<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
For the quarterly period ended: June 30, 1997 Commission file
number: 2-54663
FIRST MANISTIQUE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
130 S. CEDAR STREET, MANISTIQUE, MI 49854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (906) 341-8401
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
As of August 7, 1997, there were outstanding 2,376,578 shares of the
registrant's common stock, no par value.
<PAGE> 2
PART I - FINANCIAL INFORMATION (unaudited)
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
(In thousands of dollars)
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,424 $ 11,764
Federal funds sold 4,200 400
-------- --------
Total cash and cash equivalents 18,624 12,164
Interest-bearing deposits with banks 97 535
Securities available for sale 16,985 17,761
Loans, net of unearned income 353,434 314,886
Allowance for loan losses (5,061) (4,591)
-------- --------
Net Loans 348,373 310,295
Bank premises and equipment 17,427 14,476
Other assets 13,947 11,929
-------- --------
TOTAL ASSETS $415,453 $367,160
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 38,161 $ 33,787
Interest-bearing 315,473 271,452
-------- --------
353,634 305,239
Federal funds purchased and securities sold
under agreement to repurchase 800 5,700
Other borrowings 22,395 20,441
Accrued expenses and other liabilities 3,461 3,394
-------- --------
TOTAL LIABILITIES 380,290 334,774
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: 2,376,578 at 6/30/97 and
2,363,734 at 12/31/96 20,073 18,880
Retained earnings 15,270 13,756
Unrealized loss on securities available for sale, net (180) (250)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 35,163 32,386
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $415,453 $367,160
======== ========
</TABLE>
<PAGE> 3
Consolidated Condensed Statements of Income (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 8,716 $ 6,582 $ 16,583 $ 12,421
Securities
Taxable 299 358 574 757
Exempt from federal taxation 10 22 16 46
Other 59 109 129 270
---------- ---------- ---------- ----------
Total interest income 9,084 7,071 17,302 13,494
Interest expense
Deposits 3,600 2,854 6,929 5,555
Borrowed Funds 302 180 634 323
---------- ---------- ---------- ----------
Total interest expense 3,902 3,034 7,563 5,878
---------- ---------- ---------- ----------
Net interest income 5,182 4,037 9,739 7,616
Provision for loan losses 242 378 348 485
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 4,940 3,659 9,391 7,131
Noninterest income
Service charges on deposit accounts 284 201 522 364
Gains on sale of loans 11 20 21 20
Securities gains/(losses) 0 (10) 0 17
Other 69 122 172 259
---------- ---------- ---------- ----------
Total noninterest income 364 333 715 660
Noninterest expense
Salaries and employee benefits 1,531 1,163 3,032 2,270
Occupancy expense 533 491 1,127 926
Other 1,721 1,133 3,129 2,066
---------- ---------- ---------- ----------
Total noninterest expense 3,785 2,787 7,288 5,262
---------- ---------- ---------- ----------
Income before income tax 1,519 1,205 2,818 2,529
Provision for income tax 413 360 727 755
---------- ---------- ---------- ----------
Net income $ 1,106 $ 845 $ 2,091 $ 1,774
========== ========== ========== ==========
Weighted average common shares outstanding 2,376,704 2,122,483 2,373,522 2,118,444
========== ========== ========== ==========
Earnings per common share $ 0.47 $ 0.40 $ 0.88 $ 0.84
========== ========== ========== ==========
</TABLE>
<PAGE> 4
Consolidated Condensed Statement of Changes in Shareholders' Equity (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Three months Three months
ended ended
June 30, 1997 June 30, 1996
Shares Equity Total Shares Equity Total
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Balance-beginning of period 2,377,760 $34,219 2,120,778 $25,430
Net income for period 1,106 845
Cash dividends (288) (190)
Issuance of common stock 4,933 115 4,049 83
Common stock retired (6,115) (207)
Net change in unrealized gain (loss)
on securities available for sale 218 (109)
------------------------- ------------------------
2,376,578 $35,163 2,124,827 $26,059
========= ======= ========= =======
<CAPTION>
Six months Six months
ended ended
June 30, 1997 June 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 2,091 1,774
Cash dividends (574) (444)
Issuance of common stock 18,959 1,397 17,930 331
Common stock retired (6,115) (207)
Net change in unrealized gain (loss)
on securities available for sale 70 (609)
------------------------- ------------------------
2,376,578 $35,163 2,124,827 $26,059
========= ======= ========= =======
</TABLE>
<PAGE> 5
Consolidated Statements of Cash Flows (unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Six Months Ended Six Month Ended
June 30, June 30,
1997 1996
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 10,168 $ 3,448
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits
with banks 438 1,383
Purchase of securities available for sale (830) (8,478)
Proceeds from sales of securities
available for sale 5,847 5,945
Proceeds from maturities, calls, or
paydowns of securities available for sale 353 7,880
Proceeds from maturity and calls of securities
held to maturity 335
Net increase in loans (18,471) (29,359)
Proceeds from sale of premises and equipment 42
Purchase of premises and equipment (3,240) (579)
Net cash provided in acquisitions 32 724
-------- -------
Net cash used in investing activities (15,871) (22,107)
-------- -------
</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 20,955 16,381
Net decrease in federal funds purchased and
securities sold under agreements to
repurchase (4,900)
Proceeds from notes payable 6,000 7,900
Payment on notes payable (10,508) (80)
Proceeds from issuance of common stock 1,190 331
Payment of dividends (574) (444)
-------- -------
Net cash from financing activities 12,163 24,088
-------- -------
Net increase (decrease) in cash and cash
equivalents 6,460 5,429
Cash and cash equivalents at beginning of period 12,164 14,492
-------- -------
Cash and cash equivalents at end of period $ 18,624 $19,921
======== =======
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 June 30 1997, and the six
month period ending June 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 second 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 June 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 $12,203 $13 $258 $11,958
State and political subdivisions 887 - 15 872
Other 4,166 - 11 4,155
-------------------------------------------------------------------
Total $17,256 $13 $284 $16,985
====================================================================
</TABLE>
The amortized cost and fair value of securities by contractual maturity at June
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 $ 6,153 $ 6,165
Due after one year through five years 1,114 1,097
Due after five years through ten years 1,020 1,012
Due after ten years 8,969 8,711
---------------------
$17,256 $16,985
=====================
</TABLE>
<PAGE> 10
NOTE 6 - LOANS
Loans presented in the consolidated condensed balance sheet are comprised of
the following classifications at June 30, 1997 and December 31, 1996:
(In thousands of dollars)
June 30, December 31,
1997 1996
-------- --------
Loans:
Commercial, financial and agricultural $157,862 $141,555
Commercial leases 46,686 47,686
1-4 family residential real estate 91,745 80,592
Consumer 39,087 31,156
Construction 18,054 13,897
-------- --------
$353,434 $314,886
======== ========
<PAGE> 11
NOTE 7 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the six months ended June
30, 1997 and 1996, are summarized as follows:
(In thousands of dollars)
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
--------- ---------
<S> <C> <C>
Balance at beginning of period $ 4,591 $ 3,137
Charge offs (257) (158)
Recoveries 81 84
Allowance transferred from purchase of
U.P. Financial, Inc. 298
Allowance transferred from purchase of
South Range State Bank 285
Provision for loan loss 348 485
----------- ----------
Balance at end of period $ 5,061 $ 3,833
=========== ==========
<CAPTION>
Information regarding impaired loans is as follows:
6/30/97 12/31/96
----------- -----------
<S> <C> <C>
Average investment in impaired loans $5,090,490 $2,914,955
Interest income recognized on impaired loans
including interest income recognized on
cash basis 116,933 99,215
Interest income recognized on impaired loans on
cash basis 104,385 98,098
Balance of impaired loans $5,715,202 $4,486,883
Less portion for which no allowance for loan
loss is allocated 2,033,773 805,454
---------- ----------
Portion of impaired loan balance for which
an allowance for credit losses is
allocated $3,681,429 $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 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
<PAGE> 12
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 $155,908 through August 7, 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 June 30, 1997
and December 31, 1996.
(In thousands of dollars)
June 30, December 31,
1997 1996
------------ ------------
Savings and interest-bearing checking $155,517 $151,936
Time: In denominations under $100,000 132,940 97,666
In denomination of $100,000 or more 27,016 21,850
-------- --------
$315,473 $271,452
======== ========
<PAGE> 13
NOTE 9 - OTHER BORROWINGS
Other borrowings consists of the following at June 30, 1997 and
December 31, 1996:
(In thousands of dollars)
June 30, December 31,
1997 1996
------------ ---------------
Federal Home Loan bank advances (8), at
various rates with various maturities (see
annual financial statements). $ 13,820 $ 16,078
Federal Home Loan Bank, fixed-rate advance
at 5.87%, matures July 14, 1997 3,000
Federal Home Loan Bank, fixed-rate advance
at 5.91%, matures August 12, 1997. 2,000
Farmer's Home Administration, $2,000,000
fixed rate line agreement maturing August 24, 2024:
Interest payable at 1% 2,000 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
------- -------
$22,395 $20,441
======= =======
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 June 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 second 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 $2,091,000 through June 30, 1997
compared to $1,774,000 for the same period in 1996. Return on consolidated
average assets for the period was 1.02% compared to 1.07% for the same period
in 1996. Earnings per share increased from $0.84 through the second quarter
ending June 30, 1996, to $.88 for the same period in 1997.
FINANCIAL CONDITION
LOANS
Through the second quarter of 1997, loan balances increased by $38.5 million.
The acquisition of UP Financial accounted for $20.3 million of this increase
and the remainder was due to internal
<PAGE> 15
loan growth. The loan to deposit ratio has decreased from 103.2% at December
31, 1996, to 100.0% at June 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 June 30, 1997 the allowance for loan losses was equal to 1.43% 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 June
30, 1997 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 $10.1 million through the second
quarter of 1997 to $75,618,000 at June 30, 1997, mainly due to the acquisition
of UP Financial. Through the second quarter of 1997, loans to general
commercial businesses increased $6.2 million to $82,244,000. Commercial leases
increased $.1 million to $19,045,000 at June 30, 1997 and governmental leases
decreased $1.1 million to $27,641,000. No leases were obtained with the
purchase of UP Financial. The activity in leases are due to the Registrant's
efforts to build this area of the loan portfolio. Growth in the classification
of 1-4 family residential loans in the amount of $11.2 million has occurred
mainly due to the acquisition of UP Financial. Consumer loans have increased
$7.9 million through the second quarter of 1997 due mainly to the acquisition
of UP Financial. Construction loans have increased $4.2 million due mainly to
the purchase of UP Financial as well as an increase in this type of lending
activity. The table below shows total portfolio loans outstanding, in
thousands of dollars, at June 30, 1997, and December 31, 1996, and their
percentage of the total loan portfolio.
<TABLE>
<CAPTION>
June 30, December 31,
1997 % of total 1996 % of total
--------------------- -----------------------
<S> <C> <C> <C> <C>
Loans:
Commercial real estate $ 75,618 21.40% $ 65,522 20.81%
Commercial, financial and agricultural 82,244 23.27% 76,033 24.15%
Leases
Commercial 19,045 5.39% 18,974 6.03%
Governmental 27,641 7.82% 28,712 9.12%
1-4 family residential real estate 91,745 25.96% 80,592 25.59%
Consumer 39,087 11.06% 31,156 9.89%
Construction 18,054 5.10% 13,897 4.41%
--------- --------
Total $353,434 $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 June 30, 1997 have increased $99,000 from the same period in
1996. This is mainly the result of a $73,000 increase in installment loan
charge-offs. The provision for loan losses has decreased from the period
ending June 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 second 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 June 30, 1997, and December
31, 1996.
June 30, December 31,
1997 1996
-------- ------------
Nonaccrual loans $1,406 $49
Loans 90 or more days past due 2,364 68
Renegotiated loans 0 0
INVESTMENTS
Available for sale securities decreased $.7 million through the second quarter
of 1997 due to the sale of one security. 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 second quarter have increased $48.4 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 June 30, 1997, continuing a
trend from last fiscal year. The increase in interest bearing deposits came
from a $3.6 million increase in savings and interest-bearing checking, a $35.3
million increase in time deposits less than $100,000, and a $5.2 million
increase in time deposits less than $100,000 (refer to the table presented in
Note 8 to the second 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 has begun to use alternative
funding sources to provide funds for lending activities. Other borrowings
increased by $2.0 million through the second quarter (refer to the table
presented in Note 9 to the second quarter financial statements above for the
composition of the increase), the majority of which was used in general
operations at North Country Bank and Trust and in the purchase of UP Financial.
At June 30, 1997, $18.8 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 June 30, 1997 increased by 31.7%, compared to the
same period one year ago. The net interest margin at June 30, 1997 was 4.95%,
compared to 4.97% for all of 1996. The net yield on interest earning assets
remained relatively constant. Interest income from loans represented 95.8% of
total interest income through the second quarter of 1997 compared to 92.0% 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 the allowance at that level after considering
factors such as loan charge-offs and recoveries, changes
<PAGE> 18
in the mix of loans in the portfolio, loan growth, and other economic factors.
The provision for loan losses has decreased $137,000 through June 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 $158,000 through the second
quarter of 1997 vs. the second quarter of 1996 mainly due to the acquisition of
UP Financial. Gains on sales of loans has remained stable through the second
quarter of 1997 vs. the second quarter of 1996. Securities gains have
decreased $17,000 due to reduced sale activity in the investment portfolio.
Other noninterest income decreased $87,000 through the second quarter of 1997
vs. the second quarter of 1996 due mainly to a reduction of foreign exchange
income.
NONINTEREST EXPENSES
Noninterest expense showed an increase of 38.5% through June 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 June 30, 1997 vs. June 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 25.8% of income before income tax through
June 30, 1997 compared to 29.9% through June 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.
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
<PAGE> 19
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 June 30, 1997 and 1996.
June 30, 1997
Required Actual
$ % $ %
------- ------- -------- ------
Tier 1 risk-adjusted capital ratio $12,538 4.00% $ 28,431 9.07%
Total risk-adjusted capital ratio $25,077 8.00% $ 32,363 10.32%
Tier 1 leverage ratio $16,137 4.00% $ 28,431 7.05%
Tier 1 capital $ 28,431
Tier 2 capital 3,932
Total risk-based capital 32,363
Total risk-weighted assets 313,457
Average total assets 403,429
June 30, 1996
Required Actual
$ % $ %
------- ------- -------- ------
Tier 1 risk-adjusted capital ratio $ 9,796 4.00% $ 21,513 8.78%
Total risk-adjusted capital ratio $19,592 8.00% $ 24,574 10.03%
<PAGE> 20
Tier 1 leverage ratio $13,144 4.00% $ 21,513 6.55%
Tier 1 capital $ 21,513
Tier 2 capital 3,061
Total risk-based capital 24,574
Total risk-weighted assets 244,911
Average total assets 328,588
<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.
The Annual Meeting of Shareholders of the Registrant was held on April 15,
1997. At the meeting, the following items were voted on and passed:
*The election of three directors - to be elected for terms expiring in
2000.
*Proposal to approve a stock compensation plan for key employees.
*Proposal to approve a stock option plan for non-employee directors.
ITEM 5. OTHER INFORMATION.
None.
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
Number Exhibit
- --------- -------
27 Financial Data Schedule. Filed herewith.
The following documents are filed as part of Part I, Item 1 of this report:
<TABLE>
<S> <C>
Consolidated Balance Sheets - June 30, 1997 (Unaudited) and December 31, 1996
(Audited)
Consolidated Statements of Income - Three months ended June 30, 1997 and 1996
(Unaudited), and six months ended June 30, 1997 and 1996 (Unaudited)
Consolidated Statement of Changes in Shareholders' Equity - Three months
ended June 30, 1997 and 1996 (Unaudited), and six months ended
June 30, 1997 and 1996 (Unaudited)
Consolidated Statement of Cash Flows - Six months ended June 30, 1997 and
1996 (Unaudited)
Notes to consolidated financial statements - June 30, 1997
</TABLE>
(b) Report on Form 8-K. Previously filed on April 17, 1997 (Commission File
Number 2-54663). Here incorporated by reference
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST MANISTIQUE CORPORATION
(Registrant)
/s/ Ronald G. Ford
- ---- -------------------------
Date RONALD G. FORD, CEO
/s/ Richard B. Demers
- ---- -------------------------
Date RICHARD B. DEMERS, COO &
Chief Accounting Office
<PAGE> 24
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,424
<INT-BEARING-DEPOSITS> 97
<FED-FUNDS-SOLD> 4,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,985
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 353,434
<ALLOWANCE> 5,061
<TOTAL-ASSETS> 415,453
<DEPOSITS> 353,634
<SHORT-TERM> 11,150
<LIABILITIES-OTHER> 3,461
<LONG-TERM> 11,245
0
0
<COMMON> 20,073
<OTHER-SE> 15,090
<TOTAL-LIABILITIES-AND-EQUITY> 415,453
<INTEREST-LOAN> 16,583
<INTEREST-INVEST> 590
<INTEREST-OTHER> 129
<INTEREST-TOTAL> 17,302
<INTEREST-DEPOSIT> 6,929
<INTEREST-EXPENSE> 7,563
<INTEREST-INCOME-NET> 9,739
<LOAN-LOSSES> 348
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,288
<INCOME-PRETAX> 2,818
<INCOME-PRE-EXTRAORDINARY> 2,818
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,091
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
<YIELD-ACTUAL> 4.95
<LOANS-NON> 1,406
<LOANS-PAST> 2,364
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,591
<CHARGE-OFFS> 257
<RECOVERIES> 81
<ALLOWANCE-CLOSE> 5,061
<ALLOWANCE-DOMESTIC> 3,681
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,380
</TABLE>
