Item 1. Business
First Manistique Corporation (the "Registrant") 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 subsidiaries, North Country Bank and Trust and North Country Bank (collectively "Banks"). The Registrant also owns all of the outstanding stock of three nonbank subsidiaries: First Manistique Agency, an insurance agency which sells title, life, and health insurance, First Northern Services Company, a real estate appraisal company which is currently inactive, and First Rural Relending Company, a non-profit relending company which assists qualified borrowers with discounted loan rates creating cash flow and growth potential to new or established businesses. The Banks represent the principal assets of the Registrant.
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") and Manistique Lakes Bank. Manistique Lakes Bank merged with First Northern on May 1, 1986, 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 assets 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. South Range operates as a separate banking subsidiary of the Registrant. 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 U.P. Financial, Inc. ("U.P. Financial") on February 4, 1997, in exchange for cash. U.P. Financial owned 100% of the outstanding stock of First National Bank in Ontonagon ("Ontonagon"), a Michigan banking institution. Upon acquisition, Ontonagon was merged into North Country Bank, with North Country Bank being the survivor.
The Banks are 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, and direct and indirect consumer financing.
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:
1996 1995 1994 ----------------------
Interest and fees on loans 89.0% 85.1% 78.2% Investment income 5.0% 6.5% 12.8% Other interest income 1.5% 2.6% 1.5% Non-interest income 4.5% 5.8% 7.5% ---------------------- 100.0% 100.0% 100.0% ----------------------
The Banks' primary market areas are the area within a radius of 30 miles from their 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 S. Cedar Street, Manistique, Michigan 49854. North Country Bank and Trust maintains offices in Schoolcraft, Delta, Mackinac, Luce, Alger, Menominee, Dickinson, Marquette, and Chippewa counties, as well as in the Garden Peninsula and on Mackinac Island. The population of these counties combined is approximately 240,000. North Country Bank and Trust operates nineteen branch offices, provides drive-in convenience at sixteen locations, and has automatic teller machines operating at eight locations. North Country Bank and Trust has no foreign offices. The main office of North Country Bank is located in Ripley, Houghton County, Michigan. North Country Bank maintains offices in Houghton, Keweenaw, Ontonagon, Gogebic, and Baraga counties. The population of these counties combined is approximately 72,000. North Country Bank operates six branch offices, provides drive-in convenience at four locations, and has automatic teller machines operating at three locations.
As of December 31, 1996, the Banks employed approximately 166 full-time and 27 part-time employees.
Banking is a highly competitive business. The Banks compete primarily with financial institutions in their market areas for loans and deposits. In their primary market, namely the Upper Peninsula of Michigan, the Banks maintain the second largest deposit base, or approximately twelve percent of the deposit market share. There are 17 banking and savings institutions and 28 credit unions with offices in the Upper Peninsula of Michigan.
In addition to the other banks, the Banks also compete for loans and deposits with savings and loan associations, credit unions, investment firms, and large national retailers, and compete for deposits with money market funds. In order to successfully compete, management has developed a sales and service culture, stresses and rewards excellent customer service, and designs products to meet the needs of the customer. The Banks also utilize their ability to sell loans in the secondary market.
The Banks make mortgage, commercial, and installment loans to customers primarily in the Upper Peninsula of Michigan. Fees may be charged for these services. Historically, the Banks have predominantly sold their secondary market conforming residential mortgage loans.
The Registrant is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet financing 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):
1996 1995 ---- ---- Fixed Variable Fixed Variable ------ -------- ----- --------
Outstanding letters of credit $2,377 $1,288 Unused lines of credit $4,192 20,029 $3,474 8,556 Loan commitments outstanding 7,185 6,882 ------ ------- ------ ------ $4,192 $29,591 $3,474 $16,726
Fixed rates on unused lines of credit ranged from 9.00% to 18.00% at December 31, 1996.
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 Banks support the growth of the service industry, with its year round resort and related businesses, logging, manufacturing, and many other activities important to growth in the Upper Peninsula. The economy of the market areas of the Banks is affected by summer and winter tourism activities and, accordingly, the Banks experience 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 Banks deposits been received from, a single person, persons, industry, or group.
In 1993, North Country Bank and Trust joined the Federal Home Loan Bank of Indianapolis. North Country Bank joined in 1996. The Federal Home Loan Bank of Indianapolis generates 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 Banks regularly assess their 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 have established conservative guidelines for the total funding to be provided by these deposits. These deposits were slightly more than eight percent of total deposits at December 31, 1996. The Banks also use federal funds purchased from correspondent banks and the Federal Reserve Bank to respond to deposit fluctuations and temporary loan demands.
As of December 31, 1996, the Banks had no material risks attendant to foreign sources. 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 Banks' capital expenditures, earnings, or competitive position.
SUPERVISION AND REGULATION
Banking is a highly regulated industry, with numerous federal and state laws and regulations governing the organization and operation of banks, bank holding companies, and their affiliates. As a bank holding company under the Bank Holding Company Act of 1956, as amended (the "Act"), the Registrant is subject to supervision and examination by the Board of Governors of the Federal Reserve Board ("Federal Reserve Board") and is required to file with the Federal Reserve Board annual reports and information regarding its business operations and those of its subsidiaries. The Act requires the Registrant to obtain Federal Reserve Board approval before: (a) acquiring (except in certain limited circumstances) more than a five percent ownership interest in any class of the voting securities of any bank or bank holding company; (b) acquiring all or substantially all of the assets of a bank or bank holding company; or ( c) merging or consolidating with another bank holding company.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act was signed into law. This legislation authorizes adequately capitalized and adequately managed bank holding companies, beginning September 29, 1995, to acquire banks located outside their respective home state, irrespective of state law. The Federal Reserve Board is authorized to approve bank acquisitions by out-of-state bank holding companies whether or not such acquisition is prohibited by state law. This legislation also authorizes, effective June 1, 1997 (subject to individual state rights to (a) accelerate this date or (b) to prohibit interstate branching within its borders), banking organizations to branch nationwide by acquisition or consolidation of existing banks in other states. Michigan opted to accelerate the June 1, 1997 date to November 29, 1995 and now permits interstate branching from other states which also permit interstate branching. Interstate acquisitions and branching are subject to the approval of various federal and state agencies and other conditions. While it is too early to assess the impact of this legislation, it is reasonable to assume it could foster further industry consolidation. The Registrant could benefit indirectly from this legislation through lower supervisory costs related to overall improved quality in the industry.
The Banks are organized as Michigan banking corporations and are regulated and supervised by the Financial Institutions Bureau of the Michigan Department of Commerce. Michigan law permits Michigan state-chartered banks to consolidate on a state-wide basis and to operate the offices of merged banks as branches of a surviving bank. Also, with the written approval of the Financial Institutions Bureau, a Michigan bank may relocate its main office to any location in the state, establish and operate branch banks anywhere in the state, and contract with other banks to act as branches thereof.
The Banks accept customer deposits, and the deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). Consequently, the Banks are subject to the provisions of the Federal Deposit Insurance Act and to examination by the FDIC. As a result of such supervision and regulation, the Banks are subject to requirements to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest which may be charged thereon, restrictions relating to investments and other activities, limitations based on capital and surplus, limitations on branching, and limitations on the payment of dividends on
common stock. These regulations are intended primarily for the protection of the depositors and customers of the Banks, rather than shareholders of the Registrant.
The provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) directly affect banks and bank holding companies. FIRREA requires the FDIC to maintain two funds to insure customer deposits: for banks, the Bank Insurance Fund ("BIF"), and for savings and loan associations, the Savings Association Insurance Fund ("SAIF"). FIRREA also allows bank holding companies to acquire financially sound thrift institutions. Previously, bank holding companies could acquire only failing thrift institutions. Through a "cross-guarantee" provision in FIRREA, the FDIC may hold commonly controlled depository institutions liable if an affiliated depository institution fails. In such an event, the interests of the FDIC are placed ahead of the bank holding company shareholders.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") significantly affects the operation of banks and their relationship with federal regulatory agencies. Under FDICIA, the FDIC has implemented a system of risk based premiums for deposit insurance pursuant to which the premiums paid by a depository institution are based on the probability that the applicable insurance fund will incur a loss in respect of such institution. Also, under FDICIA, federal regulatory agencies are developing comprehensive safety and soundness standards. FDICIA also prescribes various supervisory actions by federal regulatory agencies based on an insured institution's level of capital. These prescribed actions increase restrictions on and heighten regulatory scrutiny of the institution as its capital declines.
Federal law also regulates transactions between the Registrant and the Banks, including the amount and nature of loans or other extensions of credit.
The Federal Reserve has established guidelines with respect to the maintenance of appropriate levels of capital for the Banks. The Federal Reserve Board has also established similar guidelines for the Registrant. Compliance with such standards can also limit the amount of dividends which the Banks can pay to the Registrant and the amount of dividends the Registrant can pay to its shareholders.
The banking industry is also affected by the monetary and fiscal policies of the federal government, including the Federal Reserve Board, which exerts considerable influence over the cost and availability of funds obtained for lending and investing.
Proposals to change the laws and regulations governing the operations and taxation of banks, and companies which control banks and other financial institutions, are frequently raised by Congress. The likelihood of any major changes and the impact such changes might have on the Registrant are, however, impossible to determine.
The Registrant and its subsidiary banks 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 following table details the key determinants 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 taxable equivalent basis and interest expense, as well as the average rates earned and paid on these assets and liabilities.
Net Interest Income For Year Ended December 31, 19xx (Fully taxable equivalent, in thousands)
(1) For the purpose of these computations, non-accruing loans are included in the average loans amounts outstanding. (2) Total interest income includes the effect of tax-equivalent adjustments using a 34% tax rate. (3) Interest income on loans includes loan fees
An analysis of the changes in net interest income from period to period is presented in the following table. This analysis highlights the relative effect of the changes in interest income or expense due to changes in the average balances of earning assets and interest-bearing liabilities and changes in interest rates.
Analysis of Changes in Net Interest Income For Year Ended December 31, 19xx (Fully taxable equivalent, in thousands)
1) The change in interest due to both rate and volume has been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.
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 specific loss allowances for selected loans (including large loans, non-accrual loans, and problem and delinquent loans) and consideration of historical loss information and local economic conditions.
Additional Information Relative to Allowance for Loan Losses As of December 31, 19xx (In thousands)
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, 19xx (In thousands)
The following table presents the remaining maturity of total loans outstanding (excluding residential real estate mortgage and consumer loans) at December 31, 1996, according to scheduled repayments of principal. 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, 19xx (In thousands)
The following table presents 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, 1996 (In thousands)
3 months or less $ 8,019 Over 3 months through 6 months 6,247 Over 6 months through 12 months 4,621 Over 12 months 2,963 -------
Total $21,850 =======
The following table presents a summary of non-performing assets.
Non-Performing Assets and Problem Loans As of December 31, 19xx (In thousands)
The following table is an analysis of securities.
Investment Securities As of December 31, 19xx (In thousands)
The following table presents the maturity schedule of securities held, and a weighted average of those securities, as of December 31, 1996. Mortgage backed securities are included with other securities, stratified by maturity dates. Registrant holds no securities with one issuer in which the aggregate book value and aggregate market value of the securities held with that single issuer exceeds ten percent of stockholders' equity.
Maturities of Investment Securities As of December 31, 1996 (Fully taxable equivalent, in thousands)
(1) Weighted average yield includes the effect of tax-equivalent adjustments using a 34% tax rate.
Item 2.

Item 2. Properties
The Registrant conducts business from 23 banking and administrative offices. Of these, 18 are owned in fee simple covering approximately 85,000 square feet, and 5 are leased covering approximately 5,000 square feet. The Registrant's headquarters, which were remodeled in 1996, are located at 130 S. 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.

Item 3. 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 4.

Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of fiscal 1996 to a vote of the Registrant's stockholders.
Additional Item - Executive Officers
Name Age Position - -------------- ----- ------------------------------------ Ernest D. King 73 Chairman of the Registrant and North Country Bank and Trust
Michael Henricksen 54 Vice-Chairman of the Registrant and Director of North Country Bank and Trust
Ronald G. Ford 49 President & Chief Executive Officer of the Registrant and North Country Bank and Trust
Richard B. Demers 37 Chief Operating Officer of the Registrant and Executive Vice-President of North Country Bank and Trust
Sherry Littlejohn 36 Executive Vice-President of the Registrant and Chief Operating Officer of North Country Bank and Trust
Fred LaMuth 49 Secretary and Treasurer of the Registrant
The foregoing officers serve at the pleasure of the Board of Directors and are appointed by the Board annually. There is one family relationship among the directors of the Registrant and the
executive officers - Ernest D. King, listed above, is the father of Thomas G. King, a Director of the Registrant. There are no arrangements or understandings between any officer and any other person pursuant to which the officer was elected.
PART II
Item 5.

Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters
On February 8, 1994, the Registrant issued 527,337 shares of common stock in acquiring the Bank of Stephenson. The shares were valued at $12.50 per share for purposes of that transaction. During the third and fourth quarters of 1994, the Registrant offered and sold 324,315 shares of common stock to the public at a per share price of $14.37. During the third and fourth quarters of 1996, the Registrant offered and sold 237,777 shares of common stock to the public at a per share price of $26.67.
There is no active market for the Registrant's common stock, and there is no published information with respect to it's market price. There are occasional direct sales by shareholders of which the Registrant's management is generally aware. It is the understanding of the management of the Registrant that over the last two years the Registrant's common stock has sold at a premium to book value. From January 1, 1995, through December 31, 1996, there were, so far as the Registrant's management knows, approximately 100 sales of shares of the Registrant's common stock, involving a total of approximately 67,500 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 $26.67 per share in the last quarter of 1996, and the lowest price was $14.37 in the first quarter of 1995. To the knowledge of management, the last sale of common stock occurred on March 17, 1997, at a price of $33.00 per share. As of March 1, 1997, there were 1,410 holders 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 1995 and 1996, 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.
Sales Price per share --------------------- 1995 High Low - --------------- ------ ------ First Quarter $17.67 $14.37 Second Quarter $19.33 $17.67 Third Quarter $19.33 $19.33 Fourth Quarter $20.67 $19.33
Sales Price per share --------------------- 1996 High Low - --------------- ------ ------ First Quarter $23.33 $20.67 Second Quarter $26.00 $23.33 Third Quarter $26.67 $26.00 Fourth Quarter $26.67 $26.67
The following table presents cash dividends paid by quarter for 1996 and 1995:
1996 1995 ---- ---- First Quarter Regular .087 .073 First Quarter Special .033 .093 Second Quarter .090 .077 Third Quarter .100 .080 Fourth Quarter .110 .083
Item 6.

Item 6. Selected Financial Data
For Year Ended December 31, (In thousands, except per share data)
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
HIGHLIGHTS
For First Manistique Corporation ("the Corporation"), 1996 was the third consecutive year of significant growth. During 1996, 1995 and 1994, the Corporation acquired the Bank of Stephenson ("Stephenson"), substantially all of the banking assets and liabilities of Newberry State Bank ("Newberry"), the Rudyard branch of First of America ("Rudyard"), and South Range State Bank ("South Range"). Further, in 1996, 1995 and 1994, the Corporation opened one, four, and one new branches, respectively. At December 31, 1993, the Corporation had total assets of $117.28 million. Total assets increased to $253.10 million during 1994, $282.79 million during 1995, and reached $367.16 million by the end of 1996, an increase of 213% in three years. While the largest portion of this growth, approximately $137 million, came through acquisitions, the remaining $113 million was internally generated. During the same three year time period, outstanding loan balances increased over 261%, to $314.89 million, an even greater rate of growth. Further, on a percentage basis, more loan growth than asset growth was internally generated. Of the total increase in loans of $227.75 million from the end of 1993 to the end of 1996, only $84.85 million, or 37.3% came from the acquisitions. The remaining $142.9 million, or 62.7%, was internally generated.
Earnings have also continued to increase from 1994 to 1996. Net income was $2.83 million, $2.67 million and $1.97 million for 1996, 1995 and 1994. Net income for 1996 was 44% greater than in 1994. Return on average shareholders' equity was 10.12%, 11.25%, and 11.92% for 1996, 1995 and 1994. Earnings per share have also increased during this three year period. Earnings per share were $1.14 in 1994, $1.27 in 1995, and $1.30 in 1996, an increase of 14% from 1994 to 1996. Earnings per share have not increased as quickly as net income because of the 527,337 shares issued in connection with the acquisition of the Bank of Stephenson , the 324,315 shares issued prior to the cash acquisition of the banking assets and liabilities of Newberry State Bank, and the 256,837 shares issued in 1996, the proceeds of which were used for the retirement of debt incurred in the purchase of South Range State Bank and in the purchase of U.P. Financial, Inc. (discussed below).
A resolution for a 3-for-1 stock split, for shareholders 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 report have been retroactively adjusted to reflect the 3-for-1 split.
During 1996, the Corporation's banking subsidiaries changed their names. On August 12, 1996, First Northern Bank and Trust became North Country Bank and Trust, and South Range State Bank became North Country Bank.The Corporation's most significant strength is 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 has continued into 1997, with the acquisition of U.P. Financial, Inc. ("U.P Financial") on February 4, 1997. U.P. Financial owns 100% of the outstanding stock of First National Bank in Ontonagon ("Ontonagon"), a Michigan banking institution. Upon acquisition, the assets of U.P. Financial 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 $20.25 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 85.8% of total assets at the end of 1996 compared to 78.3% of total assets at the end of 1995. The loan to deposit ratio also increased, rising from 90.6% at December 31, 1995 to 103.2% at December 31, 1996. 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, 1996 and 1995 (in thousands):
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 all categories in 1996 when compared to 1995.
Commercial real estate balances increased $13.91 million, or 27.0% during the year. At December 31, 1996, this category accounted for 20.8% of total outstanding loans. The most prominent types of properties financed include hotels, motels and similar properties, which accounted for $31.59 million of the outstanding balance at December 31, 1996. The significant growth in 1996 was a result of the purchase of South Range State Bank.
General commercial lending, consisting of loans to a wide variety of businesses, also increased significantly. Commercial loans outstanding increased $20.6 million. The rate of growth, 37.1%, was only slightly less than the overall growth rate of the lending portfolio. At the end of 1996 this category accounts for almost one-fourth of all outstanding loans. A significant portion of this growth was due to the purchase of South Range State Bank with the remainder a result of management's emphasis on this type of lending. Most of the Corporation's commercial lending customers are in Michigan's Upper Peninsula.
The Corporation finances commercial and governmental leases throughout the country. Over 70% of these leases were acquired from one originator. Management visits this originator twice a year to review their operations and credit controls. The Corporation acquires leases from 3 other originators, and 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 of 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 1996. Interest income from certain of the governmental leases is exempt from federal income taxes.
Real estate lending on 1-4 family residences consists of just over one-fourth of the Corporation's outstanding loan balances and is the single largest lending category. Most of these loans (68% at December 31, 1996 and 67% at December 31, 1995) are written at interest rates which adjust annually. Such adjustments are generally limited to two percentage points annually and five percentage points over the life of the loan. South Range's traditional residential mortgage loan products were three year balloons. As these loans mature, they are being rewritten as adjustable rate loans. Proportionally fewer of the properties in the Corporation's market area qualify as collateral for loans to be sold in the secondary market than in Michigan in general; accordingly relatively few loans are originated for resale. Loans originated for resale amounted to $6.08 million, $3.28 million and $2.74 million in 1996, 1995 and 1994 as management has looked to expand its activity in the sale of mortgage loans. Servicing on these loans is retained. The servicing portfolio has $11.77 million in loans at December 31, 1996.
The remaining significant loan category ($31.16 million outstanding at December 31, 1996) is consumer lending. This category consists of loans to individuals for a wide variety of purposes. Included are indirect auto loans of $7.2 million, which were acquired from six auto dealers in the Upper Peninsula. Management first began acquiring indirect paper midway through 1994, and less than one million dollars were on the books at the end of that year. In the middle of 1995, Management ceased writing such paper after concluding the yield was not commensurate with the cost and credit risk, particularly when compared to other alternatives. Management has no current plans to re-enter the indirect market.
CREDIT QUALITY
The higher yields on loans in comparison to investments are available because the risk that principal and interest will not be repaid is typically higher for loans than for investment securities permitted to be held by the Corporation under banking laws and regulations. The cornerstone of maintaining credit quality is effective underwriting. Lending arrangements are generally structured to provide more than one source of repayment. In commercial real estate loans the Corporation generally requires that cash flow from the collateral property be sufficient to service all related debt.
In spite of effective underwriting, some borrowers become unwilling or unable to make payments on a timely basis. Management aggressively monitors delinquencies. Commercial loan officers contact borrowers the day after a payment is missed. Mortgage and consumer loan customers are contacted 10 days after a payment is missed by the Corporation's collection staff. Management is aggressive in seizing collateral, or initiating foreclosure, in the event late payments are not quickly resolved.
The majority of the increase in net charge-offs shown below is a result of loan losses associated with Bennett Funding Group, Inc. The Corporation 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 Corporation held leases with BFG totaling $2,792,651 on December 31, 1995. The Corporation subsequently made an additional lease with ACC in the amount of $500,699 during January of 1996. The Corporation 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 Corporation was not listed. On October 10, 1996, the Bankruptcy Court approved an agreement which was reached between the Corporation and the trustee. According to the terms of this settlement, the trustee purchased the Corporation'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 Corporation 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 Corporation's existing loans including all amounts owing thereunder and rights of the Corporation related there to
(including all of the Corporation's rights to collateral for such loans), for the purchase price of $2,166,000. The Corporation 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 Corporation. 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 Corporation has recovered $147,651 through March 3, 1997. Management anticipates full recovery of it's settlement dollars in all settlements.
The Corporation's success in maintaining credit quality is demonstrated in the following table (dollars in thousands):
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.
The Corporation adopted new accounting guidance for impaired loans in 1995 as described in Notes 1 and 4 to the accompanying consolidated financial statements. The adoption of this change in accounting guidance did not have a material impact.
INVESTMENTS
During 1996, the Corporation's total investments, including interest-bearing deposits in banks, decreased $10.43 million, from $28.73 million to $18.30 million. This decrease was primarily the result of an increase in the Corporation's outstanding loans. Because of the additional 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 the Corporation to meet it's 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 took advantage of the one-time reclassification opportunity permitted by the Financial Accounting Standards Board and reclassified virtually all securities to the available for sale category at the end of 1995. 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 1996.
DEPOSITS
Deposit growth has been a key element of the Corporation's expansion strategy. Total deposits at December 31, 1996 were $305.24 million, compared to $244.41 million and $223.44 million at the end of 1995 and 1994. The acquisitions of Rudyard and South Range accounted for $41.80 million, or 51.1% of the total increase of $81.85 million from the end of 1994 to the end of 1996. Further, deposits of $26.20 million were held at December 31, 1996 at branches opened during 1994, 1995, and 1996. Deposits over $100,000 consist primarily of stable, governmental balances and balances from retail customers. There were no brokered deposits at December 31, 1996, 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 $2,162,000 and $986,000 at December 31, 1996 and 1995.
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 $4.11 US million at December 31, 1996. Such accounts are available only to Canadian citizens who are attracted to such accounts due to very low interest rates paid at 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 has begun to use alternative funding sources to provide funds for lending activities. Other borrowings increased to $20.44 million at the end of 1996 from $10.09 million in 1995. At December 31, 1996, $16.08 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 become a more permanent part of the overall funding makeup of the Corporation.
LIQUIDITY
The Corporation'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 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.
RESULTS OF OPERATIONS
SUMMARY
Earnings have continued to increase from 1994 to 1996 as a direct result of the Corporation's asset growth. Net income was $2.83 million, $2.67 million and $1.97 million for 1996, 1995 and 1994. Net income for 1996 was 44.0% greater than in 1994. Earnings per share was $1.30 in 1996, $1.27 in 1995, and $1.14 in 1994, an increase of 14.0% from 1994 to 1996. Earnings per share has not increased as quickly as net income because of the shares issued in connection with the acquisition of Stephenson, shares issued prior to the cash acquisition of the banking assets and liabilities of Newberry, and shares issued to both retire the debt associated with the purchase of South Range and in the purchase of U.P. Financial.
Net interest income is the primary source of earnings growth, increasing to $16.05 million in 1996 from $12.54 million and $7.75 million in 1995 and 1994, for a total two-year increase of 107.1%. Noninterest income did not keep pace with the asset growth. Noninterest income of $1.36 million in 1996 was only 22.5% higher than the 1994 amount of $1.11 million. The increase in noninterest expense to $11.61 million in 1996 from $9.37 million and $6.10 million in 1995 and 1994 exceeded total asset growth. The two-year increase in noninterest expense was 90.3%, compared to total asset growth of 45.1%.
NET INTEREST INCOME
The Corporation's strong lending function is evident in the net interest income measurement. Net interest income as a percentage of total interest income was 55.9%, 56.7% and 56.1% in 1996, 1995 and 1994, respectively. Net interest margin was 5.17%, 5.46% and 4.68% for the same periods.
Interest income from loans represented 93.2% of total interest income in 1996, compared to 90.3% in 1995 and 84.6% in 1994. In all cases, the total amount of interest income and the yield on total earning assets is heavily determined by the results from lending activities. The yield on earning assets was 9.27%, 9.45% and 8.07% in 1996, 1995 and 1994 respectively.
Total interest expense was $12.67 million in 1996, an increase from $9.56 million and $6.05 million in 1995 and 1994, for an increase of 109.4% from 1994 to 1996. While other sources of funding are beginning to become an important part of the Corporation's funding strategy, interest expense on deposits still represented 91.7% of total interest expense in 1996. The yield on interest-bearing liabilities was 4.10%, 4.44% and 3.80% in 1996, 1995 and 1994.
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 increase in the provision for loan losses, to $2,424,480 in 1996 from $771,000 in 1995 and $330,000 in 1994 is primarily a result of settlement and restructuring of loans with the Bennett Funding Group (discussed above) and loan growth.
NONINTEREST INCOME
Noninterest income was $1.36 million, $1.35 million and $1.11 million in 1996, 1995 and 1994. The principal source of noninterest income is service charges on deposit accounts. In 1996 such fees were $.76 million, an 86.6% increase over the amount recorded in 1994. Fees on deposit accounts have not kept pace with overall asset growth since the institutions acquired had lower fee structures than the Corporation. Management has generally maintained the former fee levels for competitive purposes.
NONINTEREST EXPENSE
Noninterest expense has steadily increased from 1994 through 1996. The two-year growth rate was 106.2% for salaries and benefits, and 89.7% for occupancy expense. As expected, these increases were all consistent with the Corporation's asset growth. While the growth was 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 can be obtained and is increasing the level of management emphasis in this area.
The application of purchase accounting to the acquisitions described above created two intangible assets, the core 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 $1.16 million in 1996, compared to $.57 million in 1995 and $.19 million in 1994.
Somewhat offsetting the intangible amortization is the decrease in deposit insurance costs. The Corporation qualifies for the lowest risk-based insurance premiums available from the Bank Insurance Fund (BIF) of the Federal Deposit Insurance Corporation (FDIC). Virtually all of the Corporation's deposits are insured by BIF. For 1994, deposit insurance costs were 23 basis points for the Corporation. Effective May 1, 1995, the FDIC reduced the Corporation's insurance rate to 4 basis points. That reduction is evident in the decrease in deposit insurance costs to $.004 million in 1996 compared to $.26 million in 1995, despite continuing increases in insured deposit balances. The rate has been further reduced to zero for the first half of 1997.
FEDERAL INCOME TAXES
The provision for income taxes was 16.1% of income before income tax in 1996, compared to 28.9% in 1995 and 18.9% in 1994. 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 decreased from 1995 to 1996 as tax-exempt income has become a larger portion of income before income tax.
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 61.5% of loans repricing within one year and 27.7% of certificates of deposit maturing over one year.
Beyond the general efforts to shorten loan pricing periods and extend deposit maturities, management can manage interest rate risk by the maturity periods of securities purchased, 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, 1996. Management considers the GAP acceptable.
The Corporation provides foreign exchange services, primarily in its banking offices in Sault Ste. Marie. Income from exchange activities during 1996 was approximately $112,000. The Corporation conducts other business in Canadian dollars, including the deposit program described above and lending activities. Further, the Corporation maintains currency balances and investments in Canadian dollars.
Maintaining assets and liabilities in Canadian dollars exposes the Corporation to foreign exchange risk. The Corporation has adopted detail policies regarding this exposure. The policy requires the purchase or sale of foreign exchange futures contracts to hedge the net mismatch in Canadian denominated assets and liabilities. The policy generally requires management to maintain the foreign exchange exposure to a $100,000 mismatch, including futures contracts (contracts are traded in $100,000 increments). Management uses an outside consultant to assist in managing the risk. At December 31, 1996 the Corporation held $5.26 million in Canadian assets and $5.63 million in Canadian liabilities. The net exposure was substantially hedged with futures contracts.
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 exceeded cash dividends by $1.92 million in 1996 and $1.82 million in 1995. In addition, in 1996 and 1995, $254,000 and $48,600 of the cash dividends were reinvested in the Corporation through the new dividend reinvestment program. The issuance of shares, retained income, and the dividend reinvestment program served to increase shareholder's equity, and regulatory capital, by $9.90 million between the end of 1994 and December 31, 1996. 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:
ISSUED BUT NOT YET ADOPTED ACCOUNTING POLICIES
See Note 19 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, 1996.
IMPACT OF INFLATION AND CHANGING PRICES
The accompanying consolidated 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.
Item 8.

Item 8. Financial Statements and Supplementary Data
FIRST MANISTIQUE CORPORATION Manistique, Michigan
CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996
CONTENTS
REPORT OF INDEPENDENT AUDITORS ................................... 11
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS .................................... 12
CONSOLIDATED STATEMENTS OF INCOME .............................. 13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ............... 14
CONSOLIDATED STATEMENTS OF CASH FLOWS .......................... 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..................... 17
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders First Manistique Corporation Manistique, Michigan
We have audited the accompanying consolidated balance sheets of First Manistique Corporation as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of First Manistique Corporation for the year ended December 31, 1994 were audited by other auditors whose report dated March 10, 1995, expressed an unqualified opinion on those statements and noted that the Corporation changed its method of accounting for securities in 1994.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Manistique Corporation as of December 31, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP Grand Rapids, Michigan February 14, 1997
FIRST MANISTIQUE CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
See accompanying notes to consolidated financial statements.
FIRST MANISTIQUE CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1996, 1995 and 1994
See accompanying notes to consolidated financial statements.
FIRST MANISTIQUE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 1996, 1995 and 1994
See accompanying notes to consolidated financial statements.
FIRST MANISTIQUE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995 and 1994
(Continued)
FIRST MANISTIQUE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1996, 1995 and 1994
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Operations: The consolidated financial statements include the accounts of First Manistique Corporation ("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. 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 revenues and expenses during the period. Actual results could differ from those estimates. The primary estimates incorporated into the Corporation's financial statements which are susceptible to change in the near term include the allowance for loan losses, fair values of certain financial instruments, the accrued liability associated with the deferred compensation plan, and the carrying value of impaired loans.
Cash Flow Reporting: Cash and cash equivalents are defined as cash and due from banks and federal funds sold. Net cash flows are reported for customer loan and deposit transactions and interest bearing deposits with other banks.
Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported separately in shareholders' equity, net of tax. Securities are written down to fair value with a charge to expense when a decline in fair value is deemed other than temporary.
Premiums and discounts on securities are recognized in interest income using the interest method over the estimated life of the security. Gains and losses on the sale of securities are determined using the specific identification method.
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans for which management has the intent and the Corporation has the ability to hold for the foreseeable future or until payoff are stated at unpaid principal balances, less the allowance for loan losses, and net of deferred loan origination fees, costs and discounts. Loans for which management does not have the intent to hold until payoff are stated at the lower of cost or fair value and recorded as loans held for sale.
Allowance for Loan Losses: Because some loans are not repaid in full, an allowance for loan losses is recorded. Increases to the allowance are recorded by a provision for loan losses charged to expense. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. The estimates may change depending on changes in economic conditions, the interest rate environment or specific situations of individual borrowers. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions and collateral values, and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem loan situations, the whole allowance is available for any loan charge-offs that may occur. A problem loan is charged-off by management as a loss when deemed uncollectible, although collection efforts may continue and future recoveries may occur.
In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan (SFAS No. 114), as later amended by SFAS No. 118. These Standards, adopted by the Corporation at January 1, 1995, require that impaired loans, as defined, be measured based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or at the fair value of collateral if the loan is collateral dependent. Under these standards, loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to increase, such increase is reported as additional provision for loan losses. The effect of adopting SFAS Nos. 114 and 118 did not have a significant impact on the consolidated financial position or results of operations of the Corporation in 1995.
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans are evaluated individually for impairment. Management uses the Corporation's normal credit analysis information, including delinquency reports, non-accrual listings and the watch list, to identify loans which should be evaluated for impairment. A loan is considered impaired when management concludes it is probable that the borrower will not remit payments in accordance with the terms of the agreement. Loans, or portions thereof, are charged off when deemed uncollectible. The nature of disclosures for impaired loans is considered generally comparable to prior nonaccrual, past due, trouble debt restructurings and nonperforming asset disclosures.
Interest Income: Interest on loans is accrued over the term of the loans based upon the principal outstanding. Management reviews loans delinquent 90 days or more to determine if interest accrual should be discontinued based on the estimated fair market value of the collateral on a present value basis, or the present value of estimated future cash flows. Under SFAS No. 114, as amended by SFAS No. 118, the carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as reductions or increases in the provision for loan losses.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of cost or fair value minus estimated costs to sell.
Premises and Equipment. Asset cost is reported net of accumulated depreciation. Depreciation expense is calculated on the straight-line method over asset useful lives.
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 ten-year period on an accelerated basis and goodwill is amortized on a straight-line basis over a fifteen-year period.
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Income Taxes: The Corporation records income tax expense based on the amount of taxes due on its income tax return plus the change in deferred taxes computed based on differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Earnings Per Share: Earnings per share is calculated on the weighted average number of common shares outstanding during the year, retroactively adjusted to give effect to all stock splits. A 3 for 1 stock split occurred on April 29, 1996.
Reclassifications: Certain prior year amounts have been reclassified to conform to the current year's presentation.
NOTE 2 - ACQUISITIONS AND SUBSEQUENT EVENT
Since early 1994, the Corporation has completed five acquisitions which have resulted in significant asset and earnings growth. The acquisitions have or will be accounted for under the purchase method of accounting. Accordingly, for those completed before December 31, 1996, the assets, liabilities, and results of operations are included in the Corporation's consolidated financial statements as of, and subsequent to, the acquisition date. The acquisition of South Range State Bank occurred on January 31, 1996 and is not reflected in the accompanying consolidated financial statements for the year ended December 31, 1995 or 1994, and the acquisition of U.P. Financial, Inc. occurred on February 4, 1997 and is not reflected in the accompanying consolidated financial statements. Following is a summary of the acquisitions. Note 6 provides information regarding acquisition intangibles and the amortization thereof. Additional information regarding assets acquired and liabilities assumed is presented supplementally on the accompanying consolidated statements of cash flows.
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 2 - ACQUISITIONS AND SUBSEQUENT EVENT (Continued)
Following is unaudited, proforma information regarding the acquisition of the Bank of Stephenson, assuming the Bank had been acquired January 1, 1994:
---- Total revenues $15,446,435 Net income 1,998,467 Net income per share 1.12
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 2 - ACQUISITIONS AND SUBSEQUENT (Continued)
Following is unaudited, proforma information regarding the acquisition of South Range State Bank, assuming the Bank had been acquired January 1, 1995:
1996 1995 ---------- ----------
Total revenues $30,357,729 $26,558,001 Net income 2,863,729 2,849,122 Net income per share 1.31 1.36
NOTE 3 - SECURITIES
Year-end securities were as follows:
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 3 - SECURITIES (Continued)
The amortized cost and estimated fair value of securities available for sale at December 31, 1996, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
The carrying value of securities pledged to secure public deposits, treasury deposits and repurchase agreements was $3,447,954 as of December 31, 1996 and $2,278,048 as of December 31, 1995.
During 1995, securities with an amortized cost of $11,944,338 and a fair value of $11,876,979 were reclassified from held to maturity to available for sale based on new interpretations issued for SFAS No. 115.
NOTE 4 - LOANS
Loans presented in the consolidated balance sheet are comprised of the following classifications:
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 4 - LOANS (Continued)
Activity in the allowance for loan losses for the years ending December 31 are summarized as follows:
Included in the loan portfolio are loans made to certain executive officers, directors, principal shareholders and companies in which they have an interest. The following is a summary of such loans:
Balance - January 1, 1996 $ 6,603,202 New loans 10,911,773 Repayments (2,569,984) Other changes 1,007,076 -------------
Balance - December 31, 1996 $ 15,952,067 =============
Other changes include adjustments for loans applicable to one reporting period that are excludable from the other reporting period.
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 5 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of December 31 consist of the following:
NOTE 6 - ACQUISITION INTANGIBLES
Intangible assets, which were principally acquired through the acquisitions described in Note 2, consist of the following as of December 31:
Amortization expense related to the acquisition intangibles was $593,220, $378,381, and $177,638 for December 31, 1996, 1995 and 1994.
NOTE 7 - INTEREST-BEARING DEPOSITS
The following is an analysis of interest-bearing deposits as of December 31:
1996 1995 -------------- ------------
Savings and interest-bearing checking $151,936,198 $118,956,109 Time: In denominations under $100,000 97,665,713 82,752,399 In denominations of $100,000 or more 21,850,180 15,023,773 -------------- ------------
$271,452,091 $216,732,281 ============== ============
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 7 - INTEREST-BEARING DEPOSITS (Continued)
At December 31, 1996, scheduled maturities of the Bank's time deposits are as follows:
1997 $ 87,864,892 1998 20,747,856 1999 7,341,020 2000 2,226,132 2001 682,138 Thereafter 653,855 ---------------
$ 119,515,893 ===============
NOTE 8 - OTHER BORROWINGS
Other borrowings consist of the following at December 31:
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 8 - OTHER BORROWINGS (Continued)
Maturities of other borrowings outstanding at December 31, 1996 are as follows:
1997 $ 8,655,178 1998 1,381,915 1999 1,413,254 2000 661,798 2001 703,037 Thereafter 7,625,597 -------------
$ 20,440,779 =============
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, 1996. The Farmers Home Administration borrowing is collateralized by loans totaling $1,874,000, originated and held by the Corporation's wholly-owned subsidiary, Rural Relending, and guaranteed by the Corporation.
NOTE 9 - INCOME TAXES
The components of federal income taxes attributable to continuing operations for 1996, 1995 and 1994 are as follows:
1996 1995 1994 --------- ---------- ---------
Current tax expense $947,500 $1,409,543 $627,300 Deferred tax benefit (404,200) (325,650) (169,300) --------- ---------- ---------
$543,300 $1,083,893 $458,000 ========= ========== =========
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 9 - INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, are as follows:
A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefits related to such assets will not be realized. Management has determined that no such allowance was required at December 31, 1996 or 1995.
The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate to income before tax are as follows:
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 10- 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 financing needs of its customers. These financial instruments include commitments to make loans, unused lines of credit, and standby letters of credit. The Corporation'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 Corporation follows the same credit policy to make such commitments as it uses for on-balance-sheet items.
The Corporation has the following fixed and variable rate commitments outstanding at December 31 (in thousands):
1996 1995 ---------------- ---------------- Fixed Variable Fixed Variable ------ -------- ------ --------
Outstanding letters of credit $ - $ 2,377 $ - $ 1,288 Unused lines of credit 4,192 20,029 3,474 8,556 Loan commitments outstanding - 7,185 - 6,882 ------ -------- ------ -------- $4,192 $ 29,591 $3,474 $ 16,726 ====== ======== ====== ========
Fixed rates on unused lines of credit range from 9.00% to 18.00% at December 31, 1996.
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.
NOTE 11 - DEFERRED COMPENSATION PLAN
As an incentive to retain key members of management and directors, the Corporation has a deferred compensation plan. Benefits are based on the number of years the key members have served in the Corporation. A liability is recorded on a present value basis and discounted using current market rates. This liability may change depending upon changes in long-term interest rates. Deferred compensation expense included in salaries and wages was approximately $56,450, $89,955 and $82,284 for 1996, 1995 and 1994. The liability at December 31, 1996 and 1995, for vested benefits was $726,528 and $471,075. It is anticipated that the death benefits received from the life insurance policies on the plan's participants will reimburse the Corporation for the obligations under the plan. The cash surrender value of these policies was $1,105,633 and $689,918 at December 31, 1996 and 1995, and is included in other assets in the accompanying financial statements.
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 12 - PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation has established a 401(k) profit sharing and deferred compensation 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. The total discretionary contributions to the plan for the years ended December 31, 1996, 1995 and 1994 were $96,218, $120,722 and $68,453, respectively.
NOTE 13 - STOCK OPTION PLAN
The Corporation adopted a stock option plan during 1992. Participants of the plan generally include senior officers and directors who do not participate in the subsidiary banks' deferred compensation plan discussed in Note 11.
Under the terms of the plan, 49,500 shares of the Corporation's common stock were reserved for awards. The options issued have a ten year life but cannot be exercised until a minimum of two years after their issue date.
The following is a summary of stock options, granted and exercised, for the years presented, restated for any stock splits or stock dividends.
Exercise Number Price Range -------- -----------
Outstanding - December 31, 1993 27,000 $ 11-12.33 Granted 21,150 12.67 Exercised (6,300) 11 --------
Outstanding December 31, 1994 41,850 11-12.67 Exercised (5,850) 11-12.33 --------
Outstanding - December 31, 1995 36,000 11-12.67 Granted - - Exercised (10,800) 12.67 --------
Outstanding December 31, 1996 25,200 $ 11-12.67 ========
At December 31, 1996, 25,200 of the above options were exercisable. No additional shares are available to be granted under the plan. At December 31, 1996, 25,200 shares of common stock were reserved for outstanding options.
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 14 - CONTINGENCIES
From time to time certain claims are made against the Corporation in the normal course of business. At December 31, 1996, there were no outstanding matters which in management's opinion would be likely to have a material impact on the Corporation's consolidated financial condition or results of operations.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, Disclosure About Fair Value of Financial Instruments (SFAS No. 107). Where quoted market prices are not available, as is the case for a significant portion of the Corporation's financial instruments, the fair values are based on estimates using present value of expected cash flows or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and the timing of estimated cash payments and receipts. Accordingly, certain of the fair value estimates presented herein cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts the Corporation could realize in a current market exchange.
In addition, the fair value estimates are limited to 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. Other significant assets and liabilities that are not considered financial assets or liabilities include the Corporation's premises and equipment, goodwill and deposit-based intangible assets. Accordingly, the aggregate fair value amounts may not represent the underlying value of the Corporation.
The carrying amounts and estimated fair values of the Corporation's financial instruments were as follows:
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The Banks' loan commitments, standby letters of credit and undisbursed loans have been estimated to have no material fair value, as such commitments are generally fulfilled at current market rates.
The carrying amounts of the following financial instruments are a reasonable approximation of their fair values:
- Cash and cash equivalents - Accrued interest receivable - Demand, savings, NOW and money market deposit accounts - Securities sold under agreement to repurchase
NOTE 16 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Details of other expense in the consolidated statements of income are as follows for the years ended December 31:
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 17 - FIRST MANISTIQUE CORPORATION (PARENT CORPORATION ONLY) FINANCIAL INFORMATION
The Corporation's primary source of funds to pay dividends to shareholders is the dividends it receives from the Banks. The Banks are subject to certain restrictions on the amount of dividends that they may declare without prior regulatory approval. At December 31, 1996, $7,629,000 of retained earnings plus current year earnings were available for dividend declaration without prior regulatory approval.
The following summarizes parent corporation financial information as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994:
CONDENSED BALANCE SHEETS
CONDENSED STATEMENTS OF INCOME
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 17 - FIRST MANISTIQUE CORPORATION (PARENT CORPORATION ONLY) FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 18 - REGULATORY MATTERS
The Corporation and Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.
At year end, consolidated actual capital levels (in millions) and minimum required levels were:
The Company and Banks at year-end 1996 were categorized as well capitalized.
FIRST MANISTIQUE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995, and 1994
NOTE 19 - PENDING ACCOUNTING CHANGES
Financial Accounting Standard No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, was issued by the Financial Accounting Standards Board in 1996. It revises the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It is effective for some transactions in 1997 and others in 1998. The effect on the financial statements has not yet been determined.
Item 9.

Item 9. Changes in and Disagreements with Accountants and Financial Disclosure There have been no disagreements with accountants. Crowe, Chizek and Company LLP was appointed as the Registrant's independent accountants for the year ended December 31, 1996, effective January 2, 1995, as disclosed on the Registrant's Current Report on Form 8-K filed January 17, 1995.
PART III
Item 10.

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, 1997, is hereby incorporated by reference.
Item 11.

Item 11. Executive Compensation
Information relating to compensation of the Registrant's executive officers is contained on pages 8 to 10, under the caption "Compensation of Executive Officers", in the Registrant's definitive Proxy Statement dated March 14, 1997, and is incorporated herein by reference.
Item 12.

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 11, under the caption "Ownership of Common Stock" in the Registrant's definitive Proxy Statement dated March 14, 1997, and is incorporated herein by reference.
Item 13.

Item 13. Certain Relationships and Related Transactions
Information relating to certain relationships and related transactions is contained on page 10, under the caption "Indebtedness of and Transactions with Management" in the Registrant's definitive Proxy Statement dated March 14, 1997, and is incorporated herein by reference.
PART IV
Item 14.

Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a)(1) Financial Statements. The following documents are filed as part of Item 8 of this report:
Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1996, and 1995 Consolidated Statements of Income for the years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, 1995, and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994 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 exhibit listed above to any shareholder of the Registrant without charge upon written request to Richard B. Demers, First Manistique Corporation, 130 South Cedar Street, P.O. Box 369, Manistique, MI 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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)
Ronald G. Ford President
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below as of March 24, 1997, by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ John P. Miller /s/ Thomas G. King - ----------------------------- ------------------------------------------- JOHN P. MILLER, Director THOMAS G. KING, Director
/s/ Stanley J. Gerou II /s/ C. Ronald Dufina - ----------------------------- ------------------------------------------- STANLEY J. GEROU II, Director C. RONALD DUFINA, Director
/s/ John B. Clark /s/ John D. Lindroth - ----------------------------- ------------------------------------------- JOHN B. CLARK, Director JOHN D. LINDROTH, Director
/s/ Ronald G. Ford /s/ Richard B. Demers - ----------------------------- ------------------------------------------- RONALD G. FORD, Director, RICHARD B. DEMERS, Chief Operating CEO, and President Officer, Principal Financial Officer, and Principal Accounting Officer
/s/ Michael C. Henricksen - ----------------------------- MICHAEL C. HENRICKSEN, Director and Vice Chairman
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 S-3 (Registration No. 033-61533). Here incorporated by reference.
4(b) A specimen stock certificate of the Registrant's Common Stock filed as an 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 it's 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 it's 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. Filed herewith.
10(e) Deferred Compensation, Deferred Stock and Current Stock Purchase Plan for Non-Employee Directors. Previously filed in the Registrant's definitive proxy
statement for it's 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 it's 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 the Registrant's definitive proxy statement for it's annual meeting of shareholders to be held April 15, 1997. Here incorporated by reference.
21 Subsidiaries of the Registrant. Filed herewith.
27 Financial Data Schedule - year ended December 31, 1996. Filed herewith.