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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996 Commission file number: 2-54663
FIRST MANISTIQUE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
130 S. CEDAR STREET, MANISTIQUE, MI 49854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (906) 341-8401
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of July 28, 1996, there were outstanding 2,124,827 shares of the
registrant's common stock, no par value.
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PART I - FINANCIAL INFORMATION (unaudited)
ITEM 1. FINANCIAL STATEMENTS.
- -----------------------------------------------------------
Consolidated Condensed Balance Sheets
(In thousands of dollars)
June 30, December 31,
1996 1995
--------- ------------
ASSETS
Cash and due from banks $ 12,521 $ 10,492
Federal funds sold 7,400 4,000
-------- --------
Total cash and cash equivalents 19,921 14,492
Interest-bearing deposits with banks 1,383 1,678
Securities available for sale 23,653 26,220
Securities held to maturity (fair value of $500
at 6/30/96 and $837 at 12/31/95) 500 835
Loans 277,838 221,507
Allowance for loan losses (3,833) (3,137)
-------- --------
Net Loans 274,005 218,370
Bank premises and equipment 13,262 11,787
Other assets 10,524 9,409
-------- --------
TOTAL ASSETS $343,248 $282,791
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 30,622 $ 27,674
Interest-bearing 263,035 216,733
-------- --------
293,657 244,407
Securities sold under agreement to repurchase 700 700
Other borrowings 20,271 10,088
Other liabilities 2,561 2,589
-------- --------
TOTAL LIABILITIES 317,189 257,784
Shareholders' equity
Preferred stock, no par value, 500,000 shares
authorized, no shares outstanding
Common stock, no par value, 6,000,000 shares
authorized; outstanding: 2,124,827 at 6/30/96 and
2,106,897 at 12/31/95 13,526 13,195
Retained earnings 13,161 11,832
Net unrealized loss on securities available for sale,
net of tax of $323 at 6/30/96 and $9 at 12/31/95 (628) (20)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 26,059 25,007
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $343,248 $282,791
======== ========
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Consolidated Condensed Statements of Income (unaudited)
(In thousands of dollars)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
--------- --------- --------- ---------
Interest income
Loans, including fees $ 6,582 $ 4,937 $ 12,422 $ 9,367
Securities
Taxable 358 365 757 794
Exempt from federal taxation 22 45 46 97
Other 110 113 269 269
--------- --------- --------- ---------
Total interest income 7,072 5,460 13,494 10,527
Interest expense
Deposits 2,854 2,271 5,555 4,413
Borrowed Funds 181 120 323 183
--------- --------- --------- ---------
Total interest expense 3,035 2,391 5,878 4,596
--------- --------- --------- ---------
Net interest income 4,037 3,069 7,616 5,931
Provision for loan losses 378 78 485 147
--------- --------- --------- ---------
Net interest income after provision for loan losses 3,659 2,991 7,131 5,784
Noninterest income
Service charges on deposit accounts 201 139 364 279
Gains on sale of loans 2 11 20 17
Securities gains/(losses) (10) (22) 17 (19)
Other 140 222 260 439
--------- --------- --------- ---------
Total noninterest income 333 350 661 716
Noninterest expense
Salaries and employee benefits 1,163 914 2,270 1,835
Furniture and equipment expense 257 233 455 431
Occupancy expense 235 160 471 311
Other 1,132 902 2,067 1,747
--------- --------- --------- ---------
Total noninterest expense 2,787 2,209 5,263 4,324
--------- --------- --------- ---------
Income before income tax 1,205 1,132 2,529 2,176
Provision for income tax 360 349 755 616
--------- --------- --------- ---------
Net income $ 845 $ 783 $ 1,774 $ 1,560
========= ========= ========= =========
Weighted average common shares outstanding 2,122,483 2,097,738 2,118,444 2,097,408
========= ========= ========= =========
Earnings per common share $ 0.40 $ 0.37 $ 0.84 $ 0.74
========= ========= ========= =========
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Consolidated Condensed Statement of Changes in Shareholders' Equity (unaudited)
(In thousands of dollars)
Three months Three months
ended ended
June 30, 1996 June 30, 1995
Shares Equity Total Shares Equity Total
--------------------------- ---------------------------
Balance-beginning of period 2,120,778 $25,430 2,097,072 $23,193
Net income for period 845 783
Cash dividends (190) (160)
Issuance of common stock 4,049 83 2,250 44
Net change in unrealized gain (loss)
on securities available for sale (109) 225
------------------------ ------------------------
2,124,827 $26,059 2,099,322 $24,085
========= ======= ========= =======
Six months Six months
ended ended
June 30, 1996 June 30, 1995
Shares Equity Total Shares Equity Total
--------------------------- ---------------------------
Balance-beginning of period 2,106,897 $25,007 2,097,072 $22,484
Net income YTD 1,774 1,560
Cash dividends (444) (510)
Issuance of common stock 17,930 331 2,250 44
Net change in unrealized gain (loss)
on securities available for sale (609) 507
------------------------ ------------------------
2,124,827 $26,059 2,099,322 $ 24,085
========= ======= ========= ========
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Consolidated Statements of Cash Flows (unaudited)
(In thousands of dollars)
Six Months Ended Six Months Ended
June 30, June 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1995
---------------- ----------------
Net income $ 1,774 $ 1,559
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 485 147
Deferred taxes 140 9
Depreciation 450 388
Amortization 403 61
Proceeds from sale of mortgage loans 3,455 2529
Origination of mortgage loans for sale (3,435) (2500)
(Gains) losses on sale
Loans held for sale (20) (29)
Securities (17) 19
Premises and equipment 21 (41)
Changes in assets and liabilities
Interest receivable and other assets 1,174 (591)
Interest payable and other liabilities (982) 1,040
-------- --------
Net cash from operating
activities 3,448 2,591
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits
with banks 1,383 528
Purchase of securities available for sale (8,478) (974)
Purchase of securities held to maturity (1,511)
Proceeds from sales of securities
available for sale 5,945 9,014
Proceeds from maturities, calls, or
paydowns of securities available for sale 7,880 1,997
Proceeds from maturity and calls of securities
held to maturity 335 1,408
Net increase in loans (29,359) (21,707)
Proceeds from sale of premises and equipment 42 85
Purchase of premises and equipment (579) (675)
Net cash provided in acquisition of
South Range State Bank 724
-------- --------
Net cash provided from investing activities (22,107) (11,835)
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Consolidated Statements of Cash Flows - continued (unaudited)
(In thousands of dollars)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 16,381 2,069
Proceeds from notes payable 7,900 6,014
Payment on notes payable (80) 43
Proceeds from issuance of common stock 331
Payment of dividends (444) (510)
-------- --------
Net cash from investing activities 24,088 7,616
-------- --------
Net increase (decrease) in cash and cash
equivalents 5,429 (1,628)
Cash and cash equivalents at beginning of period 14,492 14,319
-------- --------
Cash and cash equivalents at end of period $ 19,921 $ 12,691
======== ========
Supplemental disclosures of cash flow
information
Cash paid during the period for
Interest $ 6,033 $ 4,597
Income taxes 720 592
Supplemental disclosures of noncash activities
Issuance of notes payable to South Range
State Bank's former shareholders' 2,363
Assets and liabilities acquired in acquisition
(refer to Note 3)
Interest-bearing deposits 1,088
Premises and equipment 1,409
Acquisition intangibles 1,630
Other assets and accrued interest receivable 774
Loans, net 26,761
Securities available for sale 3,800
Deposits 32,869
Other liabilities and accrued interest payable 954
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of First Manistique
Corporation (the "Registrant") have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ending June 30, 1996 and the six
month period ending June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing Rights (SFAS
No. 122), adopted by the Registrant on January 1, 1996. This Statement changes
the accounting for mortgage servicing rights retained by the loan originator.
Under the Statement, if the originator sells or securitizes mortgage loans and
retains the related servicing rights, the total costs of the mortgage loan are
allocated between the loan (without the servicing rights) and the servicing
rights, based on their relative fair values. The costs allocated to mortgage
servicing rights will be recorded as a separate asset and amortized in
proportion to, and over the life of, the net servicing income. The carrying
value of the mortgage servicing rights will be periodically evaluated for
impairment. Impairment will be recognized using the fair value of individual
stratum of servicing rights based on the underlying risk characteristics of the
serviced loan portfolio, compared to an aggregate portfolio approach under
existing accounting guidance. The impact on the Registrant's financial
position and results of operation through the second quarter of 1996 was
insignificant. Based on the Registrant's historical level of mortgage
originations for sale in the secondary market, management believes that the
impact for the year will also be immaterial.
NOTE 3 - PER SHARE CALCULATIONS
A resolution for a 3-for-1 stock split, for shareholder's of record on April
29, 1996, was approved by the Board of Directors on April 23, 1996. All share
and per share amounts in this filing have been retroactively adjusted to
reflect the 3-for-1 stock split.
NOTE 4 - ACQUISITION OF SOUTH RANGE STATE BANK
The Registrant acquired 100% of the outstanding stock of South Range State Bank
(with assets of $36,503,000, liabilities of $33,823,000, total deposits of
$32,869,000, and net loans of $26,761,000) on January 31, 1996. The total
purchase price was $4,310,000 with $1,947,000 paid in cash and the remaining
$2,363,000 financed through the issuance of notes payable.
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NOTE 5 - SECURITIES
The amortized cost and fair value of securities at June 30, 1996 are shown
below:
(In thousands of dollars)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
--------- ---------- ---------- -------
Securities Available for Sale
U.S. Treasury and federal agency $19,268 $ 7 $ 870 $18,405
State and political subdivisions 1,348 45 1,303
Other 3,988 43 3,945
------- --- ------ -------
Total $24,604 $ 7 $ 958 $23,653
======= === ====== =======
Securities Held To Maturity
State and political subdivisions $ 500 $ 500
======= === ====== =======
The amortized cost and fair value of securities by contractual maturity at June
30, 1996, are shown below, in thousands of dollars
Available for Sale Held to Maturity
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $ 7,933 $ 7,702 $500 $500
Due after one year through five years 9,836 9,460
Due after five years through ten years 1,539 1,505
Due after ten years 5,296 4,986
------- ------- ---- ----
$24,604 $23,653 $500 $500
======= ======= ==== ====
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NOTE 6 - LOANS
Loans presented in the consolidated condensed balance sheet are comprised of
the following classifications at June 30, 1996 and December 31, 1995:
(In thousands of dollars)
June 30, December 31,
1996 1995
-------- -----------
Loans:
Commercial, financial and agricultural $161,106 $130,921
1-4 family residential real estate 75,938 58,433
Consumer 35,420 29,954
Construction 5,392 2,235
-------- --------
Total 277,856 221,543
Less: unearned income (18) (36)
-------- --------
$277,838 $221,507
======== ========
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NOTE 7 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the six months ended June 30,
1996 and 1995, are summarized as follows:
(In thousands of dollars)
June 30, June 30,
1996 1995
------------ ---------
Balance at beginning of period $ 3,137 $ 2,350
Charge offs (158) (192)
Recoveries 84 292
Adjustment from loans put back to Newberry
State Bank (6)
Allowance transferred from purchase of
South Range State Bank 285
Provision for loan loss 485 147
---------- --------
Balance at end of period $ 3,833 $ 2,591
========== ========
Information regarding impaired loans is as follows:
6/30/96 12/31/95
---------- --------
Average investment in impaired loans $1,922,795 $659,412
Interest income recognized on impaired loans
including interest income recognized on
cash basis 22,548 40,856
Interest income recognized on impaired loans on
cash basis 40,856
Balance of impaired loans $3,981,510 $570,847
Less portion for which no allowance for loan
loss is allocated 185,750 22,548
---------- --------
Portion of impaired loan balance for which
an allowance for credit losses is
allocated $3,795,760 $548,299
========== ========
Portion of allowance for loan losses
allocated to the impaired loan balance $1,203,000 $200,000
========== ========
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The Registrant continues as a secured creditor of leases issued by
Bennett Funding Group, Inc. (BFG), and Aloha Capital Corporation (ACC), a
subsidiary of BFG. BFG filed Chapter 11 Bankruptcy on March 29, 1996, and
subsequently in April of 1996, ACC filed involuntary bankruptcy. Since the
appointment of the bankruptcy trustee on April 19, 1996, all payments to
creditors for BFG and ACC were seized. The outstanding balances of leases held
by the Registrant was $2,792,651 on December 31, 1995, and $3,036,586 on June
30, 1996. This amount is classified as impaired and is on nonaccrual. The
Registrant contends to hold first lien positions on all leases held. In June
of 1996, the trustee provided a list of creditors identified as those holding
double pledged paper. The Registrant did not receive a duplicate lease listing
notice from the trustee which further strengthens the position that the
Registrant is the primary holder of leases held. On July 16, 1996, the trustee
held a meeting at which time he proposed terms of settlement to the creditors.
The proposed offer to settle from the trustee was declined. However, the
Registrant concurs with the trustee that the Bank will not collect 100% of the
lease payments owed. Because of the unknown exposure to the loss, the
Registrant has allocated $1 million of it's allowance for loan losses (see Note
6 above). Several factors are in the favor of the Registrant. If allowed by
the bankruptcy court, the Registrant could rewrite all lease agreements and
begin servicing it's own lease portfolio. In addition, six of the twelve
portfolios held, representing approximately $565,000, have insurance allowing
for the continuation of payments. However, according to the insurer, the
trustee must make the determination that there has been default before the
continuation of payments can resume. The trustee has not determined that there
has been default. The Registrant's attorney has joined an alliance with other
counsel representing approximately 175 secured creditors to prepare a counter
proposal to the trustee to settle. Also, on August 15, 1996, the Registrant's
counsel will meet with the bankruptcy judge at which time a definitive date
will be set to lift the motion to stay as previously set by the bankruptcy
judge.
NOTE 8 - DEPOSITS
The following is an analysis of interest-bearing deposits as of June 30, 1996
and December 31, 1995.
(In thousands of dollars)
June 30, December 31,
1996 1995
-------- ------------
Savings and interest-bearing checking $132,154 $118,957
Time: In denominations under $100,000 113,040 82,752
In denomination of $100,000 or more 17,841 15,024
-------- --------
$263,035 $216,733
======== ========
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NOTE 9 - OTHER BORROWINGS
Other borrowings consists of the following at June 30, 1996 and December 31,
1995:
(In thousands of dollars)
March 31, December 31,
1996 1995
--------- ------------
Federal Home Loan Bank advances (7), at
various rates with various maturities (see
annual financial statements). $ 8,008 $ 8,088
Federal Home Loan Bank, fixed-rate advance
at 7.06%, matures May 15, 2006. 5,000
Farmer's Home Administration, $2,000,000
fixed rate line agreement maturing August 24, 2024:
interest payable at 1% 2,000 2,000
Associated Bank Green Bay, $4,000,000 variable
rate line agreement maturing February 1, 1999:
interest payable at Associated's prime rate - 8.25%
at March 31, 1996. 2,900
Notes Payable to South Range State Bank's former
stockholders, $2,362,852 maturing in three equal
annual installments beginning February 1, 1997:
interest payable at 5.20%. 2,363
-------- --------
$ 20,271 $ 10,088
======== ========
The Federal Home Loan Bank borrowings are collateralized by a blanket
collateral agreement on the Registrant's residential mortgage loans.
Prepayment of the advances is subject to the provisions and conditions of the
credit policy of the Federal Home Loan Bank of Indianapolis in effect as of
December 31, 1995 and June 30, 1996. Borrowing other than Federal Home Loan
Bank are not subject to prepayment penalties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and results of
operations provides additional information to assess the consolidated condensed
financial statements of the Registrant and its wholly-owned subsidiaries
through the second quarter of 1996. The discussion should be read in
conjunction with those statements, and with management's discussion and
analysis accompanying the 1995 annual financial statements, included herewith.
The Registrant is not aware of any market or institutional trends, events, or
circumstances that will have or are reasonably likely to have a material effect
on liquidity, capital resources, or
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results of operations except as discussed herein. Also, the Registrant is not
aware of any current recommendations by regulatory authorities which will have
such effect if implemented.
HIGHLIGHTS
The Registrant acquired 100% of the outstanding stock of South Range State Bank
(with assets of $36,503,000, liabilities of $33,823,000, total deposits of
$32,869,000, and net loans of $26,761,000) on January 31, 1996. The total
purchase price was $4,310,000 with $1,947,000 paid in cash and the remaining
$2,363,000 financed through the issuance of notes payable.
The Registrant has signed a definitive agreement with U.P. Financial, Inc., a
Michigan bank holding company, to purchase 100% of it's outstanding shares.
The purchase will be entirely with cash. The agreement was signed on July 11,
1996, with the purchase to be completed in February of 1997. U.P. Financial,
Inc. owns 100% of the outstanding stock of First National Bank in Ontonagon, a
Michigan banking institution with approximately $27 million in total assets.
Upon purchase, the assets of U.P. Financial, Inc., will be merged into South
Range State Bank, with South Range State Bank being the survivor. As the
purchase will not be completed until February of 1997, there will be no impact
on the earning of the Registrant during 1996.
Year to date consolidated net income through June 30, 1996 was $1,774,000
compared to $1,560,000 for the same period in 1995. Improved interest income,
combined with acquisitions and internal growth, and careful control of
operating expenses have contributed to this improvement. Net income for the
year is 13.7% above the same period last year. Return on consolidated average
assets for the six months ended June 30, 1996 was 1.07% compared to 1.22% for
the same period in 1995. Earnings per share increased from $0.74 for the year
to date through June 30, 1995, 1995, to $0.84 for the same period in 1996. The
increase is due to increased earnings and no significant change in outstanding
shares.
The Registrant is offering for sale 400,000 shares of its common stock. Each
shareholder of record on July 23, 1996 is entitled to purchase .1886 share of
common stock for each whole share owned, subject to the purchase minimum of 100
shares and a maximum purchase of 10,000 shares. This offering will expire on
August 30, 1996 with any remaining shares being offered to the public. The
minimum number of shares that can be purchased by the public is 100 shares, and
the maximum number of shares except as otherwise agreed to by the Board of
Directors of the Registrant is 10,000 shares. The net proceeds to the
Registrant from the sale of common stock is estimated to be $10.668 million.
The Registrant anticipates using approximately $2.9 to retire debt at
Associated Bank of Green Bay (see Note 8 above). The balance of the funds will
be used in the acquisition of U.P. Financial, Inc., working capital needs, and
to generally strengthen the Registrant's capital position in anticipation of
future growth through acquisitions.
FINANCIAL CONDITION
LOANS
Through June 30, 1996, loan balances increased by $56.3 million. The
acquisition of South Range State Bank accounted for $26.8 million of this
increase and the remainder was due to loan
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growth. The loan to deposit ratio has increased from 90.6% at December 31,
1995, to 94.6% at June 30, 1996. Management believes loans provide the most
attractive earning asset yield available to the Registrant and that trained
personnel and controls are in place to successfully manage a growing portfolio.
Accordingly, management intends to continue to maintain loans at the highest
level possible while also maintaining adequate liquidity.
Management is aware of the risk associated with an increase in average balances
of loans but feels that the current level in the allowance for loan losses is
adequate. At June 30, 1996 the allowance for loan losses was equal to 1.34% of
total loans outstanding compared to 1.42% at December 31, 1995.
The majority of the increase in impaired loans from December 31, 1995 to June
30, 1996 consisted of leases to the Bennett Funding Group, Inc. The loan loss
reserve allocated to this loan is adequate to meet the estimated exposure to
loss.
Commercial real estate loans and loans to general commercial businesses have
increased by $8.5 and $6.1 million, respectively, through the second quarter of
1996 to $60,089,000 and $61,552,000, respectively, at June 30, 1996, mainly due
to the acquisition of South Range State Bank and management's desire to
increase the commercial loan portfolio. Commercial leases increased $6.2
million to $11,997,000 at June 30, 1996 and governmental leases increased $9.4
million to $27,468,000. No leases were obtained with the purchase of South
Range State Bank. The increases are due to the Registrant's efforts to build
this area of the loan portfolio. Growth in the classification of 1-4 family
residential loans in the amount of $17.5 million has occurred mainly due to the
acquisition of South Range State Bank and management's emphasis on this type of
loan. Consumer loans have increased $5.5 million through the second quarter of
1996 due mainly to the acquisition of South Range State Bank. Construction
loans have increased $3.2 million due mainly to the purchase of South Range
State Bank. The table below shows total portfolio loans outstanding, in
thousands of dollars, at June 30, 1996, and December 31, 1995, and their
percentage of the total loan portfolio.
June 30, December 31,
1996 % of total 1995 % of total
-------- ---------- ------------ ----------
Loans:
Commercial real estate $ 60,089 21.63% $ 51,609 23.30%
Commercial, financial and agricultural 61,552 22.15% 55,445 25.03%
Leases
Commercial 11,997 4.32% 5,806 2.62%
Governmental 27,468 9.89% 18,061 8.15%
1-4 family residential real estate 75,920 27.33% 58,433 26.38%
Consumer 35,420 12.75% 29,918 13.51%
Construction 5,392 1.93% 2,235 1.01%
-------- ----- --------
Total $277,838 $221,507
======== ========
CREDIT QUALITY
Management analyzes the allowance for loan losses in detail on a monthly basis
to ensure that
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the losses inherent in the portfolio are properly recognized. The Registrant's
success in maintaining excellent credit quality is demonstrated in it's
historical chargeoff percentage. Chargeoffs through June 30, 1996 have
decreased $34,000 from the same period in 1995. The majority is a result of a
$17,000 increase in installment loan chargeoffs and a $55,000 decrease in
commercial loan chargeoffs. The provision for loan loss has increased through
June 30, 1996 to the same period in 1995 as a result of the Registrant's
increased loan portfolio. See Note 6 to the second quarter financial statements
for a discussion of certain lease receivables.
The table presented below shows the balances of nonaccrual loans, loans 90 or
more days past due, and renegotiated loans as of June 30, 1996, and December
31, 1995. The majority of the increase in nonaccrual loans from December 31,
1995 to June 30, 1996 consisted of leases to the Bennett Funding Group, Inc.
(discussed above). The loan loss reserve allocated to this loan is adequate to
meet the estimated exposure.
June 30, December 31,
1996 1995
-------- ------------
Nonaccrual loans $3,141 $ 579
Loans 90 or more days past due 44 1,439
Renegotiated loans 0 0
Management is aware of the risk associated with an increase in average balances
of loans and feels that the current level in the allowance for loan losses is
adequate. At June 30, 1996 the allowance for loan losses was equal to 1.38% of
total loans outstanding compared to 1.42% at December 31, 1995.
INVESTMENTS
Available for sale and hold to maturity securities have decreased through the
period ending June 30, 1996. Although there was an increase in available for
sale securities due to the acquisition of South Range State Bank, the
Registrant's need for funds due to it's emphasis on loan growth has resulted in
an overall decrease in the loan portfolio. The mix of the portfolio remained
relatively unchanged from December 31, 1995. The primary use of the portfolio
is to provide a source of liquidity. Most of the portfolio is invested in U.S.
Treasury and agency securities which have little credit risk and are highly
liquid. The only securities now classified as held to maturity are state and
local political subdivision issues from small issuers whose bonds have little
market liquidity.
DEPOSITS
Total deposits increased through June 30, 1996 by $49.3 million. A substantial
portion, $32.9 million, of the increase came from the acquisition of South
Range State Bank. The remainder came as a result of internal deposit growth.
Interest bearing deposit balances increased through June 30, 1996, continuing a
trend from last fiscal year. The bulk of the increase in interest bearing
deposits came from savings and interest-bearing checking with time deposits
less than
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$100,000 making up the remainder of the increase (refer to the table
presented in Note 7 to the first quarter financial statements above). The time
deposits of $100,000 or more consist of government balances and balances from
retail customers.
BORROWINGS
The Registrant's branching network is a relatively high cost network in
comparison to peers. Accordingly, the Registrant has begun to use alternative
funding sources to provide funds for lending activities. Other borrowings
increased by $10.2 million through June 30, 1996 (refer to the table presented
in Note 8 to the first quarter financial statements above for the composition
of the increase). The majority of this was used in the acquisition of South
Range State Bank and in the funding of one specific loan. At June 30, 1996,
$13.1 of the total borrowings were from the Federal Home Loan Bank of
Indianapolis. Alternative sources of funding can be obtained at interest rates
which are competitive with, or lower than, retail deposit rates and with
inconsequential administrative costs.
LIQUIDITY
The Registrant's sources of liquidity include principal payments on loans and
investments, sales of securities available for sale, deposits from customers,
borrowings from the Federal Home Loan Bank, other bank borrowings, and the
issuance of common stock. The Registrant has ready access to significant
sources of liquidity on an almost immediate basis. Management anticipates no
difficulty in maintaining liquidity at the levels necessary to conduct the
Registrant's day-to-day business activities.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income through June 30, 1996 increased by 28% compared to June 30,
1995. The net interest margin at June 30, 1996 was 4.93%, compared to 4.92% for
all of 1995 and 4.99% at June 30, 1995. The net yield on interest earning
assets remained relatively constant. At year ended December 31, 1995, the net
yield on earning assets was 9.13%, at June 30, 1996 it was 9.16%, and at June
30, 1995 it was 9.09%. Interest income from loans represented 92.1% of total
interest income through June 30, 1996 compared to 90.4% for all of 1995 and
89.0% through June 30, 1995. In all cases, the total amount of interest income
and the yield on total earning assets is strongly influenced by lending
activities.
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NONINTEREST INCOME
Service charges on deposit accounts increased $85,000 through June 30, 1996 vs.
the same period of 1995 mainly due to the acquisition of South Range State Bank.
Gains on sales of loans has increased due to the larger volume of loans being
originated and sold through June 30, 1996 vs. same period of 1995. Income from
sale of securities has increased due to additional sale activity in the
investment portfolio, the proceeds of which were used to fund the increase in
loans. Other noninterest income decreased $179,000 through June 30, 1996 vs.
the same period of 1995 due mainly to a reduction of foreign exchange income.
The increase in income from sales and servicing of loans reflects the growing
demand for residential real estate mortgages, following the unprecedented
origination volume throughout the country in 1993 and 1992. Management expects
continued growth in interest income due to continued expansion of the
Corporation.
PROVISION FOR LOAN LOSSES
The Registrant maintains the allowance for loan losses at a level adequate to
cover losses inherent in the portfolio. The Registrant records a provision for
loan losses necessary to maintain the allowance at that level after considering
factors such as loan charge-offs and recoveries, changes in the mix of loans in
the portfolio, loan growth, and other economic factors. The increase in the
provision for loan losses from $147,000 June 30, 1995 to $485,000 at June 30,
1996 is due to loan growth, particularly in the commercial real estate
portfolio. Management expects the provision for the remainder of the year to
continue to remain above 1995 levels, totaling approximately 200% of 1995
provision, due to the increased risk of loss on Bennett Funding Group.
NONINTEREST EXPENSES
Noninterest expense showed an increase of 21.7% through June 30 of 1996 vs. the
same period of 1995. The increase is consistent with the Registrant's asset
growth. The majority of the increase is due to an increase in salary and
occupancy expense. Salary expense increased mainly due to an increase in
full-time equivalent employees at June 30, 1996 vs. June 30, 1995, due to the
Registrant's purchase of the Rudyard branch and South Range State Bank and the
opening of additional branches. Occupancy expense increased due to the
purchases of the Rudyard branch and South Range State Bank, as well as the
opening of additional branches. While the growth was expected, a primary
objective of management is to hold the rate of increase in this category below
future asset growth. Management believes that significant efficiencies can be
obtained and is increasing the level of management emphasis in this area.
FEDERAL INCOME TAX
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The provision for income taxes was 29.8% of income before income tax at June
30, 1996 compared to 28.3% at June 30, 1995. The difference between these
rates and the federal corporate income tax rate of 34% is primarily due to
tax-exempt interest earned on loans and investments. The effective tax rate
has increased as tax-exempt income has become a smaller portion of total
interest income.
INTEREST RATE RISK
Management actively manages the Registrant's interest rate risk. In the
relatively low interest rate environment which has been in place the last few
years, borrowers have generally tried to extend the maturities and repricing
periods on their loans and place deposits in demand or very short term
accounts. Management has taken various actions to offset the imbalance which
those tendencies would otherwise create. Management writes commercial and real
estate loans at variable rates or, if necessary, fixed rate loans for
relatively short terms. Management has also offered products that give
customers an incentive to accept longer term deposits.
Management can also manage interest rate risk with the maturity periods of
securities purchased, selling securities available for sale, and borrowing
funds with targeted maturity periods.
The Registrant has experienced a slight shift in the cumulative net asset
(liability) funding gap for 1 - 365 days since December 31, 1995, to being
liability sensitive. The shift was mainly due to an increase in CD's less than
$100,000 maturing within one year and an increase in IMM accounts which are
placed entirely in the 1 - 90 days maturity category.
CAPITAL RESOURCES
It is the policy of the Registrant to maintain capital at a level consistent
with both safe and sound operations and proper leverage to generate an
appropriate return on shareholders' equity. The capital ratios of the
Registrant exceed the regulatory guidelines for well capitalized institutions.
The table below shows the Registrant's capital, in thousands of dollars, and
capital ratio's at June 30, 1996 and 1995.
June 30, 1996
Required Actual
$ % $ %
----- ----- ----- -----
Tier 1 risk-adjusted capital ratio $ 9,796 4.00% $21,513 8.78%
Total risk-adjusted capital ratio $19,592 8.00% $24,574 10.03%
Tier 1 leverage ratio $13,144 4.00% $21,513 6.55%
Tier 1 capital $21,513
Tier 2 capital 3,061
Total risk-based capital 24,574
Total risk-weighted assets 244,911
Average total assets 328,588
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June 30, 1995
Required Actual
$ % $ %
----- ----- ----- -----
Tier 1 risk-adjusted capital ratio $ 7,492 4.00% $20,258 10.82%
Total risk-adjusted capital ratio $14,984 8.00% $22,599 12.07%
Tier 1 leverage ratio $10,217 4.00% $20,258 7.93%
Tier 1 capital $20,258
Tier 2 capital 2,341
Total risk-based capital 22,599
Total risk-weighted assets 187,304
Average total assets 255,421
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
At the date hereof, there were no material pending legal proceedings, other
than routine litigation incidental to the business of banking, to which the
Registrant or any of its subsidiaries is a party of or which any of its
properties is the subject.
ITEM 2. CHANGES IN SECURITIES.
The Registrant's Articles of Incorporation have been amended to increase its
authorized common stock to 6,000,000 shares without par value and to increase
its authorized series preferred stock to 500,000 shares. In addition, the
Articles have been amended to provide (a) for a classified board of directors,
(b) for filling vacancies or new positions on the Board of Directors, ( c)
special vote requirements for removal of directors, (d) procedures shareholders
must follow to nominate directors, (e) notice requirements shareholders must
satisfy to present a proposal for consideration at annual meeting of
shareholders, (f) for required evaluations by the directors of certain
transactions, and (g) increased voting requirements to amend or repeal these
provisions or adopt inconsistent provisions. Any or all of these provisions
may be interpreted as having anti-takeover implications.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There have been no defaults upon senior securities relevant to the requirements
of this section.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders of the Registrant was held on April 23,
1996. At the meeting, the following items were voted on and passed:
*The election of three directors, each to hold office for a three year
term.
*Proposal to amend the Restated Articles of Incorporation to increase
authorized stock (discussed in Item 2 above).
*Proposal to amend the Restated Articles of Incorporation relating to
continuity of management (discussed in Item 2 above).
*Proposal to amend the Restated Articles of Incorporation with respect to
the required evaluation by directors of certain transactions.
*Proposal to approve a deferred compensation, deferred stock, and current
stock purchase plan for nonemployee directors.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
Number Exhibit
- ------ -------
3(a) Amendments to Articles III, VII, VIII, IX, and X of the Registrant's
Articles of Incorporation. Previously filed as Appendices to the
Registrant's definitive proxy statement for its annual meeting held
April 23, 1996. Here incorporated by reference.
10(a) Deferred compensation, deferred stock and current stock purchase plan
for non- employee directors. Previously filed as an exhibit to the
Registrant's definitive proxy statement for its annual meeting held
April 23, 1996. Here incorporated by reference.
27 Financial Data Schedule. Filed herewith.
The following documents are filed as part of Part I, Item 1 of this report:
Consolidated Balance Sheets - June 30, 1996 (Unaudited) and December 31,
1995 (Audited)
Consolidated Statements of Income - Three months ended June 30, 1996 and
1995 and Six months ended June 30, 1996 and 1995 (Unaudited)
Consolidated Statement of Changes in Shareholders' Equity - June 30, 1996
and 1995 (Unaudited)
Consolidated Statement of Cash Flows - Six months ended June 30, 1996 and
1995 (Unaudited)
Notes to consolidated financial statements - June 30, 1996
(b) Report on Form 8-K. Previously filed on February 14, 1996 (Commission File
Number 2- 54663), and amended on April 8, 1996 . Here incorporated by
reference
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST MANISTIQUE CORPORATION
(Registrant)
- ---------- ---------------------------------
Date RONALD G. FORD, President & CEO
- ---------- ---------------------------------
Date RICHARD B. DEMERS, Chief
Accounting Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 FINANCIAL DATA SCHEDULE