<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-20167
FIRST MANISTIQUE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
------------------------------- --------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 SOUTH CEDAR STREET, MANISTIQUE, MICHIGAN 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
(Title of Class)
-----------
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 amendments to
this Form 10-K. [X]
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the Registrant, based on a per share price of $55 as of March
17, 1998, was $118,901,970 (common stock, no par value). As of February 19,
1998, there were outstanding 2,379,367 shares of the Company's Common Stock (no
par value).
Documents Incorporated by Reference: Portions of the Company's 1997 Annual
Report to Shareholders are incorporated by reference into Part II of this
Report.
Portions of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 14, 1998 are incorporated by reference into Part
III of this Report.
<PAGE> 2
PART I
ITEM 1: Business
First Manistique Corporation (the "Registrant" or "Company") 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 subsidiary, North Country Bank
and Trust ("Bank"). The Registrant also owns all of the outstanding stock of
three nonbank subsidiaries: First Manistique Agency, an insurance agency which
sells annuities as well as life and health insurance; First Northern Services
Company, a real estate appraisal company which is currently inactive; and First
Rural Relending Company, a nonprofit relending company. The Bank represents the
principal asset of the Registrant. The Registrant and its subsidiary bank 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 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"). On May 1, 1986, Manistique
Lakes Bank merged with First Northern, 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 assists 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. 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 UP Financial Inc., the parent holding company of First National Bank of
Ontonagon ("Ontonagon"). Upon completion of the latter acquisition, Ontonagon
was merged into North Country Bank with North Country Bank being the survivor.
North Country Bank was operated as a separate banking subsidiary of the
Registrant until March 10, 1998, when it was merged into North Country Bank and
Trust with North Country Bank and Trust being the survivor.
The Bank is 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, commercial and governmental
lease financing, direct and indirect consumer financing, and trust services.
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest and fees on loans $ 34,525,569 $ 26,785,141 $ 19,966,340
Investment income 1,065,458 1,501,589 1,526,729
Other interest income 373,010 437,396 606,906
Noninterest income 1,638,216 1,360,453 1,354,094
</TABLE>
The Bank's primary market areas are the areas within a radius of 30 miles from
its 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 South Cedar Street, Manistique, Michigan
49854. North Country Bank and Trust maintains offices in Schoolcraft, Delta,
Machinac, Luce, Alger, Menominee, Dickinson, Marquette, Baraga, Chippewa,
Houghton, Iron, Gogebic, and Ontonagon Counties. The population of these
counties combined is approximately 325,000. North Country Bank and Trust
operates 28 branch offices, provides drive-in convenience
<PAGE> 3
at 21 branch locations, and has automatic teller machines operating at 16
locations. North Country Bank and Trust has no foreign offices.
The Company has plans to expand in 1998 beyond its traditional borders of the
Upper Peninsula. The Company has filed an application with the Arizona State
Banking Commission and the Federal Deposit Insurance Corporation to establish a
De Novo bank in Arizona. The Company also has plans underway to establish branch
locations in the northern part of lower Michigan.
These new locations, which are all expected to be in operation by the summer of
1998, will expand the Company's ability to raise deposits, as well as provide
new customer lending bases.
As of December 31, 1997, the Company employs approximately 153.5 F.T.E.'s.
Banking is a highly competitive business. The Bank competes primarily with
financial institutions in its market areas for loans and deposits. In its
market, namely the Upper Peninsula of Michigan, the Bank maintains the second
largest deposit base, or approximately 15% of the deposit market share. There
are 20 banking and savings institutions and 31 credit unions with offices in the
Upper Peninsula of Michigan.
In addition to other banks, the Bank also competes for loans and deposits with
savings and loan associations, credit unions, investment firms, and large
national retailers, and competes for deposits with money market funds. In order
to successfully compete, management has developed a sales and service culture,
stresses and rewards quality customer service, and designs products to meet the
needs of the customer. The Bank also utilizes its ability to sell loans in the
secondary market.
The Bank makes mortgage, commercial, and installment loans to customers
primarily in the Upper Peninsula of Michigan. Fees may be charged for these
services. Historically, the Bank has predominantly sold its secondary market
conforming residential mortgage loans. The Bank also finances commercial and
governmental leases throughout the country. The leases are originated by
unrelated entities and the Bank reviews the credit quality of each lease before
entering into a financing agreement.
The Registrant is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet financial 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 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):
<TABLE>
<CAPTION>
1997 1996
Fixed Variable Fixed Variable
<S> <C> <C> <C> <C>
Outstanding Letter of Credit $2,214 $2,377
Unused Lines of Credit $2,964 $20,311 $4,192 $20,029
Loan Commitments Outstanding $19,652 $7,185
</TABLE>
Fixed rates on unused lines of credit ranged from 9.00% to 18.00% at December
31, 1997.
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 Bank supports the growth of the service industry, with its year round resort
and related businesses, gaming, forestry, restaurants, farming, fishing, and
many other activities important to growth in the Upper and Lower Peninsula. The
economy of the market areas of the Bank is affected by summer and winter tourism
activities and,
<PAGE> 4
accordingly, the Bank experiences 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 Bank's deposits been received from, a single person, industry,
or group.
In 1993, North Country Bank and Trust joined the Federal Home Loan Bank of
Indianapolis. The Federal Home Loan Bank of Indianapolis provides 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 Bank regularly assesses its 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 has established conservative guidelines for the total
funding to be provided by these deposits. These deposits were slightly more than
7% of total deposits at December 31, 1997. The Bank also uses federal funds
purchased from correspondent banks and the Federal Reserve Bank to respond to
deposit fluctuations and temporary loan demands.
As of December 31, 1997, the Bank had no material risks attendant to foreign
sources. See "Interest Rate and Foreign Exchange Risk Management" section in
Management's Discussion and Analysis for details on the Registrant's foreign
account activity. Compliance with federal, state, and local statutes and/or
ordinances relating to the protection of the environment is not expected to have
a material effect upon the Bank's capital expenditures, earnings, or competitive
position.
SUPERVISION AND REGULATION
The following is a summary of certain statutes and regulations
affecting the Company and the Bank. This summary is qualified in its entirety by
such statutes and regulations. A change in applicable laws or regulations may
have a material effect on the Company, the Bank and the business of the Company
and the Bank.
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Bank can be affected not only by management
decisions and general economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities. Those authorities include, but are not limited to, the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the FDIC,
the Commissioner of the Michigan Financial Institutions Bureau ("Commissioner"),
the Internal Revenue Service, and state taxing authorities. The effect of such
statutes, regulations and policies can be significant, and cannot be predicted
with a high degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions and their holding companies regulate, among other things,
the scope of business, investments, reserves against deposits, capital levels
relative to operations, lending activities and practices, the nature and amount
of collateral for loans, the establishment of branches, mergers, consolidations
and dividends. The system of supervision and regulation applicable to the
Company and the Bank establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC's deposit
insurance funds, the depositors of the Bank, and the public, rather than
shareholders of the Bank or the Company.
Federal law and regulations establish supervisory standards applicable
to the lending activities of the Bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
<PAGE> 5
THE COMPANY
GENERAL. The Company is a bank holding company and, as such, is
registered with, and subject to regulation by, the Federal Reserve Board under
the Bank Holding Company Act, as amended (the "BHCA"). Under the BHCA, the
Company is subject to periodic examination by the Federal Reserve Board, and is
required to file with the Federal Reserve Board periodic reports of its
operations and such additional information as the Federal Reserve Board may
require.
In accordance with Federal Reserve Board policy, the Company is
expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances where the Company might not do so
absent such policy. In addition, if the Commissioner deems the Bank's capital to
be impaired, the Commissioner may require the Bank to restore its capital by a
special assessment upon the Company as the Bank's sole shareholder. If the
Company were to fail to pay any such assessment, the directors of the Bank would
be required, under Michigan law, to sell the shares of the Bank's stock owned by
the Company to the highest bidder at either a public or private auction and use
the proceeds of the sale to restore the Bank's capital.
INVESTMENTS AND ACTIVITIES. In general, any direct or indirect
acquisition by the Company of any voting shares of any bank which would result
in the Company's direct or indirect ownership or control of more than 5% of any
class of voting shares of such bank, and any merger or consolidation of the
Company with another bank company, will require the prior written approval of
the Federal Reserve Board under the BHCA. In acting on such applications, the
Federal Reserve Board must consider various statutory factors, including among
others, the effect of the proposed transaction on competition in relevant
geographic and product markets, and each party's financial condition, managerial
resources, and record of performance under the Community Reinvestment Act.
Effective September 29, 1995, bank holding companies may acquire banks located
in any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring company and all of its insured depository institution
affiliates.
The merger or consolidation of an existing bank subsidiary of the
Company with another bank, or the acquisition by such a subsidiary of assets of
another bank, or the assumption of liability by such a subsidiary to pay any
deposits in another bank, will require the prior written approval of the
responsible Federal depository institution regulatory agency under the Bank
Merger Act, based upon a consideration of statutory factors similar to those
outlined above with respect to the BHCA. In addition, in certain such cases an
application to, and the prior approval of, the Federal Reserve Board under the
BHCA and/or the Commissioner under the Michigan Banking Code, may be required.
With certain limited exceptions, the BHCA prohibits any bank company
from engaging, either directly or indirectly through a subsidiary, in any
activity other than managing or controlling banks unless the proposed
non-banking activity is one that the Federal Reserve Board has determined to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Under current Federal Reserve Board regulations, such
permissible non-banking activities include such things as mortgage banking,
equipment leasing, securities brokerage, and consumer and commercial finance
company operations. As a result of recent amendments to the BHCA,
well-capitalized and well-managed bank holding companies may engage de novo in
certain types of non-banking activities without prior notice to, or approval of,
the Federal Reserve Board, provided that written notice of the new activity is
given to the Federal Reserve Board within 10 business days after the activity is
commenced. If a bank company wishes to engage in a non-banking activity by
acquiring a going concern, prior notice and/or prior approval will be required,
depending upon the activities in which the company to be acquired is engaged,
the size of the company to be acquired and the financial and managerial
condition of the acquiring bank company.
In evaluating a proposal to engage (either de novo or through the
acquisition of a going concern) in a non-banking activity, the Federal Reserve
Board will consider various factors, including among others the financial and
managerial resources of the bank company, and the relative public benefits and
adverse effects which may be expected to result from the performance of the
activity by an affiliate of the bank company. The Federal Reserve Board may
apply different standards to activities proposed to be commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.
<PAGE> 6
CAPITAL REQUIREMENTS. The Federal Reserve Board uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank company may, among other things,
be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve Board's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: (i) a
leverage capital requirement expressed as a percentage of total assets, and (ii)
a risk-based requirement expressed as a percentage of total risk-weighted
assets. The leverage capital requirement consists of a minimum ratio of Tier 1
capital (which consists principally of shareholders' equity) to total assets of
3% for the most highly rated companies, with minimum requirements of 4% to 5%
for all others. The risk- based requirement consists of a minimum ratio of total
capital to total risk-weighted assets of 8%, of which at least one-half must be
Tier 1 capital.
The risk-based and leverage standards presently used by the Federal
Reserve Board are minimum requirements, and higher capital levels will be
required if warranted by the particular circumstances or risk profiles of
individual banking organizations. For example, Federal Reserve Board regulations
provide that additional capital may be required to take adequate account of,
among other things, interest rate risk and the risks posed by concentrations of
credit, nontraditional activities or securities trading activities. Further, any
banking organization experiencing or anticipating significant growth would be
expected to maintain capital ratios, including tangible capital positions (i.e.,
Tier 1 capital less all intangible assets), well above the minimum levels. The
Federal Reserve Board has not advised the Company of any specific minimum Tier 1
Capital leverage ratio applicable to it.
DIVIDENDS. The Company is a corporation separate and distinct from the
Bank. Most of the Company's revenues are received by it in the form of dividends
paid by the Bank. Thus, the Company's ability to pay dividends to its
shareholders is indirectly limited by statutory restrictions on the Bank's
ability to pay dividends. See "SUPERVISION AND REGULATION - The Bank -
Dividends." Further, the Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies. In the policy
statement, the Federal Reserve Board expressed its view that a bank company
experiencing earnings weaknesses should not pay cash dividends exceeding its net
income or which can only be funded in ways that weakened the bank company's
financial health, such as by borrowing. Additionally, the Federal Reserve Board
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to proscribe the payment of dividends by banks and bank
holding companies. Similar enforcement powers over the Bank are possessed by the
FDIC. The "prompt corrective action" provisions of federal law and regulation
authorizes the Federal Reserve Board to restrict the payment of dividends by the
Company for an insured bank which fails to meet specified capital levels.
In addition to the restrictions on dividends imposed by the Federal
Reserve Board, the Michigan Business Corporation Act provides that dividends may
be legally declared or paid only if after the distribution a corporation, such
as the Company, can pay its debts as they come due in the usual course of
business and its total assets equal or exceed the sum of its liabilities plus
the amount that would be needed to satisfy the preferential rights upon
dissolution of any holders of preferred stock whose preferential rights are
superior to those receiving the distribution. The Company is authorized to issue
preferred stock but it has no current plans to issue any such preferred stock.
THE BANK
GENERAL. The Bank is a Michigan banking corporation and its deposit
accounts are insured by the Bank Insurance Fund (the "BIF") of the FDIC. As a
BIF-insured Michigan chartered bank, the Bank is subject to the examination,
supervision, reporting and enforcement requirements of the Commissioner, as the
chartering authority for Michigan banks, and the FDIC, as administrator of the
BIF. These agencies and the federal and state laws applicable to the Bank and
its operations, extensively regulate various aspects of the banking business
including, among other things, permissible types and amounts of loans,
investments and other activities, capital adequacy, branching, interest rates on
loans and on deposits, the maintenance of non-interest bearing reserves on
deposit accounts, and the safety and soundness of banking practices.
DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank is
required to pay deposit insurance premium assessments to the FDIC. The FDIC has
adopted a risk-based assessment system under which all insured depository
<PAGE> 7
institutions are placed into one of nine categories and assessed insurance
premiums, based upon their respective levels of capital and results of
supervisory evaluation. Institutions classified as well-capitalized (as defined
by the FDIC) and considered healthy pay the lowest premium while institutions
that are less than adequately capitalized (as defined by the FDIC) and
considered of substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
The Federal Deposit Insurance Act ("FDIA") requires the FDIC to
establish assessment rates at levels which will maintain the Deposit Insurance
Fund at a mandated reserve ratio of not less than 1.25% of estimated insured
deposits. Accordingly, the FDIC established the schedule of BIF insurance
assessments for the first semi-annual assessment period of 1998, ranging from 0%
of deposits for institutions in the lowest risk category to .27% of deposits for
institutions in the highest risk category.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order, or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
COMMISSIONER ASSESSMENTS. Michigan banks are required to pay
supervisory fees to the Commissioner to fund the operations of the Commissioner.
The amount of supervisory fees paid by a bank is based upon the bank's total
assets, as reported to the Commissioner.
FICO ASSESSMENTS. Pursuant to federal legislation enacted September 30,
1996, the Bank, as a member of the BIF, is subject to assessments to cover the
payments on outstanding obligations of the Financing Corporation ("FICO"). FICO
was created in 1987 to finance the recapitalization of the Federal Savings and
Loan Insurance Corporation, the predecessor to the FDIC's Savings Association
Insurance Fund (the "SAIF") which insures the deposits of thrift institutions.
Until January 1, 2000, the FICO assessments made against BIF members may not
exceed 20% of the amount of FICO assessments made against SAIF members.
Currently, SAIF members pay FICO assessments at a rate equal to approximately
0.063% of deposits while BIF members pay FICO assessments at a rate equal to
approximately 0.013% of deposits. Between January 1, 2000 and the maturity of
the outstanding FICO obligations in 2019, BIF members and SAIF members will
share the cost of the interest on the FICO bonds on a pro rata basis. It is
estimated that FICO assessments during this period will be less than 0.025% of
deposits
CAPITAL REQUIREMENTS. The FDIC has established the following minimum
capital standards for state-chartered, FDIC-insured non-member banks, such as
the Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital
to total assets of 3% for the most highly-rated banks with minimum requirements
of 4% to 5% for all others, and a risk-based capital requirement consisting of a
minimum ratio of total capital to total risk-weighted assets of 8%, at least
one-half of which must be Tier 1 capital. Tier 1 capital consists principally of
shareholders' equity. These capital requirements are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions. For example, FDIC
regulations provide that higher capital may be required to take adequate account
of, among other things, interest rate risk and the risks posed by concentrations
of credit, nontraditional activities or securities trading activities.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Federal regulations define these capital categories as
follows:
<PAGE> 8
<TABLE>
<CAPTION>
Total Tier 1
Risk-Based Risk-Based
Capital Ratio Capital Ratio Leverage Ratio
------------- ------------- --------------
<S> <C> <C> <C>
Well capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- A ratio of tangible
equity to total assets
of 2% or less
</TABLE>
As of December 31, 1997, each of the Bank's ratios exceeded minimum
requirements for the well capitalized category.
Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include: requiring the submission of
a capital restoration plan; placing limits on asset growth and restrictions on
activities; requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; restricting transactions
with affiliates; restricting the interest rate the institution may pay on
deposits; ordering a new election of directors of the institution; requiring
that senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution.
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital levels if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
DIVIDENDS. Under Michigan law, the Bank is restricted as to the maximum
amount of dividends it may pay on its common stock. The Bank may not pay
dividends except out of net profits after deducting its losses and bad debts. A
Michigan state bank may not declare or pay a dividend unless the bank will have
a surplus amounting to at least 20% of its capital after the payment of the
dividend. If the Bank has a surplus less than the amount of its capital, it may
not declare or pay any dividend until an amount equal to at least 10% of net
profits for the preceding one-half year (in the case of quarterly or semi-annual
dividends) or full-year (in the case of annual dividends) has been transferred
to surplus. A Michigan state bank may, with the approval of the Commissioner, by
vote of shareholders owning 2/3 of the stock eligible to vote increase its
capital stock by a declaration of a stock dividend, provided that after the
increase the bank's surplus equals at least 20% of its capital stock, as
increased. The Bank may not declare or pay any dividend until the cumulative
dividends on preferred stock (should any such stock be issued and outstanding)
have been paid in full. The Bank's Articles of Incorporation do not authorize
the issuance of preferred stock and there are no current plans to seek such
authorization.
Federal law generally prohibits a depository institution from making
any capital distribution (including payment of a dividend) or paying any
management fee to its company if the depository institution would thereafter be
undercapitalized. The FDIC may prevent an insured bank from paying dividends if
the bank is in default of payment of any assessment due to the FDIC. In
addition, the FDIC may prohibit the payment of dividends by the Bank, if such
payment is determined, by reason of the financial condition of the Bank, to be
an unsafe and unsound banking practice.
INSIDER TRANSACTIONS. The Bank is subject to certain restrictions
imposed by the Federal Reserve Act on any extensions of credit to the Company or
its subsidiaries, on investments in the stock or other securities of the Company
or its subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by the
<PAGE> 9
Bank to its directors and officers, to directors and officers of the Company and
its subsidiaries, to principal shareholders of the Company, and to "related
interests" of such directors, officers and principal shareholders. In addition,
federal law and regulations may affect the terms upon which any person becoming
a director or officer of the Company or one of its subsidiaries or a principal
shareholder of the Company may obtain credit from banks with which the Bank
maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have
adopted guidelines to promote the safety and soundness of federally insured
depository institutions. These guidelines establish standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits, asset quality and earnings. In general, the guidelines prescribe
the goals to be achieved in each area, and each institution will be responsible
for establishing its own procedures to achieve those goals. If an institution
fails to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit a
plan for achieving and maintaining compliance. The preamble to the guidelines
states that the agencies expect to require a compliance plan from an institution
whose failure to meet one or more of the standards is of such severity that it
could threaten the safe and sound operation of the institution. Failure to
submit an acceptable compliance plan, or failure to adhere to a compliance plan
that has been accepted by the appropriate regulator, would constitute grounds
for further enforcement action.
STATE BANK ACTIVITIES. Under federal law and FDIC regulations,
FDIC-insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law. These restrictions are not currently
expected to have a material impact on the operations of the Bank.
CONSUMER PROTECTION LAWS. The Bank's business includes making a variety
of types of loans to individuals. In making these loans, the Bank is subject to
State usury and regulatory laws and to various federal statutes, such as the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and
settlement costs, and regulate the mortgage loan servicing activities of the
Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. In receiving deposits, the Bank is subject
to extensive regulation under State and federal law and regulations, including
the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy
Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.
Violation of these laws could result in the imposition of significant damages
and fines upon the Bank and its directors and officers.
BRANCHING AUTHORITY. Michigan banks, such as the Bank, have the
authority under Michigan law to establish branches anywhere in the State of
Michigan, subject to receipt of all required regulatory approvals (including the
approval of the Commissioner and the FDIC).
Effective June 1, 1997 (or earlier if expressly authorized by
applicable state law), the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "IBBEA") allows banks to establish interstate branch
networks through acquisitions of other banks, subject to certain conditions,
including certain limitations on the aggregate amount of deposits that may be
held by the surviving bank and all of its insured depository institution
affiliates. The establishment of de novo interstate branches or the acquisition
of individual branches of a bank in another state (rather than the acquisition
of an out-of-state bank in its entirety) is allowed by IBBEA only if
specifically authorized by state law. The legislation allowed individual states
to "opt-out" of interstate branching authority by enacting appropriate
legislation prior to June 1, 1997.
Michigan did not opt out of IBBEA, and now permits both U.S. and
non-U.S. banks to establish branch offices in Michigan. The Michigan Banking
Code permits, in appropriate circumstances and with the approval of
<PAGE> 10
the Commissioner, (i) the acquisition of all or substantially all of the assets
of a Michigan-chartered bank by an FDIC-insured bank, savings bank, or savings
and loan association located in another state, (ii) the acquisition by a
Michigan-chartered bank of all or substantially all of the assets of an
FDIC-insured bank, savings bank or savings and loan association located in
another state, (iii) the consolidation of one or more Michigan-chartered banks
and FDIC-insured banks, savings banks or savings and loan associations located
in other states having laws permitting such consolidation, with the resulting
organization chartered by Michigan, (iv) the establishment by a foreign bank,
which has not previously designated any other state as its home state under the
International Banking Act of 1978, of branches located in Michigan, and (v) the
establishment or acquisition of branches in Michigan by FDIC-insured banks
located in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting Michigan-chartered banks to establish
branches in such jurisdiction. Further, the Michigan Banking Code permits, upon
written notice to the Commissioner, (i) the acquisition by a Michigan-chartered
bank of one or more branches (not comprising all or substantially all of the
assets) of an FDIC-insured bank, savings bank or savings and loan association
located in another state, the District of Columbia, or a U.S. territory or
protectorate, (ii) the establishment by Michigan-chartered banks of branches
located in other states, the District of Columbia, or U.S. territories or
protectorates, and (iii) the consolidation of one or more Michigan-chartered
banks and FDIC-insured banks, savings banks or savings and loan associations
located in other states, with the resulting organization chartered by one of
such other states.
SELECTED STATISTICAL INFORMATION
The following statistical information is presented in response to the Securities
and Exchange Commission's "Guide 3 - Statistical Disclosures by Bank Holding
Companies."
I. A&B Distribution of Assets, Liabilities, and Stockholders' Equity
The following table details the key components of net interest income,
the average daily balance sheet for each year--including the components
of earning assets and supporting liabilities--the related interest
income on a fully tax equivalent basis and interest expense, as well as
the average rates earned and paid on these assets and liabilities.
<PAGE> 11
The following table sets forth average consolidated balance sheet data and
average yield and rate data on a tax equivalent basis for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(dollars in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (1)(2)(3) 352,079 35,567 10.10% 277,464 27,675 9.97% 202,570 20,540 10.14%
Taxable investment securities 14,801 1,030 6.96% 22,164 1,422 6.42% 25,876 1,398 5.40%
Nontaxable investment
securities (2) 900 53 5.89% 1,344 121 9.00% 2,751 195 7.09%
Other investments 7,009 373 5.32% 10,356 437 4.22% 10,228 607 5.93%
----------------- ---------------- ------------------
Total 374,789 37,023 9.88% 311,328 29,655 9.53% 241,425 22,740 9.42%
Noninterest earning assets:
Cash and due from banks 11,800 13,056 9,789
Premises & equipment - net 15,797 13,172 10,036
Other assets 13,266 10,688 8,860
Less: Allowance for loan loss (4,999) (3,815) (2,561)
------- ------- -------
Total 410,653 344,429 267,549
======= ======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits 156,167 5,593 3.58% 148,412 5,391 3.63% 118,162 4,447 3.76%
Time deposits 159,244 9,040 5.68% 114,585 6,233 5.44% 88,462 4,689 5.30%
Short-term and Other borrowings 21,604 1,265 5.86% 14,864 1,050 7.06% 8,548 425 4.97%
----------------- ---------------- ------------------
Total 337,015 15,898 4.72% 277,861 12,674 4.56% 215,172 9,561 4.44%
Non-interest bearing liabilities:
Demand deposits 35,285 32,194 25,802
Other liabilities 1,993 3,406 3,653
Stockholders' equity 36,360 30,968 22,922
------- ------- -------
Total 410,653 344,429 267,549
======= ======= =======
Net interest income 21,125 16,981 13,179
Rate spread 5.16% 4.96% 4.98%
Net interest margin 5.64% 5.45% 5.46%
</TABLE>
(1) For the purposes of these computations, non-accruing loans are
included in the daily average loan amounts outstanding.
(2) The amount of interest income on nontaxable investment
securities and loans has been adjusted to its fully tax
equivalent.
(3) Interest income on loans includes loan fees
I. C Interest Income and Expense Volume and Rate Chance
An analysis of the changes in net interest income from
period-to-period is presented in the following table. The analysis
highlights the relative effect of the changes in interest income and
expense due to changes in the average balances of earning assets and
interest-bearing liabilities and changes in interest rates.
<PAGE> 12
Analysis of Changes in Net Interest Income
For Year Ended December 31,
(Fully taxable equivalent, in thousands)
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE) DUE TO (1) INCREASE (DECREASE) DUE TO (1)
-------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (2) $ 7,527 $ 365 $ 7,892 $ 7,472 $(337) $ 7,135
Taxable investment securities (525) 133 (392) (217) 241 24
Nontaxable investment securities (2) (62) (6) (68) (117) 43 (74)
Other investments (331) 267 (64) 8 (178) (170)
------------------------------ --------------------------------
Total interest earning assets $ 6,609 $ 759 $ 7,368 $ 7,146 $(231) $ 6,915
------------------------------ --------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits $ 274 $ (72) $ 202 $ 1,104 $(160) $ 944
Time deposits 2,522 285 2,807 1,418 126 1,544
Short-term and Other borrowings 344 (129) 215 398 227 625
------------------------------ --------------------------------
Total interest bearing liabilities $ 3,140 $ 84 $ 3,224 $ 2,920 $ 193 $ 3,113
------------------------------ --------------------------------
Net change in net interest income $ 3,469 $ 675 $ 4,144 $ 4,226 $(424) $ 3,802
============================== ================================
</TABLE>
(1) The change in interest due to both rate and volume has been
allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in
each.
(2) The amount of interest income on nontaxable loans and
investment securities has been adjusted to its fully tax
equivalent.
II. A. Investment Portfolio
The following table presents the balances of investment securities
at each respective year-end.
Investment Securities
As of December 31,
(In thousands)
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
---------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C>
U.S. treasury and federal agency $ 7,743 $ 12,569 $ 20,899
State and political subdivisions 830 917 481
Other securities 1,530 1,705 4,265
---------- ----------- -----------
TOTAL $ 10,103 $ 15,191 $ 25,645
========== =========== ===========
HELD TO MATURITY
---------------------------------------
1997 1996 1995
---------- ----------- -----------
State and political subdivisions $ - $ - $ 835
========== =========== ===========
</TABLE>
<PAGE> 13
II. B. Relative Maturities and Weighted Average Interest Rates
The following table presents the maturity schedule of securities held
and the weighted average yield of those securities, as of December
31, 1997. Mortgage backed securities are included with other
securities stratified by maturity dates. Registrant holds no
securities with one issuer in which the aggregate carrying value of
the securities exceeds ten percent of stockholders' equity.
Maturities of Investment Securities
As of December 31, 1997
(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 1,501 - 41 6.79%
One through five years 505 103 179 6.80%
Five through 10 years - 475 536 8.06%
Over 10 years 5,737 252 774 7.40%
---------- ---------- ----------
7,743 830 1,530
========== ========== ==========
</TABLE>
(1) Weighted average yield includes the effect of tax-equivalent adjustments
using a 34% tax rate.
III. A. Types of Loans
The following table sets forth the major categories of loans
outstanding for each category at December 31 for each year indicated.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 181,683 $ 141,555 $107,054 $ 94,515 $113,056
Real estate - construction 10,940 13,897 2,235 1,283 -
Real estate - mortgage 95,543 80,592 58,434 58,797 53,138
Consumer 26,795 31,156 29,918 28,574 17,041
Leases 57,558 47,686 23,867
--------------------------------------------------------
Total $ 372,519 $ 314,886 $221,508 $ 183,169 $183,235
--------------------------------------------------------
</TABLE>
Included in the above totals are approximately $2.8 million of loans to
Canadian obligors.
To the extent the Company utilizes lease financing for its customers, the
leases are accounted for as loans.
<PAGE> 14
III. B Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents the remaining maturity of total
loans outstanding for the categories shown at December 31, 1997, based
on scheduled principal repayments. 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, 1997
(In thousands)
<TABLE>
<CAPTION>
Commercial,
Financial, and
Agricultural Construction
---------------- ------------
<S> <C> <C>
In one year or less $ 116,820 $ 7,928
After one year but within five years:
Variable interest rates 812 -
Fixed interest rates 63,477 3,012
After five years:
Variable interest rates 462 -
Fixed interest rates 57,670 -
--------- ------------
Total $ 239,241 $ 10,940
--------- ------------
</TABLE>
III. C Risk Elements
The following table presents a summary of non-performing assets.
Non-Performing Assets and Problem Loans
As of December 31,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 1,956 $ 49 $ 579 none none
Accruing loans past-due 90 days
or more $ 698 $ 68 $ 1,439 $ 142 $ 116
Restructured loans none none none none none
Interest income that would have been
recorded under original terms $ 93 none none none none
Interest income recorded during period none none none none none
</TABLE>
III. D Other Interest Bearing Assets
None
<PAGE> 15
IV. A Summary of Loan Loss Experience
Additional information relative to the allowance for loan losses is
presented in the following table. This table summarizes loan
balances at the end of each period and daily average balances, changes
in the allowance for loan losses arising from loans charged off,
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 specified loss allowances for selected loans (including
large loans, nonaccrual loans, and problem and delinquent loans) and
consideration of historical loss information and local economic
conditions.
<PAGE> 16
Additional Information Relative to Allowance for Loan Losses
As of December 31,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance of allowance for
possible loan losses at
beginning of period $ 4,591 $ 3,137 $ 2,350 $ 917 $ 834
Loans charged off:
Commercial, financial, and
agricultural 351 1,012 90 92 45
Real estate-construction - - - - -
Real estate-mortgage 37 8 - 34 -
Consumer 413 357 252 149 10
Leases - 98 - -
--------------------------------------------------------
TOTAL LOANS CHARGED OFF 801 1,377 440 275 55
--------------------------------------------------------
Recoveries of loans previously
charged off:
Commercial, financial and
agricultural 2 67 336 118 9
Real estate-construction - - - - -
Real estate-mortgage 7 - 22 31 -
Consumer 77 55 98 44 4
Leases 27 - - - -
--------------------------------------------------------
TOTAL RECOVERIES 113 122 456 193 13
--------------------------------------------------------
Net loans charged off 688 1,255 (16) 82 42
Provisions charged to expense 1,398 2,424 771 330 125
Allowance from acquisitions 299 285 - 1,185 -
--------------------------------------------------------
BALANCE AT END OF PERIOD $ 5,600 $ 4,591 $ 3,137 $ 2,350 $ 917
========================================================
Total loans outstanding at
end of period $372,519 $314,886 $ 221,507 $ 183,169 $ 87,145
Average total loans outstanding
for the year $352,079 $277,464 $ 202,570 $ 137,444 $ 80,332
Ratio of net charge-offs during
period to average loans
outstanding 0.20% 0.45% -0.01% 0.06% 0.05%
</TABLE>
<PAGE> 17
IV. B. Allocation of Allowance for Loan Losses
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,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 2,873 48.8% $2,356 45.0% $ 583 48.3% $655 51.6% $ 410 61.7%
Real estate-
construction - 2.9% - 4.4% - 1.0% - 0.7% - 0.0%
Real estate-mortgage 99 25.6% 81 25.6% 59 26.4% 270 32.1% 180 29.0%
Consumer 416 7.2% 341 9.9% 112 13.5% 125 15.6% 75 9.3%
Leases 350 15.5% 287 15.1% 23 10.8%
Unallocated 1,862 N/A 1,526 N/A 2,360 N/A 1,300 N/A 252 N/A
-----------------------------------------------------------------------------------------------------
$ 5,600 100.0% $4,591 100.0% $ 3,137 100.0% $2,350 100.0% $ 917 100.0%
=====================================================================================================
</TABLE>
V. Deposits
The following table represents 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, 1997
(In thousands)
<TABLE>
<S> <C>
3 months or less $ 11,680
Over 3 months through 6 months 6,283
Over 6 months through 12 months 6,635
Over 12 months 2,229
---------
Total $ 26,827
=========
</TABLE>
Approximately $5.7 million of total deposits are from Canadian
customers.
VI. Return on Equity and Assets
The various ratios are disclosed in Item 6, "Selected Financial
Data."
<PAGE> 18
VII. Short-Term Borrowings
The Company's short-term borrowings consist only of federal funds
purchased. Following are the balances of federal funds purchased as of
December 31 of each year shown.
1997 1996 1995
---- ---- ----
$ 1,195,000 $ 5,000,000 $ -0-
ITEM 2: Properties
The Registrant conducts business from 30 banking and administrative offices. Of
these, 21 are owned in fee simple covering approximately 95,000 square feet, and
nine are leased covering approximately 15,000 square feet. The Registrant's
headquarters, which were remodeled in 1996, are located at 130 South 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
As 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 1997 to a vote of
the Registrant's stockholders.
ADDITIONAL ITEM - EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ronald G. Ford 50 Chairman and C.E.O., Director of North
Country Bank and Trust, and Director of
Registrant
John Lindroth 42 Vice Chairman and Director of North Country
Bank and Trust and Director of the Registrant
Michael C. Henricksen 55 Chairman and Director of the Registrant and
Director of North Country Bank and Trust
Thomas G. King 45 Vice Chairman and Director of the Registrant
and Director of North Country Bank and Trust
Sherry L. Littlejohn 37 President and C.O.O. of North Country Bank
and Trust and Executive Vice President of the
Registrant
Richard B. Demers 38 Executive Vice President and C.O.O. of the
Registrant and Executive Vice President of
North Country Bank and Trust
</TABLE>
<PAGE> 19
The foregoing officers serve at the pleasure of the Board of Directors and are
appointed by the Board annually. There are no arrangements or understandings
between any officer and any other person pursuant to which the officer was
elected.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussions in this Report on Form 10-K and the documents incorporated
herein by reference which are not statements of historical fact (including
statements in the future tense and those which include terms such as "believe,"
"will," "expect," and "anticipate") contain forward-looking statements that
involve risks and uncertainties. The Company's actual future results could
materially differ from those discussed. Factors that could cause or contribute
to such differences include, but are not limited to, acceptance of new products
and services, the Company's future lending and collection experience, the
effects of acquisitions, competition from other institutions, changes in the
banking industry and its regulation, needs for technological change, and other
factors including those discussed in Item 1 above in this Report and in the
Management's Discussion and Analysis in Item 7, as well as those discussed
elsewhere in this Report and the documents incorporated herein by reference.
PART II
ITEM 5: Market for Registrant's Common Stock and Related Security Holder
Matters
There is no active market for the Registrant's common stock and there is no
published information with respect to its market price. There are occasional
direct sales by shareholders of which the Registrant's common stock has sold at
a premium to book value. From January 1, 1996, through December 31, 1997, there
were, so far as the Registrant's management knows, approximately 185 sales of
shares of the Registrant's common stock, involving a total of approximately
128,488 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 $49.00 per
share in the last quarter of 1997, and the lowest price was $30.00 in the first
quarter of 1997. To the knowledge of management, the last sale of common stock
occurred on March 17, 1998, at a price of $55.00. As of March 1, 1998, there
were 1,545 shareholders 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 1996 and 1997, 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.
<TABLE>
<CAPTION>
Sales Price Per Share
1997 1996*
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $33.00 $30.00 $23.33 $20.67
Second Quarter $37.00 $35.00 $26.00 $23.33
Third Quarter $49.00 $47.00 $26.67 $26.00
Fourth Quarter $49.00 $49.00 $26.67 $26.67
</TABLE>
* During the third and fourth quarters of 1996, the Registrant offered
and sold 237,777 shares of common stock to the public at a price per
share of $26.67.
The holders of the Registrant's common stock are entitled to dividends when, as
and if declared by the Board of Directors of the Registrant out of funds legally
available for that purpose. Dividends have been paid on a quarterly basis, plus
a special dividend in the first quarter of 1996. In determining dividends, the
Board of Directors considers the earnings, capital requirements and financial
condition of the Registrant and its subsidiary bank, along with other relevant
factors. The Registrant's principal source of funds for cash dividends is the
dividends paid by the subsidiary bank. The ability of the Registrant and the
subsidiary bank to pay dividends is subject to regulatory restrictions and
requirements.
<PAGE> 20
The following table presents cash dividends paid by quarter for 1997 and 1996:
<TABLE>
<CAPTION>
Dividends Paid
1997 1996
---- ----
<S> <C> <C>
First Quarter $ .1225 $ .087
First Quarter Special N/A .033
Second Quarter .1250 .090
Third Quarter .1275 .100
Fourth Quarter .1288 .110
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
- -------------------------------
For the Year ended December 31,
(in thousands, except per
share data)
1997 1996 1995 1994 1993
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 35,964 $ 28,724 $ 22,100 $ 13,798 $ 7,942
Interest expense (15,898) (12,674) (9,561) (6,053) (3,543)
-------- -------- -------- -------- -------
Net interest income 20,066 16,050 12,539 7,745 4,399
Net security gains (losses) (60) (8) (19) 75 175
Provision for loan losses (1,398) (2,424) (771) (330) (125)
Other income 1,698 1,368 1,373 1,037 795
Other expenses (14,797) (11,609) (9,368) (6,101) (3,715)
-------- -------- -------- -------- -------
Income before income taxes 5,509 3,377 3,754 2,426 1,529
Cummulative effect of change
in accounting for income taxes 13
Provision for income taxes (1,403) (543) (1,084) (458) (260)
-------- -------- -------- -------- -------
Net income $ 4,106 $ 2,834 $ 2,670 $ 1,968 $ 1,282
======== ======== ======== ======== =======
Per Share Data:
Net income - Basic $ 1.73 $ 1.30 $ 1.27 $ 1.14 $ 1.05
Net income - Diluted 1.72 1.29 1.26 1.14 1.05
Cash dividends 0.50 0.42 0.41 0.20 0.49
Book value 15.38 13.81 11.87 10.72 8.12
Ratios based on net income:
Return on average equity 11.29% 9.15% 11.65% 14.26% 13.33%
Return on average assets 1.00% 0.82% 1.00% 1.01% 1.13%
Dividend payout ratio 28.79% 32.11% 31.97% 17.77% 46.68%
Shareholders' average equity
as a percent of average assets 8.85% 8.99% 8.57% 7.11% 8.45%
Financial Condition:
Assets 421,434 367,160 282,791 253,098 117,279
Loans 372,519 314,886 221,507 183,168 87,144
Securities 10,103 15,191 25,645 35,796 17,183
Deposits 360,549 305,939 244,407 223,436 103,717
Other borrowings 19,628 20,441 10,087 3,552 2,250
Shareholder's equity 36,592 32,386 25,006 22,483 9,943
</TABLE>
<PAGE> 22
ITEM 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Incorporated by reference to the Management's Discussion and Analysis in the
Company's 1997 Annual Report to Shareholders and contained in Exhibit 13 to this
Report on Form 10-K.
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. The Company currently does not enter into futures, forwards,
swaps, or options. However, the Company is party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates and may require collateral from the borrower if deemed
necessary by the Company. Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party up to a stipulated amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded as
an asset or liability by the Company until the instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while at the same time
maximize income. Management realizes certain risks are inherent and that the
goal is to identify and minimize the risks. Tools used by management include the
standard GAP report and a simulation model. The Company has no market risk
sensitive instruments held for trading purposes. It appears the Company's market
risk is reasonable at this time.
ITEM 8: Financial Statements
Incorporated by reference to the Registrant's Consolidated Financial Statements
for the years ended December 31, 1997, 1996 and 1995 in the Company's 1997
Annual Report to Shareholders and contained in Exhibit 13 to this Report on Form
10-K.
ITEM 9: Changes in and Disagreements With Accountants and Financial Disclosure
There have been no disagreements with Accountants. Wipfli Ullrich Bertelson LLP
was appointed as the Registrant's independent accountants for the year ended
December 31, 1997, effective April 17, 1997, as disclosed in the Registrant's
Current Report on Form 8-K filed April 25, 1997.
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, 1998, is hereby incorporated by reference.
<PAGE> 23
ITEM 11: Executive Compensation
Information relating to compensation of the Registrant's executive officers and
directors is contained on pages 3 - 7, under the captions "Remuneration of
Directors" and "Compensation of Executive Officers," in the Registrant's
definitive Proxy Statement dated March 14, 1998, 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 8, under the caption "Ownership of Common Stock"
in the Registrant's definitive Proxy Statement dated March 14, 1998, 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 7, under the caption "Indebtedness of and Transactions With
Management" in the Registrant's definitive Proxy Statement dated March 14, 1998,
and is incorporated herein by reference.
PART IV
ITEM 14 - Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) Financial Statements.
1. The following documents are filed as part of Item 8 of this
report:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December
31, 1997, 1996, and 1995 Consolidated Statements of Changes in
Shareholders Equity for the years ended December 31, 1997,
1996, and 1995 Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996, and 1995 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 exhibits listed on
the Exhibit Index to any shareholder of the Registrant without
charge upon written request of Richard B. Demers, First
Manistique Corporation, 130 South Cedar Street, P.O. Box 369,
Manistique, Michigan 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> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, dated March 27, 1998.
FIRST MANISTIQUE CORPORATION
/S/RONALD G. FORD
------------------------------------------------
RONALD G. FORD
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
/S/RICHARD B. DEMERS
------------------------------------------------
RICHARD B. DEMERS
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 27, 1998, by the following persons on
behalf of the Registrant and in the capacities indicated. Each director of the
Registrant, whose signature appears below, hereby appoints Ronald G. Ford and
Michael C. Henricksen, and each of them severally, as his attorney-in-fact, to
sign in his name and on his behalf, as a director of the Registrant, and to file
with the Commission any and all Amendments to this Report on Form 10-K.
SIGNATURE
/s/Stanley J. Gerou II /s/C. Ronald Dufina
- ---------------------------------- ------------------------------------
Stanley J. Gerou II - Director C. Ronald Dufina - Director
/s/Thomas G. King /s/Michael C. Henricksen
- ---------------------------------- ------------------------------------
Thomas G. King - Director Michael C. Henricksen - Director
/s/John Lindroth /s/John P. Miller
- ---------------------------------- ------------------------------------
John Lindroth - Director John P. Miller - Director
/s/Charles B. Beaulieu /s/Ronald G. Ford
- ---------------------------------- ------------------------------------
Charles B. Beaulieu - Director Ronald G. Ford - Director
/s/Bernard A. Bouschor /s/Loren Hulsizer
- ---------------------------------- ------------------------------------
Bernard A. Bouschor - Director Loren Hulsizer - Director
<PAGE> 25
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 F-3 (Registration No.
033-61533). Here incorporated by reference.
4(b) A specimen stock certificate of the Registrant's Common Stock filed as
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 its annual meeting of shareholders held April 21,
1994. Here incorporated by reference.
10(b) First Manistique Corporation Executive and Board Member Restricted
Stock Plan. Previously filed in the Registrant's definitive proxy
statement for its 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. Previously filed as an exhibit to Registrant's
Report on Form 10-K for the year ended December 31, 1996.
Here incorporated by reference.
10(e) Deferred Compensation, Deferred Stock, and Current Stock Purchase Plan
for Nonemployee Directors. Previously filed in the Registrant's
definitive proxy statement for its 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
its 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 Registrant's definitive proxy
statement for its annual meeting of shareholders held April 15, 1997.
Here incorporated by reference.
13 Excepts from the Registrant's 1997 Annual Report to Shareholders,
including Management's Discussion and Analysis of Financial Condition
and Results of Operations and the Registrant's Consolidated Financial
Statements for the years ended December 31, 1997, 1996 and 1995.
21 Subsidiaries of the Registrant. Filed herewith.
27 Financial Data Schedule - year ended December 31, 1997. Filed herewith.
<PAGE> 1
EXHIBIT 13
FIRST MANISTIQUE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
HIGHLIGHTS
For First Manistique Corporation ("the Corporation"), 1997 was a year of
continued growth. The Corporation grew approximately 15 percent. The purchase
of U.P. Financial, Inc. ("U.P. Financial") added three new offices in the
western Upper Peninsula.
In addition to the filing and opening of six branches in 1997, the Corporation
formulated a business plan to operate a Denovo bank in Arizona. An application
for permission to establish a Denovo bank was filed with the Arizona State
Banking Commission and The Federal Deposit Insurance Corporation on February
13, 1998. Approval is expected by April 1, and the operation is expected to
open July 1, 1998.
At December 31, 1997, the Corporation had total assets of $421.43 million, an
increase of $54.27 million from December 31, 1996. The acquisition of U.P.
Financial accounted for $29.76 million of this growth, with the remaining
$24.51 million being generated internally. During 1997, outstanding loan
balances increased 18.3% to $372.52 million. Of the total increase in loans,
$19.95 million, or 34.6% came from the acquisition. The remaining $37.68
million was internally generated.
The growth in 1997 continues the trend which has developed over the past three
years. From 1993 through 1996, assets grew by a total of $249.88 million or
213%, with approximately 55% of this growth occurring due to acquisitions.
During the same period, loans grew over 261%, with nearly 63% of this growth
being internally generated.
Earnings have also continued to increase from 1995 to 1997. Net income was
$4.11 million, $2.83 million, and $2.67 million for 1997, 1996, and 1995,
respectively. Return on average shareholders' equity was 12.06%, 10.12%, and
11.25% for 1997, 1996, and 1995, respectively. Earnings per share have also
increased during this three-year period. Earnings per share were $1.73 in
1997, $1.30 in 1996, and $1.27 in 1995, an increase of 36% from 1995 to 1997.
This significant increase in earnings per share is a result of growth in
earnings without a significant increase in outstanding stock. In prior years,
the Corporation has issued stock for acquisitions. The consolidated operations
of the Corporation in 1997 provided improved profitability through an improved
interest margin and more efficient operations.
1
<PAGE> 2
The Corporation's most significant strength continues to be 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 continued in 1997, with
the acquisition of U.P. Financial on February 4, 1997. U.P. Financial owned
100% of the outstanding stock of First National Bank in Ontonagon
("Ontonagon"), a Michigan banking institution. Upon acquisition, the assets of
Ontonagon were merged into North Country Bank, with North Country Bank being the
survivor. This acquisition gives the 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
$19.95 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 88.4% of total assets at the end of 1997, compared to 85.8%
at the end of 1996. The loan to deposit ratio increased slightly rising from
103.2% at December 31, 1996 to 103.5% at December 31, 1997. 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:
Percent
1997 1996 Change
------- ------- -------
Commercial real estate $86,052 $65,522 25.8
Commercial, financial, and agricultural 95,631 76,033 31.3
Leases:
Commercial 11,094 18,974 (41.5)
Governmental 46,464 28,712 61.8
1 - 4 family residential real estate 95,543 80,592 18.6
Consumer 26,795 31,156 (14.0)
Construction 10,940 13,897 (22.0)
------- ------- -------
Total $ 372,519 $314,886 18.3
========= ======== =======
2
<PAGE> 3
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 the commercial, governmental leasing, and
residential real estate categories in 1997. Management feels these categories
will continue to grow in the future with the level of consumer lending
continuing to decrease.
The Corporation finances commercial and governmental leases throughout the
country. Management visits all originators twice a year to review their
operations and credit controls. 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
to 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
1997. Interest income from certain of the governmental leases is exempt from
federal income taxes.
For the year, commercial loans increase by $40.1 million or by 28%.
The most prominent type of financing remains hospitality and tourism related
industries. Tourism related financing represents $52 million, or 29%, of the
commercial loan portfolio. The growth represents a continual business
development by the Relationship Bankers and their ability to penetrate growth
markets such as Marquette and Sault Ste. Marie. The rest of the commercial
loan portfolio is diversified in such categories as gaming, forestry, and
farming.
Real estate lending on 1-4 family residences makes up the second largest
portion of the loan portfolio. This past year, real estate loans grew by 19%
or by $15 million to $95.5 million. Approximately 75% of these loans are
adjustable rate products that have an annual interest adjustment. These loans
typically have a maximum adjustment of two percentage points annually and five
percentage points over the life of the loan. Loans made and sold to the
secondary market totaled $6.8 million compared to $6.08 in 1996. These loans
are sold but servicing is retained as it provides the Corporation with a source
of noninterest income and a means of maintaining customer contact.
The other large portion of the loan portfolio is consumer loans. This segment
of the loan portfolio represents $26.8 million dollars of the loan portfolio.
In 1997, consumer loans dropped by $4.4 million or 14%. This represents the
direction management has taken to minimize risk associated with consumer
lending. Underwriting standards have become more strict to insure that credit
risk is minimized.
This past year, the Allowance for Loan/Lease Losses reached 1.50% or $5.6
million. This represents a continual effort by management to provide for any
loan/lease losses that may occur. Management's direction will be to
continually focus on the Allowance so that the Corporation is properly reserved
for the risk associated with the loan portfolio.
3
<PAGE> 4
RESORT FUNDING, INC. ("RFI")
As mentioned in previous reports, the Corporation entered into a Settlement
Agreement outside of the Bankruptcy Court proceedings on November 21, 1996.
Since this time covenants and payments on this credit have occurred as agreed.
Taking in consideration the modest interest rate (3%) for the 48 months
remaining, and the fact that payments are interest only with the principal due
in four years, the loan to RFI has a present value of $3,342,272 as of December
31, 1997. The Bank has allocated $339,728 of its Allowance for Loan and Lease
towards this credit. The financial strength of RFI was substantially upgraded
recently when a creditor converted $25 million of debt into stock of RFI. This
gave RFI approximately $31 million of equity, reducing 1996 year-end
debt-to-equity ratio of 27:1, down to 3:1 currently.
The Corporation's success in maintaining credit quality is demonstrated in the
following table:
1997 1996 1995
---- ---- ----
Allowance to total loans at end of year 1.50% 1.46% 1.42%
Net charge-offs (recoveries) $ 689 $1,256 $ (16)
Net charge-offs (recoveries to average
outstanding loans 0.20% 0.45% (0.01)%
Net charge-offs (recoveries) to beginning
allowance balance 15.01% 40.03% (0.7)%
Nonaccrual loans $1,956 $ -0- $ -0-
Loans 90 days or more delinquent
(excluding nonaccrual loans) $ 698 $ 68 $1,439
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.
INVESTMENTS
During 1997, the Corporation's total investments, including interest-bearing
deposits in banks, decreased $5.63 million, from $15.73 million to $10.10
million. This decrease was primarily the result of an increase in the
Corporation's outstanding loans. Because of the higher yield associated with
funds invested in loans (as discussed above), management's desire is to
maintain a minimum balance in the investment portfolio. The amount to be
maintained will be the minimum which will allow us to meet our 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 classifies virtually all securities as available for sale, in order
to maximize our ability to react to changing market conditions. 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 1997.
4
<PAGE> 5
DEPOSITS
Deposit growth has been a key element of the Corporation's expansion strategy.
Total deposits at December 31, 1997, were $359.85 million, compared to $305.24
million and $244.41 million at the end of 1996 and 1995, respectively. The
acquisition of Ontonagon accounted for $27.44 million, or 50.2% of the total
increase of $54.61 million in deposits in 1997. When the $32.87 million of
deposits acquired in the South Range acquisition are considered, the growth in
deposits over the past two years resulting from acquisitions represents 52.2%
of the total increase of $115.44 million. Additional growth has occurred at
branch locations opened in 1996 and 1997, where at December 31, 1997, $9.3
million in deposits were held. Deposits over $100,000 consist primarily of
stable, governmental balances, and balances from retail customers. There were
no brokered deposits at December 31, 1997, 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 $2,612,000 and $2,162,000 at
December 31, 1997 and 1996, respectively.
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 $5.5 US million at December 31, 1997. Such accounts are available
only to Canadian citizens who are attracted to such accounts due to very low
interest rates paid by 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 continues to use alternative funding sources to provide funds for
lending activities. Other borrowings remained stable in 1997 with a balance of
$19.63 million at the end of 1997, compared to $20.44 million in 1996. At
December 31, 1997, $16.12 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 continue to be a significant part of the
overall funding mix of the Corporation.
LIQUIDITY
The Corporation's sources of liquidity include principle 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.
5
<PAGE> 6
RESULTS OF OPERATIONS
SUMMARY
Earnings have continued to increase from 1995 to 1997 as a direct result of the
Corporation's asset growth. Net income was $4.11 million, $2.83 million, and
$2.67 million for 1997, 1996, and 1995, respectively. Net income for 1997 was
53.8% greater than in 1995, while assets grew by 49.0% over the same period.
Earnings per share was $1.73 in 1997, $1.30 in 1996, and $1.27 in 1995, an
increase of 33% in 1997. The dramatic increase in earnings per share is a
result of the combination of the Corporation growing in 1997 without issuing
any additional stock, and improvements in operations in 1997, particularly at
locations acquired over the past several years.
Net interest income is the primary source of earnings growth, increasing to
$20.07 million in 1997, from $16.05 million and $12.54 million in 1996 and
1995, respectively, for a total two-year increase of 60%. Though noninterest
income did not keep pace with the asset growth it did grow 24.1% in 1997 to
$1.70 million (before security losses). This is a significant improvement over
1996 where noninterest income remained flat in comparison to 1995. Management
feels income from noninterest sources will become a more significant component
of the Corporation's earnings due to the expectation that the net interest
margin may begin to decrease in the future due to competitive pressures. As a
result of this expectation, management instituted policies in 1997 designed to
maximize fees collected for services provided to customers. The increase in
noninterest expense to $14.80 million in 1997 from $11.61 million and $9.37
million in 1996 and 1995, exceeded total asset growth. The two-year increase
in noninterest expense was 58% compared to total asset growth of 49.0%.
NET INTEREST INCOME
The Corporation's emphasis on the lending function is evident in the net
interest income measurement. Net interest income as a percentage of total
interest income was 55.8%, 55.9%, and 56.1% in 1997, 1996, and 1995,
respectively. Net interest margin was 5.63%, 5.45%, and 5.46% for the same
periods.
Interest income from loans represented 96.0% of total interest income in 1997,
compared to 93.2% in 1996, and 90.3% in 1995. In all cases, the total amount
of interest income and the yield on total earning assets is heavily impacted by
the results from lending activities. The yield on earning assets was 9.86%,
9.53%, and 9.42% in 1997, 1996, and 1995, respectively.
Total interest expense was $15.90 million in 1997, compared to $12.67 million
and $9.56 million in 1996 and 1995, for an increase of 66.3% from 1995 to 1997.
While other sources of funding are beginning to become an important part of
the Corporation's funding strategy, interest expense on deposits still
represented 92.0% of total interest expense in 1997. The yield on
interest-bearing liabilities was 4.73%, 4.56%, and 4.44% in 1997, 1996, and
1995, respectively.
6
<PAGE> 7
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 reduction in the provision for loan losses to $1,398,201 in
1997 is a result of lower charge-offs and overall improvement in the loan
portfolio. The increase in the provision for loan losses, to $2,424,480 in
1996 from $771,000 in 1995, was primarily a result of settlement and
restructuring of loans with the Bennett Funding Group (discussed above) and
loan growth. The allowance for loan losses increased in 1997 to 1.50% of total
loans, compared to 1.46% at December 31, 1996.
NONINTEREST INCOME
Noninterest income was $1.64 million, $1.36 million, and $1.35 million in 1997,
1996, and 1995, respectively. The principal source of noninterest income is
service charges on deposit accounts. In 1997, such fees were $1.22 million, a
116.7% increase over the amount recorded in 1995. Fees on deposit accounts
have not kept pace with overall asset growth since the institutions acquired
had lower fee structures than the Corporation. However, management has put in
place controls and procedures to ensure the Corporation maximizes its fees for
services rendered.
NONINTEREST EXPENSE
Noninterest expense has steadily increased from 1995 through 1997. The
two-year growth rate was 45.6% for salaries and benefits, and 37.4% for
occupancy expense. These increases were less than the Corporation's asset
growth, over the same period, with a downward trend for annual increases over
the three-year period. While increases in these expenses are 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 have been obtained with further improvements coming in the future
as management continues its outsourcing of back room operations.
The Corporation underwent a significant internal restructuring process in 1997.
As a result of this process, the Corporation will be able to provide better
customer service and have more cost-effective operations. However, this
transition added approximately $500,000 of costs to other operating expenses in
1997.
The application of purchase accounting to the acquisitions described above
created two intangible assets, the cost 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 $.72 million in 1997, compared to
$.59 million in 1996 and $.38 million in 1995.
FEDERAL INCOME TAXES
The provision for income taxes was 25.5% of income before income tax in 1997,
compared to 16.1% in 1996, and 28.9% in 1995. The difference between these
rates and the federal corporate income tax rate of 34% is primarily due to
tax-exempt interest earned on loans and investments. The effective tax rate
has increased from 1996 to 1997, as tax-exempt income became a proportionately
smaller portion of income and nondeductible intangible amortization increased.
7
<PAGE> 8
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 56.8% of loans repricing within one year and 19.0% of
certificates of deposit maturing over one year.
Beyond general efforts to shorten loan pricing periods and extend deposit
maturities, management can manage interest rate risk by the maturity periods of
securities purchase, 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.
Presented below is the Corporation's GAP table at December 31, 1997. This
table treats all money market accounts (approximately $78 million) as
immediately repriceable. Management considers the GAP acceptable.
<TABLE>
<CAPTION>
GAP Table
(In Thousands)
--------------------------------------------------------------------
1 - 90 91 - 180 181 - 365 1 - 2 2 - 5 Over 5
Days Days Days Years Years Years Total
----- -------- --------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning assets
- --------------
Federal funds sold $1,805 $1,805
Securities -0- $-0- $560 $666 $22 $ 8,855 10,103
Loans 136,352 26,295 49,078 22,231 75,184 63,379 372,519
------- ------ ------ ------ ------- ------ -------
Total earning assets 138,157 26,295 49,638 22,897 75,206 72,234 384,427
Interest-bearing liabilities
- ----------------------------
Savings, NOW, and
money market
accounts 86,321 7,828 23,485 41,646 159,280
Certificates of deposit 47,196 53,540 35,357 19,707 11,487 629 167,916
Short-term borrowings 1,195 1,195
Other borrowed funds 788 1,622 3,440 3,851 195 9,732 19,628
------- ---------- --------- --------- --------- ------- -------
Total interest-bearing
liabilities 135,500 62,990 62,282 65,204 11,682 10,361 348,019
------- ---------- --------- --------- --------- ------- -------
GAP $2,657 $(36,695) $(12,644) $(42,307) $63,524 $61,873 $36,408
======= ========== ========= ========= ========= ======= =======
Cumulative GAP $2,657 $(34,038) $(46,682) $(88,989) $(25,465) $36,408 $36,408
======= ========== ========= ========= ========= ======= =======
</TABLE>
8
<PAGE> 9
The Corporation provides foreign exchanges services, makes loans to, and
accepts deposits from, Canadian customers primarily at its banking office in
Sault Ste. Marie, Michigan. To protect against foreign exchange risk, the
Corporation monitors the volume of Canadian deposits it takes in and then
invests these Canadian deposits in Canadian commercial loans. As of December
31, 1997, the Corporation had excess Canadian liabilities of approximately $2.6
million (or $1.82 million in U.S. dollars). Management anticipates this spread
to decrease in early 1998 as the Canadian loans are expected to increase faster
than deposits. Management feels the exposure to short-term foreign exchange
risk is minimal and at an acceptable level for the Corporation.
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 exceeds cash
dividends by $$2.92 million in 1997, $1.92 million in 1996, and $1.82 million
in 1995. In addition, $355,000, $254,000, and $48,000 of the cash dividends
were reinvested in the Corporation through the dividend reinvestment program in
1997, 1996, and 1995, respectively. The issuance of shares, retained income,
and the dividend reinvestment program increased shareholder's equity, and
regulatory capital, by $14.11 million between the beginning of 1995 and
December 31, 1997. 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:
Tier 1 Tier 1
Risk-Based Risk-Based
Leverage Capital Capital
Ratio Ratio Ratio
-------- ------- -------
Regulatory minimum 4.0% 4.0% 4.0%
Regulatory designation as well-capitalized 5.0% 6.0% 10.0%
The Corporation:
December 31, 1996 7.6% 10.0% 11.2%
December 31, 1997 7.2% 9.6% 10.8%
9
<PAGE> 10
USED BUT NOT YET ADOPTED ACCOUNTING POLICIES
See Note 1 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, 1997.
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying 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.
YEAR 2000 ISSUE
The Corporation has identified the resolution of the Year 2000 issue as a
priority item. During 1997 the Corporation committed resources, mainly
manpower, to the task of identifying the scope of the Year 2000 issue and
formulating a plan for ensuring that all impacted systems are compliant by the
end of 1998.
Because the Corporation has outsourced virtually of if its data processing, we
have begun the process of contacting all related vendors, requesting written
confirmation that their respective products are Year 2000 compliant. Vendor
assertions will be tested during 1998 so that the Corporation has ample time to
react to any problems.
The Corporation has already begun contacting significant commercial customers
regarding their status on the Year 2000 issue so as to avoid any negative
impact on the quality of the loan portfolio.
Because of the outsourcing utilized by the Corporation, the addressing of the
Year 2000 issue is not expected to materially impact the Corporation's results
of operations and capital resources.
10
<PAGE> 11
FIRST MANISTIQUE CORPORATION
AND SUBSIDIARIES
Manistique, Michigan
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, and 1995
<PAGE> 12
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Independent Auditor's Report 1
Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Shareholders' Equity 4
Consolidated Statements of Cash Flows 5 - 7
Notes to Consolidated Financial Statements 8 - 34
</TABLE>
<PAGE> 13
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
First Manistique Corporation
Manistique, Michigan
We have audited the accompanying consolidated balance sheet of First Manistique
Corporation and Subsidiaries as of December 31, 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated financial
statements of First Manistique Corporation and Subsidiaries as of and for each
of the two years in the period ended December 31, 1996, were audited by other
auditors whose report dated February 14, 1997, expressed an unqualified opinion
on those statements.
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 1997 financial statements referred to above present fairly,
in all material respects, the financial position of First Manistique Corporation
and Subsidiaries at December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
-----------------------------------
Wipfli Ullrich Bertelson LLP
January 30, 1998
Appleton, Wisconsin
1.
<PAGE> 14
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 9,338,168 $ 11,764,481
Federal funds sold 1,805,000 400,000
------------- -------------
Cash and cash equivalents 11,143,168 12,164,481
Investments:
Interest-bearing deposits in other financial institutions -0- 534,622
Investment securities available for sale - Stated at fair value 10,102,893 15,190,970
Total loans 372,518,549 314,886,294
Allowance for loan losses (5,599,546) (4,590,938)
------------- -------------
Net loans 366,919,003 310,295,356
Premises and equipment 17,477,345 14,476,300
Other assets 15,791,961 14,498,264
------------- -------------
TOTAL ASSETS $ 421,434,370 $ 367,159,993
============= =============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Non-interest-bearing deposits $ 33,353,597 $ 33,786,485
Interest-bearing deposits 327,195,088 272,152,091
------------- -------------
Total deposits 360,548,685 305,938,576
Short-term borrowings 1,195,000 5,000,000
Other borrowings 19,628,178 20,440,779
Other liabilities 3,470,434 3,395,076
------------- -------------
Total liabilities 384,842,297 334,774,431
------------- -------------
Shareholders' equity:
Common stock - No par value:
Authorized - 6,000,000 shares
Issued and outstanding - 2,379,490 and 2,363,734
shares at December 31, 1997 and 1996, respectively 19,916,026 18,879,454
Retained earnings 16,679,281 13,755,636
Unrealized loss on securities available for sale - Net of tax (3,234) (249,528)
------------- -------------
Total shareholders' equity 36,592,073 32,385,562
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 421,434,370 $ 367,159,993
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
2.
<PAGE> 15
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $ 34,525,569 $ 26,785,141 $ 19,966,340
Interest on investment securities:
Taxable 1,030,414 1,421,952 1,397,953
Tax-exempt 35,044 79,637 128,776
Other interest income 373,010 437,396 606,906
------------ ------------ ------------
Total interest income 35,964,037 28,724,126 22,099,975
------------ ------------ ------------
Interest expense:
Deposits 14,633,670 11,647,491 9,173,701
Short-term borrowings 33,062 21,511 26,130
Other borrowings 1,231,323 1,005,083 361,517
------------ ------------ ------------
Total interest expense 15,898,055 12,674,085 9,561,348
------------ ------------ ------------
Net interest income 20,065,982 16,050,041 12,538,627
Provision for loan losses 1,398,201 2,424,480 771,000
------------ ------------ ------------
Net interest income after provision for
loan losses 18,667,781 13,625,561 11,767,627
------------ ------------ ------------
Other income:
Service fees 1,220,028 757,909 562,806
Net security losses (60,163) (7,899) (19,083)
Other operating income 478,351 610,443 810,371
------------ ------------ ------------
Total other income 1,638,216 1,360,453 1,354,094
------------ ------------ ------------
Other expenses:
Salaries and employee benefits 5,898,110 5,130,808 4,049,844
Occupancy expense 2,212,311 1,921,540 1,609,740
Other operating expenses 6,686,500 4,556,182 3,707,929
------------ ------------ ------------
Total other expenses 14,796,921 11,608,530 9,367,513
------------ ------------ ------------
Income before provision for income taxes 5,509,076 3,377,484 3,754,208
Provision for income taxes 1,403,417 543,300 1,083,893
------------ ------------ ------------
Net income $ 4,105,659 $ 2,834,184 $ 2,670,315
============ ============ ============
Earnings per share:
Basic $ 1.73 $ 1.30 $ 1.27
============ ============ ============
Diluted $ 1.72 $ 1.29 $ 1.26
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3.
<PAGE> 16
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Unrealized
Loss on
Securities
Shares of Available
Common Common Retained for Sale -
Stock Stock Earnings Net of Tax Total
--------- ------ -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 2,097,072 $ 13,037,296 $ 10,014,844 $ (568,713) $ 22,483,427
Net income 2,670,315 2,670,315
Cash dividends ($.41 per
share) (853,704) (853,704)
Issuance of common stock 9,825 157,973 157,973
Change in unrealized
loss on securities
available for sale -
Net of tax 548,866 548,866
----------- ---------- ------------ ----------- ----------
Balance, December 31,
1995 2,106,897 13,195,269 11,831,455 (19,847) 25,006,877
Net income 2,834,184 2,834,184
Cash dividends ($.42 per
share) (910,003) (910,003)
Issuance of common stock 256,837 5,684,185 5,684,185
Change in unrealized
loss on securities
available for sale -
Net of tax (229,681) (229,681)
----------- ---------- ------------ ----------- ----------
Balance, December 31,
1996 2,363,734 18,879,454 13,755,636 (249,528) 32,385,562
Net income 4,105,659 4,105,659
Cash dividends ($.495
per share) (1,182,014) (1,182,014)
Issuance of common stock 34,813 1,868,178
Retirement of common stock (19,057) (831,606) (831,606)
Change in unrealized loss
on securities available
for sale - Net of tax 246,294 246,294
----------- ---------- ------------ ----------- ----------
Balance, December 31,
1997 2,379,490 $ 19,916,026 $ 16,679,281 $ (3,234) $ 36,592,073
----------- ---------- ------------ ----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
4.
<PAGE> 17
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 4,105,659 $ 2,834,184 $ 2,670,315
------------ ------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 1,398,201 2,424,480 771,000
Credit for deferred income taxes (322,707) (404,200) (325,650)
Provision for depreciation and net
amortization 1,988,487 2,433,469 1,457,085
Proceeds from loan sales 6,803,965 6,121,420 3,307,457
Loans originated for sale (6,745,114) (6,076,247) (3,275,010)
(Gains) losses on sales of:
Loans held for sale (58,851) (45,173) (32,447)
Securities 60,163 7,899 19,083
Premises, equipment, and other
real estate 27,624 10,000 (29,050)
Change in other assets 1,029,093 (699,274) 1,238,622
Change in other liabilities (163,100) 316,778 (662,220)
------------ ------------ ------------
Total adjustments 4,017,761 4,089,152 2,468,870
------------ ------------ ------------
Net cash provided by operating activities 8,123,420 6,923,336 5,139,185
------------ ------------ ------------
Cash flows from investing activities:
Net decrease in interest-bearing deposits
in other financial institutions 534,622 2,231,458 743,829
Payment for purchases of securities:
Available for sale (2,114,281) (7,595,025) (5,749,932)
Held to maturity -0- -0- (500,000)
Equity (843,500) (1,625,800) (365,000)
Proceeds from sale of securities:
Available for sale 9,824,063 11,542,876 10,821,380
Equity 327,300 -0- -0-
Proceeds from maturities of securities:
Available for sale 2,173,899 9,224,050 3,702,740
Held to maturity -0- 835,049 1,495,677
Net increase in loans (38,423,930) (67,589,084) (38,338,850)
Proceeds from sale of premises,
equipment, and other real estate 434,693 69,000 153,976
Capital expenditures (3,496,436) (2,795,067) (2,811,612)
Net cash provided from acquisitions 32,054 723,993 8,006,430
------------ ------------ ------------
Net cash used in investing activities (31,551,516) (54,978,550) (22,841,362)
------------ ------------ ------------
</TABLE>
5.
<PAGE> 18
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 27,169,826 $ 27,962,963 $ 12,035,652
Net increase (decrease) in short-term
borrowings (3,805,000) 5,000,000 -0-
Proceeds from other borrowings 7,842,577 10,293,013 6,535,204
Principal payments on other
borrowings (8,655,178) (2,302,820) -0-
Proceeds from issuance of common
stock 1,868,178 5,684,185 157,973
Retirement of common stock (831,606) -0- -0-
Dividends paid (1,182,014) (910,003) (853,704)
------------ ------------ ------------
Net cash provided by financing activities 22,406,783 45,727,338 17,875,125
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (1,021,313) (2,327,876) 172,948
Cash and cash equivalents at beginning 12,164,481 14,492,357 14,319,409
------------ ------------ ------------
Cash and cash equivalents at end $ 11,143,168 $ 12,164,481 $ 14,492,357
============ ============ ============
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 15,561,189 $ 12,547,840 $ 9,212,594
Income taxes 1,955,760 1,214,508 1,397,394
Noncash investing and financing activities:
Transfer from securities held to maturity
to securities available for sale -0- -0- 11,944,338
Transfer of foreclosures from loans to
other real estate 356,856 -0- 16,623
Issuance of notes payable to South Range
State Bank's former shareholders -0- 2,362,851 -0-
</TABLE>
6.
<PAGE> 19
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Assets and liabilities acquired in acquisitions:
Interest-bearing deposits $ -0- $ 1,088,000 $ -0-
Premises and equipment 969,437 1,409,480 439,310
Acquisition intangibles 2,099,287 1,584,000 514,902
Loans - Net 19,954,774 26,760,657 -0-
Securities 4,488,326 3,800,350 -0-
Other assets 134,863 673,454 11,994
Deposits (27,440,283) (32,868,918) (8,935,477)
Other liabilities (238,458) (808,165) (37,159)
</TABLE>
See accompanying notes to consolidated financial statements.
7.
<PAGE> 20
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of First Manistique Corporation (the "Corporation") and
Subsidiaries conform to generally accepted accounting principles and prevailing
practices within the banking industry. Significant accounting policies are
summarized below.
Principles of Consolidation
The consolidated financial statements include the accounts of the 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.
Nature of Operations
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 revenue and expenses during the period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, non-interest-bearing deposits in correspondent banks, and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
8.
<PAGE> 21
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment Securities
The Corporation's investment securities are classified in two categories and
accounted for as follows:
Securities available for sale - Securities available for sale consist of
investment securities not classified as securities held to maturity. These
securities are stated at fair value. Unrealized holding gains and losses, net
of tax, on securities available for sale are reported as a net amount in a
separate component of shareholders' equity until realized.
Securities held to maturity - Investment securities for which the Corporation
has the positive intent and ability to hold to maturity are reported at cost,
adjusted for amortization of premiums and accretion of discounts, which are
recognized in interest income using the interest method over the period to
maturity.
Gains and losses on the sale of securities are determined using the
specific-identification method.
Loans Held for Sale
Loans held for sale represent originations of fixed-rate, first mortgage loans
recorded at cost. The loans are sold at face value shortly after origination
based on an agreement with an outside mortgage company.
Interest Income and Fees on Loans
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discontinued when, in
the opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all unpaid
accrued interest is reversed. Loan-origination fees are credited to income when
received, as capitalization of the fees and related costs would not have a
material effect on the overall consolidated financial statements.
Allowance for Loan Losses
The allowance for loan losses includes specific allowances related to commercial
loans which have been judged to be impaired. A loan is impaired when, based on
current information, it is probable that the Corporation will not collect all
amounts due in accordance with the contractual terms of the loan agreement.
These specific allowances are based on discounted cash flows of expected future
payments using the loan's initial effective interest rate or the fair value of
the collateral if the loan is collateral dependent.
9.
<PAGE> 22
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Corporation continues to maintain a general allowance for loan losses for
loans not considered impaired. The allowance for loan losses is maintained at a
level which management believes is adequate to provide for possible loan losses.
Management periodically evaluates the adequacy of the allowance using the
Corporation's past loan loss experience, known and inherent risks in the
portfolio, composition of the portfolio, current economic conditions, and other
factors. This evaluation is inherently subjective since it requires material
estimates that may be susceptible to significant change.
Other Real Estate
Other real estate is carried at the lower of cost or fair value, less estimated
sales costs.
Premises and Equipment
Premises and equipment are stated at cost. Maintenance and repair costs are
charged to expense as incurred. Gains or losses on disposition of premises and
equipment are reflected in income. Depreciation is computed on the straight-line
method and is based on the estimated useful lives of the assets.
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 10-year period on an accelerated basis, and goodwill is amortized
on a straight-line basis over periods ranging from 15 to 25 years.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Deferred income taxes have been provided under the liability method. Deferred
tax assets and liabilities are determined based upon the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences are expected to
reverse. Deferred tax expense (benefit) is the result of changes in the deferred
tax asset and liability.
10.
<PAGE> 23
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Corporation has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, and standby letters of credit. Such financial instruments are recorded
in the consolidated financial statements when they become payable.
Future Accounting Changes
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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 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 surplus in the equity section of the balance sheet. 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, cannot determine the
effect that adoption of this statement may have on the consolidated financial
statements of the Corporation as comprehensive income is dependent on the amount
and nature of assets and liabilities held which generate nonincome 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 fiscal years beginning after December 15, 1997. In
the initial year of application, comparative information for earlier years is to
be restated. The statement is not expected to have an effect on the financial
position or operating results of the Corporation, but may require additional
disclosures in the consolidated financial statements.
Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
11.
<PAGE> 24
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - CHANGE IN ACCOUNTING PRINCIPLE
FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," in June 1996. The Corporation
adopted the provisions of SFAS No. 125 effective January 1, 1997. SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. The statement provides
guidelines for classification of a transfer as a sale. The statement also
requires liabilities incurred or obtained by transferors as part of a transfer
of financial assets be initially recorded at fair value. Subsequent to
acquisition, the servicing assets and liabilities are to be amortized over the
estimated net servicing period.
NOTE 3 - ACQUISITIONS
During the period of 1995 through 1997, the Corporation completed three
acquisitions. The acquisitions have been accounted for under the purchase method
of accounting. Accordingly, the assets, liabilities, and results of operations
are included in the Corporation's consolidated financial statements as of and
subsequent to the respective acquisition dates. Following is a summary of the
acquisitions. Note 9 provides information regarding acquisition intangibles and
the amortization thereof. Additional information regarding assets acquired and
liabilities assumed is presented on the accompanying consolidated statements of
cash flows.
<TABLE>
<CAPTION>
Assets
Acquired Resulting
Acquisition (Excludes Acquisition
Cost Intangibles) Intangibles
----------- ------------- --------------
(In Thousands)
<S> <C> <C> <C>
On February 4, 1997, acquired 100% of the
outstanding stock of U.P. Financial, Inc. in
exchange for cash $ 4,298 $ 29,763 $ 2,099
On January 31, 1996, acquired 100% of the
outstanding stock of South Range State Bank in
exchange for cash and notes 4,310 35,623 1,584
On 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
</TABLE>
12.
<PAGE> 25
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (CONTINUED)
Following is unaudited, pro forma information regarding the acquisition of U.P.
Financial, Inc., assuming the Company had been acquired January 1, 1996.
Separate presentation of 1997 is not material due to the early acquisition date.
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
(Dollars in Thousands,
Except Earnings Per Share)
<S> <C>
Total revenue $ 32,396
Net income 3,059
Earnings per share - Basic 1.40
</TABLE>
NOTE 4 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the amount of $1,546,000 are restricted at December
31, 1997, to meet the reserve requirements of the Federal Reserve System.
NOTE 5 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities available
for sale as of December 31 are as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 7,758,368 $ 6,394 $ 22,292 $ 7,742,470
Obligations of states and
political subdivisions 833,248 509 3,826 829,931
Mortgage-related securities 394,081 575 2,354 392,302
Other securities 1,122,096 16,094 -0- 1,138,190
---------------- ---------------- ---------------- ----------------
Total investment securities
available for sale $ 10,107,793 $ 23,572 $ 28,472 $ 10,102,893
=============== ================ =============== ================
</TABLE>
13.
<PAGE> 26
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $12,900,000 $ 1,719 $ 332,872 $12,568,847
Obligations of states and
political subdivisions 942,414 -0- 25,077 917,337
Mortgage-related securities 571,370 357 8,542 563,185
Other securities 1,154,116 -0- 12,515 1,141,601
----------- ----------- ----------- -----------
Total investment securities
available for sale $15,567,900 $ 2,076 $ 379,006 $15,190,970
=========== =========== =========== ===========
</TABLE>
Included in other assets are equity securities, including stock in the Federal
Home Loan Bank, totaling $3,044,300 and $2,569,988 at December 31, 1997 and
1996, respectively. Equity securities are reported at the lower of cost or
market.
Following is a summary of the proceeds from sales of investment securities
available for sale, as well as gross gains and losses for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Proceeds from sale of investment securities $ 10,151,363 $ 11,542,876 $ 10,821,380
Gross gains on sales -0- 30,905 14,942
Gross losses on sales 60,163 38,804 34,025
</TABLE>
14.
<PAGE> 27
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of investment securities available
for sale at December 31, 1997, by contractual maturity, are shown below.
Contractual maturities will differ from expected maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------- ----------
<S> <C> <C>
Due after three months through one year $ 1,503,896 $ 1,500,937
Due after one year through five years 611,680 607,603
Due after five years through ten years 975,163 975,308
Due after ten years 6,622,973 6,626,743
---------------- --------------
9,713,712 9,710,591
Mortgage-related securities 394,081 392,302
---------------- --------------
Total $ 10,107,793 $ 10,102,893
================ ==============
</TABLE>
The carrying value of securities pledged to secure public deposits, treasury
deposits, and repurchase agreements was $3,595,938 and $3,447,954 as of December
31, 1997 and 1996, respectively.
NOTE 6 - LOANS
The composition of loans at December 31 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial, financial, and agricultural $ 181,682,624 $141,555,454
Commercial leases 57,557,615 47,686,000
1-4 family residential real estate 95,542,880 80,591,780
Consumer 26,795,585 31,156,222
Construction 10,939,845 13,896,838
------------------- ------------
Total loans $ 372,518,549 $314,886,294
=================== ============
</TABLE>
15.
<PAGE> 28
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LOANS (CONTINUED)
An analysis of the allowance for loan losses for the years ended December 31
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, January 1 $4,590,938 $ 3,137,315 $2,349,957
Allowance from acquisitions 299,295 285,000 -0-
Provision for loan losses 1,398,201 2,424,480 771,000
Recoveries on loans 112,712 121,890 456,702
Loans charged off (801,600) (1,377,747) (440,344)
---------- --------------- ----------
Balance, December 31 $5,599,546 $ 4,590,938 $3,137,315
========== =============== ==========
</TABLE>
Information regarding impaired loans follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Year-end loans with no allowance for loan losses allocated $ -0- $ 805,454
Year-end loans with allowance for loan losses allocated 6,933,060 3,681,429
Amount of the allowance allocated 923,014 467,877
Average investment in impaired loans during the year $6,709,911 $2,914,955
Interest income recognized during impairment 223,500 99,215
Cash-basis interest income recognized 212,699 98,098
</TABLE>
The subsidiary banks in the ordinary course of banking business grant loans to
the Corporation's executive officers and directors including their families and
firms in which they are principal owners.
Substantially all loans to executive officers and directors were made on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with others and did not involve more than the
normal risk of collectibility or present other unfavorable features. Activity in
such loans during 1997 is summarized below:
Loans outstanding, January 1, 1997 $ 15,952,067
New loans 4,329,427
Repayment (7,642,646)
------------------
Loans outstanding, December 31, 1997 $ 12,638,848
==================
16.
<PAGE> 29
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - PREMISES AND EQUIPMENT
Details of premises and equipment at December 31 follow:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 1,643,792 $ 1,626,692
Buildings and improvements 14,284,318 10,864,584
Furniture, fixtures, and equipment 7,929,563 6,607,982
----------- -----------
Totals 23,857,673 19,099,258
Less - Accumulated depreciation and amortization 6,380,328 4,622,958
----------- -----------
Net book value $17,477,345 $14,476,300
=========== ===========
</TABLE>
Depreciation and amortization of premises and equipment charged to operating
expenses amounted to $1,222,939 in 1997, $1,436,612 in 1996, and $816,720 in
1995.
NOTE 8 - OTHER REAL ESTATE
Included in other assets is other real estate totaling $397,861 and $318,341 at
December 31, 1997 and 1996, respectively. There is no allowance for losses on
other real estate. Other real estate expenses totaled $104,408, $9,489, and
$7,695 for 1997, 1996, and 1995, respectively.
NOTE 9 - ACQUISITION INTANGIBLES
Intangible assets, which were acquired through the acquisitions described in
Note 3, consist of the following as of December 31 (net of amortization):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Goodwill $ 3,904,720 $ 2,352,456
Core deposit intangible 2,794,364 2,966,412
----------------- -----------------
Total acquisition intangibles $ 6,699,084 $ 5,318,868
================= =================
</TABLE>
Amortization expense related to the acquisition intangibles was $719,071,
$593,220, and $378,381 for the years ended December 31, 1997, 1996, and 1995,
respectively.
17.
<PAGE> 30
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - DEPOSITS
The distribution of deposits at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Non-interest-bearing demand deposits $ 33,353,597 $ 33,786,485
Savings, money market, and interest-bearing demand deposits 159,279,613 151,936,198
Time deposits 167,915,475 120,215,893
------------------- ------------
Total deposits $ 360,548,685 $305,938,576
=================== ============
</TABLE>
Time deposits of $100,000 or more were $26,827,133 and $21,850,180 at December
31, 1997 and 1996, respectively. Interest expense on time deposits of $100,000
or more was $1,606,273, $1,085,714, and $513,114 for the years ended December
31, 1997, 1996, and 1995, respectively.
NOTE 11 - SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased of $1,195,000 and
$5,000,000 at December 31, 1997 and 1996, respectively.
NOTE 12 - OTHER BORROWINGS
Other borrowings consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Federal Home Loan Bank:
Adjustable rate advance, maturing November 24, 1997,
5.47% at December 31, 1996 $ -0- $ 4,000,000
Fixed-rate advance at 5.61%, maturing April 20, 1997 -0- 1,300,000
Fixed-rate advance at 5.79%, maturing June 2, 1997 -0- 1,000,000
Fixed-rate advance at 5.96%, maturing June 29, 1998 2,000,000 -0-
Fixed-rate advance at 5.97%, maturing July 28, 1998 2,000,000 -0-
Fixed-rate advance at 5.98%, maturing August 27, 1998 1,000,000 -0-
Fixed-rate advance at 5.82%, maturing May 20, 1999 3,000,000 -0-
Fixed-rate advance at 6.13%, maturing June 2, 2000 -0- 1,000,000
Fixed-rate advance at 5.86%, maturing December 15, 2003 -0- 184,129
Fixed-rate advance at 7.37%, maturing April 15, 2004 186,049 215,359
Fixed-rate advance at 7.59%, maturing May 17, 2004 327,828 379,212
Fixed-rate advance at 6.5%, maturing October 17, 2005 2,778,351 2,999,215
Fixed-rate advance at 7.06%, maturing May 15, 2006 4,822,898 5,000,000
----------- -----------
16,115,126 16,077,915
</TABLE>
18.
<PAGE> 31
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - OTHER BORROWINGS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---- ----
<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% $ 1,937,740 $ 2,000,013
Other borrowings:
Unsecured variable rate note payable to South Range State Bank's former
stockholders, maturing in three equal annual installments beginning February
1, 1997, 5.04%
at December 31, 1997 and 1996 1,575,312 2,362,851
----------- -----------
Total other borrowings $19,628,178 $20,440,779
=========== ===========
</TABLE>
Maturities of other borrowings outstanding at December 31, 1997, are as follows:
1998 $ 5,850,422
1999 3,851,324
2000 64,147
2001 64,788
2002 65,436
Thereafter 9,732,061
-------------
$ 19,628,178
=============
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, 1997. The
Farmers Home Administration borrowing is collateralized by loans totaling
$1,918,276, originated and held by the Corporation's wholly owned subsidiary,
Rural Relending, and guaranteed by the Corporation.
NOTE 13 - INCOME TAXES
The components of the federal income tax provision for the years ended December
31 follow:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current tax expense $ 1,726,124 $ 947,500 $ 1,409,543
Deferred tax credit (322,707) (404,200) (325,650)
----------------- --------------- ---------------
Total provision for income taxes $ 1,403,417 $ 543,300 $ 1,083,893
================= =============== ===============
</TABLE>
19.
<PAGE> 32
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES (CONTINUED)
Included in the total provision for income taxes are credits of $20,455, $2,686,
and $6,488 for the years ended December 31, 1997, 1996, and 1995, respectively,
related to security transactions.
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Corporation's assets and
liabilities. The major components of net deferred tax assets at December 31 are
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 1,679,962 $ 1,368,268
Deferred compensation 285,274 258,390
Unrealized loss on securities available for sale 1,666 127,402
----------- -----------
Total deferred tax assets 1,966,902 1,754,060
----------- -----------
Deferred tax liabilities:
Depreciation (742,041) (640,343)
Intangibles (389,711) (513,253)
----------- -----------
Total deferred tax liabilities (1,131,752) (1,153,596)
----------- -----------
Net deferred tax asset $ 835,150 $ 600,464
=========== ===========
</TABLE>
A summary of the source of differences between income taxes at the federal
statutory rate and the provision for income taxes for the years ended December
31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax expense at statutory rate $ 1,873,086 $ 1,148,345 $ 1,276,431
Increase (decrease) in taxes resulting from:
Tax-exempt interest (603,836) (539,365) (372,381)
Other 134,167 (65,680) 179,843
------------- ----------- -----------
Provision for income taxes $ 1,403,417 $ 543,300 $ 1,083,893
============= =========== ===========
</TABLE>
NOTE 14 - RETIREMENT PLAN
The Corporation has established a 401(k) profit-sharing 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. Retirement plan
contribution expense charged to operations totaled $105,267, $120,126, and
$120,722 for 1997, 1996, and 1995, respectively.
20.
<PAGE> 33
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - DEFERRED COMPENSATION PLANS
As an incentive to retain key members of management and directors, the
Corporation has two deferred compensation plans.
Benefits under one of the plans is based on the number of years the key members
have served the Corporation. A liability is recorded on a present value basis
and discounted using current market rates. The liability may change depending
upon changes in long-term interest rates. The liability at December 31, 1997 and
1996, for vested benefits under this plan, was $841,236 and $762,528,
respectively. The Corporation maintains life insurance policies on the plan
participants. Death benefits received from the life insurance policies will be
used to offset the obligations under the plan. The cash surrender value of these
policies was $781,040 and $806,176 at December 31, 1997 and 1996, respectively.
In 1996, the Corporation began sponsoring a deferred stock compensation plan for
directors. Directors are allowed to defer their director's fees under the plan.
The deferred compensation is computed as stock equivalents as the compensation
is earned. Directors receive the deferred compensation in the form of common
stock upon retirement. The liability relating to this plan was $141,700 and
$49,500 at December 31, 1997 and 1996, respectively.
Deferred compensation expense for the plans was $175,000, $105,950, and $89,955
for 1997, 1996, and 1995, respectively.
NOTE 16 - SHAREHOLDERS' EQUITY
Earnings per share are based upon the weighted average number of shares
outstanding, restated to reflect the three-for-one stock split on April 29,
1996. The following shows the computation of the basic and diluted earnings per
share for the years ended December 31:
<TABLE>
<CAPTION>
Weighted
Average
Number of Earnings Per
Net Income Shares Share
---------- --------- ------------
<S> <C> <C> <C>
1997
- ----
Earnings per share - Basic $4,105,659 2,377,118 $ 1.73
========
Effect of stock options - Net 3,900
Effect of deferred stock compensation - Net 4,241
---------- ---------
Earnings per share - Diluted $4,105,659 2,385,259 $ 1.72
========== ========= ========
</TABLE>
21.
<PAGE> 34
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Weighted
Average
Number of Earnings Per
Net Income Shares Share
---------- --------- ------------
<S> <C> <C> <C>
1996
- ----
Earnings per share - Basic $2,834,184 2,181,626 $ 1.30
========
Effect of stock options - Net 12,442
Effect of deferred stock compensation - Net 1,867
---------- ---------
Earnings per share - Diluted $2,834,184 2,195,935 $ 1.29
========== ========= ========
<CAPTION>
1995
- ----
Earnings per share - Basic $2,670,315 2,099,880 $ 1.27
========
Effect of stock options - Net 11,099
---------- ---------
Earnings per share - Diluted $2,670,315 2,110,979 $ 1.26
========== ========= ========
</TABLE>
Effective April 29, 1996, the Board of Directors of the Corporation approved a
three-for-one stock split. All references to the number of shares of common
stock in the consolidated financial statements and footnotes thereto have been
restated for the stock split.
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that involve
quantitative measures of the Corporation's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Corporation's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets and of Tier I
capital to average assets. Management believes, as of December 31, 1997, the
Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the subsidiary banks as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the subsidiary banks' category.
22.
<PAGE> 35
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SHAREHOLDERS' EQUITY (CONTINUED)
The Corporation's actual and required capital amounts and ratios as of December
31 are as follows:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
Total capital (to risk-
weighted assets):
Consolidated $ 33,794,000 10.8% >$ 24,954,000 8.0% N/A
-
North Country Bank & Trust $ 27,909,000 11.1% >$ 20,158,000 8.0% >$25,197,000 10.0%
- -
North Country Bank $ 6,169,000 10.6% >$ 4,649,000 8.0% >$ 5,812,000 10.0%
- -
Tier I capital (to risk- weighted assets):
Consolidated $ 29,895,000 9.6% >$ 12,477,000 4.0% N/A
-
North Country Bank & Trust $ 24,739,000 9.8% >$ 10,079,000 4.0% >$15,118,000 6.0%
- -
North Country Bank $ 5,441,000 9.4% >$ 2,324,000 4.0% >$ 3,487,000 6.0%
- -
Tier I capital (to average assets):
Consolidated $ 29,895,000 7.2% >$ 16,684,000 4.0% N/A
-
North Country Bank & Trust $ 24,739,000 7.3% >$ 13,504,000 4.0% >$16,880,000 5.0%
- -
North Country Bank $ 5,441,000 7.1% >$ 3,074,000 4.0% >$ 3,843,000 5.0%
- -
1996
- ----
Total capital (to risk-
weighted assets):
Consolidated $ 30,810,000 11.2% >$ 21,934,000 8.0% N/A
-
North Country Bank & Trust $ 26,718,000 11.0% >$ 19,481,000 8.0% >$24,351,000 10.0%
- -
North Country Bank $ 4,045,000 11.9% >$ 2,722,000 8.0% >$ 3,402,000 10.0%
- -
Tier I capital (to risk- weighted assets):
Consolidated $ 27,383,000 10.0% >$ 10,967,000 4.0% N/A
-
North Country Bank & Trust $ 23,666,000 9.7% >$ 9,740,000 4.0% >$14,610,000 6.0%
- -
North Country Bank $ 3,620,000 10.6% >$ 1,361,000 4.0% >$ 2,041,000 6.0%
- -
Tier I capital (to average assets):
Consolidated $ 27,383,000 7.6% >$ 14,357,000 4.0% N/A
-
North Country Bank & Trust $ 23,666,000 7.6% >$ 12,519,000 4.0% >$15,648,000 5.0%
- -
North Country Bank $ 3,620,000 8.3% >$ 1,747,000 4.0% >$ 2,184,000 5.0%
- -
</TABLE>
23.
<PAGE> 36
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SHAREHOLDERS' EQUITY (CONTINUED)
Banking subsidiaries are restricted by banking regulations from making dividend
distributions above prescribed amounts. At December 31, 1997, the Banks could
have paid $8,517,000 of additional dividends to the Corporation without prior
regulatory approval.
NOTE 17 - STOCK OPTION PLANS
The Corporation adopted two stock option plans in 1997, one for officers and
employees and one for nonemployee directors. A total of 400,000 shares (200,000
under each plan) were made available for grant under these plans. The
Corporation also sponsors an additional employee and director stock option plan.
A total of 49,500 shares were made available for grant under this plan.
Options under all of the plans are granted at the discretion of a committee of
the Corporation's Board of Directors. Options to purchase shares of the
Corporation's stock are granted at a price equal to the market price of the
stock at the date of grant. The committee, within guidelines of no less than six
months and no greater than ten years, as established under the plans, determines
the vesting of the options when they are granted.
The fair value of each option granted is estimated on the grant date using the
Black-Scholes methodology. The following assumptions were made in estimating
fair value for options granted for the year ended December 31, 1997:
Dividend yield 1.25%
Risk-free interest rate 5.14%
Weighted average expected life (years) 7.0
Expected volatility 11.45%
The weighted average fair value of options granted as of their grant date, using
the assumptions shown above, was computed at $1.12 per share for options granted
in 1997. No options were granted in 1996 or 1995.
24.
<PAGE> 37
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLANS (CONTINUED)
No compensation cost has been recognized for the plans. Had compensation cost
been determined on the basis of fair value, net income and earnings per share
would have been reduced for the year ended December 31, 1997, as follows:
Net income:
As reported $ 4,105,659
=================
Pro forma $ 4,100,889
=================
Earnings per share - Basic:
As reported $ 1.73
=================
Pro forma $ 1.72
=================
Earnings per share - Diluted:
As reported $ 1.72
=================
Pro forma $ 1.72
=================
Following is a summary of stock option transactions for the years ended
December 31:
<TABLE>
<CAPTION>
Number of Shares
---------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 25,200 36,000 41,850
Granted during the year (at price of $45.00) 51,103
Exercised during the year (at prices
ranging from $11.00 to $12.77 per share) (10,050) (10,800) (5,850)
-------- ------------------- --------
Outstanding at end of year 66,253 25,200 36,000
======== =================== ========
Weighted average exercise price per share
at end of year $ 37.53 $ 12.41 $ 12.52
======== =================== ========
Available for grant at end of year 348,897 -0- -0-
======== =================== ========
</TABLE>
Options granted under these plans expire ten years after the grant.
25.
<PAGE> 38
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK OPTION PLANS (CONTINUED)
Following is a summary of the options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------------------------------------ -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life-Years Price Number Price
----------- ------ ----------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$11.11 to $12.77 15,150 6.2 $ 12.35 15,150 $ 12.35
$45.00 51,103 9.6 45.00
------ --- --------- ------ ---------
66,253 8.8 $ 37.53 15,150 $ 12.35
====== === ========= ====== =========
</TABLE>
NOTE 18 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
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 the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheets.
The Corporation's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments. These
commitments at December 31 are as follows:
1997 1996
---- ----
Commitments to extend credit $ 39,992,000 $ 27,408,000
Standby letters of credit 2,214,000 1,765,000
Credit card commitments 2,935,000 3,933,000
----------------- -----------------
$ 45,141,000 $ 33,106,000
================= =================
26.
<PAGE> 39
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies but may
include accounts receivable; inventory; property, plant, and equipment; and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The commitments are
structured to allow for 100% collateralization on all standby letters of credit.
Credit card commitments are commitments on credit cards issued by the
Corporation's subsidiaries and serviced by other companies. These commitments
are unsecured.
Contingencies
In the normal course of business, the Corporation is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the consolidated
financial statements.
Concentration of Credit Risk
The Corporation's subsidiary banks grant residential, commercial, agricultural,
and consumer loans throughout Michigan's Upper Peninsula. Due to the diversity
of locations, the ability of debtors to honor their contracts is not tied to any
particular economic sector.
27.
<PAGE> 40
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth below for the
Corporation's financial instruments:
Cash and cash equivalents - The carrying values approximate the fair values
for these assets.
Investment securities - Fair values are based on quoted market prices where
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities. Interest-bearing deposits
in other financial institutions are included in this category.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
residential mortgage, and other consumer. The fair value of loans is
calculated by discounting scheduled cash flows using discount rates
reflecting the credit and interest rate risk inherent in the loan.
The methodology in determining fair value of nonaccrual loans is to average
them into the blended interest rate at 0% interest. This has the effect of
decreasing the carrying amount below the risk-free rate amount and therefore
discounts the estimated fair value.
Impaired loans are measured at the estimated fair value of the expected
future cash flows at the loan's effective interest rate or the fair value of
the collateral for loans which are collateral dependent. Therefore, the
carrying values of impaired loans approximate the estimated fair values for
these assets.
Deposit liabilities - The fair value of deposits with no stated maturity,
such as non-interest-bearing demand deposits and savings, is equal to the
amount payable on demand at the reporting date. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows applying interest rates currently being offered on similar
certificates.
Short-term and other borrowings - Rates currently available for debt with
similar terms and remaining maturities are used to estimate the fair value of
existing debt. The fair value of borrowed funds due on demand is the amount
payable at the reporting date.
Off-balance-sheet instruments - The fair value of commitments is estimated
using the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements, the current interest
rates, and the present creditworthiness of the counterparties. Since this
amount is immaterial, no amounts for fair value are presented.
28.
<PAGE> 41
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents information for financial instruments at
December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $ 11,143,168 $ 11,143,168 $ 12,164,481 $ 12,164,481
Investment securities 10,102,893 10,102,893 15,725,592 15,725,592
Total loans 372,518,549 314,886,294
Allowance for loan
losses (5,599,546) (4,590,938)
------------- ------------- ------------- -------------
Net loans 366,919,003 374,057,342 310,295,356 309,829,000
------------- ------------- ------------- -------------
Total financial assets $ 388,165,064 $ 395,303,403 $ 338,185,429 $ 337,719,073
============= ============= ============= =============
Financial liabilities:
Deposits $ 360,548,685 $ 361,137,878 $ 305,938,576 $ 306,833,000
Short-term and other
borrowings 20,823,178 19,145,831 25,440,779 24,840,139
------------- ------------- ------------- -------------
Total financial
liabilities $ 381,371,863 $ 380,283,709 $ 331,379,355 $ 331,673,139
============= ============= ============= =============
</TABLE>
Limitations - Fair value estimates are made at a specific point in time based
on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Corporation's entire holdings
of a particular financial instrument. Because no market exists for a
significant portion of the Corporation's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. Fair value estimates are based on
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. Significant
assets and liabilities that are not considered financial assets or
liabilities include premises and equipment, other assets, and other
liabilities. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
29.
<PAGE> 42
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Forms and supplies $ 498,635 $ 538,863 $ 438,123
Amortization of acquisition intangibles 719,071 593,220 378,381
Legal and consulting fees 448,324 371,344 344,971
Data processing 853,841 245,722 107,926
FDIC assessment 59,666 4,000 261,941
Telephone 304,760 213,775 206,495
Postage 223,815 232,281 200,366
Directors' fees 197,694 176,150 161,184
Business promotion 258,081 206,171 150,426
Advertising 283,348 238,208 140,275
Audit, internal audit, and examination fees 154,374 188,216 125,051
State taxes 259,018 269,339 96,000
Zero Defects Program 255,782 -0- -0-
Other 2,170,091 1,278,893 1,096,790
---------- ---------- ----------
$6,686,500 $4,556,182 $3,707,929
========== ========== ==========
</TABLE>
30.
<PAGE> 43
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash and cash equivalents $ 1,152,760 $ 2,051,699
Investment in subsidiaries 36,789,622 32,197,472
Other assets 789,668 661,371
----------- -----------
TOTAL ASSETS $38,732,050 $34,910,542
=========== ===========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Liabilities:
Accrued expenses $ 564,665 $ 162,129
Other borrowings 1,575,312 2,362,851
----------- -----------
Total liabilities 2,139,977 2,524,980
Total shareholders' equity 36,592,073 32,385,562
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $38,732,050 $34,910,542
=========== ===========
</TABLE>
31.
<PAGE> 44
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income:
Dividends received from subsidiaries $ 4,377,878 $ 400,000 $ -0-
Net security losses (41,888) -0- -0-
Other 9,317 3,600 -0-
----------- ---------- -----------
Total income 4,345,307 403,600 -0-
----------- ---------- -----------
Expenses:
Salaries and benefits 270,038 152,365 102,699
Interest 123,191 254,077 -0-
Other 398,325 352,638 239,647
----------- ---------- -----------
Total expenses 791,554 759,080 342,346
----------- ---------- -----------
Income (loss) before credit for income
taxes and equity in undistributed net
income of subsidiaries 3,553,753 (355,480) (342,346)
Credit for income taxes (258,964) (120,863) (116,398)
----------- ---------- -----------
Income (loss) before equity in undistributed
net income of subsidiaries 3,812,717 (234,617) (225,948)
Equity in undistributed net income of
subsidiaries 292,942 3,068,801 2,896,263
----------- ---------- -----------
Net income $ 4,105,659 $ 2,834,184 $ 2,670,315
=========== =========== ===========
</TABLE>
32.
<PAGE> 45
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents:
Cash flows from operating activities:
Net income $ 4,105,659 $ 2,834,184 $ 2,670,315
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loss on sale of equity securities 41,888 -0- -0-
Provision for depreciation and
amortization -0- 8,000 7,610
Equity in undistributed net income
of subsidiaries (292,942) (3,068,801) (2,896,263)
Change in other assets (487,485) (120,599) (116,083)
Change in accrued expenses 402,536 162,129 -0-
----------- ----------- -----------
Total adjustments (336,003) (3,019,271) (3,004,736)
----------- ----------- -----------
Net cash provided by (used in) operating
activities 3,769,656 (185,087) (334,421)
----------- ----------- -----------
Cash flows from investing activities:
Investment in subsidiaries (4,052,914) (4,810,280) -0-
Payment for purchase of equity
securities -0- (359,188) -0-
Proceeds from sales of equity
securities 317,300 -0- -0-
Capital expenditures -0- -0- (80,000)
----------- ----------- -----------
Net cash used in investing activities (3,735,614) (5,169,468) (80,000)
----------- ----------- -----------
</TABLE>
33.
<PAGE> 46
FIRST MANISTIQUE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from other borrowings $ -0- $ 5,262,851 $ -0-
Principal payments on other
borrowings (787,539) (2,900,000) -0-
Proceeds from issuance of
common stock 1,868,178 5,684,185 157,973
Retirement of common stock (831,606) -0- -0-
Dividends paid (1,182,014) (910,003) (853,704)
------------ ----------- -----------
Net cash provided by (used in)
financing activities (932,981) 7,137,033 (695,731)
------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents (898,939) 1,782,478 (1,110,152)
Cash and cash equivalents at beginning 2,051,699 269,221 1,379,373
------------ ----------- -----------
Cash and cash equivalents at end $ 1,152,760 $ 2,051,699 $ 269,221
============ =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 21 - SUBSIDIARIES OF REGISTRANT
North County Bank and Trust - 100% owned
Incorporated as a Michigan Banking Corporation
130 South Cedar Street
Manistique, MI 49854
First Manistique Agency - 100% owned
Incorporated as a Michigan Corporation
130 South Cedar Street
Manistique, MI 49854
First Northern Services Company - 100%
Incorporated as a Michigan Corporation
130 South Cedar Street
Manistique, MI 49854
First Rural Relending Company
Incorporated as a Michigan Corporation
130 South Cedar Street
Manistique, MI 49854
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 9,338,168
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,805,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 10,102,893
<LOANS> 372,518,549
<ALLOWANCE> 5,599,546
<TOTAL-ASSETS> 421,434,370
<DEPOSITS> 360,548,685
<SHORT-TERM> 1,195,000
<LIABILITIES-OTHER> 3,470,434
<LONG-TERM> 19,628,178
0
0
<COMMON> 19,916,026
<OTHER-SE> 16,676,047
<TOTAL-LIABILITIES-AND-EQUITY> 421,434,370
<INTEREST-LOAN> 34,525,569
<INTEREST-INVEST> 1,065,458
<INTEREST-OTHER> 373,010
<INTEREST-TOTAL> 35,964,037
<INTEREST-DEPOSIT> 14,633,670
<INTEREST-EXPENSE> 15,898,055
<INTEREST-INCOME-NET> 20,065,982
<LOAN-LOSSES> 1,398,201
<SECURITIES-GAINS> 60,163
<EXPENSE-OTHER> 14,796,921
<INCOME-PRETAX> 5,509,076
<INCOME-PRE-EXTRAORDINARY> 5,509,076
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,105,659
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.72
<YIELD-ACTUAL> 5.64
<LOANS-NON> 1,956,000
<LOANS-PAST> 698,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,590,938
<CHARGE-OFFS> 801,600
<RECOVERIES> 112,712
<ALLOWANCE-CLOSE> 5,599,546
<ALLOWANCE-DOMESTIC> 5,599,546
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,862,000
</TABLE>
