<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S><C>
For the quarterly period ended: September 30, 1997 Commission file number: 0-20167
FIRST MANISTIQUE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
130 S. CEDAR STREET, MANISTIQUE, MI 49854
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (906) 341-8401
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of November 10, 1997, there were outstanding 2,384,648 shares of the
registrant's common stock, no par value.
<PAGE> 2
PART I - FINANCIAL INFORMATION (unaudited)
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS.
- ------------------------------
Consolidated Condensed Balance Sheets
(In thousands of dollars)
September 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,288 $ 11,764
Federal funds sold 9,992 400
--------- -----------
Total cash and cash equivalents 23,280 12,164
Interest-bearing deposits with banks 97 535
Securities available for sale 12,961 17,761
Loans, net of unearned income 359,530 314,886
Allowance for loan losses (5,494) (4,591)
--------- -----------
Net loans 354,036 310,295
Premises and equipment 17,546 14,476
Other assets 13,626 11,929
--------- -----------
TOTAL ASSETS $ 421,546 $ 367,160
========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 39,202 $ 33,787
Interest-bearing 324,948 271,452
--------- -----------
Total deposits 364,150 305,239
Federal funds purchased and securities sold
under agreement to repurchase 700 5,700
Other borrowings 16,733 20,441
Accrued expenses and other liabilities 3,724 3,394
--------- -----------
TOTAL LIABILITIES 385,307 334,774
Shareholders' equity
Preferred stock, no par value, 500,000 shares
authorized, no shares outstanding
Common stock, no par value, 6,000,000 shares
authorized; outstanding: 2,382,607 at 9/30/97 and
2,363,734 at 12/31/96 20,165 18,880
Retained earnings 16,183 13,756
Unrealized loss on securities available for sale, net (109) (250)
--------- -----------
TOTAL SHAREHOLDERS' EQUITY 36,239 32,386
--------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 421,546 $ 367,160
========= ===========
</TABLE>
<PAGE> 3
Consolidated Condensed Statements of Income (unaudited)
<TABLE>
<CAPTION>
(In thousands of dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 8,988 $ 6,898 $ 25,571 $ 19,319
Securities
Taxable 223 366 797 1,123
Exempt from federal taxation 9 21 26 67
Other 109 132 237 402
---------- ---------- ---------- ----------
Total interest income 9,329 7,417 26,631 20,911
Interest expense
Deposits 3,782 3,010 10,712 8,565
Borrowed Funds 298 222 931 544
---------- ---------- ---------- ----------
Total interest expense 4,080 3,232 11,643 9,109
---------- ---------- ---------- ----------
Net interest income 5,249 4,185 14,988 11,802
Provision for loan losses 530 599 878 1,084
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 4,719 3,586 14,110 10,718
Noninterest income
Service charges on deposit accounts 334 194 856 558
Gains on sale of loans 20 10 41 30
Securities gains/(losses) (17) 0 (17) 17
Other 91 150 263 409
---------- ---------- ---------- ----------
Total noninterest income 428 354 1,143 1,014
Noninterest expense
Salaries and employee benefits 1,405 1,284 4,437 3,554
Occupancy 540 514 1,667 1,439
Other 1,793 1,267 4,923 3,335
---------- ---------- ---------- ----------
Total noninterest expense 3,738 3,065 11,027 8,328
---------- ---------- ---------- ----------
Income before income tax 1,409 875 4,226 3,404
Income tax expense 194 269 921 1,025
---------- ---------- ---------- ----------
Net income $ 1,215 $ 606 $ 3,305 $ 2,379
========== ========== ========== ==========
Weighted average common shares outstanding 2,381,542 2,170,360 2,376,225 2,135,876
========== ========== ========== ==========
Earnings per common share $ 0.51 $ 0.28 $ 1.39 $ 1.11
========== ========== ========== ==========
</TABLE>
<PAGE> 4
Consolidated Condensed Statement of Changes in Shareholders' Equity (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Three months Three months
ended ended
September 30, 1997 September 30, 1996
Shares Equity Total Shares Equity Total
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Balance-beginning of period 2,376,578 $ 35,163 2,124,827 $ 26,059
Net income for period 1,215 606
Cash dividends (305) (213)
Issuance of common stock 7,529 160 178,117 4,170
Common stock retired (1,500) (65)
Net change in unrealized gain (loss)
on securities available for sale 71 137
----------------------------- ------------------------
2,382,607 $ 36,239 2,302,944 $ 30,759
========= ======== ========= =========
<CAPTION>
Nine months Nine months
ended ended
September 30, 1997 September 30, 1996
Shares Equity Total Shares Equity Total
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Balance-beginning of period 2,363,734 $ 32,386 2,106,897 $ 25,007
Net income YTD 3,305 2,379
Cash dividends (878) (656)
Issuance of common stock 26,488 1,557 196,047 4,500
Common stock retired (7,615) (272)
Net change in unrealized gain (loss)
on securities available for sale 141 (471)
----------------------------- ------------------------
2,382,607 $ 36,239 2,302,944 $ 30,759
========= ======== ========= ========
</TABLE>
<PAGE> 5
Consolidated Statements of Cash Flows (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended Nine Month Ended
September 30, September 30,
1997 1996
------------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 6,303 $ 5,770
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits
with banks 438 1,617
Purchase of securities available for sale (830) (8,478)
Proceeds from sales of securities
available for sale 9,847 5,945
Proceeds from maturities, calls, or
paydowns of securities available for sale 488 9,180
Proceeds from maturity and calls of securities
held to maturity 835
Net increase in loans (24,664) (46,139)
Proceeds from sale of premises and equipment 65
Purchase of premises and equipment (3,668) (1,405)
Net cash provided in acquisitions 32 724
--------- ---------
Net cash used in investing activities (18,357) (37,656)
--------- ---------
</TABLE>
<PAGE> 6
Consolidated Statements of Cash Flows - continued (unaudited)
(In thousands of dollars)
CASH FLOWS FROM FINANCING ACTIVITIES
<TABLE>
<S> <C> <C>
Net increase in deposits 31,471 28,664
Net (decrease)/increase in federal funds purchased
and securities sold under agreements to
repurchase (5,000) 400
Proceeds from notes payable 14,950 7,900
Payment on notes payable (18,658) (2,980)
Proceeds from issuance of common stock 1,286 4,500
Payment of dividends (879) (656)
-------- -------
Net cash from financing activities 23,170 37,828
-------- -------
Net increase (decrease) in cash and cash
equivalents 11,116 5,942
Cash and cash equivalents at beginning of period 12,164 14,492
-------- -------
Cash and cash equivalents at end of period $ 23,280 $20,434
======== =======
Assets and liabilities acquired in acquisition
(refer to Note 4)
Interest-bearing deposits 1,088
Premises and equipment 676 1,409
Acquisition intangibles 2,214 1,630
Other assets and accrued interest receivable 313 774
Loans, net 19,955 26,761
Securities available for sale 4,488 3,800
Deposits 27,440 32,869
Other liabilities and accrued interest payable 238 954
</TABLE>
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of First Manistique
Corporation (the "Registrant") have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ending September 30 1997, and the
nine month period ending September 30, 1997, are not necessarily indicative of
the results that may be expected for the year ended December 31, 1997. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
NOTE 2 - ACCOUNTING CHANGES
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights (SFAS
No. 122), adopted by the Registrant on January 1, 1996. This Statement changes
the accounting for mortgage servicing rights retained by the loan originator.
Under the Statement, if the originator sells or securitizes mortgage loans and
retains the related servicing rights, the total costs of the mortgage loan are
allocated between the loan (without the servicing rights) and the servicing
rights, based on their relative fair values. The costs allocated to mortgage
servicing rights will be recorded as a separate asset and amortized in
proportion to, and over the life of, the net servicing income. The carrying
value of the mortgage servicing rights will be periodically evaluated for
impairment. Impairment will be recognized using the fair value of individual
stratum of servicing rights based on the underlying risk characteristics of the
serviced loan portfolio, compared to an aggregate portfolio approach under
existing accounting guidance. The impact on the Registrant's financial
position and results of operation through the third quarter of 1996 and 1997
was insignificant. Based on the Registrant's historical level of mortgage
originations for sale in the secondary market, management believes that the
impact for the year will also be immaterial.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". This statement simplifies the standards for computing earnings per
share ("EPS"). It replaces the presentation of primary EPS with basic EPS and
further requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. The statement
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods; earlier application is not permitted. The
statement requires restatement of all prior-period EPS data
<PAGE> 8
presented. Management anticipates that adoption of this statement will not
materially effect the consolidated financial statements of the Registrant.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting and display of comprehensive
income in a full set of general-purpose financial statements. This statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This statement requires that an enterprise display an amount
representing total comprehensive income for the period in a financial
statement, but does not require a specific format for that financial statement.
This statement also requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial position. The statement is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Management, at this
time, can not determine any effect that adoption of this statement will have on
the financial statements of the Registrant as comprehensive income is dependent
on the amount and nature of assets and liabilities held which generate
non-income changes to equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", but retains the
requirement to report information about major customers. It also amends SFAS
No. 94, "Consolidation of All Majority-Owned Subsidiaries", to remove the
special disclosure requirements for previously unconsolidated subsidiaries.
The statement is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This Statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second
year of application. The statement is not expected to have an effect on the
financial position or operating results of the Registrant, but may require
additional disclosures in the financial statements.
NOTE 3 - PER SHARE CALCULATIONS
A resolution for a 3-for-1 stock split, for shareholder's of record on April
29, 1996, was approved by the Board of Directors on April 23, 1996. All share
and per share amounts in this filing have been adjusted to reflect the 3-for-1
stock split.
<PAGE> 9
NOTE 4 - ACQUISITIONS
The Registrant acquired 100% of the outstanding stock of South Range State Bank
(with assets of $36,503,000, liabilities of $33,823,000, total deposits of
$32,869,000, and net loans of $26,761,000) on January 31, 1996. The total
purchase price was $4,310,000 with $1,947,000 paid in cash and the remaining
$2,363,000 financed through the issuance of notes payable. South Range State
Bank has since been renamed North Country Bank.
The Registrant acquired 100% of the outstanding stock of U.P. Financial, Inc.
("UP Financial") on February 4, 1997. UP Financial owned 100% of the
outstanding stock of First National Bank in Ontonagon ("Ontonagon"), a Michigan
banking institution. Upon acquisition, the assets of UP Financial were merged
into North Country Bank, with North Country Bank being the survivor. At the
date of the acquisition, UP Financial had assets of $29,760,000, liabilities of
$27,679,000, total deposits of $27,440,000, and net loans of $20,250,000. The
total purchase price was $4,298,000 with $2,048,000 paid in cash and the
remaining $2,250,000 financed through borrowings on a line of credit.
NOTE 5 - SECURITIES
The amortized cost and fair value of securities at September 30, 1997 are shown
below:
(In thousands of dollars)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
U.S. Treasury and federal agency $ 8,070 $ 10 $161 $ 7,919
State and political subdivisions 885 - 9 876
Other 4,166 - - 4,166
------- ----- ---- -------
Total $13,121 $ 10 $170 $12,961
======= ===== ==== =======
</TABLE>
The amortized cost and fair value of securities by contractual maturity at
September 30, 1997, are shown below, in thousands of dollars
<TABLE>
<CAPTION>
Available for Sale
------------------------
Amortized Fair
Cost Value
------------------------
<S> <C> <C>
Due in one year or less $ 5,146 $ 5,157
Due after one year through five years 1,079 1,067
Due after five years through ten years 1,017 1,012
Due after ten years 5,879 5,725
-------- --------
$ 13,121 $ 12,961
======== ========
</TABLE>
<PAGE> 10
NOTE 6 - LOANS
Loans presented in the consolidated condensed balance sheet are comprised of
the following classifications at September 30, 1997 and December 31, 1996:
(In thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
Loans:
Commercial, financial and agricultural $ 166,932 $ 141,555
Commercial leases 46,302 47,686
1-4 family residential real estate 93,140 80,592
Consumer 37,845 31,156
Construction 15,311 13,897
---------- -----------
$ 359,530 $ 314,886
========== ===========
</TABLE>
<PAGE> 11
NOTE 7 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the nine months ended
September 30, 1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Balance at beginning of period $ 4,591 $ 3,137
Charge offs (370) (325)
Recoveries 97 97
Allowance transferred from purchase of
U.P. Financial, Inc. 298
Allowance transferred from purchase of
South Range State Bank 285
Provision for loan loss 878 1,084
---------- -----------
Balance at end of period $ 5,494 $ 4,278
========== ===========
<CAPTION>
Information regarding impaired loans is as follows:
9/30/97 12/31/96
---------- -----------
<S> <C> <C>
Average investment in impaired loans $5,076,419 $ 2,914,955
Interest income recognized on impaired loans
including interest income recognized on
cash basis 189,047 99,215
Interest income recognized on impaired loans on
cash basis 154,186 98,098
Balance of impaired loans $5,707,107 $ 4,486,883
Less portion for which no allowance for loan
loss is allocated 2,026,586 805,454
---------- -----------
Portion of impaired loan balance for which
an allowance for credit losses is
allocated $3,680,521 $ 3,681,429
========== ===========
Portion of allowance for loan losses
allocated to the impaired loan balance $ 423,489 $ 467,877
========== ===========
</TABLE>
The Registrant 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 Registrant held leases with BFG totaling $2,792,651 on December 31,
1995. The Registrant subsequently made an additional lease with ACC in the
amount of $500,699 during January of 1996. The Registrant held first lien
positions on all leases held. This was confirmed when, in June of 1996, the
trustee provided a list of
<PAGE> 12
creditors identified as those holding double pledged paper and the Registrant
was not listed. On October 10, 1996, the Bankruptcy Court approved an
agreement which was reached between the Registrant and the trustee. According
to the terms of this settlement, the trustee purchased the Registrant's
outstanding loans, together with all notes, security agreements, and rights to
collateral relating to the same. All other claims or disputes between the
trustee and/or BFG and the Registrant 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 Registrant's existing loans including all
amounts owing thereunder and rights of the Registrant related there to
(including all of the Registrant's rights to collateral for such loans), for
the purchase price of $2,166,000. The Registrant will receive interest only
for sixty months with a payment of principal due at maturity. The interest
rate 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 Registrant. 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 Registrant has
recovered $155,973 through September 30, 1997. Management anticipates full
recovery of it's settlement dollars in all settlements.
NOTE 8 - DEPOSITS
The following is an analysis of interest-bearing deposits as of
September 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
(In thousands of dollars)
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Savings and interest-bearing checking $ 161,203 $ 151,936
Time: In denominations under $100,000 137,363 97,666
In denomination of $100,000 or more 26,382 21,850
---------- ----------
$ 324,948 $ 271,452
========== ==========
</TABLE>
<PAGE> 13
NOTE 9 - OTHER BORROWINGS
Other borrowings consists of the following at September 30, 1997 and
December 31, 1996:
(In thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Federal Home Loan bank advances (6), at
various rates with various maturities (see
annual financial statements). $ 12,520 $ 16,078
Federal Home Loan Bank, fixed-rate advance
at 5.72%, matures November 20, 1997. 700
Farmer's Home Administration, $2,000,000
fixed rate line agreement maturing August 24, 2024:
interest payable at 1% 1,938 2,000
Bank line of credit, $4,000,000 variable
rate line agreement maturing February 1, 1999:
interest payable at the bank's prime rate - 8.50%
at June 30, 1997. 0 0
Notes Payable to South Range State Bank's former
stockholders, maturing in three equal
annual installments beginning February 1, 1997:
interest payable at 5.20%. 1,575 2,363
-------- ----------
$ 16,733 $ 20,441
======== ==========
</TABLE>
The Federal Home Loan Bank borrowings are collateralized by a blanket
collateral agreement on the Registrant's residential mortgage loans.
Prepayment of the advances is subject to the provisions and conditions of the
credit policy of the Federal Home Loan Bank of Indianapolis in effect as of
December 31, 1996 and September 30, 1997. Borrowings other than Federal Home
Loan Bank are not subject to prepayment penalties.
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and results of
operations provides additional information to assess the consolidated condensed
financial statements of the Registrant and its wholly-owned subsidiaries
through the third quarter of 1997. The discussion should be read in
conjunction with those statements and their accompanying notes.
The Registrant is not aware of any market or institutional trends, events, or
circumstances that will have or are reasonably likely to have a material effect
on liquidity, capital resources, or results of operations except as discussed
herein. Also, the Registrant is not aware of any current recommendations by
regulatory authorities which will have such effect if implemented.
HIGHLIGHTS
The Registrant acquired 100% of the outstanding stock of South Range State Bank
(with assets of $36,503,000, liabilities of $33,823,000, total deposits of
$32,869,000, and net loans of $26,761,000) on January 31, 1996. The total
purchase price was $4,310,000 with $1,947,000 paid in cash and the remaining
$2,363,000 financed through the issuance of notes payable. South Range State
Bank has since been renamed North Country Bank.
The Registrant acquired 100% of the outstanding stock of U.P. Financial, Inc.
("UP Financial") on February 4, 1997. UP Financial owned 100% of the
outstanding stock of First National Bank in Ontonagon ("Ontonagon"), a Michigan
banking institution. Upon acquisition, the assets of UP Financial were merged
into North Country Bank, with North Country Bank being the survivor. At the
date of the acquisition, UP Financial had assets of $29,760,000, liabilities of
$27,679,000, total deposits of $27,440,000, and net loans of $20,250,000. The
total purchase price was $4,298,000 with $2,048,000 paid in cash and the
remaining $2,250,000 financed through borrowings on a line of credit.
Year to date consolidated net income was $3,305,000 through September 30, 1997
compared to $2,379,000 for the same period in 1996. Earnings per share
increased from $1.11 through the third quarter ending September 30, 1996, to
$1.39 for the same period in 1997.
FINANCIAL CONDITION
LOANS
Through the third quarter of 1997, loan balances increased by $44.6 million.
The acquisition of UP Financial accounted for $20.3 million of this increase
and the remainder was due to internal loan growth. The loan to deposit ratio
has decreased from 103.2% at December 31, 1996, to
<PAGE> 15
98.7% at September 30, 1997. Management believes loans provide the most
attractive earning asset yield available to the Registrant and that trained
personnel and controls are in place to successfully manage a growing portfolio.
Accordingly, management intends to continue to maintain loans at the highest
level which is consistent with maintaining adequate liquidity.
Management is aware of the risk associated with an increase in average balances
of loans but feels that the current level in the allowance for loan losses is
adequate. At September 30, 1997 the allowance for loan losses was equal to
1.53% of total loans outstanding compared to 1.46% at December 31, 1996.
The majority of the increase in impaired loans from December 31, 1996 to
September 30, 1997 (as shown in the table presented below in the section headed
"Credit Quality") consisted of credit extended to one car dealer. The loan
loss reserve allocated to this loan is adequate to meet the estimated exposure
to loss.
Commercial real estate loans have increased by $12.6 million through the third
quarter of 1997 to $78,123,000 at September 30, 1997, mainly due to the
acquisition of UP Financial. Through the third quarter of 1997, loans to
general commercial businesses increased $12.8 million to $88,809,000.
Commercial leases increased $.8 million to $19,724,000 at September 30, 1997
and governmental leases decreased $2.1 million to $26,578,000. No leases were
obtained with the purchase of UP Financial. Growth in the classification of
1-4 family residential loans in the amount of $12.5 million has occurred mainly
due to the acquisition of UP Financial. Consumer loans have increased $6.7
million through the third quarter of 1997 due mainly to the acquisition of UP
Financial. Construction loans have increased $1.4 million due mainly to the
purchase of UP Financial.
The table below shows total portfolio loans outstanding, in thousands of
dollars, at September 30, 1997, and December 31, 1996, and their percentage of
the total loan portfolio.
<TABLE>
<CAPTION>
September 30, December 31,
1997 % of total 1996 % of total
------------------------- -----------------------
<S> <C> <C> <C> <C>
Loans:
Commercial real estate $ 78,123 21.73% $ 65,522 20.81%
Commercial, financial and agricultural 88,809 24.70% 76,033 24.15%
Leases
Commercial 19,724 5.49% 18,974 6.03%
Governmental 26,578 7.39% 28,712 9.12%
1-4 family residential real estate 93,140 25.91% 80,592 25.59%
Consumer 37,845 10.53% 31,156 9.89%
Construction 15,311 4.25% 13,897 4.41%
------------- --------
Total $ 359,530 $314,886
============= ========
</TABLE>
<PAGE> 16
CREDIT QUALITY
Management analyzes the allowance for loan losses in detail on a monthly basis
to ensure that the losses inherent in the portfolio are properly recognized.
The Registrant's success in maintaining excellent credit quality is
demonstrated in it's historical charge-off percentage. Charge-offs for the
period ending September 30, 1997 have increased $45,000 from the same period in
1996. This is mainly the result of a $21,000 increase in both real estate and
installment loan charge-offs. The provision for loan losses has decreased from
the period ending September 30, 1996 to the same period in 1997 as a result of
the Registrant's adequate percentage of allowance to loans. See Note 7 to the
third quarter financial statements for a discussion of certain lease
receivables.
The table presented below shows the balances of nonaccrual loans, loans 90 or
more days past due, and renegotiated loans as of September 30, 1997, and
December 31, 1996.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Nonaccrual loans $ 2,369 $ 49
Loans 90 or more days past due 1,116 68
Renegotiated loans 0 0
</TABLE>
INVESTMENTS
Available for sale securities decreased $4.8 million through the third quarter
of 1997 due to the sale of two securities and one security being called. The
mix of the portfolio remained relatively unchanged from December 31, 1996. The
primary use of the portfolio is to provide a source of liquidity. Most of the
portfolio is invested in U.S. Treasury and agency securities which have little
credit risk and are highly liquid. There are no securities classified as held
to maturity.
DEPOSITS
Total deposits through the third quarter have increased $58.9 million. A
substantial portion, $27.4 million, of the increase came from the acquisition
of UP Financial. The remainder came as a result of internal deposit growth.
Interest bearing deposit balances increased through September 30, 1997,
continuing a trend from last fiscal year. The increase in interest bearing
deposits came from a $9.3 million increase in savings and interest-bearing
checking, a $39.7 million increase in time deposits less than $100,000, and a
$4.5 million increase in time deposits less than $100,000 (refer to the table
presented in Note 8 to the third quarter financial statements above). The time
deposits of $100,000 or more consist of stable, government balances and
balances from retail customers.
<PAGE> 17
BORROWINGS
The Registrant's branching network is a relatively high cost network in
comparison to peers. Accordingly, the Registrant uses alternative funding
sources to provide funds for lending activities. Other borrowings decreased by
$3.7 million through the third quarter (refer to the table presented in Note 9
to the third quarter financial statements above for the composition of the
decrease) as management has made an effort to reduce the outstanding borrowings
of the banking subsidiaries. At September 30, 1997, $12.9 of the total
borrowings were from the Federal Home Loan Bank of Indianapolis. Alternative
sources of funding can be obtained at interest rates which are competitive
with, or lower than, retail deposit rates and with inconsequential
administrative costs.
LIQUIDITY
The Registrant's sources of liquidity include principal payments on loans and
investments, sales of securities available for sale, deposits from customers,
borrowings from the Federal Home Loan Bank, other bank borrowings, and the
issuance of common stock. The Registrant has ready access to significant
sources of liquidity on an almost immediate basis. Management anticipates no
difficulty in maintaining liquidity at the levels necessary to conduct the
Registrant's day-to-day business activities.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income through September 30, 1997 increased by 27.0%, compared to
the same period one year ago. The net interest margin at September 30, 1997 was
5.01%, compared to 4.97% for all of 1996. The net yield on interest earning
assets remained relatively constant. Interest income from loans represented
96.0% of total interest income through the third quarter of 19q97 compared to
92.4% for the same period of 1996. In all cases, the total amount of interest
income and the yield on total earning assets is strongly influenced by lending
activities.
PROVISION FOR LOAN LOSSES
The Registrant maintains the allowance for loan losses at a level adequate to
cover losses inherent in the portfolio. The Registrant records a provision for
loan losses necessary to maintain
<PAGE> 18
the allowance at that level after considering factors such as loan charge-offs
and recoveries, changes in the mix of loans in the portfolio, loan growth, and
other economic factors. The provision for loan losses has decreased $206,000
through September 30, 1997 compared to the same period in 1996 as a result of
the Registrant's adequate percentage of allowance to loans.
NONINTEREST INCOME
Service charges on deposit accounts increased $298,000 through the third
quarter of 1997 vs. the third quarter of 1996 mainly due to the acquisition of
UP Financial. Gains on sales of loans has increased to $41,000 through the
third quarter of 1997 vs. $30,000 through the third quarter of 1996 due to an
increase in loan sale activity. Securities gains have decreased $34,000
through the third quarter of 1997 vs. the same period in 1996 due to the sale
of securities in 1997 resulting in a loss. The proceeds from the security
sales were used to fund loans in the Registrant's growing loan portfolio.
Other noninterest income decreased $146,000 through the third quarter of 1997
vs. the third quarter of 1996 due mainly to a reduction of foreign exchange
income.
NONINTEREST EXPENSES
Noninterest expense showed an increase of 32.4% through September 30, 1997
compared to the same period of 1996. The increase is consistent with the
Registrant's asset growth. Salary expense increased mainly due to an increase
in full-time equivalent employees at September 30, 1997 vs. September 30, 1996
(due to the Registrant's purchase of UP Financial and the opening of additional
branches). Occupancy expense increased due to the purchase of UP Financial and
the opening of additional branches. Other noninterest expense increased due to
the purchase of UP Financial, the opening of additional branches, and increased
costs associated with out-sourcing of the computer processing for the
Registrant's subsidiary banks. While the increases were expected, a primary
objective of management is to hold the rate of increase in this category below
future asset growth. Management believes that significant efficiencies can be
obtained and is increasing the level of management emphasis in this area.
FEDERAL INCOME TAX
The provision for income taxes was 21.8% of income before income tax through
September 30, 1997 compared to 30.1% through September 30, 1996. The
difference between these rates and the federal corporate income tax rate of 34%
is primarily due to tax-exempt interest earned on loans, leases, and
investments. The effective tax rate has decreased as tax-exempt income has
become a larger portion of total interest income.
<PAGE> 19
INTEREST RATE RISK
Management actively manages the Registrant's interest rate risk. In relatively
low interest rate environments which have been in place the last few years,
borrowers have generally tried to extend the maturities and repricing periods
on their loans and place deposits in demand or very short term accounts.
Management has taken various actions to offset the imbalance which those
tendencies would otherwise create. Management writes commercial and real
estate loans at variable rates or, if necessary, fixed rate loans for
relatively short terms. Management has also offered products that give
customers an incentive to accept longer term deposits. Management can also
manage interest rate risk with the maturity periods of securities purchased,
selling securities available for sale, and borrowing funds with targeted
maturity periods. The Registrant has remained slightly liability sensitive in
the cumulative net asset (liability) funding gap for 1 - 365 days since
December 31, 1996.
CAPITAL RESOURCES
It is the policy of the Registrant to maintain capital at a level consistent
with both safe and sound operations and proper leverage to generate an
appropriate return on shareholders' equity. The capital ratios of the
Registrant exceed the regulatory guidelines for well capitalized institutions.
The table below shows the Registrant's capital, in thousands of dollars, and
capital ratio's at September 30, 1997 and 1996.
<TABLE>
<CAPTION>
September 30, 1997
Required Actual
$ % $ %
---------- -------- --------- -----
<S> <C> <C> <C> <C>
Tier 1 risk-adjusted capital ratio $12,701 4.00% $ 29,402 9.26%
Total risk-adjusted capital ratio $25,402 8.00% $ 33,390 10.52%
Tier 1 leverage ratio $16,494 4.00% $ 29,402 7.13%
Tier 1 capital $ 29,402
Tier 2 capital 3,988
Total risk-based capital 33,390
Total risk-weighted assets 317,525
Average total assets 412,356
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
September 30, 1996
Required Actual
$ % $ %
------- ---- -------- -----
<S> <C> <C> <C> <C>
Tier 1 risk-adjusted capital ratio $10,152 4.00% $ 25,844 10.18%
Total risk-adjusted capital ratio $20,305 8.00% $ 29,030 11.44%
Tier 1 leverage ratio $13,992 4.00% $ 25,844 7.39%
Tier 1 capital $ 25,844
Tier 2 capital 3,186
Total risk-based capital 29,030
Total risk-weighted assets 253,812
Average total assets 349,791
</TABLE>
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
At the date hereof, there were no material pending legal proceedings, other
than routine litigation incidental to the business of banking, to which the
Registrant or any of its subsidiaries is a party of or which any of its
properties is the subject.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There have been no defaults upon senior securities relevant to the requirements
of this section.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the third quarter of fiscal 1997 to a vote of
the Registrant's stockholders.
ITEM 5. OTHER INFORMATION.
None.
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Number Exhibit
- ------ -------
<S> <C>
27 Financial Data Schedule. Filed herewith.
The following documents are filed as part of Part I, Item 1 of this report:
Consolidated Balance Sheets - September 30, 1997 (Unaudited) and
December 31, 1996 (Audited)
Consolidated Statements of Income - Three months ended
September 30, 1997 and 1996 (Unaudited), and nine months ended
September 30, 1997 and 1996 (Unaudited)
Consolidated Statement of Changes in Shareholders' Equity - Three months
ended September 30, 1997 and 1996 (Unaudited), and nine months
ended September 30, 1997 and 1996 (Unaudited)
Consolidated Statement of Cash Flows - Nine months ended
September 30, 1997 and 1996 (Unaudited)
Notes to consolidated financial statements - September 30, 1997
(b) Report on Form 8-K. Previously filed on April 17, 1997 (Commission File
Number 2-54663). Here incorporated by reference
</TABLE>
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST MANISTIQUE CORPORATION
- ----------------------------
(Registrant)
11/12/97 /s/ Ronald G. Ford
- ------------ ------------------------------
Date RONALD G. FORD, CEO
11/12/97 /s/ Richard B. Demers
- ------------ ------------------------------
Date RICHARD B. DEMERS, COO &
Chief Accounting Officer
<PAGE> 24
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 13,288
<INT-BEARING-DEPOSITS> 97
<FED-FUNDS-SOLD> 9,992
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,961
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 359,530
<ALLOWANCE> 5,494
<TOTAL-ASSETS> 421,546
<DEPOSITS> 364,150
<SHORT-TERM> 5,551
<LIABILITIES-OTHER> 3,724
<LONG-TERM> 11,182
0
0
<COMMON> 20,165
<OTHER-SE> 16,074
<TOTAL-LIABILITIES-AND-EQUITY> 421,546
<INTEREST-LOAN> 25,571
<INTEREST-INVEST> 823
<INTEREST-OTHER> 237
<INTEREST-TOTAL> 26,631
<INTEREST-DEPOSIT> 10,712
<INTEREST-EXPENSE> 11,643
<INTEREST-INCOME-NET> 14,988
<LOAN-LOSSES> 878
<SECURITIES-GAINS> (17)
<EXPENSE-OTHER> 11,027
<INCOME-PRETAX> 4,226
<INCOME-PRE-EXTRAORDINARY> 4,226
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,305
<EPS-PRIMARY> $1.39
<EPS-DILUTED> $1.39
<YIELD-ACTUAL> 5.01
<LOANS-NON> 2,369
<LOANS-PAST> 1,116
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,591
<CHARGE-OFFS> 370
<RECOVERIES> 97
<ALLOWANCE-CLOSE> 5,494
<ALLOWANCE-DOMESTIC> 3,681
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,813
</TABLE>
