1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1997 Commission file
number: 2-54663
FIRST MANISTIQUE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2062816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
130 S. CEDAR STREET, MANISTIQUE, MI 49854
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (906) 341-8401
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___X___ No ___________
As of May 6, 1997, there were outstanding 2,376,480 shares of the registrant's
common stock, no par value.
2
PART I - FINANCIAL INFORMATION (unaudited)
------------------------------------------
ITEM 1. FINANCIAL STATEMENTS.
- -----------------------------
Consolidated Condensed Balance Sheets
(In thousands of dollars)
March 31, December 31,
1997 1996
---------------- ----------------
ASSETS
Cash and due from banks $ 11,678 $ 11,764
Federal funds sold 10,700 400
------------- -------------
Total cash and cash equivalents 22,378 12,164
Interest-bearing deposits with banks 97 535
Securities available for sale 17,760 17,761
Loans 347,287 314,886
Allowance for loan losses (4,951) (4,591)
------------ ------------
Net Loans 342,336 310,295
Bank premises and equipment 16,311 14,476
Other assets 13,861 11,929
------------- -------------
TOTAL ASSETS $ 412,743 $ 367,160
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 33,944 $ 33,787
Interest-bearing 312,803 271,452
------------- -------------
346,747 305,239
Federal funds purchased and securities sold
under agreement to repurchase 1,600 5,700
Other borrowings 26,903 20,441
Other liabilities 3,274 3,394
------------- -------------
TOTAL LIABILITIES 378,524 334,774
Shareholders' equity
Preferred stock, no par value, 500,000 shares
authorized, no shares outstanding
Common stock, no par value, 6,000,000 shares
authorized; outstanding: 2,377,760 at 3/31/97 and
2,363,734 at 12/31/96 20,162 18,880
Retained earnings 14,455 13,756
Unrealized loss on securities available for sale, net (398) (250)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 34,219 32,386
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 412,743 $ 367,160
============= =============
3
Consolidated Condensed Statements of Income (unaudited)
(In thousands of dollars)
Three Months Ended
March 31,
1997 1996
---------------- ---------------
Interest income
Loans, including fees $ 7,867 $ 5,840
Securities
Taxable 275 399
Exempt from federal taxation 7 24
Other 69 159
---------- ----------
Total interest income 8,218 6,422
Interest expense
Deposits 3,330 2,701
Borrowed Funds 331 142
---------- ----------
Total interest expense 3,661 2,843
---------- ----------
Net interest income 4,557 3,579
Provision for loan losses 106 107
---------- ----------
Net interest income after provision for loan losses 4,451 3,472
Noninterest income
Service charges on deposit accounts 238 163
Gains on sale of loans 9 18
Securities gains 0 27
Other 104 120
---------- ----------
Total noninterest income 351 328
Noninterest expense
Salaries and employee benefits 1,501 1,107
Furniture and equipment expense 334 198
Occupancy expense 260 236
Other 1,409 935
---------- ----------
Total noninterest expense 3,504 2,476
---------- ----------
Income before income tax 1,298 1,324
Provision for income tax 314 395
---------- ----------
Net income $ 984 $ 929
=========== ==========
Weighted average common shares outstanding 2,370,305 2,109,363
========== ==========
Earnings per common share $ 0.42 $ 0.44
========== ==========
4
Consolidated Condensed Statement of Changes in Shareholders' Equity (unaudited)
(In thousands of dollars)
Three months Three months
ended ended
March 31, 1997 March 31, 1996
Shares Equity Total Shares Equity Total
--------------------------------- ---------------------------------
Balance-beginning of period 2,363,734 $ 32,386 2,106,897 $ 25,007
Net Income YTD 984 929
Cash dividends (285) (254)
Issuance of common stock 14,026 1,282 13,881 248
Net change in unrealized gain (loss)
on securities available for sale
(148) (500)
------------------------------- -------------------------------
2,377,760 $ 34,219 2,120,778 $ 25,430
=============================== ===============================
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Consolidated Statements of Cash Flows (unaudited)
(In thousands of dollars)
March 31, March 31,
1997 1996
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES $1,730 $643
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits
with banks 438 1,068
Purchase of securities available for sale (830) (6,149)
Proceeds from sales of securities
available for sale 4,847 3,043
Proceeds from maturities, calls, or
paydowns of securities available for sale 246 5,033
Proceeds from maturity and calls of securities
held to maturity 125
Net increase in loans (12,192) (6,635)
Proceeds from sale of premises and equipment 42
Purchase of premises and equipment (1,484) (236)
Net cash provided in acquisitions 32 724
-------------- -------------
Net cash used in investing activities (8,943) (2,985)
-------------- -------------
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Consolidated Statements of Cash Flows - continued (unaudited)
(In thousands of dollars)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 14,068 5,793
Net decrease in federal funds purchased and securities
sold under agreements to repurchase (4,100)
Proceeds from notes payable 8,250 2,900
Payment on notes payable (1,788)
Proceeds from issuance of common stock 1,282 248
Payment of dividends (285) (254)
----------- ----------
Net cash from investing activities 17,427 8,687
----------- ----------
Net increase (decrease) in cash and cash
equivalents 10,214 6,345
Cash and cash equivalents at beginning of period 12,164 14,492
----------- ----------
Cash and cash equivalents at end of period $22,378 $20,837
=========== ==========
Assets and liabilities acquired in acquisition
(refer to Note 3)
Interest-bearing deposits 1,088
Premises and equipment 676 1,409
Acquisition intangibles 2,214 1,630
Other assets and accrued interest receivable 313 774
Loans, net 19,955 26,761
Securities available for sale 4,488 3,800
Deposits 27,440 32,869
Other liabilities and accrued interest payable 238 954
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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 March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
NOTE 2 - 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 for the first quarter of 1996 and 1997 was
insignificant. Based on the Registrant's historical level of mortgage
originations for sale in the secondary market, management believes that the
impact for the year will also be immaterial.
NOTE 3 - PER SHARE CALCULATIONS
A resolution for a 3-for-1 stock split, for shareholder's of record on April
29, 1996, was approved by the Board of Directors on April 23, 1996. All share
and per share amounts in this filing have been adjusted to reflect the 3-for-1
stock split.
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NOTE 4 - ACQUISITIONS
The Registrant acquired 100% of the outstanding stock of South Range State Bank
(with assets of $36,503,000, liabilities of $33,823,000, total deposits of
$32,869,000, and net loans of $26,761,000) on January 31, 1996. The total
purchase price was $4,310,000 with $1,947,000 paid in cash and the remaining
$2,363,000 financed through the issuance of notes payable. South Range State
Bank has since been renamed North Country Bank.
The Registrant acquired 100% of the outstanding stock of U.P. Financial, Inc.
("UP Financial") on February 4, 1997. UP Financial owned 100% of the
outstanding stock of First National Bank in Ontonagon ("Ontonagon"), a Michigan
banking institution. Upon acquisition, the assets of UP Financial were merged
into North Country Bank, with North Country Bank being the survivor. At the
date of the acquisition, UP Financial had assets of $29,760,000, liabilities of
$27,679,000, total deposits of $27,440,000, and net loans of $20,250,000. The
total purchase price was $4,298,000 with $2,048,000 paid in cash and the
remaining $2,250,000 financed through borrowings on a line of credit.
NOTE 5 - SECURITIES
The amortized cost and fair value of securities at March 31, 1997 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 $ 13,231 $ 1 $ 552 $ 12,680
State and political subdivisions 940 - 25 915
Other 4,192 - 27 4,165
--------------------------------------------------------------
Total $ 18,363 $ 1 $ 604 $ 17,760
==============================================================
The amortized cost and fair value of securities by contractual maturity at
March 31, 1997, are shown below, in thousands of dollars
Available for Sale
-------------------------
Amortized Fair
Cost Value
-------------------------
Due in one year or less $ 1,157 $ 1,153
Due after one year through five years 7,031 6,894
Due after five years through ten years 1,205 1,185
Due after ten years 8,970 8,528
----------------------
$ 18,363 $ 17,760
======================
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NOTE 6 - LOANS
Loans presented in the consolidated condensed balance sheet are comprised of
the following classifications at March 31, 1997 and December 31, 1996:
(In thousands of dollars)
March 31, December 31,
1997 1996
--------------- ------------------
Loans:
Commercial, financial and agricultural $ 148,629 $ 141,555
Commercial leases 49,737 47,686
1-4 family residential real estate 90,012 80,592
Consumer 40,865 31,156
Construction 18,044 13,897
--------------- ------------------
$ 347,287 $ 314,886
=============== ==================
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NOTE 7 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the three months ended March 31,
1997 and 1996, are summarized as follows:
(In thousands of dollars)
March 31, March 31,
1997 1996
------------ -----------
Balance at beginning of period $ 4,591 $ 3,137
Charge offs (93) (74)
Recoveries 49 20
Allowance transferred from purchase of
U.P. Financial, Inc. 298
Allowance transferred from purchase of
South Range State Bank 285
Provision for loan loss 106 107
------------ ----------
Balance at end of period $ 4,951 $ 3,475
============ ==========
Information regarding impaired loans is as follows:
3/31/97 12/31/96
-------------- --------------
Average investment in impaired loans $ 4,499,599 $ 2,914,955
Interest income recognized on impaired loans
including interest income recognized on
cash basis 104,382 99,215
Interest income recognized on impaired loans on
cash basis 79,118 98,098
Balance of impaired loans $ 5,733,498 $ 4,486,883
Less portion for which no allowance for loan
loss is allocated 2,052,069 805,454
-------------- --------------
Portion of impaired loan balance for which
an allowance for credit losses is
allocated $ 3,681,429 $ 3,681,429
============== ==============
Portion of allowance for loan losses
allocated to the impaired loan balance $ 467,877 $ 467,877
============== ==============
The Registrant was a secured creditor of leases issued to Bennett Funding
Group, Inc. ("BFG"), and Aloha Capital Corporation ("ACC"), a subsidiary of
BFG. BFG filed Chapter 11 Bankruptcy on March 29, 1996, and ACC filed
involuntary bankruptcy in April of 1996. A bankruptcy trustee was appointed on
April 19, 1996, and after that date, all payments for creditors of BFG and ACC
were seized. The Registrant held leases with BFG totaling $2,792,651 on
December 31, 1995. The Registrant subsequently made an additional lease with
ACC in the amount of $500,699 during January of 1996. The Registrant held
first lien positions on all leases held. This was confirmed when, in June of
1996, the trustee provided a list of creditors identified as those holding
double pledged paper and the Registrant was not listed. On October 10, 1996,
the
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Bankruptcy Court approved an agreement which was reached between the Registrant
and the trustee. According to the terms of this settlement, the trustee
purchased the Registrant's outstanding loans, together with all notes, security
agreements, and rights to collateral relating to the same. All other claims or
disputes between the trustee and/or BFG and the Registrant were released,
waived, or settled. The settlement included the granting of a loan in the
amount of $3,682,000 to Resort Funding, Inc. ("RFI"), of which $1,516,000 are
new funds. RFI is a subsidiary of BFG which is 100% operated by the trustee.
This entity is not in bankruptcy. The primary collateral for this loan is a
real estate mortgage interest in a commercial real estate project in South
Carolina. The payment stream of the old collateral and RFI pledged properties
are additional collateral for this loan. The new loan to RFI closed on
November 22, 1996, and the trustee purchased ten of the Registrant's existing
loans including all amounts owing thereunder and rights of the Registrant
related there to (including all of the Registrant's rights to collateral for
such loans), for the purchase price of $2,166,000. The Registrant will receive
interest only for sixty months with a payment of principal due at maturity.
The interest rate has been set at 3.00% per annum based on a 365-366 day year
for actual days elapsed. There has been a separate settlement agreement for
the other two blocks of BFG leases owned by the Registrant. One lease, to
Americorp, with a balance of $329,894, has a separate settlement agreement for
$.50 per $1.00 of principal collected by the trustee. The entire amount of
principal has been charged-off due to anticipated lengthy court delays. This
lease was insured by an off-shore insurance company which is being sued by the
trustee. The final lease was a separate note to Aloha Capital with an original
amount of $500,699. An agreement to settle has been reached for $.65 per $1.00
of outstanding principal. The full amount of principal was charged-off and the
Registrant has recovered $155,908 through May 7, 1997. Management anticipates
full recovery of it's settlement dollars in all settlements.
NOTE 8 - DEPOSITS
The following is an analysis of interest-bearing deposits as of March 31, 1997
and December 31, 1996.
(In thousands of dollars)
March 31, December 31,
1997 1996
----------------------------------------
Savings and interest-bearing checking $ 172,496 $ 151,936
Time: In denominations under $100,000 112,915 97,666
In denomination of $100,000 or more 27,392 21,850
--------------- --------------
$ 312,803 $ 271,452
=============== ==============
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NOTE 9 - OTHER BORROWINGS
Other borrowings consists of the following at March 31, 1997 and December 31,
1996:
(In thousands of dollars)
March 31, December 31,
1997 1996
-----------------------------------------
Federal Home Loan bank advances (8), at
various rates with various maturities (see
annual financial statements). $ 15,078 $ 16,078
Federal Home Loan Bank, fixed-rate advance
at 5.51%, matures May 14, 1997. 6,000
Farmer's Home Administration, $2,000,000
fixed rate line agreement maturing August 24, 2024:
interest payable at 1% 2,000 2,000
Bank line of credit, $4,000,000 variable rate line
agreement maturing February 1, 1999:
interest payable at the Bank's prime rate - 8.50%
at March 31, 1997. 2,250
Notes Payable to South Range State Bank's former
stockholders, maturing in three equal
annual installments beginning February 1, 1997:
interest payable at 5.20%. 1,575 2,363
-------------- -----------
$ 26,903 $ 20,441
============== ===========
The Federal Home Loan Bank borrowings are collateralized by a blanket collateral
agreement on the Registrant's residential mortgage loans. Prepayment of the
advances is subject to the provisions and conditions of the credit policy of the
Federal Home Loan Bank of Indianapolis in effect as of December 31, 1996 and
March 31, 1997. Borrowings 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 for
the first quarter of 1997. The discussion should be read in conjunction with
those statements and their accompanying notes.
The Registrant is not aware of any market or institutional trends, events, or
circumstances that will have or are reasonably likely to have a material effect
on liquidity, capital resources, or results of operations except as discussed
herein. Also, the Registrant is not aware of any current recommendations by
regulatory authorities which will have such effect if implemented.
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HIGHLIGHTS
The Registrant acquired 100% of the outstanding stock of South Range State Bank
(with assets of $36,503,000, liabilities of $33,823,000, total deposits of
$32,869,000, and net loans of $26,761,000) on January 31, 1996. The total
purchase price was $4,310,000 with $1,947,000 paid in cash and the remaining
$2,363,000 financed through the issuance of notes payable. South Range State
Bank has since been renamed North Country Bank.
The Registrant acquired 100% of the outstanding stock of U.P. Financial, Inc.
("UP Financial") on February 4, 1997. UP Financial owned 100% of the
outstanding stock of First National Bank in Ontonagon ("Ontonagon"), a Michigan
banking institution. Upon acquisition, the assets of UP Financial were merged
into North Country Bank, with North Country Bank being the survivor. At the
date of the acquisition, UP Financial had assets of $29,760,000, liabilities of
$27,679,000, total deposits of $27,440,000, and net loans of $20,250,000. The
total purchase price was $4,298,000 with $2,048,000 paid in cash and the
remaining $2,250,000 financed through borrowings on a line of credit.
Year to date consolidated net income was $984,000 for the period ending March
31, 1997 compared to $929,000 for the same period in 1996. Return on
consolidated average assets for the quarter was 1.00% compared to 1.13% for the
first quarter period in 1996. Earnings per share decreased from $0.44 for the
period ending March 31, 1996, to $0.42 for the same period in 1997.
FINANCIAL CONDITION
LOANS
During the first quarter of 1997, loan balances increased by $32.4 million. The
acquisition of UP Financial accounted for $20.5 million of this increase and
the remainder was due to internal loan growth. The loan to deposit ratio has
decreased from 103.2% at December 31, 1996, to 100.2% at March 31, 1997.
Management believes loans provide the most attractive earning asset yield
available to the Registrant and that trained personnel and controls are in
place to successfully manage a growing portfolio. Accordingly, management
intends to continue to maintain loans at the highest level which is consistent
with maintaining adequate liquidity.
Management is aware of the risk associated with an increase in average balances
of loans but feels that the current level in the allowance for loan losses is
adequate. At March 31, 1997 the allowance for loan losses was equal to 1.43%
of total loans outstanding compared to 1.46% at December 31, 1996.
The majority of the increase in impaired loans from December 31, 1996 to March
31, 1997
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consisted of credit extended to one car dealer. The loan loss reserve
allocated to this loan is adequate to meet the estimated exposure to loss.
Commercial real estate loans have increased by $7.3 million during the first
quarter of 1997 to $72,813,000 at March 31, 1997, mainly due to the acquisition
of UP Financial. During the first quarter of 1997, loans to general commercial
businesses decreased $.2 million to $75,816,000. Commercial leases increased
$2.5 million to $21,513,000 at March 31, 1997 and governmental leases decreased
$.5 million to $28,224,000. No leases were obtained with the purchase of UP
Financial. The activity in leases are due to the Registrant's efforts to build
this area of the loan portfolio. Growth in the classification of 1-4 family
residential loans in the amount of $9.4 million has occurred mainly due to the
acquisition of UP Financial. Consumer loans have increased $9.7 million during
the first quarter of 1997 due mainly to the acquisition of UP Financial.
Construction loans have increased $4.1 million due mainly to the purchase of UP
Financial as well as an increase in this type of lending activity. The table
below shows total portfolio loans outstanding, in thousands of dollars, at
March 31, 1997, and December 31, 1996, and their percentage of the total loan
portfolio.
March 31, December 31,
1997 % of total 1996 % of total
----------------------------------------------------------------
Loans:
Commercial real estate $ 72,813 20.97% $ 65,522 20.81%
Commercial, financial and agricultural 75,816 21.83% 76,033 24.15%
Leases
Commercial 21,513 6.19% 18,974 6.03%
Governmental 28,224 8.13% 28,712 9.12%
1-4 family residential real estate 90,012 25.92% 80,592 25.59%
Consumer 40,865 11.77% 31,156 9.89%
Construction 18,044 5.19% 13,897 4.41%
------------- --------------
Total $ 347,287 $ 314,886
============= ==============
CREDIT QUALITY
Management analyzes the allowance for loan losses in detail on a monthly basis
to ensure that the losses inherent in the portfolio are properly recognized.
The Registrant's success in maintaining excellent credit quality is
demonstrated in it's historical charge-off percentage. Chargeoffs for the
period ending March 31, 1997 have increased $19,000 from the same period in
1996. This is the result of a $32,000 increase in installment loan
charge-offs, a $12,000 increase in credit card charge-offs, and a $25,000
decrease in commercial loan charge-offs. The provision for loan losses has
decreased from the period ending March 31, 1996 to the same period in 1997 as a
result of the Registrant's adequate percentage of allowance to loans. See Note
7 to the first 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
15
due, and renegotiated loans as of March 31, 1997, and December 31, 1996.
March 31, December 31,
1997 1996
--------- ------------
Nonaccrual loans $ 26 $ 49
Loans 90 or more days past due 113 68
Renegotiated loans 0 0
INVESTMENTS
Available for sale securities remained steady during the first quarter of 1997.
The mix of the portfolio remained relatively unchanged from December 31, 1996.
The primary use of the portfolio is to provide a source of liquidity. Most of
the portfolio is invested in U.S. Treasury and agency securities which have
little credit risk and are highly liquid. There are no securities classified
as held to maturity.
DEPOSITS
Total deposits increased this quarter by $41.5 million. A substantial portion,
$27.4 million, of the increase came from the acquisition of UP Financial. The
remainder came as a result of internal deposit growth. Interest bearing
deposit balances increased through March 31, 1997, continuing a trend from last
fiscal year. The increase in interest bearing deposits came from a $20.6
million increase in savings and interest-bearing checking, a $15.2 million
increase in time deposits less than $100,000, and a $5.5 million increase in
time deposits less than $100,000 (refer to the table presented in Note 8 to the
first quarter financial statements above). The time deposits of $100,000 or
more consist of stable, 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 $6.5 million during the first quarter (refer to the table
presented in Note 9 to the first quarter financial statements above for the
composition of the increase), the majority of which was used in general
operations at North Country Bank and Trust and the purchase of UP Financial.
At March 31, 1997, $21.1 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.
16
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 increased by 27.3% compared to March 31, 1996. The net
interest margin at March 31, 1997 was 4.90%, compared to 4.97% for all of 1996.
The net yield on interest earning assets remained relatively constant.
Interest income from loans represented 95.7% of total interest income for the
first quarter of 1997 compared to 90.9% for the first quarter of 1996. In all
cases, the total amount of interest income and the yield on total earning
assets is strongly influenced by lending activities.
PROVISION FOR LOAN LOSSES
The Registrant maintains the allowance for loan losses at a level adequate to
cover losses inherent in the portfolio. The Registrant records a provision for
loan losses necessary to maintain the allowance at that level after considering
factors such as loan charge-offs and recoveries, changes in the mix of loans in
the portfolio, loan growth, and other economic factors. The provision for loan
losses remained steady from March 31, 1996 to March 31, 1997.
NONINTEREST INCOME
Service charges on deposit accounts increased $75,000 during the first quarter
of 1997 vs. the first quarter of 1996 mainly due to the acquisition of UP
Financial. Gains on sales of loans has decreased due to the smaller volume of
loans being originated and sold in the first quarter of 1997 vs. the first
quarter of 1996. Securities gains have decreased due to reduced sale activity
in the investment portfolio. Other noninterest income decreased $16,000 during
the first quarter of 1997 vs. the first quarter of 1996 due mainly to a
reduction of foreign exchange income.
17
NONINTEREST EXPENSES
Noninterest expense showed an increase of 41.5% over the first quarter of 1996.
The increase is consistent with the Registrant's asset growth. The majority of
the increase is due to an increase in salary and employee benefits and other
noninterest expense. Salary expense increased mainly due to an increase in
full-time equivalent employees at March 31, 1997 vs. March 31, 1996, due to the
Registrant's purchase of UP Financial and the opening of additional branches.
Other noninterest expense increased due to the purchase of UP Financial, the
opening of additional branches, and increased costs associated with
out-sourcing of the computer processing for the Registrant's subsidiary banks.
Furniture and equipment expense and occupancy expense increased due to the
purchase of UP Financial and the opening of additional branches. While the
increase 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
The provision for income taxes was 24.2% of income before income tax at March
31, 1997 compared to 29.8% at March 31, 1996. The difference between these
rates and the federal corporate income tax rate of 34% is primarily due to
tax-exempt interest earned on loans, leases and investments. The effective
tax rate has decreased as tax-exempt income has become a larger portion of
total interest income.
INTEREST RATE RISK
Management actively manages the Registrant's interest rate risk. In relatively
low interest rate environments which have been in place the last few years,
borrowers have generally tried to extend the maturities and repricing periods
on their loans and place deposits in demand or very short term accounts.
Management has taken various actions to offset the imbalance which those
tendencies would otherwise create. Management writes commercial and real
estate loans at variable rates or, if necessary, fixed rate loans for
relatively short terms. Management has also offered products that give
customers an incentive to accept longer term deposits. Management can also
manage interest rate risk with the maturity periods of securities purchased,
selling securities available for sale, and borrowing funds with targeted
maturity periods. The Registrant has remained slightly liability sensitive in
the cumulative net asset (liability) funding gap for 1 - 365 days since
December 31, 1996.
CAPITAL RESOURCES
It is the policy of the Registrant to maintain capital at a level consistent
with both safe and sound
18
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 March
31, 1997 and 1996.
March 31, 1997
Required Actual
$ % $ %
--------- ---------- --------- ---------
Tier 1 risk-adjusted capital ratio $ 12,258 4.00% $ 27,521 8.98%
Total risk-adjusted capital ratio $ 24,516 8.00% $ 31,365 10.23%
Tier 1 leverage ratio $ 15,451 4.00% $ 27,521 7.12%
Tier 1 capital $ 27,521
Tier 2 capital $ 3,844
Total risk-based capital $ 31,365
Total risk-weighted assets $ 306,449
Average total assets $ 386,276
March 31, 1996
Required Actual
$ % $ %
-------------- ----------------- ------------- -----------
Tier 1 risk-adjusted capital ratio $ 9,622 4.00% $ 25,229 10.49%
Total risk-adjusted capital ratio $ 19,243 8.00% $ 28,162 11.71%
Tier 1 leverage ratio $ 12,680 4.00% $ 25,229 7.96%
Tier 1 capital $ 25,229
Tier 2 capital 2,933
Total risk-based capital 28,162
Total risk-weighted assets 240,542
Average total assets 316,999
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- --------------------------
At the date hereof, there were no material pending legal proceedings, other
than routine litigation incidental to the business of banking, to which the
Registrant or any of its subsidiaries is a party of or which any of its
properties is the subject.
ITEM 2. CHANGES IN SECURITIES.
- ------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ----------------------------------------
There have been no defaults upon senior securities relevant to the requirements
of this section.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
No matters were submitted during the first quarter of fiscal 1997 to a vote of
the Registrant's stockholders.
ITEM 5. OTHER INFORMATION.
- --------------------------
None.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------
(a) The following exhibits are filed as part of this report:
Number Exhibit
- ------ -------
27 Financial Data Schedule. Filed herewith.
The following documents are filed as part of Part I, Item 1 of this report:
Consolidated Balance Sheets - March 31, 1997 (Unaudited) and December
31, 1996 (Audited)
Consolidated Statements of Income - Three months ended March 31, 1997
and 1996 (Unaudited)
Consolidated Statement of Changes in Shareholders' Equity - Three
months ended March 31, 1997 and 1996 (Unaudited)
Consolidated Statement of Cash Flows - Three months ended March 31,
1997 and 1996 (Unaudited)
Notes to consolidated financial statements - March 31, 1997
(b) Report on Form 8-K. Previously filed on April 17, 1997 (Commission File
Number 2-54663). Here incorporated by reference
21
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)
5/15/97 /s/ Ronald G. Ford
- ------- --------------------------------
Date RONALD G. FORD, President & CEO
5/15/97 /s/ Richard B. Demers
- ------- --------------------------------
Date RICHARD B. DEMERS, COO &
Chief Accounting Officer
22
EXHIBIT INDEX
Exhibit
No. Description
------- -----------------------
27 Financial Data Schedule