UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________ to__________________
Commission file number 0-7515
MICHIGAN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2011532
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
101 West Washington Street, Marquette, Michigan 49855
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (906) 228-6940
Not applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days YES _x_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding as of July 27, 1995
Common Stock, no par value 5,598,267
PART I. FINANCIAL INFORMATION
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
(dollars in thousands)
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 33,713 $ 32,378 $ 29,607
Short-term investments:
Federal funds sold 23,350 4,450 12,450
Money market investments 267 109 184
23,617 4,559 12,634
Investment securities:
Available for sale 78,467 84,773 88,553
Held to maturity 64,880 75,921 82,413
Loans 548,714 540,841 518,505
Allowance for loan losses (6,844) (6,701) (6,481)
NET LOANS 541,870 534,140 512,024
Premises and equipment 22,868 22,695 20,865
Accrued interest receivable 5,337 5,164 4,878
Other assets 6,962 7,943 7,729
$777,714 $767,573 $758,703
LIABILITIES
Domestic deposits:
Noninterest bearing $ 68,521 $ 96,772 $ 84,469
Interest bearing 619,959 588,430 586,874
TOTAL DEPOSITS 688,480 685,202 671,343
Short-term borrowings 667 6,610
Accrued interest payable 2,726 2,226 2,004
Other liabilities 8,360 6,950 6,897
TOTAL LIABILITIES 700,233 694,378 686,854
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized shares - 10,000,000
Shares issued and outstanding - 5,598,267 18,555 18,555 18,555
Retained earnings 59,479 57,113 54,123
Securities valuation (553) (2,473) (829)
TOTAL STOCKHOLDERS' EQUITY 77,481 73,195 71,849
$777,714 $767,573 $758,703
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1995 1994 1995 1994
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $13,182 $11,539 $25,886 $22,626
Short-term investments 295 239 416 577
Investment securities:
Taxable 1,665 1,686 3,429 3,307
Tax-exempt 326 393 709 784
TOTAL INTEREST INCOME 15,468 13,857 30,440 27,294
Interest expense:
Deposits 6,020 4,627 11,442 9,378
Borrowings 19 11 79 11
TOTAL INTEREST EXPENSE 6,039 4,638 11,521 9,389
NET INTEREST INCOME 9,429 9,219 18,919 17,905
Provision for loan losses 307 170 527 299
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,122 9,049 18,392 17,606
Other income:
Trust department income 893 873 1,772 1,753
Fees for other customer services 720 666 1,360 1,266
Net gains on sale of loans 36 55 64 136
Other 405 371 729 766
Investment securities losses (6) (40) (6)
2,054 1,959 3,885 3,915
11,176 11,008 22,277 21,521
Other expenses:
Salaries and employee benefits 4,531 4,317 8,915 8,483
Net occupancy 601 580 1,217 1,183
Furniture and equipment 398 404 838 802
FDIC premiums 383 397 766 794
Data processing 347 402 709 818
Advertising 265 225 510 452
Other 1,826 1,888 3,769 3,729
8,351 8,213 16,724 16,261
Income before income tax 2,825 2,795 5,553 5,260
Income tax expense 818 823 1,564 1,498
NET INCOME $ 2,007 $ 1,972 $ 3,989 $ 3,762
WEIGHTED AVERAGE SHARES OUTSTANDING 5,598 5,598 5,598 5,598
Per share data:
Net income $.36 $.35 $.71 $.67
Dividends paid $.145 $.125 $.29 $.25
</TABLE>
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
June 30
1995 1994
(in thousands)
OPERATING ACTIVITIES
Net income $ 3,989 $ 3,762
Adjustments to reconcile net income to net
cash provided by operating activities:
Origination of mortgage loans held for sale (12,877) (28,757)
Proceeds from sale of mortgage loans held
for sale 11,636 30,777
Depreciation and amortization 875 816
Provision for loan losses 527 299
Increase (decrease) in interest payable 500 (156)
Increase in interest receivable (173) (153)
Amortization of investment securities premium 156 183
Realized gain on sale of loans (64) (136)
Realized investment securities losses 40 6
Other 1,375 107
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,984 6,748
INVESTING ACTIVITIES
Net (increase) decrease in short-term investments (19,058) 43,329
Proceeds from maturities of held to maturity
securities 11,532 12,776
Net increase in loans (6,952) (17,796)
Proceeds from sale of available for sale
securities 6,459 1,004
Proceeds from maturities of available for sale
securities 3,570 13,164
Purchases of available for sale securities (1,501) (20,455)
Purchases of premises and equipment (1,039) (716)
Proceeds from sale of premises and equipment 18
Purchases of held to maturity securities (12,702)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (6,971) 18,604
FINANCING ACTIVITIES
Net increase (decrease) in deposits 3,278 (31,024)
Increase in short-term borrowing 667 6,610
Cash dividends (1,623) (1,392)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,322 (25,806)
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 1,355 (454)
Cash and due from banks at beginning of year 32,378 30,061
CASH AND DUE FROM BANKS AT END OF PERIOD $33,713 $29,607
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q, and therefore do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been reflected in the financial statements.
However, the results of operations for the three and six month periods ended
June 30, 1995 and 1994 are not necessarily indicative of the results to be
expected for the full year.
For further information, refer to the consolidated financial statements and
foot-notes included in the Company's annual report on Form 10-K for the year
ended December 31, 1994.
NOTE B - ACCOUNTING CHANGES
Effective January 1, 1995, the Company adopted Financial Accounting Standards
Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan." As
a result of applying the new rules, certain impaired loans are reported at the
present value of expected future cash flows using the loan's effective interest
rate, or as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. The adoption
of Statement 114 has not had, and is not expected to have, a material impact on
the Company's financial position or results of operations.
NOTE C - INVESTMENT SECURITIES
A comparison of the carrying amount and approximate market value follows:
June 30, 1995 December 31, 1994
Amortized Approximate Amortized Approximate
Cost Market Value Cost Market Value
(in thousands)
Available for Sale
U.S. Treasury and
government agencies $71,455 $70,645 $80,505 $77,034
State and political
subdivisions 408 409 408 385
Mortgage-backed securities 3,552 3,500 3,704 3,456
Other securities 3,890 3,913 3,903 3,898
TOTAL $79,305 $78,467 $88,520 $84,773
Held to Maturity
U.S. Treasury and
government agencies $ 4,720 $ 4,739 $ 4,218 $ 4,154
State and political
subdivisions 26,886 32,977 35,565 34,477
Mortgage-backed securities 33,274 26,579 36,138 34,015
TOTAL $64,880 $64,295 $75,921 $72,646
NOTE D - RECLASSIFICATIONS
Certain amounts in 1994 have been reclassified to conform with the
classifications in 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and earnings
during the periods included in the accompanying consolidated financial
statements.
FINANCIAL CONDITION
A summary of the period changes in principal sources and uses of funds is shown
below in thousands of dollars, and as a percent.
Change from December 31, 1994
to June 30, 1995
Amount of Percent
Increase Increase
(Decrease) (Decrease)
Funding sources:
Deposits $ 3,278 .5%
Short-term borrowing 667 NMF
Other sources, net 6,023 42.4
$ 9,968 1.4%
Funding uses:
Loans $ 8,257 1.5%
Investment securities (17,347) (10.8)
Short-term investments 19,058 NMF
Total uses $ 9,968 1.4%
Aggregate deposits, the primary source of funds, increased by $3,278 or .5%
during the first six months of 1995. Experience was mixed within the deposit
category, as shown below:
Increase
(Decrease) Percent
Demand $(28,251) (29.2)%
Savings 23,004 8.0
Time-retail (3,207) (1.2)
Time-jumbo 11,732 43.3
$ 3,278 .5%
As a result, total deposit levels at June 30, 1995 showed a slight increase from
the end of 1994.
The loan portfolio increased slightly by 1.5% during the first half of 1995. All
of the major loan areas showed increases during the period. Five of the
Company's seven member banks had an increase in real estate mortgages due to
strong demand. Installment loans increased at six of the Company's member banks
due to stable demand for these types of loans. There was only a slight increase
in the commercial loan area.
For liquidity purposes the excess funds generated during the period were mainly
placed in short-term investments.
Late in the first quarter of 1995, the Company entered into a short-term
borrowing arrangement. It is expected that this borrowing will be repaid before
year end.
In addition to the above trends in the sources and uses of funds, the Company
services loans for outside agencies, primarily Freddie Mac. At June 30, 1995 the
volume of Freddie Mac loans sold with servicing being retained was $192.5
million. The comparable figure for 1994 was $185.7 million. The ability of the
Company to sell these loans enables it to more effectively manage its funding
operations.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1995 there were no significant changes with respect to
the capital resources of the Company. Management feels that the liquidity
position of the Company as of June 30, 1995 is much more than adequate to meet
its future cash flow needs. Management also closely monitors capital levels to
provide for normal business needs and to comply with regulatory requirements. As
summarized below, the Company's capital ratios were well in excess of the
regulatory requirements for classification as "Well Capitalized":
Regulatory
Minimum for June 30,
"Well Capitalized" 1995 1994
Total capital 10.0% 15.23% 14.88%
Tier I capital 6.0 14.00 13.66
Tier I leverage ratio 5.0 10.15 9.59
RESULTS OF OPERATIONS
A summary of the period to period changes in the principal items included in the
consolidated statements of income is shown below in thousands of dollars, and as
a percent.
Comparison of
Three months Six months
ended June 30, ended June 30,
1995 and 1994 1995 and 1994
Increase(Decrease)
Interest income $1,611 11.6% $3,146 11.5%
Interest expense 1,401 30.2 2,132 22.7
Net interest income 210 2.3 1,014 5.7
Provision for loan losses 137 80.6 228 76.3
Net interest income after provision
for loan losses 73 .8 786 4.5
Other income 95 4.8 (30) (.8)
Other expenses 138 1.7 463 2.8
Income before income tax 30 1.1 293 5.6
Income tax expense (5) (.6) 66 4.4
Net income $ 35 1.8% $ 227 6.0%
Net Interest Income
The increase in net interest income during the second quarter and the first six
months of 1995 was due to the fact that while both the interest income and the
interest expense increased from the comparable periods in 1994 the interest
income increased more. The increase in the loan to deposit ratio to 79.7% at
June 30, 1995 from 77.2% at June 30, 1994 also contributed to the increase in
net interest income. Net interest income performance in future periods will be
primarily dependent upon general interest rate developments.
Provision for Loan Losses
The increase in the loan loss provision during both the second quarter and the
first six months of 1995 was largely due to the larger loan portfolio. This
increased loan loss provision resulted in an increase to the allowance for loan
losses of $143,000 or 2.1% during the first half of 1995. Net loan charge-offs
for the first six months amounted to $384,000, up slightly from the amount of
$371,000 for the comparable period in 1994. Based on average loans, these
charge-offs on an annualized basis amounted to .14% of average loans
outstanding, down from the .15% for the comparable period in 1994. These are
relatively low levels on an internal historical basis as well as in comparison
to peer groups.
Expressed as a percent of outstanding loans the allowance increased from 1.24%
at year end 1994 to 1.25% at June 30, 1995. The allowance level will not
necessarily be maintained at this level during future periods as the amounts
provided during any given period are dependent upon management's ongoing review
process and assessment of the perceived loss exposure in the then outstanding
loan portfolio.
Nonperforming loans continue at low levels, decreasing in the first half of 1995
by $75,000 or 2.0%. Total nonperforming assets, which include other real estate,
also continue at low levels decreasing by $572,000 or 11.3% from December 31,
1994.
The table below presents a comparison of nonperformings.
June 30, December 31,
1995 1994
(in thousands)
Nonaccrual loans $2,316 $2,374
Loans past due
90 days or more 837 830
Restructured loans 568 592
Total nonperforming loans 3,721 3,796
Other real estate 770 1,267
Total nonperforming assets $4,491 $5,063
Nonperforming loans
as a % of total loans .68% .70%
Nonperforming assets
as a % of total assets .58% .66%
On a percentage basis, the allowance for loan losses increased from 177% of
nonperforming loans at the end of 1994 to 184% at June 30, 1995. Management
intends to continue in its efforts toward maintaining the high quality of the
loan portfolio.
Other Expenses
The increase in other expenses resulted from increases (decreases) in the major
categories of other expenses, indicative of the normal effects of inflation as
well as the growth of the organization. The major components of other expenses
increased (decreased) as follows:
Three months Six months
ended ended
June 30, 1995 June 30, 1995
Salaries and employee benefits 5.0% 5.1%
Occupancy, furniture and equipment 1.5 3.5
Data processing (13.7) (13.3)
FDIC premiums (3.5) (3.5)
Advertising 17.8 12.8
Other (3.3) 1.1
Applicable Income Tax
Applicable income tax expense is based on income, less that portion which is
exempt from federal taxation, taxed at the statutory federal income tax rate of
34%. The provision is further reduced by other smaller items. The decrease in
the 1995 income tax provision for the second quarter is due to $127,000 of
merger expenses incurred during the second quarter of 1994 that were not
deductible for federal income tax purposes. The increase in the 1995 income tax
provision for the first six months was lower than it would have been without the
merger expense, but was higher than the 1994 expense mostly due to the increase
in pre-tax income of the Company for the first half of 1995.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for the three
months ended June 30, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Michigan Financial Corporation
(Registrant)
Dated: July 27, 1995 /s/ HOWARD L. COHODAS
Howard L. Cohodas, Chairman
& President
(Chief Executive Officer)
Dated: July 27, 1995 /s/ KENNETH F. BECK
Kenneth F. Beck,
Senior Vice President,
Treasurer & Secretary
(Chief Financial Officer and
Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 33,713
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,467
<INVESTMENTS-CARRYING> 64,880
<INVESTMENTS-MARKET> 64,295
<LOANS> 548,714
<ALLOWANCE> 6,844
<TOTAL-ASSETS> 777,714
<DEPOSITS> 688,480
<SHORT-TERM> 667
<LIABILITIES-OTHER> 11,086
<LONG-TERM> 0
<COMMON> 18,555
0
0
<OTHER-SE> 58,926
<TOTAL-LIABILITIES-AND-EQUITY> 777,714
<INTEREST-LOAN> 25,886
<INTEREST-INVEST> 4,554
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 30,440
<INTEREST-DEPOSIT> 11,442
<INTEREST-EXPENSE> 11,521
<INTEREST-INCOME-NET> 18,919
<LOAN-LOSSES> 527
<SECURITIES-GAINS> (40)
<EXPENSE-OTHER> 16,724
<INCOME-PRETAX> 5,553
<INCOME-PRE-EXTRAORDINARY> 3,989
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,989
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
<YIELD-ACTUAL> 5.49
<LOANS-NON> 2,316
<LOANS-PAST> 837
<LOANS-TROUBLED> 568
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,701
<CHARGE-OFFS> 523
<RECOVERIES> 139
<ALLOWANCE-CLOSE> 6,844
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
