
full range of loan and deposit products. These banking services include
customary retail and commercial banking services, including checking and
savings accounts, time deposits, interest bearing transaction accounts, safe
deposit facilities, real estate mortgage lending, commercial lending, and
direct and indirect consumer financing.
The principal source of revenue for the Registrant is interest and fees on
loans and investments. The sources of income for the three most recent years
are as follows:
<PAGE> 3
1996 1995 1994
----------------------
Interest and fees on loans 89.0% 85.1% 78.2%
Investment income 5.0% 6.5% 12.8%
Other interest income 1.5% 2.6% 1.5%
Non-interest income 4.5% 5.8% 7.5%
----------------------
100.0% 100.0% 100.0%
----------------------
The Banks' primary market areas are the area within a radius of 30 miles from
their various offices in the Upper Peninsula of Michigan. North Country Bank
and Trust is headquartered in Manistique, Michigan. The executive offices and
mailing address are located at 130 S. Cedar Street, Manistique, Michigan 49854.
North Country Bank and Trust maintains offices in Schoolcraft, Delta,
Mackinac, Luce, Alger, Menominee, Dickinson, Marquette, and Chippewa counties,
as well as in the Garden Peninsula and on Mackinac Island. The population of
these counties combined is approximately 240,000. North Country Bank and Trust
operates nineteen branch offices, provides drive-in convenience at sixteen
locations, and has automatic teller machines operating at eight locations.
North Country Bank and Trust has no foreign offices. The main office of North
Country Bank is located in Ripley, Houghton County, Michigan. North Country
Bank maintains offices in Houghton, Keweenaw, Ontonagon, Gogebic, and Baraga
counties. The population of these counties combined is approximately 72,000.
North Country Bank operates six branch offices, provides drive-in convenience
at four locations, and has automatic teller machines operating at three
locations.
As of December 31, 1996, the Banks employed approximately 166 full-time and 27
part-time employees.
Banking is a highly competitive business. The Banks compete primarily with
financial institutions in their market areas for loans and deposits. In their
primary market, namely the Upper Peninsula of Michigan, the Banks maintain the
second largest deposit base, or approximately twelve percent of the deposit
market share. There are 17 banking and savings institutions and 28 credit
unions with offices in the Upper Peninsula of Michigan.
In addition to the other banks, the Banks also compete for loans and deposits
with savings and loan associations, credit unions, investment firms, and large
national retailers, and compete for deposits with money market funds. In order
to successfully compete, management has developed a sales and service culture,
stresses and rewards excellent customer service, and designs products to meet
the needs of the customer. The Banks also utilize their ability to sell loans
in the secondary market.
The Banks make mortgage, commercial, and installment loans to customers
primarily in the Upper Peninsula of Michigan. Fees may be charged for these
services. Historically, the Banks have predominantly sold their secondary
market conforming residential mortgage loans.
The Registrant 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 Registrant's exposure to credit
loss in the event of nonperformance by the other party to the financial
<PAGE> 4
instrument is represented by the contractual amount of those instruments.
The Registrant follows the same credit policy to make such commitments as it
uses for on-balance-sheet items.
The Registrant had the following fixed and variable rate commitments
outstanding at December 31 (in thousands):
1996 1995
---- ----
Fixed Variable Fixed Variable
------ -------- ----- --------
Outstanding letters of credit $2,377 $1,288
Unused lines of credit $4,192 20,029 $3,474 8,556
Loan commitments outstanding 7,185 6,882
------ ------- ------ ------
$4,192 $29,591 $3,474 $16,726
Fixed rates on unused lines of credit ranged from 9.00% to 18.00% at December
31, 1996.
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.
The Banks support the growth of the service industry, with its year round
resort and related businesses, logging, manufacturing, and many other
activities important to growth in the Upper Peninsula. The economy of the
market areas of the Banks is affected by summer and winter tourism activities
and, accordingly, the Banks experience seasonal consumer and commercial deposit
growth, with substantial growth increases from May to September.
There are no material concentrations of credit to, nor have other material
portions of the Banks deposits been received from, a single person, persons,
industry, or group.
In 1993, North Country Bank and Trust joined the Federal Home Loan Bank of
Indianapolis. North Country Bank joined in 1996. The Federal Home Loan Bank
of Indianapolis generates an additional source of liquidity and long-term
funds. Membership in the Federal Home Loan Bank also provides access to
additional advantageous lending programs. The Community Investment Program
makes advances to be used for funding community-oriented mortgage lending, and
the Affordable Housing Program grants advances to fund lending for long-term
low and moderate income owner occupied and affordable rental housing at
subsidized interest rates.
The Banks regularly assess their ability to raise funds through the issuance of
certificates of deposit in denominations of $100,000 or more in the local and
regional market area and have established conservative guidelines for the total
funding to be provided by these deposits. These deposits were slightly more
than eight percent of total deposits at December 31, 1996. The Banks also use
federal funds purchased from correspondent banks and the Federal Reserve Bank
to respond to deposit fluctuations and temporary loan demands.
As of December 31, 1996, the Banks had no material risks attendant to foreign
sources. Compliance with federal, state, and local statutes and/or ordinances
relating to the protection of
<PAGE> 5
the environment is not expected to have a material effect upon the Banks'
capital expenditures, earnings, or competitive position.
SUPERVISION AND REGULATION
Banking is a highly regulated industry, with numerous federal and state laws
and regulations governing the organization and operation of banks, bank holding
companies, and their affiliates. As a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "Act"), the Registrant is subject
to supervision and examination by the Board of Governors of the Federal Reserve
Board ("Federal Reserve Board") and is required to file with the Federal
Reserve Board annual reports and information regarding its business operations
and those of its subsidiaries. The Act requires the Registrant to obtain
Federal Reserve Board approval before: (a) acquiring (except in certain
limited circumstances) more than a five percent ownership interest in any class
of the voting securities of any bank or bank holding company; (b) acquiring all
or substantially all of the assets of a bank or bank holding company; or ( c)
merging or consolidating with another bank holding company.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act was signed into law. This legislation authorizes adequately
capitalized and adequately managed bank holding companies, beginning September
29, 1995, to acquire banks located outside their respective home state,
irrespective of state law. The Federal Reserve Board is authorized to approve
bank acquisitions by out-of-state bank holding companies whether or not such
acquisition is prohibited by state law. This legislation also authorizes,
effective June 1, 1997 (subject to individual state rights to (a) accelerate
this date or (b) to prohibit interstate branching within its borders), banking
organizations to branch nationwide by acquisition or consolidation of existing
banks in other states. Michigan opted to accelerate the June 1, 1997 date to
November 29, 1995 and now permits interstate branching from other states which
also permit interstate branching. Interstate acquisitions and branching are
subject to the approval of various federal and state agencies and other
conditions. While it is too early to assess the impact of this legislation, it
is reasonable to assume it could foster further industry consolidation. The
Registrant could benefit indirectly from this legislation through lower
supervisory costs related to overall improved quality in the industry.
The Banks are organized as Michigan banking corporations and are regulated and
supervised by the Financial Institutions Bureau of the Michigan Department of
Commerce. Michigan law permits Michigan state-chartered banks to consolidate
on a state-wide basis and to operate the offices of merged banks as branches of
a surviving bank. Also, with the written approval of the Financial
Institutions Bureau, a Michigan bank may relocate its main office to any
location in the state, establish and operate branch banks anywhere in the
state, and contract with other banks to act as branches thereof.
The Banks accept customer deposits, and the deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC"). Consequently, the Banks are subject to
the provisions of the Federal Deposit Insurance Act and to examination by the
FDIC. As a result of such supervision and regulation, the Banks are subject to
requirements to maintain reserves against deposits, restrictions on the nature
and amount of loans which may be made and the interest which may be charged
thereon, restrictions relating to investments and other activities, limitations
based on capital and surplus, limitations on branching, and limitations on the
payment of dividends on
<PAGE> 6
common stock. These regulations are intended primarily for the protection of
the depositors and customers of the Banks, rather than shareholders of the
Registrant.
The provisions of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA) directly affect banks and bank holding companies. FIRREA
requires the FDIC to maintain two funds to insure customer deposits: for
banks, the Bank Insurance Fund ("BIF"), and for savings and loan associations,
the Savings Association Insurance Fund ("SAIF"). FIRREA also allows bank
holding companies to acquire financially sound thrift institutions.
Previously, bank holding companies could acquire only failing thrift
institutions. Through a "cross-guarantee" provision in FIRREA, the FDIC may
hold commonly controlled depository institutions liable if an affiliated
depository institution fails. In such an event, the interests of the FDIC are
placed ahead of the bank holding company shareholders.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
significantly affects the operation of banks and their relationship with
federal regulatory agencies. Under FDICIA, the FDIC has implemented a system
of risk based premiums for deposit insurance pursuant to which the premiums
paid by a depository institution are based on the probability that the
applicable insurance fund will incur a loss in respect of such institution.
Also, under FDICIA, federal regulatory agencies are developing comprehensive
safety and soundness standards. FDICIA also prescribes various supervisory
actions by federal regulatory agencies based on an insured institution's level
of capital. These prescribed actions increase restrictions on and heighten
regulatory scrutiny of the institution as its capital declines.
Federal law also regulates transactions between the Registrant and the Banks,
including the amount and nature of loans or other extensions of credit.
The Federal Reserve has established guidelines with respect to the maintenance
of appropriate levels of capital for the Banks. The Federal Reserve Board has
also established similar guidelines for the Registrant. Compliance with such
standards can also limit the amount of dividends which the Banks can pay to the
Registrant and the amount of dividends the Registrant can pay to its
shareholders.
The banking industry is also affected by the monetary and fiscal policies of
the federal government, including the Federal Reserve Board, which exerts
considerable influence over the cost and availability of funds obtained for
lending and investing.
Proposals to change the laws and regulations governing the operations and
taxation of banks, and companies which control banks and other financial
institutions, are frequently raised by Congress. The likelihood of any major
changes and the impact such changes might have on the Registrant are, however,
impossible to determine.
The Registrant and its subsidiary banks are engaged in a single industry
segment, commercial banking, broadly defined to include commercial and retail
banking and trust activities along with other permitted activities closely
related to banking, namely credit life and accident and health insurance.
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
<PAGE> 7
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.
Net Interest Income
For Year Ended December 31, 19xx
(Fully taxable equivalent, in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earnings assets:
Loans (domestic) (1) (2) (3) $277,464 $27,675 9.97% $202,570 $20,540 10.14%
Taxable investment securities 22,164 1,297 5.85% 25,876 1,398 5.40%
Tax-exempt investment
securities (2) 1,344 121 9.00% 2,751 195 7.09%
Federal funds sold 7,020 362 5.16% 5,180 273 5.27%
Federal Home Loan Bank 1,621 125 7.71% 921 83 9.01%
Interest-bearing deposits
with other banks 1,715 75 4.37% 4,127 251 6.08%
-------- ------- ----- -------- ------- -----
Total interest-earning assets $311,328 $29,655 9.53% $241,425 $22,740 9.42%
Non-interest earning assets:
Cash and due from banks $13,056 $9,789
Premises and equipment, net 13,172 10,036
Other assets 10,688 8,860
Less: allowance for loan
losses ($3,815) ($2,561)
-------- --------
TOTAL $344,429 $267,549
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits and interest-
bearing demand deposits $148,412 $5,391 3.63% $118,162 $4,447 3.76%
Time deposits 114,585 6,233 5.44% 88,462 4,689 5.30%
Federal funds purchased,
securities sold under
repurchase agreements,
and other borrowings 14,864 1,050 7.06% 8,548 425 4.97%
-------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities $277,861 $12,674 4.56% $215,172 $9,561 4.44%
-------- ------- ----- -------- ------- -----
Non-interest bearing liabilities
Domestic demand deposits $32,194 $25,802
Other 3,406 3,653
Shareholders' equity 30,968 22,922
-------- --------
TOTAL $344,429 $267,549
-------- --------
Net interest earnings $16,981 $13,179
------- -------
Net yield on interest-earning
assets 5.45% 5.46%
----- -----
<CAPTION>
Year Ended December 31,
-------------------------------
1994
-------------------------------
Average Yield/
Balance Interest Rate
-------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earnings assets:
Loans (domestic) (1) (2) (3) $137,444 $12,151 8.84%
Taxable investment securities 31,618 1,645 5.20%
Tax-exempt investment
securities (2) 5,564 438 7.87%
Federal funds sold 3,942 167 4.24%
Federal Home Loan Bank 0 0 n/a
Interest-bearing deposits
with other banks 415 35 8.43%
-------- ------- -----
Total interest-earning assets $178,983 $14,436 8.07%
Non-interest earning assets:
Cash and due from banks $6,787
Premises and equipment, net 6,543
Other assets 3,628
Less: allowance for loan
losses ($1,863)
--------
TOTAL $194,078
--------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits and interest-
bearing demand deposits $71,148 $2,035 2.86%
Time deposits 82,761 3,713 4.49%
Federal funds purchased,
securities sold under
repurchase agreements,
and other borrowings 5,306 305 5.75%
-------- ------- -----
Total interest-bearing
liabilities $159,215 $6,053 3.80%
-------- ------- -----
Non-interest bearing liabilities
Domestic demand deposits $17,513
Other 3,546
Shareholders' equity 13,804
--------
TOTAL $194,078
--------
Net interest earnings $8,383
-------
Net yield on interest-earning
assets 4.68%
-----
</TABLE>
(1) For the purpose of these computations, non-accruing loans are included in
the average loans 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
<PAGE> 8
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.
Analysis of Changes in Net Interest Income
For Year Ended December 31, 19xx
(Fully taxable equivalent, in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
1996 compared to 1995 1995 compared to 1994
Increase (decrease) Due to (1) Increase (decrease) Due to (1)
-----------------------------------------------------------------------
Volume Rate Net Volume Rate Net
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earnings assets:
Loans (domestic) $7,472 ($337) $7,135 $6,403 $1,986 $8,389
Taxable investment securities (211) 110 (101) (308) 61 (247)
Tax-exempt investment
securities (117) 43 (74) (203) (40) (243)
Federal funds sold 95 (6) 89 60 46 106
Federal Home Loan Bank 55 (13) 42 83 0 83
Interest-bearing deposits
with other banks (119) (57) (176) 228 (12) 216
------ ----- ------ ------ ------ ------
Total interest-bearing assets $7,175 ($260) $6,915 $6,263 $2,041 $8,304
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits and interest-
bearing demand deposits $1,104 ($160) $944 $1,632 $780 $2,412
Time deposits 1,418 126 1,544 269 707 976
Federal funds purchased,
securities sold under
repurchase agreements,
and other 398 227 625 166 (46) 120
------ ----- ------ ------ ------ ------
Total interest-bearing
liabilities $2,920 $193 $3,113 $2,067 $1,441 $3,508
------ ----- ------ ------ ------ ------
Net change in net interest income/(expense) $4,255 ($453) $3,802 $4,196 $600 $4,796
====== ===== ====== ====== ====== ======
</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.
<PAGE> 9
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, recoveries on loans previously charged off by
loan category, and additions 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, non-accrual
loans, and problem and delinquent loans) and consideration of historical loss
information and local economic conditions.
Additional Information Relative to Allowance for Loan Losses
As of December 31, 19xx
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance of allowance for
possible loan losses at
beginning of period $3,137 $2,350 $917 $834 $625
Loans charged off:
Commercial, financial and
agricultural 1,012 90 92 45 35
Real estate-construction 0 0 0 0 0
Real estate-mortgage 8 0 34 0 0
Consumer 357 252 149 10 22
Leases 0 98 0 0 0
------------------------------------------------------
TOTAL LOANS CHARGED OFF 1,377 440 275 55 57
Recoveries of loans previously
charged off:
Commercial, financial and
agricultural 67 336 118 9 19
Real estate-construction 0 0 0 0 0
Real estate-mortgage 0 22 31 0 0
Consumer 55 98 44 4 8
------------------------------------------------------
TOTAL RECOVERIES 122 456 193 13 27
------------------------------------------------------
Net loans charged off 1,255 (16) 82 42 30
Provisions charged to expense 2,424 771 330 125 239
Allowance from purchase of South
Range State Bank 285 0 0 0 0
Allowance from purchase of
Bank of Stephenson 0 0 1,185 0 0
------------------------------------------------------
BALANCE AT END OF PERIOD $4,591 $3,137 $2,350 $917 $834
======================================================
Total loans outstanding at
end of period $314,886 $221,507 $183,169 $87,145 $73,108
======================================================
Average total loans outstanding
for the year $277,464 $202,570 $137,444 $80,332 $66,639
======================================================
Ratio of net charge-offs during
period to average loans
outstanding 0.45% -0.01% 0.06% 0.05% 0.05%
======================================================
</TABLE>
<PAGE> 10
The allocation of the allowance for loan losses for the years ended December 31
is shown on the following table.
Allocation of the Allowance for Loan Losses
As of December 31, 19xx
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in each Loans in each Loans in each
category to category to category to
Amount Total Loans Amount Total Loans Amount Total Loans
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $2,356 45.0% $583 48.3% $655 51.6%
Real estate-
construction 0 4.4% 0 1.0% 0 0.7%
Real estate-mortgage 81 25.6% 59 26.4% 270 32.1%
Consumer 341 9.9% 112 13.5% 125 15.6%
Leases 287 15.1% 23 10.8%
Unallocated 1,526 N/A 2,360 N/A 1,300 N/A
---------------------------------------------------------------------------
$4,591 100.0% $3,137 100.0% $2,350 100.0%
===========================================================================
<CAPTION>
1993 1992
-------------------------------------------------
Percent of Percent of
Loans in each Loans in each
category to category to
Amount Total Loans Amount Total Loans
-------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $410 61.7% $400 59.7%
Real estate-
construction 0 0.0% 0 0.0%
Real estate-mortgage 180 29.0% 175 30.0%
Consumer 75 9.3% 75 10.3%
Leases
Unallocated 252 N/A 184 N/A
-------------------------------------------------
$917 100.0% $834 100.0%
=================================================
</TABLE>
<PAGE> 11
The following table presents the remaining maturity of total loans outstanding
(excluding residential real estate mortgage and consumer loans) at December 31,
1996, according to scheduled repayments of principal. The amounts due after
one year are classified according to the sensitivity to changes in interest
rates.
Maturity and Rate Sensitivity of Selected Loans
As of December 31, 19xx
(In thousands)
<TABLE>
<CAPTION>
Commercial
Financial
Agricultural Construction
------------ ------------
<S> <C> <C>
In one year or less $81,773 $12,454
After one year but within five years
Variable interest rates 2,294 0
Fixed interest rates 52,439 1,443
After five years
Variable interest rates 322 0
Fixed interest rates 52,413 0
------------ ------------
Total $189,241 $13,897
============ ============
</TABLE>
<PAGE> 12
The following table presents the maturities of time certificates of deposit and
other time deposits of $100,000 or more.
Maturity of COD's Greater Than $100,000
As of December 31, 1996
(In thousands)
3 months or less $ 8,019
Over 3 months through 6 months 6,247
Over 6 months through 12 months 4,621
Over 12 months 2,963
-------
Total $21,850
=======
<PAGE> 13
The following table presents a summary of non-performing assets.
Non-Performing Assets and Problem Loans
As of December 31, 19xx
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $49 $579 none none none
Accruing loans past-due 90 days
or more. 68 1,439 $142 $116 $175
Restructured loans none none none none none
Interest income that would have been
recorded under original terms none none none none none
Interest income recorded during period none none none none none
</TABLE>
<PAGE> 14
The following table is an analysis of securities.
Investment Securities
As of December 31, 19xx
(In thousands)
<TABLE>
<CAPTION>
Available for Sale
------------------------------
1996 1995 1994
--------- ---------- --------
<S> <C> <C> <C>
U.S. treasury and federal agency $12,569 $20,899 $17,057
State and political subdivisions 917 481 3,130
Other securities 4,275 4,840 1,742
--------- ---------- --------
TOTAL $17,761 $26,220 $21,929
========= ========== ========
Held to Maturity
------------------------------
1996 1995 1994
--------- ---------- --------
U.S. treasury and federal agency $0 $0 $8,799
State and political subdivisions 0 835 1,150
Other securities 0 0 3,917
--------- ---------- --------
TOTAL $0 $835 $13,866
========= ========== ========
</TABLE>
<PAGE> 15
The following table presents the maturity schedule of securities held, and a
weighted average of those securities, as of December 31, 1996. Mortgage backed
securities are included with other securities, stratified by maturity dates.
Registrant 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.
Maturities of Investment Securities
As of December 31, 1996
(Fully taxable equivalent, in thousands)
<TABLE>
<CAPTION>
(1)
Weighted
U.S. Treasury State & Political Other Average
& Federal Agency Subdivision Securities Yield
----------------- ----------------- ---------- ---------
<S> <C> <C> <C> <C>
One year or less $4,117 $103 $420 6.35%
One through five years 1,507 128 285 6.05%
five through 10 years 5,019 686 536 6.54%
Over 10 years 1,926 0 833 6.67%
Equity securities 0 0 2,201 n/a
----------------- ----------------- ----------
$12,569 $917 $4,275
================ ================= ==========
</TABLE>
(1) Weighted average yield includes the effect of tax-equivalent adjustments
using a 34% tax rate.
<PAGE> 16
Item 2. Properties
The Registrant conducts business from 23 banking and administrative offices.
Of these, 18 are owned in fee simple covering approximately 85,000 square feet,
and 5 are leased covering approximately 5,000 square feet. The Registrant's
headquarters, which were remodeled in 1996, are located at 130 S. Cedar Street,
Manistique, Michigan 49854. This facility is used for centralized support
services and corporate administration. Other owned and leased properties are
banking branches. All of the facilities are believed to be in good condition
and adequate to meet the Registrant's present needs.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of fiscal 1996 to a vote of
the Registrant's stockholders.
Additional Item - Executive Officers
Name Age Position
- -------------- ----- ------------------------------------
Ernest D. King 73 Chairman of the Registrant and North
Country Bank and Trust
Michael Henricksen 54 Vice-Chairman of the Registrant and
Director of North Country Bank and Trust
Ronald G. Ford 49 President & Chief Executive Officer of the
Registrant and North Country
Bank and Trust
Richard B. Demers 37 Chief Operating Officer of the Registrant
and Executive Vice-President of North
Country Bank and Trust
Sherry Littlejohn 36 Executive Vice-President of the Registrant
and Chief Operating Officer of North
Country Bank and Trust
Fred LaMuth 49 Secretary and Treasurer of the Registrant
The foregoing officers serve at the pleasure of the Board of Directors and are
appointed by the Board annually. There is one family relationship among the
directors of the Registrant and the
<PAGE> 17
executive officers - Ernest D. King, listed above, is the father of Thomas G.
King, a Director of the Registrant. There are no arrangements or understandings
between any officer and any other person pursuant to which the officer was
elected.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
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. During the third and fourth quarters of
1996, the Registrant offered and sold 237,777 shares of common stock to the
public at a per share price of $26.67.
There is no active market for the Registrant's common stock, and there is no
published information with respect to it's market price. There are occasional
direct sales by shareholders of which the Registrant's management is generally
aware. It is the understanding of the management of the Registrant that over
the last two years the Registrant's common stock has sold at a premium to book
value. From January 1, 1995, through December 31, 1996, there were, so far as
the Registrant's management knows, approximately 100 sales of shares of the
Registrant's common stock, involving a total of approximately 67,500 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 $26.67 per share in the
last quarter of 1996, and the lowest price was $14.37 in the first quarter of
1995. To the knowledge of management, the last sale of common stock occurred
on March 17, 1997, at a price of $33.00 per share. As of March 1, 1997, there
were 1,410 holders of record of the Registrant's common stock.
The following table sets forth the range of high and low sales prices of the
Registrant's common stock during 1995 and 1996, based on information made
available to management. Although management is not aware of any transactions
at higher or lower prices, there may have been transactions at prices outside
the ranges listed in the table.
Sales Price per share
---------------------
1995 High Low
- --------------- ------ ------
First Quarter $17.67 $14.37
Second Quarter $19.33 $17.67
Third Quarter $19.33 $19.33
Fourth Quarter $20.67 $19.33
<PAGE> 18
Sales Price per share
---------------------
1996 High Low
- --------------- ------ ------
First Quarter $23.33 $20.67
Second Quarter $26.00 $23.33
Third Quarter $26.67 $26.00
Fourth Quarter $26.67 $26.67
The following table presents cash dividends paid by quarter for 1996 and 1995:
1996 1995
---- ----
First Quarter Regular .087 .073
First Quarter Special .033 .093
Second Quarter .090 .077
Third Quarter .100 .080
Fourth Quarter .110 .083
<PAGE> 19
Item 6. Selected Financial Data
For Year Ended December 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $28,724 $22,100 $13,798 $7,942 $8,035
Interest expense 12,674 9,561 6,053 3,543 3,788
-------- -------- -------- -------- --------
Net interest income 16,050 12,539 7,745 4,399 4,247
Security gains (losses) (8) (19) 75 175 191
Provision for loan losses 2,424 771 330 125 239
Other income 1,368 1,373 1,037 795 577
Other expenses 11,609 9,368 6,101 3,715 3,277
-------- -------- -------- -------- --------
Income before tax 3,377 3,754 2,426 1,529 1,499
Cumulative effect of change
in accounting for income taxes 0 0 0 13 0
Applicable income taxes 543 1,084 458 260 331
-------- -------- -------- -------- --------
Net income $2,834 $2,670 $1,968 $1,282 $1,168
======== ======== ======== ======== ========
Per Share:
Earnings $1.30 $1.27 $1.14 $1.05 $0.95
Dividends 0.42 0.41 0.20 0.49 0.31
Book Value 13.81 11.87 10.72 8.12 7.57
Ratios based on net income:
Return on average equity 9.15% 11.65% 14.26% 13.33% 13.25%
Return on average assets 0.82% 1.00% 1.01% 1.13% 1.15%
Dividend payout ratio 32.11% 31.97% 17.77% 46.68% 32.14%
Shareholders' average equity
as a percent of average assets 8.99% 8.57% 7.11% 8.45% 8.67%
Financial Condition:
Assets $367,160 $282,791 $253,098 $117,279 $106,798
Loans 314,886 221,507 183,168 87,144 73,108
Securities 17,761 27,056 35,796 17,183 21,107
Deposits 305,239 244,407 223,436 103,717 94,257
Other borrowings 20,441 10,087 3,552 2,250 2,000
Shareholder's equity 32,386 25,006 22,483 9,943 9,260
</TABLE>
<PAGE> 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
HIGHLIGHTS
For First Manistique Corporation ("the Corporation"), 1996 was the third
consecutive year of significant growth. During 1996, 1995 and 1994, the
Corporation acquired the Bank of Stephenson ("Stephenson"), substantially all
of the banking assets and liabilities of Newberry State Bank ("Newberry"), the
Rudyard branch of First of America ("Rudyard"), and South Range State Bank
("South Range"). Further, in 1996, 1995 and 1994, the Corporation opened one,
four, and one new branches, respectively. At December 31, 1993, the
Corporation had total assets of $117.28 million. Total assets increased to
$253.10 million during 1994, $282.79 million during 1995, and reached $367.16
million by the end of 1996, an increase of 213% in three years. While the
largest portion of this growth, approximately $137 million, came through
acquisitions, the remaining $113 million was internally generated. During the
same three year time period, outstanding loan balances increased over 261%, to
$314.89 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 $227.75 million from the end of 1993 to the end of
1996, only $84.85 million, or 37.3% came from the acquisitions. The remaining
$142.9 million, or 62.7%, was internally generated.
Earnings have also continued to increase from 1994 to 1996. Net income was
$2.83 million, $2.67 million and $1.97 million for 1996, 1995 and 1994. Net
income for 1996 was 44% greater than in 1994. Return on average shareholders'
equity was 10.12%, 11.25%, and 11.92% for 1996, 1995 and 1994. Earnings per
share have also increased during this three year period. Earnings per share
were $1.14 in 1994, $1.27 in 1995, and $1.30 in 1996, an increase of 14% from
1994 to 1996. Earnings per share have not increased as quickly as net income
because of the 527,337 shares issued in connection with the acquisition of the
Bank of Stephenson , the 324,315 shares issued prior to the cash acquisition of
the banking assets and liabilities of Newberry State Bank, and the 256,837
shares issued in 1996, the proceeds of which were used for the retirement of
debt incurred in the purchase of South Range State Bank and in the purchase of
U.P. Financial, Inc. (discussed below).
A resolution for a 3-for-1 stock split, for shareholders 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 report have been retroactively adjusted to reflect
the 3-for-1 split.
During 1996, the Corporation's banking subsidiaries changed their names. On
August 12, 1996, First Northern Bank and Trust became North Country Bank and
Trust, and South Range State Bank became North Country Bank.The Corporation'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 1997, with the acquisition of U.P.
Financial, Inc. ("U.P Financial") on February 4, 1997. U.P. Financial owns 100%
of the outstanding stock of First National Bank in Ontonagon ("Ontonagon"), a
Michigan banking institution. Upon acquisition, the assets of U.P. Financial
were merged into North Country Bank, with North Country Bank being the
survivor. This acquisition gives the
<PAGE> 21
Corporation a new presence in the far western corner of Michigan's Upper
Peninsula. At the date of the acquisition, U.P. Financial had consolidated
total assets of $29.76 million, total loans of $20.25 million, and total
deposits of $27.44 million.
Growth remains a critical element of the Corporation'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 Corporation's banking offices are
currently 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 Corporation's banking
network is higher than the average for banking companies the same size as the
Corporation. 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.
FINANCIAL CONDITION
LOANS
Loans represented 85.8% of total assets at the end of 1996 compared to 78.3% of
total assets at the end of 1995. The loan to deposit ratio also increased,
rising from 90.6% at December 31, 1995 to 103.2% at December 31, 1996. Loans
provide the most attractive earning asset yield available to the Corporation
and management believes that the trained 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 Corporation's loan balances at December 31, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
Percent
1996 1995 Change
-------- -------- -------
<S> <C> <C> <C>
Commercial real estate $65,522 $51,608 27.0
Commercial, financial and agricultural 76,033 55,445 37.1
Leases
Commercial 18,974 5,806 226.8
Governmental 28,712 18,061 59.0
1-4 family residential real estate 80,592 58,434 37.9
Consumer 31,156 29,918 4.1
Construction 13,897 2,235 521.8
-------- -------- -------
Total $314,886 $221,507 42.2
======== ======== =======
</TABLE>
<PAGE> 22
The Corporation 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 1996 when compared to 1995.
Commercial real estate balances increased $13.91 million, or 27.0% during the
year. At December 31, 1996, this category accounted for 20.8% of total
outstanding loans. The most prominent types of properties financed include
hotels, motels and similar properties, which accounted for $31.59 million of
the outstanding balance at December 31, 1996. The significant growth in 1996
was a result of the purchase of South Range State Bank.
General commercial lending, consisting of loans to a wide variety of
businesses, also increased significantly. Commercial loans outstanding
increased $20.6 million. The rate of growth, 37.1%, was only slightly less
than the overall growth rate of the lending portfolio. At the end of 1996 this
category accounts for almost one-fourth of all outstanding loans. A
significant portion of this growth was due to the purchase of South Range State
Bank with the remainder a result of management's emphasis on this type of
lending. Most of the Corporation's commercial lending customers are in
Michigan's Upper Peninsula.
The Corporation finances commercial and governmental leases throughout the
country. Over 70% of these leases were acquired from one originator.
Management visits this originator twice a year to review their operations and
credit controls. The Corporation 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 Corporation 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. Management
continues to aggressively pursue leases. The makeup of the lease portfolio has
remained substantially the same from 1994 through 1996. 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 Corporation's outstanding loan balances and is the single largest
lending category. Most of these loans (68% at December 31, 1996 and 67% at
December 31, 1995) 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. South Range's traditional
residential mortgage loan products were three year balloons. As these loans
mature, they are being rewritten as adjustable rate loans. Proportionally
fewer of the properties in the Corporation'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 $6.08 million, $3.28 million and $2.74 million in 1996,
1995 and 1994 as management has looked to expand its activity in the sale of
mortgage loans. Servicing on these loans is retained. The servicing portfolio
has $11.77 million in loans at December 31, 1996.
<PAGE> 23
The remaining significant loan category ($31.16 million outstanding at December
31, 1996) is consumer lending. This category consists of loans to individuals
for a wide variety of purposes. Included are indirect auto loans of $7.2
million, which were acquired from six auto dealers in the Upper Peninsula.
Management first began acquiring indirect paper midway through 1994, and less
than 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 Corporation
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 Corporation 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 Corporation's collection staff. Management is
aggressive in seizing collateral, or initiating foreclosure, in the event late
payments are not quickly resolved.
The majority of the increase in net charge-offs shown below is a result of loan
losses associated with Bennett Funding Group, Inc. The Corporation was a
secured creditor of leases issued to Bennett Funding Group, Inc. ("BFG"), and
Aloha Capital Corporation ("ACC"), a subsidiary of BFG. BFG filed Chapter 11
Bankruptcy on March 29, 1996, and ACC filed involuntary bankruptcy in April of
1996. A bankruptcy trustee was appointed on April 19, 1996, and after that
date, all payments for creditors of BFG and ACC were seized. The Corporation
held leases with BFG totaling $2,792,651 on December 31, 1995. The Corporation
subsequently made an additional lease with ACC in the amount of $500,699 during
January of 1996. The Corporation held first lien positions on all leases held.
This was confirmed when, in June of 1996, the trustee provided a list of
creditors identified as those holding double pledged paper and the Corporation
was not listed. On October 10, 1996, the Bankruptcy Court approved an
agreement which was reached between the Corporation and the trustee. According
to the terms of this settlement, the trustee purchased the Corporation'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 Corporation were released, waived, or settled. The
settlement included the granting 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 for this loan is a real estate mortgage
interest in a commercial real estate project in South Carolina. The payment
stream of the old collateral and RFI pledged properties are additional
collateral for this loan. The new loan to RFI closed on November 22, 1996, and
the trustee purchased ten of the Corporation's existing loans including all
amounts owing thereunder and rights of the Corporation related there to
<PAGE> 24
(including all of the Corporation's rights to collateral for such loans), for
the purchase price of $2,166,000. The Corporation will receive interest only
for sixty months with a payment of principal due at maturity. The interest
rate has been set at 3.00% per annum based on a 365-366 day year for actual
days elapsed. There has been a separate settlement agreement for the other two
blocks of BFG leases owned by the Corporation. One lease, to Americorp, with a
balance of $329,894, has a separate settlement agreement for $.50 per $1.00 of
principal collected by the trustee. The entire amount of principal has been
charged-off due to anticipated lengthy court delays. This lease was insured by
an off-shore insurance company which is being sued by the trustee. The final
lease was a separate note to Aloha Capital with an original amount of $500,699.
An agreement to settle has been reached for $.65 per $1.00 of outstanding
principal. The full amount of principal was charged-off and the Corporation
has recovered $147,651 through March 3, 1997. Management anticipates full
recovery of it's settlement dollars in all settlements.
The Corporation's success in maintaining credit quality is demonstrated in the
following table (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Allowance to total loans at end of year 1.46% 1.42% 1.28%
Net charge-offs (recoveries) $1,256 $(16) $81
Net charge-offs (recoveries) to average
outstanding loans .45% (.01)% .06%
Net charge-offs (recoveries) to beginning
allowance balance 40.03% (.7)% 8.84%
Nonaccrual loans - - -
Loans 90 days or more delinquent
(excluding nonaccrual loans) $68 $1,439 $142
</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
loan 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 Corporation adopted new accounting guidance for impaired loans in 1995 as
described in Notes 1 and 4 to the accompanying consolidated financial
statements. The adoption of this change in accounting guidance did not have a
material impact.
INVESTMENTS
During 1996, the Corporation's total investments, including interest-bearing
deposits in banks, decreased $10.43 million, from $28.73 million to $18.30
million. This decrease was primarily the result of an increase in the
Corporation's outstanding loans. Because of the additional yield associated
with funds invested in loans (as discussed above), management's desire is to
maintain a
<PAGE> 25
minimum balance in the investment portfolio. The amount to be maintained will
be the minimum which will allow the Corporation to meet it's pledging
requirements. Most of the portfolio is invested in U.S. Treasury and agency
securities which have little credit risk and are highly liquid. The Corporation
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
classified as held to maturity are state and local political subdivision issues
from small issuers which have little liquidity, of which there were none at the
end of 1996.
DEPOSITS
Deposit growth has been a key element of the Corporation's expansion strategy.
Total deposits at December 31, 1996 were $305.24 million, compared to $244.41
million and $223.44 million at the end of 1995 and 1994. The acquisitions of
Rudyard and South Range accounted for $41.80 million, or 51.1% of the total
increase of $81.85 million from the end of 1994 to the end of 1996. Further,
deposits of $26.20 million were held at December 31, 1996 at branches opened
during 1994, 1995, and 1996. Deposits over $100,000 consist primarily of
stable, governmental balances and balances from retail customers. There were
no brokered deposits at December 31, 1996, and Management has no current plans
to solicit such deposits.
The Corporation 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 Corporation offers firearms,
golf clubs, diamond jewelry, 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 Corporation 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 $2,162,000 and $986,000 at
December 31, 1996 and 1995.
Another nontraditional source of deposits is the Corporation'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 $4.11 US million at December 31, 1996. Such accounts are available
only to Canadian citizens who are attracted to such accounts due to very low
interest rates paid at domestic Canadian banks.
BORROWINGS
As previously discussed, the Corporation's branching network is a relatively
high cost network in comparison to peer banking companies. Accordingly, the
Corporation has begun to use alternative funding sources to provide funds for
lending activities. Other borrowings increased to $20.44 million at the end of
1996 from $10.09 million in 1995. At December 31, 1996, $16.08 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 Corporation.
<PAGE> 26
LIQUIDITY
The Corporation'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 Corporation 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
Corporation's day-to-day business activities.
RESULTS OF OPERATIONS
SUMMARY
Earnings have continued to increase from 1994 to 1996 as a direct result of the
Corporation's asset growth. Net income was $2.83 million, $2.67 million and
$1.97 million for 1996, 1995 and 1994. Net income for 1996 was 44.0% greater
than in 1994. Earnings per share was $1.30 in 1996, $1.27 in 1995, and $1.14
in 1994, an increase of 14.0% from 1994 to 1996. Earnings per share has not
increased as quickly as net income because of the shares issued in connection
with the acquisition of Stephenson, shares issued prior to the cash acquisition
of the banking assets and liabilities of Newberry, and shares issued to both
retire the debt associated with the purchase of South Range and in the purchase
of U.P. Financial.
Net interest income is the primary source of earnings growth, increasing to
$16.05 million in 1996 from $12.54 million and $7.75 million in 1995 and 1994,
for a total two-year increase of 107.1%. Noninterest income did not keep pace
with the asset growth. Noninterest income of $1.36 million in 1996 was only
22.5% higher than the 1994 amount of $1.11 million. The increase in
noninterest expense to $11.61 million in 1996 from $9.37 million and $6.10
million in 1995 and 1994 exceeded total asset growth. The two-year increase in
noninterest expense was 90.3%, compared to total asset growth of 45.1%.
NET INTEREST INCOME
The Corporation's strong lending function is evident in the net interest income
measurement. Net interest income as a percentage of total interest income was
55.9%, 56.7% and 56.1% in 1996, 1995 and 1994, respectively. Net interest
margin was 5.17%, 5.46% and 4.68% for the same periods.
Interest income from loans represented 93.2% of total interest income in 1996,
compared to 90.3% in 1995 and 84.6% in 1994. 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 9.27%,
9.45% and 8.07% in 1996, 1995 and 1994 respectively.
Total interest expense was $12.67 million in 1996, an increase from $9.56
million and $6.05 million in 1995 and 1994, for an increase of 109.4% from 1994
to 1996. While other sources of funding are beginning to become an important
part of the Corporation's funding strategy, interest expense on deposits still
represented 91.7% of total interest expense in 1996. The yield on
interest-bearing liabilities was 4.10%, 4.44% and 3.80% in 1996, 1995 and 1994.
<PAGE> 27
PROVISION FOR LOAN LOSSES
The Corporation maintains the allowance for loan losses at a level considered
adequate to cover losses inherent in the portfolio. The Corporation 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 1 to the accompanying consolidated financial
statements. The increase in the provision for loan losses, to $2,424,480 in
1996 from $771,000 in 1995 and $330,000 in 1994 is primarily a result of
settlement and restructuring of loans with the Bennett Funding Group (discussed
above) and loan growth.
NONINTEREST INCOME
Noninterest income was $1.36 million, $1.35 million and $1.11 million in 1996,
1995 and 1994. The principal source of noninterest income is service charges
on deposit accounts. In 1996 such fees were $.76 million, an 86.6% increase
over the amount recorded in 1994. Fees on deposit accounts have not kept pace
with overall asset growth since the institutions acquired had lower fee
structures than the Corporation. Management has generally maintained the former
fee levels for competitive purposes.
NONINTEREST EXPENSE
Noninterest expense has steadily increased from 1994 through 1996. The
two-year growth rate was 106.2% for salaries and benefits, and 89.7% for
occupancy expense. As expected, these increases were all consistent with the
Corporation's asset growth. While the growth was expected, a primary objective
of 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 $1.16 million in 1996, compared to
$.57 million in 1995 and $.19 million in 1994.
Somewhat offsetting the intangible amortization is the decrease in deposit
insurance costs. The Corporation qualifies for the lowest risk-based insurance
premiums available from the Bank Insurance Fund (BIF) of the Federal Deposit
Insurance Corporation (FDIC). Virtually all of the Corporation's deposits are
insured by BIF. For 1994, deposit insurance costs were 23 basis points for the
Corporation. Effective May 1, 1995, the FDIC reduced the Corporation's
insurance rate to 4 basis points. That reduction is evident in the decrease in
deposit insurance costs to $.004 million in 1996 compared to $.26 million in
1995, despite continuing increases in insured deposit balances. The rate has
been further reduced to zero for the first half of 1997.
<PAGE> 28
FEDERAL INCOME TAXES
The provision for income taxes was 16.1% of income before income tax in 1996,
compared to 28.9% in 1995 and 18.9% in 1994. 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 decreased from 1995 to 1996 as tax-exempt income has become a larger
portion of income before income tax.
INTEREST RATE AND FOREIGN EXCHANGE RATE RISK MANAGEMENT
Management actively manages the Corporation'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 61.5% of loans repricing within one year and 27.7% of
certificates of deposit maturing over one year.
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.
<PAGE> 29
Presented below is the Corporation's GAP table at December 31, 1996.
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 $ 400 $ 400
Interest-bearing
deposits in banks 438 $ 97 535
Securities and other 3,200 $ 50 1,101 $ 5,062 $ 1,846 $ 4,015 15,274
Loans 116,562 22,427 54,553 36,548 52,910 31,886 314,886
------- --------- --------- --------- ------- ------- -------
Total earning assets 120,600 22,477 55,751 41,610 54,756 35,901 331,095
COSTING LIABILITIES
Savings and NOW
accounts 72,073 7,322 21,967 36,614 137,976
Certificates of deposit 33,248 34,612 28,651 22,736 13,575 654 133,476
Repurchase agreements 5,700 5,700
Other borrowed funds 788 2,300 4,060 908 2,147 10,238 20,441
------- --------- --------- --------- ------- ------- -------
Total costing liabilities 111,809 44,234 54,678 60,258 15,722 10,892 297,593
------- --------- --------- --------- ------- ------- -------
GAP $ 8,791 $(21,757) $ 1,073 $(18,648) $39,034 $25,009 $33,502
======= ========= ========= ========= ======= ======= =======
Cumulative GAP $ 8,791 $(12,966) $(11,893) $(30,541) $ 8,493 $33,502 $33,502
======= ========= ========= ========= ======= ======= =======
</TABLE>
The Corporation provides foreign exchange services, primarily in its banking
offices in Sault Ste. Marie. Income from exchange activities during 1996 was
approximately $112,000. The Corporation conducts other business in Canadian
dollars, including the deposit program described above and lending activities.
Further, the Corporation maintains currency balances and investments in
Canadian dollars.
Maintaining assets and liabilities in Canadian dollars exposes the Corporation
to foreign exchange risk. The Corporation 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, 1996 the
Corporation held $5.26 million in Canadian assets and $5.63 million in Canadian
liabilities. The net exposure was substantially hedged with futures contracts.
<PAGE> 30
CAPITAL
It is the policy of the Corporation 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 Corporation's growth. During 1996, the Corporation raised $5.68 million in
capital through the issuance of common stock. Net income exceeded cash
dividends by $1.92 million in 1996 and $1.82 million in 1995. In addition, in
1996 and 1995, $254,000 and $48,600 of the cash dividends were reinvested in
the Corporation 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 $9.90 million between
the end of 1994 and December 31, 1996. Management believes that significant
demand for the Corporation'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 Corporation is required to maintain certain levels of
capital under government regulation. There are several measurements of
regulatory capital and the Corporation 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 Corporation's acquisition
intangibles are examples of such assets.
Presented below is a summary of the Corporation's consolidated capital position
in comparison to regulatory requirements:
<TABLE>
<CAPTION>
Tier 1 Risk Total Risk
Leverage Based Capital Based Capital
Ratio Ratio Ratio
-------- ------------- -------------
<S> <C> <C> <C>
Regulatory minimum 4.00% 4.00% 8.00%
Regulatory designation as well capitalized 5.00% 6.00% 10.00%
The Corporation:
December 31, 1996 7.63% 10.01% 11.27%
December 31, 1995 7.64% 10.33% 11.58%
</TABLE>
ISSUED BUT NOT YET ADOPTED ACCOUNTING POLICIES
See Note 19 to the accompanying consolidated financial statements for a
discussion of accounting pronouncements issued by the Financial Accounting
Standards Board which the Corporation is not required to implement until
periods subsequent to December 31, 1996.
<PAGE> 31
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 Corporation's operations. Nearly all the assets and
liabilities of the Corporation are financial, unlike industrial or commercial
companies. As a result, the Corporation's performance is directly impacted by
changes in interest rates, which are indirectly influenced by inflationary
expectations. The Corporation's ability to match the interest sensitivity of
its financial assets to the interest sensitivity of its financial liabilities
tends to minimize the effect of changes in interest rates on the Corporation's
performance. Changes in interest rates do not necessarily move to the same
extent as changes in the price of goods and services.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITOR
Board of Directors and Shareholders
First Manistique Corporation
Manistique, Michigan
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of First Manistique Corporation for the
year ended December 31, 1994. 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.
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 results of operations and the cash flows
of First Manistique Corporation for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.
The Corporation changed its method of accounting for securities in 1994 to
conform to new accounting guidance.
Schneider, Larche, Haapala & Company
Escanaba, Michigan
March 10, 1995
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
First Manistique Corporation
Manistique, Michigan
We have audited the accompanying consolidated balance sheets of First
Manistique Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The consolidated financial statements of First Manistique Corporation
for the year 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Manistique
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 14, 1997
<PAGE> 33
FIRST MANISTIQUE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,764,481 $ 10,492,357
Federal funds sold 400,000 4,000,000
------------ ------------
Total cash and cash equivalents 12,164,481 14,492,357
Interest-bearing deposits with banks 534,622 1,678,080
Securities available for sale 17,760,958 26,220,378
Securities held to maturity (fair value of
$836,753) - 835,049
Loans, net of allowance for loan losses 310,295,356 218,370,095
Premises and equipment, net 14,476,300 11,787,365
Accrued interest receivable 2,554,696 2,194,968
Acquisition intangibles 5,252,166 4,261,255
Other assets 4,121,414 2,951,827
------------ ------------
Total assets $367,159,993 $282,791,374
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 33,786,485 $ 27,674,414
Interest-bearing 271,452,091 216,732,281
------------ ------------
305,238,576 244,406,695
Federal funds purchased and securities sold
under agreements to repurchase 5,700,000 700,000
Other borrowings 20,440,779 10,087,735
Accrued expenses and other liabilities 3,395,076 2,590,067
------------ ------------
Total liabilities 334,774,431 257,784,497
Shareholders' equity
Common stock, no par value, 6,000,000 shares
authorized; outstanding: 2,363,734 in 1996 and
2,106,897 in 1995 18,879,454 13,195,269
Retained earnings 13,755,636 11,831,455
Unrealized loss on securities available for sale, net (249,528) (19,847)
------------ ------------
Total shareholders' equity 32,385,562 25,006,877
------------ ------------
Total liabilities and shareholders' equity $367,159,993 $282,791,374
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 34
FIRST MANISTIQUE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest income
Loans, including fees $26,785,141 $19,966,340 $11,667,088
Taxable securities 1,421,952 1,397,953 1,625,314
Non-taxable securities 79,637 128,776 284,881
Other 437,396 606,906 221,266
----------- ----------- -----------
Total interest income 28,724,126 22,099,975 13,798,549
Interest expense
Deposits 11,624,510 9,136,243 5,748,404
Other borrowed funds 1,049,575 425,105 304,997
----------- ----------- -----------
Total interest expense 12,674,085 9,561,348 6,053,401
----------- ----------- -----------
NET INTEREST INCOME 16,050,041 12,538,627 7,745,148
Provision for loan losses 2,424,480 771,000 330,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 13,625,561 11,767,627 7,415,148
Noninterest income
Service charges on deposit accounts 757,909 562,806 406,262
Net gains on sales of loans 45,173 - -
Net realized gains (losses) on sales of
available for sale securities (7,899) (19,083) 75,438
Other noninterest income 565,270 810,371 630,597
----------- ----------- -----------
Total other noninterest income 1,360,453 1,354,094 1,112,297
Noninterest expenses
Salaries and employee benefits 5,130,808 4,049,844 2,488,694
Occupancy expense 1,921,540 1,609,740 1,012,823
Other noninterest income 4,556,182 3,707,929 2,600,386
----------- ----------- -----------
Total other noninterest expenses 11,608,530 9,367,513 6,101,903
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,377,484 3,754,208 2,425,542
Provision for income taxes 543,300 1,083,893 458,000
----------- ----------- -----------
NET INCOME $ 2,834,184 $ 2,670,315 $ 1,967,542
=========== =========== ===========
Net income per share $ 1.30 $ 1.27 $ 1.14
=========== =========== ===========
Average common shares outstanding 2,181,626 2,099,880 1,727,130
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 35
FIRST MANISTIQUE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Shares of on Securities Total
Common Common Retained Available Share-
Stock Stock Earnings for Sale, Net holders'
--------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 1,224,000 $1,546,565 $8,396,877 $ $ 9,943,442
Effect of initial application of
SFAS No. 115 at January 1, 1994 100,075 100,075
Net income 1,967,542 1,967,542
Shares issued in the acquisition
of the Bank of Stephenson 527,337 6,591,712 6,591,712
Issuance of common stock 346,635 4,911,284 4,911,284
Cash dividends ($.20 per share) (349,575) (349,575)
Purchase of outstanding shares (900) (12,265) (12,265)
Change in unrealized gain (loss)
on securities available for sale (668,788) (668,788)
--------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1994 2,097,072 13,037,296 10,014,844 (568,713) 22,483,427
Net income 2,670,315 2,670,315
Cash dividends ($.41 per share) (853,704) (853,704)
Issuance of common stock 9,825 157,973 157,973
Change in unrealized gain (loss)
on securities available for sale 548,866 548,866
--------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1995 2,106,897 13,195,269 11,831,455 (19,847) 25,006,877
Net income 2,834,184 2,834,184
Cash dividends ($.42 per share) (910,003) (910,003)
Issuance of common stock 256,837 5,684,185 5,684,185
Change in unrealized gain (loss)
on securities available for sale (229,681) (229,681)
--------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1996 2,363,734 $18,879,454 $13,755,636 $(249,528) $32,385,562
========= =========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 36
FIRST MANISTIQUE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,834,184 $2,670,315 $1,967,542
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 2,424,480 771,000 330,000
Deferred taxes (404,200) 325,650 (169,300)
Depreciation 1,436,612 816,720 565,075
Amortization 996,857 640,365 374,991
Proceeds from sales of mortgage loans 6,121,420 3,307,457 2,773,213
Origination of mortgage loans for sale (6,076,247) (3,275,010) (2,742,021)
(Gains) losses on sales of
Loans held for sale (45,173) (32,447) (31,192)
Securities available for sale 7,899 19,083 (75,438)
Premises and equipment 10,000 (29,050) (19,584)
Changes in
Interest receivable and other assets (699,274) 587,322 (827,996)
Interest payable and other liabilities 316,778 (662,220) 558,073
------------ ------------ ------------
Net cash from operating
activities 6,923,336 5,139,185 2,703,363
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits
with banks 2,231,458 743,829 (2,226,909)
Purchases of securities available for sale (9,220,825) (6,114,932) (4,563,979)
Purchases of securities held to maturity - (500,000) (7,677,780)
Proceeds from sale of securities
available for sale 11,542,876 10,821,380 9,199,024
Proceeds from maturities, calls, or
paydowns of securities available for sale 9,224,050 3,702,740 6,391,486
Proceeds from maturity and calls of
securities held to maturity 835,049 1,495,677 1,301,563
Net increase in loans (67,589,084) (38,338,850) (60,287,160)
Purchase of other assets - - (2,490,000)
Proceeds from sale of premises
and equipment 69,000 153,976 (33,267)
Purchase of premises and equipment (2,795,067) (2,811,612) (4,632,129)
Net cash provided from acquisitions 723,993 8,006,430 2,915,646
------------ ------------ ------------
Net cash from investing activities (54,978,550) (22,841,362) (62,103,505)
</TABLE>
(Continued)
<PAGE> 37
FIRST MANISTIQUE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $27,962,963 $12,035,652 $61,085,578
Proceeds from notes payable 13,200,000 6,634,125 1,315,875
Payment on notes payable (5,209,807) (98,921) (20,344)
Net increase in federal funds purchased
and securities sold under agreements to
repurchase 5,000,000 - -
Proceeds from issuance of common stock 5,684,185 157,973 4,911,284
Repurchase of common stock - - (12,265)
Payment of dividends (910,003) (853,704) (542,697)
------------ ----------- ------------
Net cash from investing activities 45,727,338 17,875,125 66,737,431
------------ ----------- ------------
Changes in cash and cash equivalents (2,327,876) 172,948 7,337,289
Cash and cash equivalents at
beginning of year 14,492,357 14,319,409 6,982,120
------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $12,164,481 $14,492,357 $14,319,409
============ =========== ============
Interest paid $12,547,840 $9,212,594 $5,783,912
Income taxes paid 1,214,508 1,397,394 521,000
Supplemental disclosure of noncash investing
activities
Transfer from securities held to maturity
to securities available for sale (Note 3) - 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
Issuance of notes payable to South Range
State Bank's former shareholders 2,362,851 - -
Assets and liabilities acquired in acquisitions
(Note 2)
Interest-bearing deposits 1,088,000 - -
Premises and equipment 1,409,480 439,310 1,360,778
Acquisitions intangibles 1,584,000 514,902 4,175,000
Other assets and accrued interest receivable 673,454 11,994 647,775
Loans, net 26,760,657 - 34,633,411
Securities 3,800,350 - 24,846,498
Deposits (32,868,918) (8,935,477) (59,332,539)
Other liabilities and accrued
interest payable (808,165) (37,159) (2,654,857)
</TABLE>
<PAGE> 38
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Operations: The consolidated
financial statements include the accounts of First Manistique Corporation
("Corporation") and its wholly-owned subsidiaries, North Country Bank & Trust,
North Country Bank (collectively "Banks"), Rural Relending, and other minor
subsidiaries, after elimination of intercompany transactions and accounts. The
Corporation's and the Banks' revenues, operating income, and assets are
primarily from the banking industry. Rural Relending is in the business of
generating loans for commercial entities. Loan customers are mainly located in
Michigan's Upper Peninsula. In addition, a significant portion of its
commercial loan portfolio consists of leases to commercial and government
entities which are secured by equipment and vehicles. These leases are
dispersed geographically throughout the country.
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 Flow Reporting: Cash and cash equivalents are defined as cash and due
from banks and federal funds sold. Net cash flows are reported for customer
loan and deposit transactions and interest bearing deposits with other banks.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might
be sold before maturity. Securities available for sale are carried at fair
value, with unrealized holding gains and losses reported separately in
shareholders' equity, net of tax. Securities are written down to fair value
with a charge to expense when a decline in fair value is deemed other than
temporary.
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.
<PAGE> 39
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans for which management has the intent and the Corporation has the
ability to hold for the foreseeable future or until 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), as 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 in 1995.
<PAGE> 40
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans 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.
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. Asset cost is reported net of accumulated
depreciation. Depreciation expense is calculated on the straight-line method
over asset useful lives.
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.
<PAGE> 41
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Income Taxes: The Corporation records income tax expense based on the
amount of taxes due on its income tax return plus the change in 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.
Earnings Per Share: 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. A 3 for 1 stock split occurred on April 29,
1996.
Reclassifications: Certain prior year amounts have been reclassified to
conform to the current year's presentation.
NOTE 2 - ACQUISITIONS AND SUBSEQUENT EVENT
Since early 1994, the Corporation has completed five 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, 1996, 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 for the year ended December 31,
1995 or 1994, and the acquisition of U.P. Financial, Inc. occurred on February
4, 1997 and is not reflected in the accompanying consolidated financial
statements. Following is a summary of the acquisitions. Note 6 provides
information regarding acquisition intangibles and the amortization thereof.
Additional information regarding assets acquired and liabilities assumed is
presented supplementally on the accompanying consolidated statements of cash
flows.
<PAGE> 42
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 2 - ACQUISITIONS AND SUBSEQUENT EVENT (Continued)
<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 (527,337 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 (see note 8) 4,310 35,623 1,584
February 4, 1997 Acquired 100% of the outstanding
stock of U.P. Financial, Inc. in
exchange for cash 4,298 29,763 2,219
</TABLE>
Following is unaudited, proforma information regarding the acquisition of the
Bank of Stephenson, assuming the Bank had been acquired January 1, 1994:
1994
----
Total revenues $15,446,435
Net income 1,998,467
Net income per share 1.12
<PAGE> 43
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 2 - ACQUISITIONS AND SUBSEQUENT (Continued)
Following is unaudited, proforma information regarding the acquisition of South
Range State Bank, assuming the Bank had been acquired January 1, 1995:
1996 1995
---------- ----------
Total revenues $30,357,729 $26,558,001
Net income 2,863,729 2,849,122
Net income per share 1.31 1.36
NOTE 3 - SECURITIES
Year-end securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Available for sale - 1996
U.S. Treasury and federal agency $12,900,000 $ 1,719 $ 332,872 $ 12,568,847
Mortgage backed 571,370 357 8,542 563,185
State and political subdivisions 942,414 - 25,077 917,337
Other 3,724,104 - 12,515 3,711,589
------------- ---------- ---------- -------------
$ 18,137,888 $ 2,076 $ 379,006 $ 17,760,958
============= ========== ========== =============
Available for sale - 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
============= ========== ========== =============
Held to maturity - 1995
State and political subdivisions $ 835,049 $ 1,964 $ 260 $ 836,753
============= ========== ========== =============
Sales of available for sale securities were:
<Caption
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Gross proceeds $ 11,542,876 $ 10,821,380 $ 9,199,024
Gross gains 30,905 14,942 126,337
Gross losses 38,804 34,025 50,899
</TABLE>
<PAGE> 44
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 3 - SECURITIES (Continued)
The amortized cost and estimated fair value of securities available for sale at
December 31, 1996, 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>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $4,615,452 $4,526,778
Due after one year through
five years 1,566,330 1,558,535
Due after five years through
ten years 6,161,386 6,086,276
Due after ten years 3,022,550 2,825,384
Mortgage backed securities 571,370 563,185
Equity securities 2,200,800 2,200,800
----------- -----------
$18,137,888 $17,760,958
=========== ===========
</TABLE>
The carrying value of securities pledged to secure public deposits, treasury
deposits and repurchase agreements was $3,447,954 as of December 31, 1996 and
$2,278,048 as of December 31, 1995.
During 1995, securities with an amortized cost of $11,944,338 and a fair value
of $11,876,979 were reclassified from held to maturity to available for sale
based on new interpretations issued for SFAS No. 115.
NOTE 4 - LOANS
Loans presented in the consolidated balance sheet are comprised of the
following classifications:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Loans:
Commercial, financial and agricultural $141,555,454 $107,054,057
Commercial leases 47,686,000 23,867,000
1-4 family residential real estate 80,591,780 58,433,457
Consumer 31,156,222 29,917,866
Construction 13,896,838 2,235,030
------------ ------------
314,886,294 221,507,410
Less: Allowance for loan losses 4,590,938 3,137,315
------------ ------------
$310,295,356 $218,370,095
============ ============
</TABLE>
<PAGE> 45
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 4 - LOANS (Continued)
Activity in the allowance for loan losses for the years ending December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 3,137,315 $ 2,349,957 $ 916,633
Add:
Allowance from acquisitions 285,000 - 1,184,666
Provision for loan losses 2,424,480 771,000 330,000
Loan recoveries 121,890 456,702 193,660
Loans charged off (1,377,747) (440,344) (275,002)
------------- ------------ ------------
Balance at end of year $ 4,590,938 $ 3,137,315 $ 2,349,957
============= ============ ============
Information regarding impaired loans was as follows:
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Year-end loans with no allowance for loan losses allocated $ 805,454 $ 22,548
Year-end loans with allowance for loan losses allocated 3,681,429 548,299
Amount of the allowance allocated 467,877 200,000
Average investment in impaired loans during year $ 2,914,955 $ 659,412
Interest income recognized during impairment 99,215 40,856
Cash-basis interest income recognized 98,098 40,856
</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:
Balance - January 1, 1996 $ 6,603,202
New loans 10,911,773
Repayments (2,569,984)
Other changes 1,007,076
-------------
Balance - December 31, 1996 $ 15,952,067
=============
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
<PAGE> 46
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 5 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land $1,626,692 $1,104,692
Buildings and improvements 10,864,584 9,159,250
Furniture, fixtures and equipment 6,607,982 4,659,299
----------- -----------
19,099,258 14,923,241
Allowance for depreciation (4,622,958) (3,135,876)
----------- -----------
$14,476,300 $11,787,365
=========== ===========
</TABLE>
NOTE 6 - ACQUISITION INTANGIBLES
Intangible assets, which were principally acquired through the acquisitions
described in Note 2, consist of the following as of December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Goodwill $2,410,192 $1,403,232
Core deposit intangible 4,004,194 3,427,023
---------- ----------
6,414,386 4,830,255
Less accumulated amortization 1,162,220 569,000
---------- ----------
$5,252,166 $4,261,255
========== ==========
</TABLE>
Amortization expense related to the acquisition intangibles was $593,220,
$378,381, and $177,638 for December 31, 1996, 1995 and 1994.
NOTE 7 - INTEREST-BEARING DEPOSITS
The following is an analysis of interest-bearing deposits as of December 31:
1996 1995
-------------- ------------
Savings and interest-bearing checking $151,936,198 $118,956,109
Time: In denominations under $100,000 97,665,713 82,752,399
In denominations of $100,000 or more 21,850,180 15,023,773
-------------- ------------
$271,452,091 $216,732,281
============== ============
<PAGE> 47
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 7 - INTEREST-BEARING DEPOSITS (Continued)
At December 31, 1996, scheduled maturities of the Bank's time deposits are as
follows:
1997 $ 87,864,892
1998 20,747,856
1999 7,341,020
2000 2,226,132
2001 682,138
Thereafter 653,855
---------------
$ 119,515,893
===============
NOTE 8 - OTHER BORROWINGS
Other borrowings consist of the following at December 31:
<TABLE>
<CAPTION>
Federal Home Loan Bank 1996 1995
- ---------------------- --------------- --------------
<S> <C> <C>
Adjustable rate advance, maturing November 21, 1996:
5.65% interest rate at December 31, 1995, adjusting
period is semi-annually. $ - $ 2,000,000
Adjustable rate advance, maturing November 24, 1997:
5.47% interest rate at December 31, 1996, adjusting
period is quarterly. 4,000,000 -
Fixed-rate advance at 5.61%, maturing April 20, 1997. 1,300,000 -
Fixed-rate advance at 5.79%, maturing June 2, 1997. 1,000,000 1,000,000
Fixed-rate advance at 6.13%, maturing June 2, 2000. 1,000,000 1,000,000
Fixed-rate advance at 5.86%, maturing December 15, 2003. 184,129 213,907
Fixed-rate advance at 7.37%, maturing April 15, 2004. 215,359 237,440
Fixed-rate advance at 7.59%, maturing May 17, 2004. 379,212 436,388
Fixed-rate advance at 6.5%, maturing October 17, 2005. 2,999,215 3,200,000
Fixed-rate advance at 7.06%, maturing May 15, 2006. 5,000,000 -
--------------- --------------
16,077,915 8,087,735
</TABLE>
<PAGE> 48
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 8 - OTHER BORROWINGS (Continued)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Farmers Home Administration
$2,000,000 fixed-rate line agreement with Farmers
Home Administration maturing August 24, 2024:
interest payable at 1% $ 2,000,013 $ 2,000,000
Other borrowings
Variable rate note payable to South Range State Bank's
former stockholders, maturing in three equal annual
installments beginning February 1, 1997: 5.04% interest
rate at December 31, 1996. 2,362,851 -
------------ ------------
$ 20,440,779 $ 10,087,735
============ ============
</TABLE>
Maturities of other borrowings outstanding at December 31, 1996 are as follows:
1997 $ 8,655,178
1998 1,381,915
1999 1,413,254
2000 661,798
2001 703,037
Thereafter 7,625,597
-------------
$ 20,440,779
=============
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, 1996. The Farmers Home Administration borrowing is collateralized
by loans totaling $1,874,000, originated and held by the Corporation's
wholly-owned subsidiary, Rural Relending, and guaranteed by the Corporation.
NOTE 9 - INCOME TAXES
The components of federal income taxes attributable to continuing operations
for 1996, 1995 and 1994 are as follows:
1996 1995 1994
--------- ---------- ---------
Current tax expense $947,500 $1,409,543 $627,300
Deferred tax benefit (404,200) (325,650) (169,300)
--------- ---------- ---------
$543,300 $1,083,893 $458,000
========= ========== =========
<PAGE> 49
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 9 - INCOME TAXES (Continued)
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>
1996 1995
---------- --------
<S> <C> <C>
Deferred tax assets
Allowance for loan loss $1,368,268 $689,982
Nonaccrual loan interest - 9,957
Deferred compensation 258,390 171,533
Unrealized loss on securities available for sale 127,402 9,081
---------- --------
1,754,060 880,553
Deferred tax liabilities
Bank premises and equipment 235,476 384,308
Core deposit intangible 918,120 418,302
---------- --------
Net deferred tax asset $600,464 $77,943
========== ========
</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, 1996 or 1995.
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>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Federal income tax computed at the
statutory rate of 34% $1,148,345 $1,276,431 $824,684
Add (deduct) effect of:
Tax-exempt interest income (539,365) (372,381) (363,978)
Other items, net (65,680) 179,843 (2,706)
---------- ---------- ---------
$543,300 $1,083,893 $458,000
========== ========== =========
</TABLE>
<PAGE> 50
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 10- 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):
1996 1995
---------------- ----------------
Fixed Variable Fixed Variable
------ -------- ------ --------
Outstanding letters of credit $ - $ 2,377 $ - $ 1,288
Unused lines of credit 4,192 20,029 3,474 8,556
Loan commitments outstanding - 7,185 - 6,882
------ -------- ------ --------
$4,192 $ 29,591 $3,474 $ 16,726
====== ======== ====== ========
Fixed rates on unused lines of credit range from 9.00% to 18.00% at December
31, 1996.
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 11 - 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. 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
$56,450, $89,955 and $82,284 for 1996, 1995 and 1994. The liability at
December 31, 1996 and 1995, for vested benefits was $726,528 and $471,075. 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
$1,105,633 and $689,918 at December 31, 1996 and 1995, and is included in
other assets in the accompanying financial statements.
<PAGE> 51
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 12 - 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, 1996, 1995 and 1994
were $96,218, $120,722 and $68,453, respectively.
NOTE 13 - 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 11.
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.
The following is a summary of stock options, granted and exercised, for the
years presented, restated for any stock splits or stock dividends.
Exercise
Number Price Range
-------- -----------
Outstanding - December 31, 1993 27,000 $ 11-12.33
Granted 21,150 12.67
Exercised (6,300) 11
--------
Outstanding December 31, 1994 41,850 11-12.67
Exercised (5,850) 11-12.33
--------
Outstanding - December 31, 1995 36,000 11-12.67
Granted - -
Exercised (10,800) 12.67
--------
Outstanding December 31, 1996 25,200 $ 11-12.67
========
At December 31, 1996, 25,200 of the above options were exercisable. No
additional shares are available to be granted under the plan. At December 31,
1996, 25,200 shares of common stock were reserved for outstanding options.
<PAGE> 52
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 14 - CONTINGENCIES
From time to time certain claims are made against the Corporation in the normal
course of business. At December 31, 1996, there were no outstanding matters
which in management's opinion would be likely to have a material impact on the
Corporation's consolidated financial condition or results of operations.
NOTE 15 - 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. Accordingly, the aggregate fair value amounts may 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 6 1 9 9 5
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $12,164,481 $12,164,481 $14,492,357 $14,492,357
Interest-bearing deposits
with banks 534,622 534,622 1,678,080 1,678,080
Securities available for sale 17,760,958 17,760,958 26,220,378 26,220,378
Securities held to maturity - - 835,049 836,753
Loans receivable, net of
allowance for loan losses 310,295,356 309,829,000 218,370,095 218,106,381
Accrued interest receivable 2,554,696 2,554,696 2,194,968 2,194,968
</TABLE>
<PAGE> 53
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits (305,238,576) (306,133,000) (244,406,695) (244,723,891)
Federal funds purchased and
securities sold under
agreement to repurchase (5,700,000) (5,700,000) (700,000) (700,000)
Other borrowed funds (20,440,779) (19,840,139) (10,087,735) (9,471,893)
</TABLE>
The Banks' 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
- Demand, savings, NOW and money market deposit accounts
- Securities sold under agreement to repurchase
NOTE 16 - 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>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Forms and supplies $538,863 $438,123 $283,003
Amortization of acquisition intangibles 593,586 434,397 151,948
Legal and consulting fees 371,344 344,971 274,980
Data processing 245,722 107,926 10,330
FDIC assessment 4,000 261,941 374,263
Telephone 213,775 206,495 133,975
Postage 232,281 200,366 136,933
Directors' fees 176,150 161,184 101,116
Business promotion 206,171 150,426 120,427
Advertising 238,208 140,275 141,858
Audit, internal audit and examination fees 188,216 125,051 101,855
State taxes 269,339 96,000 95,849
Other 1,278,527 1,040,774 673,849
---------- ---------- ----------
$4,556,182 $3,707,929 $2,600,386
========== ========== ==========
</TABLE>
<PAGE> 54
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 17 - FIRST MANISTIQUE CORPORATION (PARENT CORPORATION ONLY)
FINANCIAL INFORMATION
The Corporation's primary source of funds to pay dividends to shareholders is
the dividends it receives from the Banks. The Banks are subject to certain
restrictions on the amount of dividends that they may declare without prior
regulatory approval. At December 31, 1996, $7,629,000 of retained earnings
plus current year earnings were available for dividend declaration without
prior regulatory approval.
The following summarizes parent corporation financial information as of
December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and
1994:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Assets
Cash $ 2,051,699 $ 269,221
Investment in subsidiaries 32,197,472 24,311,172
Other assets 661,371 426,484
----------- -----------
$34,910,542 $25,006,877
=========== ===========
Other borrowings $ 2,362,851 $ -
Other liabilities 162,129 -
Stockholders' equity 32,385,562 25,006,877
----------- -----------
$34,910,542 $25,006,877
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Income
Dividends from subsidiaries $ 400,000 $ - $6,272,000
Other income 3,600 - -
Expenses
Salaries and wages $ 152,365 $102,699 36,393
Professional fees 213,272 177,270 59,755
Interest expense 254,077 - 95,942
Other expenses 139,366 62,377 54,118
---------- ---------- -----------
Income before income tax and equity in
undistributed net income of subsidiaries (355,480) (342,346) 6,025,792
Income tax benefit 120,863 116,398 80,000
---------- ---------- -----------
(234,617) (225,948) 6,105,792
Equity in undistributed net income of
subsidiaries 3,068,801 2,896,263 (4,138,250)
---------- ---------- -----------
NET INCOME $2,834,184 $2,670,315 $ 1,967,542
========== ========== ===========
</TABLE>
<PAGE> 55
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 17 - FIRST MANISTIQUE CORPORATION (PARENT CORPORATION ONLY)
FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,834,184 $2,670,315 $1,967,542
Adjustments to reconcile net income to
net cash from operating activities
Undistributed earnings of subsidiaries (3,068,801) (2,896,263) 4,138,250
Loss on investment security - - 25,000
Change in other assets (120,599) (116,083) (124,775)
Change in other liabilities 162,129 - -
Depreciation and amortization 8,000 7,610 7,220
----------- ----------- -----------
Net cash from operating activities (185,087) (334,421) 6,013,237
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries (4,810,280) - (9,193,538)
Securities purchased (359,188) - (10,000)
Purchase of equipment - (80,000) -
----------- ----------- -----------
Net cash from investing activities (5,169,468) (80,000) (9,203,538)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 5,684,185 157,973 4,911,284
Repurchase of common stock - - (12,265)
Proceeds from issuance of notes payable 5,262,851 - -
Repayment on notes payable (2,900,000) - -
Dividends paid (910,003) (853,704) (542,697)
----------- ----------- -----------
Net cash from financing activities 7,137,033 (695,731) 4,356,322
----------- ----------- -----------
Increase (decrease) in cash 1,782,478 (1,110,152) 1,166,021
Cash at beginning of year 269,221 1,379,373 213,352
----------- ----------- -----------
CASH AT END OF YEAR $ 2,051,699 $ 269,221 $ 1,379,373
=========== =========== ===========
</TABLE>
<PAGE> 56
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 18 - REGULATORY MATTERS
The Corporation and Banks are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and
other factors, and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate regulatory action
that could have a direct material effect on the financial statements. The
prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition.
At year end, consolidated actual capital levels (in millions) and minimum
required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
-------------- -------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1996
Total capital (to risk weighted assets)
Consolidated $30.8 11.3% $21.8 8.0% $27.3 10.0%
NCB&T 26.7 11.0 19.5 8.0 24.4 10.0
NCB 4.0 11.9 2.7 8.0 3.4 10.0
Tier 1 capital (to risk weighted assets)
Consolidated $27.4 10.0% $10.9 4.0% $16.4 6.0%
NCB&T 23.7 9.7 9.7 4.0 14.6 6.0
NCB 3.6 10.6 1.4 4.0 2.0 6.0
Tier 1 capital (to average assets)
Consolidated $27.4 7.6% $14.4 4.0% $17.9 5.0%
NCB&T 23.7 7.6 12.5 4.0 15.6 5.0
NCB 3.6 8.3 1.7 4.0 2.2 5.0
1995
Total capital (to risk weighted assets)
Consolidated $23.5 11.6% $16.2 8.0% $20.3 10.0%
NCB&T 22.9 11.3 16.2 8.0 20.2 10.0
Tier 1 capital (to risk weighted assets)
Consolidated $20.9 10.3% $8.1 4.0% $12.2 6.0%
NCB&T 20.4 10.1 8.1 4.0 12.1 6.0
Tier 1 capital (to average assets)
Consolidated $20.9 7.6% $10.9 4.0% $13.7 5.0%
NCB&T 20.4 7.5 10.9 4.0 13.7 5.0
</TABLE>
The Company and Banks at year-end 1996 were categorized as well capitalized.
<PAGE> 57
FIRST MANISTIQUE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
NOTE 19 - PENDING ACCOUNTING CHANGES
Financial Accounting Standard No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities, was issued by the
Financial Accounting Standards Board in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. The effect on the financial
statements has not yet been determined.
<PAGE> 58
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure
There have been no disagreements with accountants. Crowe, Chizek and Company
LLP was appointed as the Registrant's independent accountants for the year
ended December 31, 1996, effective January 2, 1995, as disclosed on the
Registrant's Current Report on Form 8-K filed January 17, 1995.
PART III
Item 10. Directors and Executive Officers of the Registrant:
The information set forth on page 2, under the caption "Information About
Directors and Director Nominees", of the Registrant's definitive Proxy
Statement dated March 14, 1997, is hereby incorporated by reference.
Item 11. Executive Compensation
Information relating to compensation of the Registrant's executive officers is
contained on pages 8 to 10, under the caption "Compensation of Executive
Officers", in the Registrant's definitive Proxy Statement dated March 14, 1997,
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information relating to security ownership of certain beneficial owners and
management is contained on page 11, under the caption "Ownership of Common
Stock" in the Registrant's definitive Proxy Statement dated March 14, 1997, and
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information relating to certain relationships and related transactions is
contained on page 10, under the caption "Indebtedness of and Transactions with
Management" in the Registrant's definitive Proxy Statement dated March 14,
1997, and is incorporated herein by reference.
<PAGE> 59
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a)(1) Financial Statements. The following documents are filed as part of Item
8 of this report:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31,
1996, and 1995
Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996, 1995,
and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
(2) Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(3) The following exhibits are filed as part of this report: Reference is made
to the exhibit index which follows the signature page of this report.
The Registrant will furnish a copy of any exhibit listed above to any
shareholder of the Registrant without charge upon written request to Richard B.
Demers, First Manistique Corporation, 130 South Cedar Street, P.O. Box 369,
Manistique, MI 49854.
(b) Reports on Form 8-K. During the last quarter of the period covered by this
report, the Registrant filed no Current Reports on Form 8-K.
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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)
Ronald G. Ford
President
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below as of October 24, 1997, by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
/s/ John P. Miller /s/ Thomas G. King
- ----------------------------- -------------------------------------------
JOHN P. MILLER, Director THOMAS G. KING, Director
/s/ Stanley J. Gerou II /s/ C. Ronald Dufina
- ----------------------------- -------------------------------------------
STANLEY J. GEROU II, Director C. RONALD DUFINA, Director
/s/ John B. Clark /s/ John D. Lindroth
- ----------------------------- -------------------------------------------
JOHN B. CLARK, Director JOHN D. LINDROTH, Director
/s/ Ronald G. Ford /s/ Richard B. Demers
- ----------------------------- -------------------------------------------
RONALD G. FORD, Director, RICHARD B. DEMERS, Chief Operating
CEO, and President Officer, Principal Financial Officer,
and Principal Accounting Officer
/s/ Michael C. Henricksen
- -----------------------------
MICHAEL C. HENRICKSEN, Director
and Vice Chairman
<PAGE> 61
EXHIBIT INDEX
Number Exhibit
3(a) Amendment to Restated Articles of Incorporation. Previously
filed as an exhibit to the Registrant's Registration Statement on Form
S-2 (Registration No. 333- 06017). Here incorporated by reference.
3(b) Restated Articles of Incorporation. Previously filed 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 filed as an exhibit to
the 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). Here incorporated by reference.
4(b) A specimen stock certificate of the Registrant's Common Stock
filed as an exhibit to Registrant's Registration Statement on Form S-2
(Registration No. 333-06017). Here incorporated by reference.
10(a) Stock Option Plan. Previously filed in the Registrant's
definitive proxy statement for it's 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 it's annual meeting of shareholders held April 18,
1995. Here incorporated by reference.
10(c) Employment Contract between North Country Bank and Trust and
Ronald G. Ford. Previously filed as an exhibit to Registrant's Report
on Form 10-K for the year ended December 31, 1995. Here incorporated
by reference.
10(d) Amendment to Employment Contract between North Country Bank and
Trust and Ronald G. Ford. Here incorporated by reference.
10(e) Deferred Compensation, Deferred Stock and Current Stock Purchase
Plan for Non-Employee Directors. Previously filed in the Registrant's
definitive proxy
<PAGE> 62
statement for it's annual meeting of shareholders held April 23, 1996.
Here incorporated by reference.
10(f) First Manistique Corporation Stock Compensation Plan.
Previously filed as an exhibit to the Registrant's definitive proxy
statement for it's annual meeting of shareholders to be held April 15,
1997. Here incorporated by reference.
10(g) First Manistique Corporation 1997 Directors' Stock Option Plan.
Previously filed as an exhibit to the Registrant's definitive proxy
statement for it's annual meeting of shareholders to be held April 15,
1997. Here incorporated by reference.
21 Subsidiaries of the Registrant. Here incorporated by reference.
27 Financial Data Schedule - year ended December 31, 1996. Here
incorporated by reference.
