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 June30,1996
OR
[X] 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 30, 1996
Common Stock, no par value 5,598,267
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31, June 30,
1996 1995 1995
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 30,238 $ 32,143 $ 33,713
Short-term investments:
Federal funds sold 17,350 17,350 23,350
Money market investments 260 297 267
--------- --------- ---------
17,610 17,647 23,617
Investment securities:
Available for sale 112,874 115,194 78,467
Held to maturity 20,483 24,537 64,880
Loans 568,904 560,891 548,714
Allowance for loan losses (7,786) (7,589) (6,844)
--------- --------- ---------
NET LOANS 561,118 553,302 541,870
Premises and equipment 23,666 22,857 22,868
Accrued interest receivable 5,575 5,779 5,337
Other assets 8,860 6,857 6,962
--------- --------- ---------
$ 780,424 $ 778,316 $ 777,714
========= ========= =========
LIABILITIES
Domestic deposits:
Noninterest bearing $ 68,402 $ 70,790 $ 68,521
Interest bearing 618,785 616,364 619,959
TOTAL DEPOSITS 687,187 687,154 688,480
Short-term borrowing 667
Accrued interest payable 2,736 2,836 2,726
Other liabilities 7,943 7,341 8,360
--------- --------- ---------
TOTAL LIABILITIES 697,866 697,331 700,233
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 65,408 62,575 59,479
Securities valuation (1,405) (145) (553)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 82,558 80,985 77,481
--------- --------- ---------
$ 780,424 $ 778,316 $ 777,714
========= ========= =========
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three months ended Six months ended
June 30 June 30
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 13,567 $ 13,182 $ 27,048 $ 25,886
Short-term investments 280 295 618 416
Investment securities:
Taxable 1,642 1,665 3,225 3,429
Tax-exempt 247 326 533 709
-------- -------- -------- --------
TOTAL INTEREST INCOME 15,736 15,468 31,424 30,440
Interest expense:
Deposits 6,083 6,020 12,236 11,442
Borrowings 1 19 1 79
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 6,084 6,039 12,237 11,521
NET INTEREST INCOME 9,652 9,429 19,187 18,919
Provision for loan losses 330 307 530 527
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,322 9,122 18,657 18,392
Noninterest income:
Trust department income 1,002 893 1,997 1,772
Fees for other customer services 801 720 1,531 1,360
Net gains on sale of loans 44 36 101 64
Other 426 405 824 729
Investment securities losses (13) (13) (40)
-------- -------- -------- --------
2,260 2,054 4,440 3,885
-------- -------- -------- --------
11,582 11,176 23,097 22,277
Noninterest expenses:
Salaries and employee benefits 4,508 4,531 9,055 8,915
Net occupancy 646 601 1,293 1,217
Furniture and equipment 406 398 817 838
Advertising 418 265 726 510
Data processing 363 347 706 709
FDIC premiums 3 383 9 766
Other 1,787 1,826 3,775 3,769
-------- -------- -------- --------
8,131 8,351 16,381 16,724
-------- -------- -------- --------
Income before income tax expense 3,451 2,825 6,716 5,553
Income tax expense 1,050 818 1,979 1,564
-------- -------- -------- --------
NET INCOME $ 2,401 $ 2,007 $ 4,737 $ 3,989
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 5,598 5,598 5,598 5,598
Per share data:
Net income $ .43 $ .36 $ .85 $ .71
======== ======== ======== ========
Dividends paid $ .175 $ .145 $ .34 $ .29
======== ======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
June 30
1996 1995
(in thousands)
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,737 $ 3,989
Adjustments to reconcile net income to net
cash provided by operating activities:
Origination of mortgage loans held for sale (21,375) (12,877)
Proceeds from sale of mortgage loans held
for sale 20,900 11,636
Depreciation and amortization 898 875
Provision for loan losses 530 527
(Increase) decrease in interest receivable 204 (173)
Amortization of investment securities premium 107 156
Realized gain on sale of loans (101) (64)
Increase (decrease) in interest payable (100) 500
Realized investment securities losses 13 40
Other (756) 1,375
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,057 5,984
INVESTING ACTIVITIES
Purchases of available for sale securities (27,032) (1,501)
Proceeds from maturities of available for sale
securities 25,503 3,570
Net increase in loans (7,770) (6,952)
Proceeds from maturities of held to maturity
securities 4,362 11,532
Purchases of premises and equipment (1,697) (1,039)
Proceeds from sale of available for sale
securities 1,487 6,459
Net (increase) decrease in short-term investments 37 (19,058)
Proceeds from sale of premises and equipment 19 18
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (5,091) (6,971)
FINANCING ACTIVITIES
Cash dividends (1,904) (1,623)
Net increase in deposits 33 3,278
Increase in short-term borrowing 667
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,871) 2,322
-------- --------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (1,905) 1,335
Cash and due from banks at beginning of year 32,143 32,378
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 30,238 $ 33,713
======== ========
See notes to consolidated financial statements
</TABLE>
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 six month periods ended
June 30, 1996 and 1995 are not necessarily indicative of the results to be
expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report on Form 10-K for the year
ended December 31, 1995.
NOTE B - ACCOUNTING CHANGES
Effective January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement 122, Accounting for Mortgage Servicing Rights." This statement
requires that separate assets be recognized for the rights to service mortgage
loans for others, however those rights are acquired. The adoption of Statement
122 has not had a material impact on the Company's financial position or results
of operations. Management believes that operating results will be positively
impacted by the adoption of this statement but the eventual results will depend
on loan sale volumes.
NOTE C - INVESTMENT SECURITIES
A comparison of the carrying amount and approximate market value follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------------------- --------------------------
Amortized Approximate Amortized Approximate
Cost Market Value Cost Market Value
--------- ----------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Available for Sale
U.S. Treasury and
government agencies $ 77,927 $ 76,606 $ 75,607 $ 75,525
State and political
subdivisions 990 979 1,298 1,295
Mortgage-backed securities 32,151 31,328 34,622 34,455
Other securities 3,962 3,961 3,889 3,919
-------- -------- -------- --------
TOTAL $115,030 $112,874 $115,416 $115,194
======== ======== ======== ========
Held to Maturity
State and political
subdivisions $ 20,483 $ 20,300 $ 24,537 $ 24,269
======== ======== ======== ========
</TABLE>
NOTE D - RECLASSIFICATIONS
Certain amounts in 1995 have been reclassified to conform with the
classifications in 1996.
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
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, 1995
to June 30, 1996
-----------------------------
Amount of Percent
Increase Increase
(Decrease) (Decrease)
---------- ----------
Funding sources:
Deposits $ 33 .0%
Other sources, net 1,902 8.1
------- ---
$ 1,935 .3%
======= ===
Funding uses:
Loans $ 8,346 1.5%
Investment securities (6,374) (4.6)
Short-term investments (37) (.2)
------- ---
Total uses $ 1,935 .3%
======= ===
Aggregate deposits, the primary source of funds, increased by only $33,000
during the first six months of 1996. Experience was mixed within the deposit
category, as shown below:
Increase
(Decrease) Percent
---------- -------
Demand $(2,388) (3.4)%
Savings 6,530 2.2
Time-retail (1,416) (.5)
Time-jumbo (2,693) (7.5)
------- ---
$ 33 .0%
======= ===
As a result, total deposit levels at June 30, 1996 were virtually flat compared
to the end of 1995.
The loan portfolio increased slightly by 1.5% during the first half of 1996. All
of the major loan areas showed increases during the period. The installment
loans increased at six of the Company's seven member banks due to stable demand
for these types of loans along with a greater promotional effort. The commercial
and mortgage area's growth was due to stable demand in those areas.
The increase in loan levels coupled with the flat deposit growth caused the
level of investments to decrease.
In addition to the above trends in the sources and uses of funds, the Company
services loans for outside agencies, primarily the Federal Home Loan Mortgage
Corporation ( Freddie Mac"). At June 30, 1996 the volume of Freddie Mac loans
sold with servicing being retained was $205 million. The comparable figure for
1995 was $193 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 1996 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, 1996 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" 1996 1995
------------------ ---- ----
Total capital 10.0% 15.84% 15.23%
Tier I capital 6.0 14.59 14.00
Tier I leverage ratio 5.0 10.81 10.15
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,
1996 and 1995 1996 and 1995
--------------- -------------
Increase (Decrease)
Interest income $ 268 1.7% $ 984 3.2%
Interest expense 45 .7 716 6.2
----- ---- ----- ----
Net interest income 223 2.4 268 1.4
Provision for loan losses 23 7.5 3 .6
----- ---- ----- ----
Net interest income after provision
for loan losses 200 2.2 265
1.4
Noninterest income 206 10.0 555 14.3
Noninterest expenses (220) (2.6) (343) (2.1)
----- ---- ----- ----
Income before income tax expense 626 22.2 1,163 20.9
Income tax expense 232 28.4 415 26.5
Net income $ 394 19.6% $ 748 18.8%
===== ==== ===== ====
Net Interest Income
The modest increase in net interest income during the second quarter and the
first six months of 1996 was due to the fact that while both the interest income
and the interest expense increased from the comparable periods in 1995 the
interest income increased more. The increase in the loan to deposit ratio to
82.8% at June 30, 1996 from 79.7% at June 30, 1995 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 loan loss provision increased slightly during both the second quarter and
the first six months of 1996 largely due to the larger loan portfolio. This
increased loan loss provision allowed for an increase to the allowance for loan
losses of $197,000 or 2.6% during the first half of 1996. Net loan charge-offs
for the first six months amounted to $333,000, down from the amount of $384,000
for the comparable period in 1995. On an annualized basis these charge-offs
amounted to .12% of average loans outstanding, down from the .14% for the
comparable period in 1995. These are relatively low levels on on an internal
historical basis as well as in comparison to peer groups.
Expressed as a percent of outstanding loans the allowance increased from 1.35%
at year end 1995 to 1.37% at June 30, 1996. 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 increased in the first half of 1996 by $1,508,000 or 41.1%,
with the largest increase being a $864,000 increase in the loans past due 90
days or more. Total nonperforming assets, which includes other real estate,
increased $2,496,000 or 53.6% from December 31, 1995, with the largest increase
being other real estate increasing by $988,000. Management is concentrating its
efforts on reducing loans past due 90 days or more and other real estate.
The table below presents a comparison of nonperformings.
June 30, December 31,
1996 1995
------ ------
(in thousands)
Nonaccrual loans $2,720 $2,061
Loans past due
90 days or more 1,779 915
Restructured loans 679 694
------ ------
Total nonperforming loans 5,178 3,670
Other real estate 1,974 986
------ ------
Total nonperforming assets $7,152 $4,656
====== ======
Nonperforming loans
as a % of total loans .91% .65%
====== ======
Nonperforming assets
as a % of total assets .92% .60%
====== ======
On a percentage basis, the allowance for loan losses decreased from 207% of
nonperforming loans at the end of 1995 to 150% at June 30, 1996. Management
intends to continue in its efforts toward maintaining the quality of the loan
portfolio.
Noninterest Expenses
The decrease in noninterest expenses resulted from changes in its major
components as set forth below, indicative of the normal effects of inflation as
well as the growth of the organization. The primary reason for the overall
decrease in noninterest expenses is the substantial decrease in FDIC premium
expense of $757,000 from the first half of 1995 to the comparable period in
1996. The major components of other expenses increased (decreased) as follows:
Three months Six months
ended ended
June 30, 1996 June 30, 1996
------------- -------------
Salaries and employee benefits (.5)% 1.6%
Occupancy, furniture and equipment 5.3 2.7
Advertising 57.7 42.4
Data processing 4.6 (.4)
FDIC premiums (99.2) (98.8)
Other (2.1) .2
The advertising increase is due to expanded marketing programs, including
MFC2000, a new strategic plan which will be introduced later this year. This
increase in advertising can be expected to continue throughout 1996.
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
35%. The provision is further reduced by other smaller items. The increase in
the 1996 income tax provision reported herein for the second quarter and the
first six months was mostly due to the increase in pre-tax income of the Company
for 1996, combined with a decrease in the portion of interest income which is
exempt from federal taxation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit:
None
(b) Reports on Form 8-K:
Form 8-K Reporting Date - May 29, 1996 Items Reported - Item 4.
Changes in registrant's certifying accountant.
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 30, 1996 /s/ HOWARD L. COHODAS
Howard L. Cohodas, Chairman
& President
(Chief Executive Officer)
Dated: July 30 , 1996 /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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 30,238
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 112,874
<INVESTMENTS-CARRYING> 20,483
<INVESTMENTS-MARKET> 20,300
<LOANS> 568,904
<ALLOWANCE> 7,786
<TOTAL-ASSETS> 780,424
<DEPOSITS> 687,187
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,679
<LONG-TERM> 0
0
0
<COMMON> 18,555
<OTHER-SE> 64,003
<TOTAL-LIABILITIES-AND-EQUITY> 780,424
<INTEREST-LOAN> 27,048
<INTEREST-INVEST> 4,376
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 31,424
<INTEREST-DEPOSIT> 12,236
<INTEREST-EXPENSE> 12,237
<INTEREST-INCOME-NET> 19,187
<LOAN-LOSSES> 530
<SECURITIES-GAINS> (13)
<EXPENSE-OTHER> 16,381
<INCOME-PRETAX> 6,716
<INCOME-PRE-EXTRAORDINARY> 4,737
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,737
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
<YIELD-ACTUAL> 5.47
<LOANS-NON> 2,720
<LOANS-PAST> 1,779
<LOANS-TROUBLED> 679
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,589
<CHARGE-OFFS> 479
<RECOVERIES> 146
<ALLOWANCE-CLOSE> 7,786
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
