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 September 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 October 31, 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>
September 30, December 31, September 30,
1995 1994 1994
(dollars in thousands)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 29,725 $ 32,378 $ 35,660
Short-term investments 26,685 4,559 4,509
Federal funds sold 26,450 4,450 4,150
Money market investments 235 109 359
26,685 4,559 4,509
Investment securities:
Available for sale 74,790 84,773 89,669
Held to maturity 63,480 75,921 78,983
Loans 552,419 540,841 528,613
Allowance for loan losses (6,864) (6,701) (6,550)
NET LOANS 545,555 534,140 522,063
Premises and equipment 22,813 22,695 21,576
Accrued interest receivable 5,673 5,164 5,124
Other assets 6,599 7,943 8,071
$775,320 $767,573 $765,655
LIABILITIES
Domestic deposits:
Noninterest bearing $ 69,578 $ 96,772 $ 94,581
Interest bearing 615,100 588,430 586,720
TOTAL DEPOSITS 684,678 685,202 681,301
Short-term borrowings 333 1,845
Accrued interest payable 3,240 2,226 2,414
Other liabilities 7,953 6,950 7,062
TOTAL LIABILITIES 696,204 694,378 692,622
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 61,047 57,113 55,753
Securities valuation (486) (2,473) (1,275)
TOTAL STOCKHOLDERS' EQUITY 79,116 73,195 73,033
$775,320 $767,573 $765,655
</TABLE>
See notes to consolidated financial statements.
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1995 1994 1995 1994
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $13,597 $12,275 $39,483 $34,901
Short-term investments 428 165 844 742
Investment securities:
Taxable 1,629 1,700 5,058 5,007
Tax-exempt 301 427 1,010 1,211
TOTAL INTEREST INCOME 15,955 14,567 46,395 41,861
Interest expense:
Deposits 6,232 4,801 17,674 14,179
Borrowings 12 12 91 23
TOTAL INTEREST EXPENSE 6,244 4,813 17,765 14,202
NET INTEREST INCOME 9,711 9,754 28,630 27,659
Provision for loan losses 144 168 671 467
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,567 9,586 27,959 27,192
Other income:
Trust department income 900 864 2,672 2,617
Fees for other customer services 686 637 2,046 1,903
Other 426 408 1,219 1,310
Investment securities losses (87) (5) (127) (11)
1,925 1,904 5,810 5,819
11,492 11,490 33,769 33,011
Other expenses:
Salaries and employee benefits 4,352 4,364 13,267 12,847
Net occupancy 593 581 1,810 1,764
Furniture and equipment 426 407 1,264 1,209
FDIC premiums (37) 378 729 1,172
Data processing 330 396 1,039 1,214
Advertising 280 228 790 680
Other 2,134 1,880 5,903 5,609
8,078 8,234 24,802 24,495
Income before income tax 3,414 3,256 8,967 8,516
Income tax expense 1,033 926 2,597 2,424
NET INCOME $ 2,381 $ 2,330 $ 6,370 $6,092
WEIGHTED AVERAGE SHARES OUTSTANDING 5,598 5,598 5,598 5,598
Per share data:
Net income $ .43 .42 $ 1.14 $ 1.09
Dividends paid $ .145 $ .125 $ .435 $ .375
</TABLE>
See notes to consolidated financial statements.
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30
1995 1994
(in thousands)
OPERATING ACTIVITIES
Net income $ 6,370 $ 6,092
Adjustments to reconcile net income to net
cash provided by operating activities:
Origination of mortgage loans held for sale (24,924) (37,790)
Proceeds from sale of mortgage loans held
for sale 22,302 40,637
Depreciation and amortization 1,327 1,229
Increase in interest payable 1,014 254
Provision for loan losses 671 467
Increase in interest receivable (509) (399)
Amortization of investment securities premium 211 296
Realized gain on sale of loans (138) (217)
Realized investment securities losses 127 11
Other 1,284 (522)
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,735 10,058
INVESTING ACTIVITIES
Net (increase) decrease in short-term investments (22,126) 51,454
Proceeds from maturities of held to maturity
securities 12,932 18,198
Proceeds from sale of available for sale
securities 14,874 1,234
Purchases of available for sale securities (9,961) (22,451)
Net increase in loans (9,326) (28,749)
Proceeds from maturities of available for sale
securities 7,251 13,364
Purchases of premises and equipment (1,428) (1,836)
Proceeds from sale of premises and equipment 23 2
Purchases of held to maturity securities (14,362)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (7,761) 16,854
FINANCING ACTIVITIES
Net decrease in deposits (524) (21,066)
Increase in short-term borrowing 333 1,845
Cash dividends (2,436) (2,092)
NET CASH USED BY FINANCING ACTIVITIES (2,627) (21,313)
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (2,653) 5,599
Cash and due from banks at beginning of year 32,378 30,061
CASH AND DUE FROM BANKS AT END OF PERIOD $29,725 $35,660
See notes to consolidated financial statements.
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
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 nine month periods ended
September 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.
A comparison of the carrying amount and approximate market value follows:
September 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 $67,783 $67,036 $80,505 $77,034
State and political
subdivisions 408 418 408 385
Mortgage-backed securities 3,446 3,424 3,704 3,456
Other securities 3,890 3,912 3,903 3,898
TOTAL $75,527 $74,790 $88,520 $84,773
Held to Maturity
U.S. Treasury and
government agencies $ 4,225 $ 4,240 $ 4,218 $ 4,154
State and political
subdivisions 26,311 26,185 35,565 34,477
Mortgage-backed securities 32,944 32,645 36,138 34,015
TOTAL $63,480 $63,070 $75,921 $72,646
NOTE D - RECLASSIFICATIONS
Certain amounts in 1994 have been reclassified to conform with the
classifications in 1995.
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
MANAGEMENT'SDISCUSSION 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 September 30, 1995
Amount of Percent
Increase Increase
(Decrease) (Decrease)
Funding sources:
Deposits $ (524) (.1)%
Short-term borrowing 333 NMF
Other sources, net 11,979 84.4
$ 11,788 1.7%
Funding uses:
Loans $ 12,086 2.2%
Investment securities (22,424) (14.0)
Short-term investments 22,126 NMF
Total uses $ 11,788 1.7%
Aggregate deposits, the primary source of funds, decreased by $524 or .1% during
the first nine months of 1995. Experience was mixed within the deposit category,
as shown below:
Increase
(Decrease) Percent
Demand $(27,194) (28.1)%
Savings 15,174 5.3
Time-retail 823 .3
Time-jumbo 10,673 39.3
$ (524) (.1)%
As a result, total deposit levels at September 30, 1995 showed a slight decrease
from the end of 1994.
The loan portfolio increased slightly by 2.2% during the first nine months 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 also increased at five 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 September 30,
1995 the volume of Freddie Mac loans sold with servicing being retained was
$196.6 million. The comparable figure for 1994 was $190.2 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 nine months 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 September 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 September 30,
"Well Capitalized" 1995 1994
Total capital 10.0% 15.38% 14.84%
Tier I capital 6.0 14.16 13.64
Tier I leverage ratio 5.0 10.23 9.71
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 Nine months
ended September 30, ended September 30,
1995 and 1994 1995 and 1994
Increase(Decrease)
Interest income $1,388 9.5% $4,534 10.8%
Interest expense 1,431 29.7 3,563 25.1
Net interest income (43) (.4) 971 3.5
Provision for loan losses (24) (14.3) 204 43.7
Net interest income after provision
for loan losses (19) (.2) 767 2.8
Other income 21 1.1 (9) (.2)
Other expenses (156) (1.9) 307 1.3
Income before income tax 158 4.9 451 5.3
Income tax expense 107 11.6 173 7.1
Net income $ 51 2.2% $ 278 4.6%
Net Interest Income
The increase in net interest income during the first nine months of 1995 was due
to the fact that while both the interest income and the interest expense
increased from the comparable period in 1994 the interest income increased more.
The increase in the loan to deposit ratio to 80.7% at September 30, 1995 from
77.6% at September 30, 1994 also contributed to the increase in net interest
income for the year. A lowering in the net interest margin for the third quarter
of 1995 from the comparable period in 1994 caused the net interest income
decrease for the quarter. 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 the first nine months of 1995 was
largely due to the larger loan portfolio. The provision for the third quarter
decreased by 14.3%. The increased loan loss provision for 1995 resulted in an
increase to the allowance for loan losses of $163,000 or 2.4% during the first
nine months of 1995. Net loan charge-offs for the first nine months of 1995
amounted to $508,000, an increase of 8.1% from the amount of $470,000 for the
comparable period in 1994. Based on average loans, these charge-offs on an
annualized basis amounted to .12% of average loans outstanding, for the first
nine months of both 1995 and 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 remained at a level
1.24% for both year end 1994 and September 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, although they did increase in the
first nine months of 1995 by $535,000 or 14.1%. Total nonperforming assets,
which include other real estate, also continue at low levels despite an increase
of $104,000 or 2.1% from December 31, 1994.
The table below presents a comparison of nonperformings.
September 30, December 31,
1995 1994
(in thousands)
Nonaccrual loans $2,221 $2,374
Loans past due
90 days or more 1,482 830
Restructured loans 628 592
Total nonperforming loans 4,331 3,796
Other real estate 836 1,267
Total nonperforming assets $5,167 $5,063
Nonperforming loans
as a % of total loans .78% .70%
Nonperforming assets
as a % of total assets .67% .66%
On a percentage basis, the allowance for loan losses decreased from 177% of
nonperforming loans at the end of 1994 to 158% at September 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 Nine months
ended ended
September 30, 1995 September 30, 1995
Salaries and employee benefits (.3)% 3.3%
Occupancy, furniture and equipment 3.1 3.4
Data processing (16.7) (14.4)
FDIC premiums NMF (37.8)
Advertising 22.8 16.2
Other 13.5 5.2
The increase in advertising is due to a continuation in the expanded marketing
program begun in 1993 and can be expected to continue throughout 1995. Included
in the other expense category is a $179,000 charge recognized during the third
quarter of 1995 in connection with the planned relocation of one of our banking
offices and the declining utilization of a second office.
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 increase in
the 1995 income tax provision reported herein for the third quarter and the
first nine months was mostly due to the increase in pre-tax income of the
Company for 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 September 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: October 31, 1995 /s/ HOWARD L. COHODAS
Howard L. Cohodas, Chairman
& President
(Chief Executive Officer)
Dated: October 31, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 29,725
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 26,450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 74,790
<INVESTMENTS-CARRYING> 63,480
<INVESTMENTS-MARKET> 63,070
<LOANS> 552,419
<ALLOWANCE> 6,864
<TOTAL-ASSETS> 775,320
<DEPOSITS> 684,678
<SHORT-TERM> 333
<LIABILITIES-OTHER> 11,193
<LONG-TERM> 0
<COMMON> 18,555
0
0
<OTHER-SE> 60,561
<TOTAL-LIABILITIES-AND-EQUITY> 775,320
<INTEREST-LOAN> 39,483
<INTEREST-INVEST> 6,912
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 46,395
<INTEREST-DEPOSIT> 17,674
<INTEREST-EXPENSE> 17,765
<INTEREST-INCOME-NET> 28,630
<LOAN-LOSSES> 671
<SECURITIES-GAINS> (127)
<EXPENSE-OTHER> 24,802
<INCOME-PRETAX> 8,967
<INCOME-PRE-EXTRAORDINARY> 6,370
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,370
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 5.47
<LOANS-NON> 2,221
<LOANS-PAST> 1,482
<LOANS-TROUBLED> 628
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,701
<CHARGE-OFFS> 703
<RECOVERIES> 195
<ALLOWANCE-CLOSE> 6,864
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
