UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
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 (IRS Employer Identification Number)
incorporation or organization)
101 West Washington Street, Marquette, Michigan 49855
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (906) 228-6940
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter 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___
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 1, 1996. $85,778,621
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of March 1, 1996.
Common Stock, no par value - 5,598,267
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual stockholders report for the year ended December 31, 1995
are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual stockholders meeting to be held
April 30, 1996 are incorporated by reference into Part III.
ITEM 1. BUSINESS
Michigan Financial Corporation, a Michigan corporation, (the "Company") is a
registered bank holding company under the Bank Holding Company Act of 1956. The
Company was incorporated on June 29, 1972. The Company has seven member banks,
all wholly owned, as follows:
MFC First National Bank, Escanaba
MFC First National Bank, Houghton
MFC First National Bank, Iron Mountain
MFC First National Bank, Iron River
MFC First National Bank, Ironwood
MFC First National Bank, Marquette
MFC First National Bank, Menominee
The Company's only nonbank subsidiary is Michigan Financial Life Insurance
Company ("MFLIC"). MFLIC, an Arizona Corporation, underwrites, as a reinsurer,
credit life and credit accident and health insurance directly related to
extensions of credit by the Company's member banks.
The Company is the eighth largest commercial bank holding company in the State
of Michigan and is the largest wholly located in the Upper Peninsula of the
state.
The Company provides advice and services to its member banks and coordinates
their activities in such areas as lending, investment policies, business
development, auditing, public relations, data processing, financial reporting,
budgetary planning and compliance with government regulations. Each bank
operates under the day-to-day management of its own officers and directors.
The seven member banks of the Company, either individually or in the aggregate,
provide full banking and trust services, including commercial and savings
deposit account and safe deposit facilities, for individuals, partnerships,
corporations and governmental units. Through their commercial loan departments,
the banks provide funds for business and industry, both short-term (accounts
receivable, inventory, working capital and floor-planning) and long-term
(leasehold improvements and building construction) as well as funds for
individuals. The installment loan departments of the banks extend loans to
individuals and businesses to purchase consumer goods such as automobiles,
household goods and materials for home modernization. The mortgage loan
departments provide both residential and commercial real estate loans. The trust
departments administer trust assets for individual trusts and estates as well as
for pension and profit sharing trusts.
The Company's seven member banks have 33 banking offices in nine counties of
Michigan's Upper Peninsula: Alger, Baraga, Delta, Dickinson, Gogebic, Houghton,
Iron, Marquette and Menominee. The banks also operate 29 automated teller
machines ("ATMs") in several market areas. All the banks have a retail banking
orientation and compete vigorously with other Upper Peninsula banks, savings and
loan associations, various finance companies, and public, religious and private
credit unions. The banks receive direct banking competition from other banks
with offices in the same cities.
The Company also competes with a much larger multi-bank holding company from the
Lower Peninsula which has banking offices located in the same market areas as
six of the Company's banks and operates additional banking offices in other
areas not served by the Company's banks. The Company also competes with smaller
holding companies located in the Upper Peninsula.
The Company is subject to supervision and regulation by the Federal Reserve
Board under the Bank Holding Company Act of 1956, as amended. Since it is a bank
holding company, the services provided by the member banks and the operations of
the corporation are required to be closely related to the business of banking or
related financial services.
The deposits of all the Company's banks are insured by the Federal Deposit
Insurance Corporation, and the banks are subject to supervision, examination and
regulation by the Office of the Comptroller of the Currency (the "OCC").
The OCC has issued guidelines which impose upon national banks certain
risk-based capital and leverage standards. These guidelines, as well as the
capital requirements of bank regulators, are discussed beginning on page 16 in
the annual stockholders report for the year ended December 31, 1995 which is
incorporated herein by reference. Failure to meet applicable capital guidelines
could subject a national bank to a variety of enforcement remedies available to
the federal regulatory authorities. Depending upon circumstances, the regulatory
agencies may require an institution to surpass minimum capital ratios
established and may also take more restrictive action.
No material part of the business of the Company, its member banks or its
insurance subsidiary is dependent upon a single customer. The loss of any one or
any few customers would have no material adverse effect on the business of the
Company.
Because banks do not have any backlog of orders, backlog has no effect on the
business of the Company.
The business of the Company is not dependent on raw materials.
The business of the Company is not materially affected by the duration of
patents, trademarks, licenses, franchises, or concessions.
The Company does not have a research and development department. No funds have
been expended in this area during either of the last three fiscal years and
there are no people employed by the Company in research and development.
The Company does not have any commitments requiring the investment of a material
amount of total assets.
It is not expected that compliance with federal, state, or local provisions
regulating the discharge of materials into the environment or otherwise relating
to protection of the environment will have any material effect upon the capital
expenditures, earnings, and competitive position of the Company and its member
banks and insurance subsidiary.
The Company, its member banks and its insurance subsidiary employed 677 people
as of December 31, 1995.
No material portion of the Company's business is seasonal.
The commercial banking business, constituting one line of business, represents
substantially all of the business conducted by the Company, its member banks and
its insurance subsidiary and all revenues of the Company are derived from that
one line of business, commercial banking.
Neither the Company, its member banks nor its insurance subsidiary is engaged in
foreign operations.
CONSOLIDATED FINANCIAL AND STATISTICAL INFORMATION
The tables set forth on the next nine pages of this report contain selected
consolidated statistical information for the Company, its member banks and its
insurance subsidiary for the years 1993 through 1995 (1991 through 1995 for
certain loan portfolio and loan loss information). The financial and statistical
data presented in these tables provide a detailed review of the Company's
business activities.
<TABLE>
<CAPTION>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
1995 1994
--------------------------------------- -----------------------------------
Average Interest Average Interest
Amount Earned Yield or Amount Earned Yield or
Outstanding or Paid Rate Paid Outstanding or Paid Rate Paid
----------- ------- --------- ----------- -------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Time deposits in other banks $ 14 $ 1 5.88% $ 163 $ 6 3.54%
Federal funds sold 20,604 1,205 5.85% 18,211 715 3.93%
Other short-term investments 207 10 4.98% 4,792 156 3.26%
Investment securities:
U. S. Treasury 29,695 1,611 5.43% 33,013 1,675 5.07%
U. S. Government agencies
and corporations 84,528 4,707 5.57% 92,495 4,763 5.15%
States and political
subdivisions 29,465 1,300 6.16% 37,966 1,604 5.89%
Other 4,927 362 7.34% 5,369 321 5.99%
Loans 547,264 53,297 9.81% 515,410 47,504 9.29%
- ----------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 716,704 62,493 8.84% 707,419 56,744 8.17%
Noninterest earning assets:
Cash and due from banks 28,939 30,837
Premises and equipment 21,531 21,280
Other assets 11,637 11,505
Allowance for loan losses (6,847) (6,589)
TOTAL ASSETS $ 771,964 $ 764,452
Interest bearing liabilities:
Demand deposits 117,759 2,499 2.12% 93,674 1,418 1.51%
Savings deposits 189,464 5,176 2.73% 229,666 5,597 2.44%
Time deposits under $100,000 268,144 14,213 5.30% 247,519 11,181 4.52%
Time deposits over $100,000 34,804 2,029 5.83% 22,765 1,027 4.51%
Short-term borrowings 985 60 6.13% 779 38 4.95%
Other debt 415 36 8.55%
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST
BEARING LIABILITIES 611,571 24,013 3.93% 594,403 19,261 3.24%
- ----------------------------------------------------------------------------------------------------------------------
Noninterest bearing liabilities
and Shareholders' equity:
Demand deposits 72,601 88,488
Other liabilities 11,077 9,403
Shareholders' equity 76,715 72,158
------ ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 771,964 $ 764,452
========= =========
NET INTEREST INCOME $ 38,480 $ 37,483
========= =========
NET YIELD ON EARNING ASSETS 5.49% 5.44%
==== ====
</TABLE>
(Wide table continued from above)
<TABLE>
<CAPTION>
1993
----------------------------------------
Average Interest
Amount Earned Yield or
Outstanding or Paid Rate Paid
----------- ------- ---------
(Amounts in thousands)
<S> <C> <C> <C>
Earning assets:
Time deposits in other banks
Federal funds sold $34,789 $ 1,036 2.98%
Other short-term investments 53,058 1,640 3.09%
Investment securities:
U. S. Treasury 24,299 1,581 6.51%
U. S. Government agencies
and corporations 95,593 5,275 5.52%
States and political
subdivisions 23,170 1,084 6.41%
Other 7,126 404 5.67%
Loans 485,628 46,114 9.58%
- ---------------------------------------------------------------------------------
TOTAL EARNING ASSETS 723,663 57,134 8.01%
Noninterest earning assets:
Cash and due from banks 32,030
Premises and equipment 20,189
Other assets 11,920
Allowance for loan losses (6,097)
TOTAL ASSETS $781,705
Interest bearing liabilities:
Demand deposits 100,799 2,316 2.30%
Savings deposits 233,095 6,428 2.76%
Time deposits under $100,000 268,315 12,578 4.69%
Time deposits over $100,000 24,943 1,060 4.25%
Short-term borrowings 38 1 3.43%
Other debt 1,055 61 5.82%
- ---------------------------------------------------------------------------------
TOTAL INTEREST
BEARING LIABILITIES 628,245 22,444 3.57%
- ---------------------------------------------------------------------------------
Noninterest bearing liabilities
and Shareholders' equity:
Demand deposits 76,976
Other liabilities 8,885
Shareholders' equity 67,599
------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 781,705
===========
NET INTEREST INCOME $ 34,690
===========
NET YIELD ON EARNING ASSETS 4.91%
====
</TABLE>
All of the above percentages are computed on a fully taxable statutory
rate of 34%.
The average balance of Loans includes non-accrual loans.
The table below sets forth a summary of the reasons for changes in
interest earned and interest paid due to changes in volume and changes in rates
for 1995 as compared with 1994. The change in interest due to both rate and
volume has been allocated proportionally to change due to volume and to change
due to rate.
<TABLE>
<CAPTION>
INTEREST EARNED ON
------------------------------------------------------------------------------------------
Other Total
Time deposits Federal short-term Taxable Tax-exempt earning
in other banks funds sold investments securities securities Loans assets
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ (7) $ 104 $ (200) $ (637) $ (423) $3,040 $1,877
Rate 2 386 54 558 119 2,753 3,872
Net Change $ (5) $ 490 $ (146) $ (79) $ (304) $5,793 $5,749
</TABLE>
<TABLE>
<CAPTION>
INTEREST PAID ON
--------------------------------------------------------------------------------------
Total
Demand Savings Time Short-term Other interest bearing
deposits deposits deposits borrowings debt liabilities
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ 420 $(1,044) $ 1,590 $ 11 $ 36 $ 1,013
Rate 661 623 2,444 11 -- 3,739
Net Change $ 1,081 $ (421) $ 4,034 $ 22 $ 36 $ 4,752
</TABLE>
The table below sets forth a summary of the reasons for changes in
interest earned and interest paid due to changes in volume and changes in rates
for 1994 as compared with 1993. The change in interest due to both rate and
volume has been allocated proportionally to change due to volume and to change
due to rate.
<TABLE>
<CAPTION>
INTEREST EARNED ON
---------------------------------------------------------------------------------------------------
Other Total
Time deposits Federal short-term Taxable Tax-exempt earning
in other banks funds sold investments securities securities Loans assets
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ 6 $ (588) $(1,569) $ 225 $ 635 $ 2,775 $ 1,484
Rate -- 267 85 (726) (115) (1,385) (1,874)
Net Change $ 6 $ (321) $(1,484) $ (501) $ 520 $ 1,390 $ (390)
</TABLE>
<TABLE>
<CAPTION>
INTEREST PAID ON
---------------------------------------------------------------------------------------------
Total
Demand Savings Time Short-term Other interest bearing
deposits deposits deposits borrowings debt liabilities
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ (153) $ (94) $(1,054) $ 36 $ (61) $(1,326)
Rate (745) (737) (376) 1 -- (1,857)
Net Change $ (898) $ (831) $(1,430) $ 37 $ (61) $(3,183)
</TABLE>
INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities at
the dates indicated:
<TABLE>
<CAPTION>
December 31
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
Available for Sale Securities:
U.S. Treasury and government agencies $ 75,525 $77,034
Mortgage-backed 34,455 3,456
States and political subdivisions 1,295 385
Other 3,919 3,898 $394
$115,194 $84,773 $394
Held to Maturity Securities:
U.S. Treasury and government agencies $ 4,218 $ 86,145
Mortgage-backed 36,138 38,343
States and political subdivisions $24,537 35,565 36,824
Other 3,236
$24,537 $75,921 $164,548
</TABLE>
The table on the following page sets forth the maturities of investment
securities at December 31, 1995, the weighted average yields of such securities
(calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security) and the tax-equivalent adjustment used in
calculating the yields.
<TABLE>
<CAPTION>
MATURITIES
(Amounts in thousands)
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
Available for Sale Securities:
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
agencies $16,781 5.62% $58,530 5.64% $ 214 7.00% $ - - %
Mortgage-backed 4,325 6.29 24,140 5.76 1,331 6.87 4,659 6.53
States and political subdivisions 878 6.81 99 5.00 217 8.83 101 8.01
Other 102 8.80 532 7.73 - - 3,285 1.49
Total Available for Sale Securities $22,086 5.81% $83,301 5.69% $1,762 7.13% $8,045 4.49%
Tax-equivalent adjustment for
calculation of yield $20 $1 $7 $3
Held to Maturity Securities:
States and political subdivisions $ 6,296 6.07% $15,737 5.86% $1,699 8.56% $ 805 7.51%
Total Held to Maturity Securities $ 6,296 6.07% $15,737 5.86% $1,699 8.56% $ 805 7.51%
Tax-equivalent adjustment for
calculation of yield $130 $314 $49 $21
</TABLE>
Weighted average yields on tax-exempt obligations have been computed on a fully
tax-equivalent basis assuming a tax rate of 34 percent.
LOAN PORTFOLIO
The amounts of loans outstanding at the indicated dates are shown in the
following table according to type of loan.
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $246,134 $248,785 $230,924 $201,086 $189,721
Real estate-construction 10,095 9,175 8,521 9,289 6,885
Real estate-mortgage 191,066 175,923 166,852 172,079 176,678
Consumer 113,596 106,958 96,667 97,204 102,814
$560,891 $540,841 $502,964 $479,658 $476,098
</TABLE>
The following table shows the amounts of loans (excluding real estate mortgages
and consumer loans) outstanding as of December 31, 1995, which, based on
remaining scheduled repayments of principal, are due in the periods indicated.
<TABLE>
<CAPTION>
MATURING
Within After One But After
One Year Within Five Years Five Years Total
(in thousands)
<S> <C> <C> <C> <C>
Commercial, financial, and
agricultural $16,041 $166,352 $63,741 $246,134
Real estate-construction 7,750 1,857 488 10,095
$23,791 $168,209 $64,229 $256,229
</TABLE>
Included in the loans which are due after one year are $108,707,000 of loans
with floating or adjustable interest rates. All other loans have fixed interest
rates.
Nonaccrual, Past Due and Restructured Loans
The following table summarizes the Company's nonaccrual, past due and
restructured loans:
December 31
1995 1994 1993 1992 1991
(in thousands)
Nonaccrual loans $2,061 $2,374 $2,445 $2,651 $3,260
Accruing loans past
due 90 days or more 915 830 962 1,059 1,546
Restructured loans 694 592 222 255 205
The 1995 nonaccrual loan amount includes $1,359,000 for loans considered
impaired under Financial Accounting Standards Board Statement 114. This
statement was adopted in 1995 and is explained on page 25 of the annual
stockholders report for the year ended December 31, 1995 which is incorporated
herein by reference.
Additional information with respect to nonaccrual and restructured loans for the
two years ended December 31, 1995 is as follows:
1995 1994
(in thousands)
Gross interest income that would have been
recorded if the loans had been current
in accordance with their original terms $261 $184
Interest income that was included in net
income 73 100
Potential Problem Loans
Loans not past due but about which management has doubt as to the ability of the
borrowers to comply with present repayment terms amounted to $12,321,000 at
December 31, 1995, as detailed below. Management feels that the degree of risk
associated with these loans is not significant enough to require them to be
placed on a nonaccrual basis. These loans are subject to constant management
attention and their classification is reviewed at least quarterly.
Potential
Problem $ Amount
Loans Collateralized
(in thousands)
Commercial $10,395 $10,166
Real estate - construction - -
Real estate - mortgage 1,780 1,750
Consumer 146 122
$12,321 $12,038
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Company's loan loss experience for the five
years ended December 31, 1995.
1995 1994 1993 1992 1991
(in thousands)
Balance of allowance for
loan losses at beginning
of period $6,701 $6,553 $5,868 $6,065 $6,108
Loans charged-off:
Commercial, financial, and
agricultural 409 691 131 831 1,097
Real estate-construction - - - - -
Real estate-mortgage 125 93 107 161 189
Consumer 411 485 588 817 968
Total loans charged-off 945 1,269 826 1,809 2,254
Recoveries of loans previously
charged-off:
Commercial, financial, and
agricultural 79 106 162 84 89
Real estate-construction - - - - -
Real estate-mortgage 21 28 31 21 33
Consumer 150 162 159 192 174
Total recoveries 250 296 352 297 296
Net loans charged-off 695 973 474 1,512 1,958
Additions to allowance charged
to expense* 1,583 1,121 1,159 1,315 1,915
Balance at end of period $7,589 $6,701 $6,553 $5,868 $6,065
Ratio of net charge-offs
during period to average
loans outstanding .13% .19% .10% .32% .42%
* Management reviews the loan portfolios on a regular quarterly basis
to determine the adequacy of the allowance for loan losses and to ensure that a
proper provision for loan losses is being recognized. The amount charged to
expense by each member bank is based on several factors, including the
following: (a) analytical reviews of loan loss experience, by major loan
category, in relation to loans outstanding to determine the minimum allowance
for loan losses required for performing loans; (b) continuing reviews of problem
or nonperforming loans and overall portfolio quality; (c) assumptions with
respect to current and expected economic conditions and (d) the exercise of
management judgment.
The following table shows an allocation of the allowance for loan losses at each
of the five dates indicated:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994 December 31, 1993
Percent of Percent of Percent of
Type of Loans Type of Loans Type of Loans
Allowance to Total Loans Allowance to Total Loans Allowance to Total Loans
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural $2,228 43.9% $2,127 46.0% $1,940 45.9%
Real estate-
construction - 1.8 - 1.7 - 1.7
Real estate-
mortgage 439 34.1 470 32.5 208 33.2
Consumer 973 20.2 985 19.8 1,036 19.2
Not allocated 3,949 n/a 3,119 n/a 3,369 n/a
$7,589 100.0% $6,701 100.0% $6,553 100.0%
</TABLE>
(Wide table continued from above)
December 31, 1992 December 31, 1991
Percent of Percent of
Type of Loans Type of Loans
Allowance to Total Loans Allowance to Total Loans
(Amounts in thousands)
Commercial,
financial and
agricultural $1,633 41.9% $1,529 39.9%
Real estate-
construction 14 1.9 13 1.4
Real estate-
mortgage 747 35.9 790 37.1
Consumer 810 20.3 850 21.6
Not allocated 2,664 n/a 2,883 n/a
$5,868 100.0% $6,065 100.0%
The above allocation is based on estimates and subjective judgment and is not
necessarily indicative of the specific amounts on loan categories in which
losses may ultimately occur, nor does it necessarily reflect actual historical
charge-off experience.
REGULATORY CAPITAL RATIOS
Capital adequacy regulations require minimum capital ratios. As summarized
below, the Company's capital ratios at December 31 were well in excess of the
regulatory minimum, as well as the levels for well capitalized institutions.
The Company Regulatory Requirements
1995 1994 1993 Well Capitalized Minimum
Leverage 10.46% 9.88% 9.05% 5.0% 4.0%
Tier 1 14.31 13.73 13.43 6.0 4.0
Tier 1 + Tier 2 15.56 14.94 14.68 10.0 8.0
RETURN ON EQUITY AND ASSETS
The "Statistical Summary" on page 12 of the annual stockholders report for the
year ended December 31, 1995 is incorporated herein by reference.
ITEM 2. PROPERTIES
The Company owns seven member banks and one nonbank subsidiary, and has a total
of 33 banking offices, all of which are located in the Upper Peninsula of
Michigan. The Company owns 28 and leases 5 of these banking offices. The Company
also owns all 29 of its ATMs. The owned properties are unencumbered. Five of the
leases can be terminated or renewed at no longer than five-year intervals at the
lessees' option, with the other lease having a ten-year term and none of these
being materially significant to their businesses.
The Company also owns its item processing center in Kingsford, Michigan. This is
a noncustomer facility that was constructed during 1994 and is the site for
consolidated processing and operational functions. The executive offices of the
Company are located in office space owned by and leased annually from the MFC
First National Bank, Marquette, Michigan. The Company considers all of its
facilities to be well maintained and in generally good operating condition and
suitable for the purposes for which they are intended.
ITEM 3. LEGAL PROCEEDINGS
The Company, its member banks and its insurance subsidiary are not involved in
any litigation other than ordinary routine litigation incidental to the business
conducted by the banks. None of the litigation is expected to result in adverse
judgments materially affecting the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS
OF THE REGISTRANT
Pursuant to instruction G(3), the following information is included as an
unnumbered Item in Part I of this report in lieu of being included in the proxy
statement for the annual stockholders' meeting to be held on April 30, 1996.
The executive officers of the Company are as follows:
Name Age Position
Howard L. Cohodas 51 Chairman and President
Kenneth F. Beck 58 Senior Vice President, Treasurer
and Secretary
Ward L. Rantala 44 Vice President - Human Resources
Howard L. Cohodas has been Chairman and President of the Company since prior to
March, 1991.
Kenneth F. Beck has been Senior Vice President, Treasurer and Secretary of the
Company since prior to March, 1991.
Ward L. Rantala has been Vice President - Human Resources of the Company since
prior to March, 1991.
Terms of office for the executive officers expire April 30, 1996, the scheduled
date of the annual reorganizational meeting of the Company. The officers serve
at the pleasure of the Board of Directors.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The "Market Price and Dividend Information" on page 40 of the annual
stockholders report for the year ended December 31, 1995 is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Consolidated Selected Financial Data" on page 12 of the annual stockholders
report for the year ended December 31, 1995 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 13 through 19 of the annual stockholders report for the
year ended December 31, 1995 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements included on pages 20 through 36 of the
annual stockholders report for the year ended December 31, 1995, are
incorporated herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information contained on pages 1 and 2 of the Company's Proxy Statement
dated March 22, 1996, with respect to directors and executive officers of the
Company, is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on page 3 of the Company's Proxy Statement dated March
22, 1996, with respect to executive compensation and transactions, is
incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 7 and 8 of the Company's Proxy Statement
dated March 22, 1996, with respect to security ownership of certain beneficial
owners and management, is incorporated herein by reference in response to this
item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 6 of the Company's Proxy Statement dated March
22, 1996, with respect to certain relationships and related transactions, is
incorporated herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
The following documents are filed as a part of this report:
(1) Financial Statements as required by Item 8 of this Form
incorporated by reference herein from the 1995 annual report to
stockholders attached hereto as Exhibit 13:
Item Location
Consolidated Balance Sheets Annual report under the caption
"Consolidated Balance Sheets."
Consolidated Statements of
Income Annual report under the caption
"Consolidated Statements of
Income."
Consolidated Statements of
Cash Flows Annual report under the caption
"Consolidated Statements of Cash
Flows."
Consolidated Statements of
Shareholders' Equity Annual report under the caption
"Consolidated Statements of
Changes in Stockholders' Equity."
Notes to Consolidated
Financial Statements Annual report under the caption
"Notes to Consolidated Financial
Statements."
Report of Independent
Accountants Annual report under the caption
"Report of Independent Auditors."
(3) Listing of exhibits
(10) Material contracts - executive incentive plan
(13) Incorporated portions from the annual report to security
holders
(21) Subsidiaries of the registrant
(23) Consent of independent auditors
(24) Power of attorney
(27) Financial data schedule
(b) No reports on Form 8-K were filed in the fourth quarter of 1995.
(c) Exhibits
(10) Material contracts--A description of the Company's executive
incentive plan is filed as Exhibit 10 to the Company's
Report on Form 10-K for 1993 filed with the Commission on
March 25, 1994 and incorporated herein by this reference.
(13) Annual report to security holders--Incorporated portions
from the Company's annual stockholders report for the year
ended December 31, 1995 are filed as Exhibit 13 at page 22
of this report.
(21) Subsidiaries of the registrant--The information required for
this Exhibit is included in Item 1, page 2, of this report.
(23) Consent of independent auditors--The consent of independent
auditors is filed as Exhibit 23 at page 23 of this report.
(24) Power of attorney--Powers of attorney from those directors
whose names appear on pages 19 and 20 hereof followed by an
asterisk are filed as Exhibit 24 at page 24 of this report.
(27) Financial data schedule--The required financial data
schedule is filed as Exhibit 27 at page 25 of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 6, 1996.
MICHIGAN FINANCIAL CORPORATION
(Registrant)
By: /s/ KENNETH F. BECK
KENNETH F. BECK, Senior Vice President
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 6, 1996.
Signature Title
Howard L. Cohodas
/s/ HOWARD L. COHODAS Chairman, President (Principal
Executive Officer) and Director
Kenneth F. Beck
/s/ KENNETH F. BECK Senior Vice President (Principal
Financial and Accounting Officer),
Treasurer, Secretary and Director
Alfred J. Angeli
/s/ ALFRED J. ANGELI * Director
Gary L. Butryn
/s/ GARY L. BUTRYN * Director
Willard M. Carne
/s/ WILLARD M. CARNE * Director
Willard L. Cohodas
/s/ WILLARD L. COHODAS * Director
Clarence R. Fisher
/s/ CLARENCE R. FISHER * Director
Hugh C. Higley, Jr.
/s/ HUGH C. HIGLEY, JR * Director
David Holli
/s/ DAVID HOLLI * Director
Daniel H. Lori
/s/ DANIEL H. LORI * Director
Fred M. Saigh
/s/ FRED M. SAIGH * Director
James L. Smith
/s/ JAMES L. SMITH * Director
*By Kenneth F. Beck as Attorney-in-Fact pursuant to Powers of Attorney
executed by the directors listed above, which powers of Attorney have been filed
with the Securities and Exchange Commission.
INDEX TO EXHIBITS
Exhibit No. Description Page
13 Incorporated portions from the
annual stockholders report
for the year ended
December 31, 1995 22
23 Consent of independent auditors 23
24 Power of attorney 24
27 Financial data schedule 25
CONSOLIDATED SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income $ 38,480 $ 37,483 $ 34,690 $ 34,522 $ 32,269 $ 29,985
Provision for loan losses 1,583 1,121 1,159 1,315 1,915 2,121
Noninterest income 8,072 7,619 8,019 6,603 5,778 5,246
Noninterest expenses 32,776 32,623 31,694 29,861 27,345 25,512
Income tax expense 3,484 3,206 2,780 2,936 2,528 1,978
Net operating income 8,709 8,152 7,076 7,013 6,259 5,620
Accounting changes (1,198)
Net income 8,709 8,152 5,878 7,013 6,259 5,620
===========================================================================================
PER SHARE DATA
Net operating income $ 1.56 $ 1.46 $ 1.26 $ 1.26 $ 1.13 $ 1.02
Net income 1.56 1.46 1.05 1.26 1.13 1.02
Cash dividends .58 .50 .44 .38 .34 .31
Stockholders' equity 14.47 13.07 12.55 11.91 11.07 10.25
===========================================================================================
YEAR END BALANCES
Total assets $ 778,316 $ 767,573 $ 781,155 $ 782,613 $ 768,032 $ 733,902
Investment securities 139,731 160,694 164,942 144,021 143,630 152,448
Loans receivable 560,891 540,841 502,964 479,658 476,098 463,785
Deposits 687,154 685,202 702,367 707,720 698,315 667,591
Debt 1,200 952
Stockholders' equity 80,985 73,195 70,257 66,668 61,560 56,601
===========================================================================================
STATISTICAL SUMMARY (PERCENTAGES)
Return on average total assets* 1.13% 1.07% .91% .91% .83% .78%
Return on average
stockholders' equity* 11.35 11.30 10.47 11.03 10.70 10.38
Dividend payout ratio* 37.18 34.25 34.92 30.16 30.09 30.39
Average stockholders' equity
to average total assets 9.94 9.44 8.65 8.24 7.78 7.52
===========================================================================================
REGULATORY CAPITAL RATIOS
Total risk-based capital 15.56% 14.94% 14.68% 14.80% 14.34% 13.61%
Tier 1 risk-based capital 14.31 13.73 13.43 13.60 13.09 12.36
Leverage ratio 10.46 9.88 9.05 8.66 8.05 7.78
===========================================================================================
</TABLE>
* Before accounting changes
PAGE 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
<CAPTION>
SOURCES AND USES OF
FUNDS TRENDS 1995 1994 1993
Average Increase (Decrease) Average Increase (Decrease) Average
(Amounts in thousands) Balance Amount % Balance Amount % Balance
- --------------------------------------------------------------------------------------------------------
FUNDING SOURCES:
<S> <C> <C> <C> <C> <C> <C> <C>
Demand deposits-
Noninterest bearing $ 72,601 $ (15,887) (18.0) $ 88,488 $ 11,512 15.0 $ 76,976
Interest bearing 117,759 24,085 25.7 100,799
Savings deposits 189,464 (40,202) (17.5) 229,666 (3,429) (1.5) 233,095
Time deposits 302,948 32,664 12.1 270,284 (22,974) (7.8) 293,258
Short-term borrowings 985 206 26.4 779 741 NMF 38
Other debt 415 415 NMF (1,055) NMF 1,055
Other 32,532 8,004 32.6 24,528 6,086 33.0 18,442
----------------------------------------------------------------------------
Total sources $ 716,704 $ 9,285 1.3 $ 707,419 $ (16,244) (2.2) $ 723,663
============================================================================
FUNDING USES:
Loans $ 547,264 $ 31,854 6.2 $ 515,410 $ 29,782 6.1 $ 485,628
Taxable investment
securities 119,150 (11,727) (9.0) 130,877 3,859 3.0 127,018
Tax-exempt
investment securities 29,465 (8,501) (22.4) 37,966 14,796 63.9 23,170
Federal funds sold 20,604 2,393 13.1 18,211 (16,578) (47.7) 34,789
Interest bearing deposits
in other banks 14 (149) (91.4) 163 163 NMF
Other short-term
investments 207 (4,585) (95.7) 4,792 (48,266) (91.0) 53,058
----------------------------------------------------------------------------
Total uses $ 716,704 $ 9,285 1.3 $ 707,419 $ (16,244) (2.2) $ 723,663
============================================================================
</TABLE>
[BAR GRAPH]
NET INCOME
(In Millions of Dollars)
1991 $6.26
1992 $7.01
1993 $5.88
1994 $8.15
1995 $8.71
[BAR GRAPH]
NET INTEREST INCOME
(In Millions of Dollars)
1991 $32.2
1992 $34.5
1993 $34.7
1994 $37.5
1995 $38.5
[BAR GRAPH]
NET INCOME PER SHARE
1991 $1.13
1992 $1.26
1993 $1.05
1994 $1.46
1995 $1.56
PAGE 13
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS
FINANCIAL CONDITION
The Company functions as a financial intermediary, along with its seven member
banks, and as such its financial condition should be examined in terms of trends
in its sources and uses of funds. The comparison of average balances shown on
the previous page indicates how the Company has managed its sources and uses of
funds.
As the primary source of funds, aggregate average deposits slightly
increased by $700,000, or .1%, in 1995 after decreasing by $22 million, or 3.1%,
in 1994. Although total deposits basically remained flat for 1995, there was
significant movement within the different categories of deposits. There was a
substantial switch between noninterest bearing deposits and interest bearing
deposits as the Company introduced a simplified and improved line of deposit
products featuring the interest bearing "Right Account". The greatest volume
decrease was in the savings area and part of this can be attributed to the
expanding use of in house brokerage services and cash management accounts. The
use of these fee-based customer services facilitates deposit transfers to money
market and mutual funds. Savings were also moved by depositors to the time
deposit area as rates in that area became more attractive. Growth in the time
deposit area also benefited from the continued promotion of the "Jump Up"
certificate of deposit which provides increasing interest rates at six month
intervals. Both savings and time deposits continue to be major sources of funds
for the Company. Included in the time deposits category are $34.8 million in
jumbo certificates of deposit. The Company's use of jumbo certificates is
discussed in the "Liquidity and Interest Rate Sensitivity Management" section.
At various times during the past three years, some of the member banks
purchased federal funds. These purchases may or may not continue in the future,
but are not expected to become material.
The Company entered into a short-term borrowing arrangement in March of
1995 which was paid off in November of 1995. There are no plans to incur any
other debt.
The Company's primary use of funds traditionally is in the lending area.
Funds not required to meet loan demand are invested in other earning assets.
Average outstanding loans during 1995 increased by $31.9 million or 6.2%, up
from the increase of $29.8 million or 6.1% in 1994.
The increase in loans caused the aggregate of all other earning assets,
representing alternative uses of funds, to decrease by $22.6 million, or 11.8%
in 1995 and by $46.0 million, or 19.3% in 1994. Any excess funds generated
during the period were mainly used to increase federal funds sold.
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 the end of 1995 the volume of Freddie
Mac loans sold with servicing being retained and without recourse was $199
million. The comparable figure for 1994 was $194 million. The ability of the
Company to sell these loans in large block amounts enables it to more
effectively manage its funding operations.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and interest bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity management seeks to avoid fluctuating net interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates by matching sources and uses of funds having common maturity
dates and acceptable interest spreads. The Company has no investments in, and is
not a party to, transactions involving derivative investments.
GRAPHS:
EQUITY CAPITAL AT YEAR END
(In Millions of Dollars)
EQUITY CAPITAL PERCENTAGE OF TOTAL ASSETS
1991 61.6% 8.02%
1992 66.7 8.52
1993 70.3 8.99
1994 73.2 9.54
1995 81.0 10.41
EARNINGS AND DIVIDENDS
PER SHARE*
EARNINGS DIVIDENDS
1991 1.13 .34
1992 1.26 .38
1993 1.26 .44
1994 1.46 .50
1995 1.56 .58
* Before accounting changes
PAGE 14
Marketable investment securities, particularly those of shorter maturities,
are the principal source of asset liquidity along with the Company's excess
funds position at any given time. Securities maturing in one year or less had a
carrying value of $24,058,000 at December 31, 1995, up from the $19,312,000 at
December 31, 1994. The Company decreased its holdings of mortgage-backed
securities to $34,455,000 at December 31, 1995 from $39,594,000 at December 31,
1994. Other types of short-term assets such as federal funds sold and money
market investments are additional sources of liquidity. At December 31, 1995 the
Company's combined position in federal funds sold and money market investments
amounted to $17,647,000, up from the $4,559,000 at the end of 1994.
Historically, the Company's liquidity has been enhanced by a significant
concentration of core deposits. However there has been a continuing change in
the deposit base over the last several years so that less stable short-term
funding sources such as large denomination time deposits and money market
certificates have also been used. The ability to acquire these funds as needed
assists the Company in its management of liquidity. This necessitates having the
ability to meet market interest rate levels at the time the funds are acquired
and involves maintenance of an appropriate maturity distribution of purchased
funds.
The following table shows a comparison of the maturity distribution of
jumbo certificates of deposit (those in amounts of $100,000 or more) for each of
the last three years and also compares them as a percentage of total deposits
outstanding. These certificates can be more expensive than traditional sources
of deposits since availability is dependent upon market supply and demand.
December 31
(In thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Maturing in:
3 months or less $10,956 $ 8,100 $ 8,538
Over 3 through 6 months 9,135 5,323 3,211
Over 6 through 12 months 7,769 4,250 3,654
Over 12 months 11,013 11,154 8,015
$38,873 $28,827 $23,418
================================================================================
As a percent of deposits 5.66% 4.21% 3.33%
================================================================================
Interest rate sensitivity varies with different types of interest earning
assets and interest bearing liabilities. Overnight federal funds on which rates
change daily and loans which are tied to the prime rate differ considerably from
long-term investment securities and fixed rate loans. Similarly, jumbo
certificates and money market certificates are much more rate sensitive than
savings accounts. The shorter term interest rate sensitivities are the key to
management of the interest sensitivity gap, the difference between interest
sensitive earning assets and interest bearing liabilities.
The following table presents information for the Company relative to the
maturity structure for total interest bearing assets and liabilities at December
31, 1995.
<TABLE>
<CAPTION>
Over 3 Total Over 1
3 Months through within through Over
(In thousands) or less 12 months 1 year 5 years 5 years
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans $ 171,531 $ 55,316 $ 226,847 $ 289,538 $ 44,506
Investment securities 8,343 15,715 24,058 74,897 6,321
Mortgage-backed securities 510 3,815 4,325 24,163 5,967
Other assets 17,647 - 17,647 - -
- -----------------------------------------------------------------------------------------------------------------------------
Rate sensitive assets 198,031 74,846 272,877 388,598 56,794
Deposits:
$100,000 or more 10,956 16,904 27,860 11,013 -
Other time 49,616 102,108 151,724 123,304 94
Savings 302,369 - 302,369 - -
- -----------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities 362,941 119,012 481,953 134,317 94
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap-period $ (164,910) $ (44,166) $ (209,076) $ 254,281 $ 56,700
=============================================================================================================================
Interest rate sensitivity gap-cumulative $ (209,076) $ (209,076) $ 45,205 $ 101,905
=============================================================================================================================
</TABLE>
PAGE 15
Positive gap is the excess of assets which can be repriced by maturity
within a specified time frame over interest bearing liabilities of similar
maturity. The Company has focused on the imbalance of financing fixed rate
assets with rate sensitive liabilities in an effort to manage its immediate gap,
and avoid fluctuations in earnings during periods of volatile interest rates. A
negative gap position favors the Company's operating results during periods of
declining interest rates but has an unfavorable impact during periods of rising
rates. The Company's current gap within one year is a negative $209 million at
December 31, 1995.
Included in the $481,953,000 of rate sensitive liabilities indicated as
maturing within one year are $302,369,000 of NOW, savings and money market
deposits which do not reprice in the same proportion as rate sensitive assets.
If core deposits of $191,076,000 consisting of NOW and savings deposits were not
included as rate sensitive liabilities, the Company's negative gap would be only
$18 million or less than three percent of earning assets.
CAPITAL RESOURCES
Total equity growth has surpassed total asset growth over the past several years
and amounted to 10.6% in 1995, 4.2% in 1994 and 5.4% in 1993. The equity
increase due to operations was $5,462,000, $5,360,000 and $4,617,000 for 1995,
1994 and 1993, respectively, exclusive of the $1,198,000 in extraordinary
charges during 1993. Equity was also impacted by security valuations each of
these years. For 1995, equity increased by $2,328,000 due to investment security
valuations. During 1994 equity decreased by $2,422,000 due to security
valuations, while 1993 valuations caused equity to increase by $170,000.
Stockholders' equity increased from 9.54% of total assets at the end of 1994 to
a level of 10.41% at the end of 1995.
Capital adequacy regulations for "Well Capitalized" banks require Tier I
capital (common equity less goodwill) of 6.0% of risk-adjusted assets and Total
capital (primarily Tier I capital plus the allowance for loan losses, subject to
certain limitations) of 10.0% of risk-adjusted assets. A minimum level of Tier I
capital to average total assets ("leverage ratio") of 4.0% has also been
stipulated. As summarized below, the Corporation's capital ratios were well in
excess of those requirements.
<TABLE>
<CAPTION>
Regulatory Requirements
- ----------------------------------------------------------------------------------------------------------
December 31 Well
1995 1994 1993 Minimum Capitalized
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total capital 15.56% 14.94 % 14.68% 8.0% 10.0 %
Tier I capital 14.31 13.73 13.43 4.0 6.0
Tier I leverage ratio 10.46 9.88 9.05 4.0 4.0
</TABLE>
The Company's primary means of maintaining capital adequacy is through
internal capital growth. Management has established an objective to increase the
rate of this growth. The rate of return on equity times the percent of earnings
retained equals the internal capital growth percentage. The following table
illustrates this relationship:
GRAPHS:
NET INTEREST INCOME
(In Millions of Dollars)
INTEREST INCOME INTEREST EXPENSE NET INTEREST INCOME
1991 70.1 37.8 32.2
1992 63.2 28.7 34.5
1993 57.1 22.4 34.7
1994 56.7 19.2 37.5
1995 62.5 24.0 38.5
ALLOWANCE FOR LOAN LOSSES
ALLOWANCE TO LOANS NET CHARGE-OFFS
AT YEAR END TO AVERAGE LOANS
1991 1.27 .42
1992 1.22 .32
1993 1.30 .10
1994 1.24 .19
1995 1.35 .13
PAGE 16
<TABLE>
<CAPTION>
RELATIONSHIP BETWEEN SIGNIFICANT FINANCIAL RATIOS
Internal
Return Earnings Capital
on Equity Retained Growth
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 11.35% X 62.82 % = 7.13%
1994 11.30 X 65.75 = 7.43
1993 8.70 X 58.10 = 5.05
</TABLE>
Management decided to increase the dividend payout during 1995 for the
seventh year in a row while maintaining a minimum rate of internal capital
growth of 6.0%. As shown above, the Company achieved an actual rate of 7.13%.
Exclusive of the extraordinary charges during 1993, that year's internal capital
growth rate would have also been above the 6.0% goal. Management plans to
continue to maintain a minimum 6.0% internal capital growth rate, while
providing a dividend payout ratio that is consistent with banking industry
standards.
The ability of the Company to obtain funds for its cash requirements,
including the payment of dividends, is largely dependent on the dividends which
may be declared by its member banks. At December 31, 1995, the aggregate amount
which could be paid to the Company by its member banks and insurance subsidiary
as dividends, without obtaining prior approval from bank regulatory agencies,
was in excess of $12.4 million. These regulatory restrictions have had no
impact, and are expected to have none in the future, on the ability of the
Company to meet its cash obligations.
RESULTS OF OPERATIONS
Net interest income increased by $997,000 in 1995, $2,793,000 in 1994 and
$168,000 in 1993 or by 2.7%, 8.1% and .4%, respectively. On a fully taxable
equivalent basis the annual rates of increase would have been 2.2% in 1995, 8.4%
in 1994 and .9% in 1993.
As was discussed earlier, changes in net interest income result from
changes in the mix of average earning assets and interest bearing liabilities
during a period, as well as from changes in the related yields earned and rates
paid. Average balances, yields and rates for the three most recent years are set
forth in the following table:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average earning assets $ 716,704 $ 707,419 $ 723,663
Yields earned (fully taxable equivalent) 8.84% 8.17% 8.01%
Average interest bearing liabilities $ 611,571 $ 594,403 $ 628,245
Rates paid 3.93% 3.24% 3.57%
Net yield on earning assets 5.49 5.44 4.91
</TABLE>
Rates fell during the second half of 1995 after having increased steadily
during 1994. Rates had been flat during 1993. As discussed above, management of
the Company's gap allowed the yield on earning assets to increase by .67%, while
allowing rates paid on interest bearing liabilities to increase .69%. The result
was an increase in net yield for 1995 of .05%, due to the increase in average
earning assets. The rising rates for 1994 provided an increase of .53% in the
net yield on earning assets during that time period.
Average earning assets, interest income, interest expense and net interest
income all increased during 1995. This was due to rising rates and the increase
in loans outstanding. For 1994, the increase in net interest income resulted
mainly from the lower interest expense incurred during 1994. Performance at the
net interest income level in future periods will still be primarily dependent
upon general interest rate developments.
PAGE 17
To lessen the impact of interest rate fluctuations, the Company has
increased the volume of single family fixed rate loans sold, as discussed in the
"Financial Condition" section. During 1995 nearly $32 million in loans were sold
with the Company retaining servicing rights. The amount of loans sold with
retained servicing rights was nearly $50 million during 1994. All of the loans
sold are without recourse and servicing fees are recognized as earned. At the
end of 1995 and 1994, loans being held for sale amounted to $4.2 million and
$1.7 million, respectively. The Company plans to continue this activity in the
future but the level of activity will largely depend upon external market
factors.
As discussed in Note A to the Consolidated Financial Statements on page 26,
the Company will adopt Statement of Financial Accounting Standards No. 122
"Accounting for Mortgage Servicing Rights, an Amendment of Statement 65" in
1996.
Statement 122, which must be adopted prospectively, requires the cost of
originating mortgage servicing rights to be capitalized separately from the cost
of originating a loan when a definitive plan to sell or securitize loans and
retain the mortgage servicing rights exists. Once recorded, mortgage servicing
rights are amortized in proportion to expected net servicing income. The impact
of this statement is dependent on future loan volume levels and other
considerations.
The provision for loan losses which is charged to operations is based on
the growth of the loan portfolio, the amount of the net loan losses incurred and
management's estimation of potential future losses based on an evaluation of
portfolio risk, collateral value, and certain economic factors. The provision
was $1,583,000 in 1995 compared to $1,121,000 in 1994 and $1,159,000 in 1993.
Net loan losses were $695,000 in 1995, $973,000 in 1994 and $474,000 in 1993. On
a percentage basis the net charge-offs to average loans decreased to .13% in
1995 from a level of .19% in 1994 and an increase from .10% in 1993.
The provision for loan losses is determined by management on an ongoing
basis in order to maintain the allowance for loan losses at an adequate level.
The allowance at December 31, 1995 stood at $7,589,000 or 1.35% of outstanding
loans, compared to $6,701,000 or 1.24% in 1994 and $6,553,000 or 1.30% in 1993.
This allowance level will not necessarily be maintained during future periods as
the amounts provided during any given period are dependent upon management's
review process and assessment of the perceived loss exposure in the then
outstanding loan portfolio.
As shown in the following table, management was again able to improve the
quality of the loan portfolio during 1995. On a percentage basis, nonperforming
loans decreased to .65% of total loans at December 31, 1995, a continued
reduction from the previous year end of .70% and a level of .72% in 1993.
Coverage of nonperformings by the allowance stood at 207% at year end 1995, up
from the 177% coverage level attained in 1994 and the level of 181% in 1993.
Management intends to continue in its efforts toward improving the quality of
the loan portfolio.
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 2,061 $ 2,374 $ 2,445
Accruing loans past due 90 days or more 915 830 962
Restructured loans 694 592 222
- ------------------------------------------------------------------------------------------------
Total nonperforming loans $ 3,670 $ 3,796 $ 3,629
================================================================================================
Nonperforming loans/total loans .65% .70% .72%
Loan loss allowance/nonperforming loans 207% 177% 181%
</TABLE>
GRAPHS:
NONPERFORMING LOANS
TO TOTAL LOANS
(As of December 31)
1991 1.05%
1992 .83%
1993 .72%
1994 .70%
1995 .65%
RETURN ON ASSETS* (ROA)
1991 .83%
1992 .91%
1993 .91%
1994 1.07%
1995 1.13%
* Before accounting changes
PAGE 18
The gross interest income that would have been recorded in 1995 for
nonaccrual and restructured loans as of December 31, 1995, assuming interest had
been accrued throughout the year in accordance with original terms, is $261,000.
The comparable 1994 total for these loan categories was $184,000. The amount of
interest income recorded on these loans and included in income was $73,000 in
1995 and $100,000 in 1994. The combined effect of these changes was to lower net
interest income in 1995 by $104,000 from the prior year.
Noninterest income increased $453,000 in 1995 after having decreased
$400,000 in 1994 and increasing $1,416,000 in 1993. Exclusive of securities
losses, it increased $446,000 in 1995, decreased $298,000 in 1994 and increased
$1,412,000 in 1993. Much of the increase in 1995 is due to a $280,000 increase
in trust services income. During 1994 and 1993, trust services income had
increased $215,000 and $400,000, respectively. Gains on sale of loans decreased
$38,000 during 1995 after having decreased $471,000 during 1994 and increasing
$110,000 during 1993. Much of the decrease in noninterest income during 1994 had
been due to this decrease in gains on sale of loans. Other income for 1995 was
virtually flat, it had decreased by $250,000 during 1994. A major portion of
that decrease is due to reduced insurance premium income of $118,000 caused by
lower market penetration in the direct consumer lending area. During 1993, the
insurance premium income had increased by $311,000.
Noninterest expense increased $153,000 in 1995, $929,000 in 1994 and
$1,833,000 during 1993. The salaries and employee benefits expense for 1995
increased $557,000 from the prior year. For 1994 and 1993 the increases over
prior year for salaries and employee benefits was $1,216,000 and $1,463,000,
respectively. The increase in noninterest expense for 1995 was not as large as
it might have been due to a substantial reduction in FDIC premiums in 1995 from
the prior year of $754,000.
The income tax provision for 1995 and 1994 increased by $278,000 and
$426,000, respectively, mainly due to improved pretax income. The 1993 income
tax provision had decreased by $156,000 due to an increase in the amount of
tax-exempt interest earned during the year.
Results of operations can be measured by various ratio analyses. Two widely
recognized performance indicators are return on equity and return on assets. As
indicated by the table of consolidated selected financial data, the Company's
return on equity before accounting changes was 11.35%, up from the 11.30% during
1994 and the 10.47% achieved during 1993. The return on assets before accounting
changes for 1995 increased to 1.13%, up from the levels of 1.07% in 1994 and
.91% in 1993. The Company's 1993 return on equity and return on assets after
accounting changes were 8.70% and .75%, respectively. Management believes that
the Company's fundamental operations have been improving, as the results of the
last three years have shown.
ACCOUNTING CHANGES
The Company was required to adopt new accounting rules for postretirement
benefits and income taxes as of January 1, 1993. The combined impact of the
adoption of these rules was a one-time net income reduction of $1,198,000. For
further information on these accounting changes, see Note B to the Consolidated
Financial Statements on pages 26 and 27.
EFFECTS OF INFLATION
The impact of inflation on the reported earnings of financial institutions is
principally related to the possible understatement of depreciation charges for
fixed asset values. Inflation, however, does have an important impact on the
growth of total assets and the resulting need to increase equity capital.
Management recognizes the need to control growth and to maintain a reasonable
dividend policy to allow for the adequate internal growth of capital.
PAGE 19
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
($ -- in thousands, except per share data)
YEAR ENDED DECEMBER 21 1995 1994 1993
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 53,297 $ 47,504 $ 46,114
Short-term investments 1,216 877 2,676
Investment securities:
Taxable 6,680 6,759 7,260
Tax-exempt 1,300 1,604 1,084
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 62,493 56,744 57,134
Interest expense:
Deposits 23,917 19,223 22,382
Borrowings 96 38 62
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 24,013 19,261 22,444
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 38,480 37,483 34,690
Provision for loan losses 1,583 1,121 1,159
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 36,897 36,362 33,531
Other income:
Trust department income 3,754 3,474 3,259
Fees for other customer services 2,782 2,571 2,363
Net gains on sale of loans 207 245 716
Other 1,456 1,463 1,713
Investment securities losses (127) (134) (32)
- ----------------------------------------------------------------------------------------------------------------------------------
8,072 7,619 8,019
- ----------------------------------------------------------------------------------------------------------------------------------
44,969 43,981 41,550
Other expenses:
Salaries and employee benefits 17,453 16,896 15,680
Net occupancy 2,445 2,308 2,305
Furniture and equipment 1,717 1,642 1,587
Data processing 1,376 1,617 1,918
Advertising 1,128 1,036 857
FDIC premiums 797 1,551 1,580
Single business tax 581 653 514
Other 7,279 6,920 7,253
- ----------------------------------------------------------------------------------------------------------------------------------
32,776 32,623 31,694
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and cumulative effect of changes
in accounting principles 12,193 11,358 9,856
Income tax expense 3,484 3,206 2,780
- ----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles 8,709 8,152 7,076
Cumulative effect of changes in accounting principles (1,198)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 8,709 $ 8,152 $ 5,878
==================================================================================================================================
Per share data:
Income before cumulative effect of changes in accounting principles $ 1.56 $ 1.46 $ 1.26
Cumulative effect of changes in accounting principles (.21)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1.56 $ 1.46 $ 1.05
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
PAGE 20
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
($ -- in thousands)
DECEMBER 31 1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 32,143 $ 32,378
Short-term investments:
Federal funds sold 17,350 4,450
Money market investments 297 109
- --------------------------------------------------------------------------------------
17,647 4,559
Investment securities:
Available for sale 115,194 84,773
Held to maturity (estimated fair value:
1995 - $24,269; 1994 - $72,646) 24,537 75,921
Loans 560,891 540,841
Allowance for loan losses (7,589) (6,701)
- --------------------------------------------------------------------------------------
NET LOANS 553,302 534,140
Premises and equipment 22,857 22,695
Accrued interest receivable 5,779 5,164
Other assets 6,857 7,943
- --------------------------------------------------------------------------------------
TOTAL ASSETS $ 778,316 $ 767,573
======================================================================================
LIABILITIES
Domestic deposits:
Noninterest bearing $ 70,790 $ 96,772
Interest bearing 616,364 588,430
- --------------------------------------------------------------------------------------
TOTAL DEPOSITS 687,154 685,202
Accrued interest payable 2,836 2,226
Other liabilities 7,341 6,950
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES 697,331 694,378
STOCKHOLDERS' EQUITY
Common stock - no par value:
Authorized shares - 10,000,000
Shares issued and outstanding - 5,598,267 18,555 18,555
Retained earnings 62,575 57,113
Securities valuation (145) (2,473)
- --------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 80,985 73,195
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 778,316 $ 767,573
======================================================================================
</TABLE>
See notes to consolidated financial statements.
PAGE 21
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
($ -- in thousands, except per share data)
COMMON RETAINED SECURITIES
STOCK SURPLUS EARNINGS VALUATION TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $ 2,799 $ 15,756 $ 48,334 $ (221) $ 66,668
Net income for the year 5,878 5,878
Conversion of $1 par value common
stock to no par value 15,756 (15,756)
Increase in valuation 170 170
Cash dividends, $.44 per share (2,459) (2,459)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 18,555 51,753 (51) 70,257
Net income for the year 8,152 8,152
Adjustment to beginning balance for
change in accounting method,
net of income taxes of $235 457 457
Change in unrealized gains and losses, net
of income tax benefits of $1,509 (2,930) (2,930)
Increase in valuation 51 51
Cash dividends, $.50 per share (2,792) (2,792)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 18,555 57,113 (2,473) 73,195
Net income for the year 8,709 8,709
Net unrealized holding losses on
securities transferred from the held to
maturity category to the available for sale
category, net of income tax benefits of $42 (82) (82)
Change in unrealized gains and losses,
net of income taxes of $1,298 2,410 2,410
Cash dividends, $.58 per share (3,247) (3,247)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $18,555 $ -- $ 62,575 $ (145) $80,985
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
PAGE 22
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ -- in thousands)
YEAR ENDED DECEMBER 31 1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,709 $ 8,152 $ 5,878
Adjustments to reconcile net income to net cash provided by operating
activities:
Origination of mortgage loans held for sale (34,237) (52,592) (115,663)
Proceeds from sale of mortgage loans held for sale 31,745 49,750 117,536
Depreciation and amortization 1,805 1,674 1,564
Provision for loan losses 1,583 1,121 1,159
Decrease in other real estate 183 979 456
(Increase) decrease in interest receivable (615) (439) 678
Amortization of investment securities premium 269 423 531
Realized gain on sale of loans (207) (245) (716)
Deferred income tax (credit) (284) 7 (339)
Realized investment securities losses 127 134 32
Increase (decrease) in interest payable 610 66 (467)
Cumulative effect of changes in accounting principles 1,198
Other 324 1,050 1,284
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,012 10,080 13,131
INVESTING ACTIVITIES
Net (increase) decrease in short-term investments (13,088) 51,404 42,193
Net increase in loans (18,046) (35,763) (24,937)
Purchases of available for sale securities (19,366) (27,869)
Proceeds from maturities of held to maturity securities 18,226 20,501
Proceeds from maturities of available for sale securities 11,008 15,114
Purchases of held to maturity securities (650) (12,405)
Proceeds from sale of available for sale securities 14,874 4,603
Purchases of investment securities (91,752)
Proceeds from maturities of investment securities 61,843
Proceeds from sale of investment securities 7,625
Purchases of premises and equipment (1,963) (3,417) (4,192)
Proceeds from sale of premises and equipment 53 26 131
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (8,952) 12,194 (9,089)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 1,952 (17,165) (5,357)
Cash dividends (3,247) (2,792) (2,459)
Decrease in bank loan (1,200)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (1,295) (19,957) (9,016)
- ----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (235) 2,317 (4,974)
Cash and due from banks at beginning of year 32,378 30,061 35,035
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 32,143 $ 32,378 $ 30,061
==================================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 23,403 $ 19,195 $ 22,911
==================================================================================================================================
Income taxes paid $ 3,444 $ 3,650 $ 3,021
==================================================================================================================================
NONCASH TRANSACTIONS:
Investment securities transferred to available for sale $ 34,299 $ 84,833
===============================================================================================================
</TABLE>
See notes to consolidated financial statements.
PAGE 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands,
except per share data)
NOTE A - ACCOUNTING POLICIES
Organization: Michigan Financial Corporation (the "Company"), is a bank holding
company operating solely in the Upper Peninsula of Michigan. The Company,
through its seven member banks and one insurance subsidiary, provides a full
range of banking and trust services to nine of the fifteen counties in the Upper
Peninsula.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its member banks and insurance subsidiary, all of
which are wholly owned. Significant intercompany balances and transactions have
been eliminated in preparing the consolidated financial statements.
Use of estimates: In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the consolidated balance sheets and
statements of income. If events occur in a future period which affect the
underlying assumptions and estimates, actual results could differ significantly
from those estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the allowance
for losses on loans and certain factors related to future employee benefits. In
connection with the determination of the allowances for losses on mortgage loans
receivable and real estate owned, management obtains independent appraisals for
significant properties.
Investment Securities: Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. (see also Note D regarding special reclassifications as
of December 1, 1995). Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Held to maturity securities are stated at amortized cost.
Debt securities not classified as held to maturity and marketable equity
securities are classified as available for sale. Available for sale securities
are stated at fair value, with the unrealized gains and losses, net of taxes,
reported in a separate component of stockholders' equity.
The amortized cost of debt securities classified as held to maturity or
available for sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization and interest and dividends are
included in interest income from investments. Realized gains and losses, and
declines in value judged to be other than temporary are included in net
securities losses. The cost of securities sold is based on the specific
identification method.
Loan Interest Recognition: Interest income on loans is accrued and credited to
operations based on the principal amount outstanding. The accrual of interest
income is generally discontinued when a loan becomes 90 days past due as to
principal or interest and/or when, in the opinion of management, full collection
is unlikely. When interest accruals are discontinued, interest credited to
income in the current year is reversed and interest accrued in the prior year is
charged to the allowance for loan losses. Management may elect to continue the
accrual of interest when the loan is in the process of collection and the fair
value of collateral is sufficient to cover the principal balance and accrued
interest (cash basis method). Interest received on nonaccrual loans generally is
either applied against principal or reported as interest income, according to
management's judgment as to the collectibility of principal. Generally, loans
are restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period of
time and the ultimate collectibility of the total contractual principal and
interest is no longer in doubt.
Loan Fees and Related Costs: Loan origination and commitment fees and certain
direct loan origination costs are deferred and the net amount amortized as an
adjustment of the related loan's yield. The Company amortizes these amounts over
the contractual life of the related loans using a method which approximates the
level yield method. Unamortized net deferred amounts are recorded in income when
the underlying loans are sold or repaid. Fees related to standby letters of
credit are recognized over the commitment period.
PAGE 24
Allowance for Loan Losses: The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral and other relevant factors. This evaluation is
inherently subjective as it requires material estimates including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change. The allowance is increased by
provisions for loan losses charged against income.
Beginning in 1995, the Company adopted Financial Accounting Standards Board
("FASB") Statement 114, "Accounting by Creditors for Impairment of a Loan."
Statement 114 only applies to the Company's nonhomogeneous loan portfolios
including certain commercial, financial and agricultural loans, multifamily and
commercial real estate loans and multifamily and commercial real estate
construction loans. A nonhomogeneous loan is considered impaired when there is
serious doubt about further collectibility of principal and interest, even
though the loan is performing. Under the new standard, the 1995 allowance for
loan losses related to loans that are identified for evaluation in accordance
with Statement 114 is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for certain
collateral dependent loans. Prior to 1995, the allowance for loan losses related
to these loans was based on undiscounted cash flows or the fair value of the
collateral for collateral dependent loans.
Overall, concentrations of credit for loans and loan commitments are to
customers located primarily in the local areas served by the member banks, all
of which are in the Upper Peninsula of Michigan.
Premises and Equipment: Land is stated at cost. Buildings, furniture and
equipment are stated at cost, less accumulated depreciation. The provisions for
depreciation are predominantly computed on the straight-line method over the
useful lives of the assets. The estimated useful lives are generally 40 years
for buildings and 3 to 10 years for furniture, fixtures and equipment.
Pension Plan: The Company and its member banks have a noncontributory defined
benefit pension plan covering all qualified employees who have at least one year
of service. Annual costs charged against income are computed using the projected
unit credit actuarial cost method.
Per Share Calculations: Earnings per share are based on the weighted average
number of shares of common stock and common stock equivalents, if dilutive,
outstanding during each year. The weighted average number of shares used was
5,598,267 in 1995, 1994 and 1993.
Cash and Cash Equivalents: For the purpose of presentation in the Statements of
Cash Flows, cash and cash equivalents are defined as those amounts included in
the balance sheet captions "Cash" and "Cash and Due from Banks." These items
have an original maturity of three months or less and are generally due on
demand.
Fair Values of Financial Instruments: Disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value is presented in Note M. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Certain financial
instruments and all nonfinancial instruments are excluded. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
PAGE 25
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and due from banks and short-term investments
approximate those assets' fair values.
Investment securities (including mortgage-backed securities): Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for certain mortgage loans (e.g., one-to-four
family residential), consumer loan and other loans (e.g., commercial real
estate and rental property mortgage loans, commercial and industrial loans,
financial institution loans, and agricultural loans) are estimated using
discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality.
Off-balance-sheet instruments: Fair values for the Company's
off-balance-sheet instruments (lending commitments and standby letters of
credit) are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standing (loan commitments) and discounted cash
flow analyses (standby letters of credit). The fair value of these
off-balance-sheet items approximates the recorded amounts of the related
fees and is not material at December 31, 1995 and 1994.
Deposits: The fair values disclosed for demand deposits (e.g., interest and
noninterest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of
deposits approximate their fair values at the reporting date. Fair values
for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered
on certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Pending Accounting Changes: In 1995, the FASB issued Statement 122, "Accounting
for Mortgage Servicing Rights, an Amendment of Statement 65". The Company must
adopt this new standard no later than the year ending December 31, 1996.
Statement 122, which must be adopted prospectively, requires the cost of
originating mortgage servicing rights to be capitalized separately from the cost
of originating a loan when a definitive plan to sell or securitize loans and
retain the mortgage servicing rights exists. Once recorded, mortgage servicing
rights are amortized in proportion to expected net servicing income. The impact
of this statement is dependent on future loan volume levels and other
considerations.
NOTE B - ACCOUNTING CHANGES
In March 1995, the FASB issued Statement 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of", which requires
impairment losses to be recognized for long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows are not
sufficient to recover the assets' carrying amount. The impairment loss is
measured by comparing the fair value of the asset to its carrying amount. The
Company adopted the provisions of this new standard as of January 1, 1995
without significant effect on the Company's consolidated financial position or
its results of operations for the year.
PAGE 26
In May 1993, the FASB issued Statement 115, "Accounting for Certain Investments
in Debt and Equity Securities." The Company adopted the provisions of the new
standard for investments held as of or acquired after January 1, 1994. In
accordance with the Statement, prior period financial statements have not been
restated to reflect the change in accounting principle. The opening balance of
stockholders' equity was increased by $457,000 (net of $235,000 in deferred
income taxes) to reflect the net unrealized holding gains on securities
classified as available for sale previously carried at amortized cost or lower
of cost or market.
Effective January 1, 1993, the Company adopted FASB Statement 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
standard, which applies to certain health care and life insurance benefits
provided for retired employees, requires that the expected cost of these
postretirement benefits be charged to expense in the years the employees render
the services necessary to earn their benefits. This was a significant change
from the Company's previous policy of recognizing these costs on the cash basis.
The Company elected immediate recognition of the accumulated postretirement
obligation through a one-time charge to earnings of $1,023,000, net of related
tax benefits of $527,000.
As of January 1, 1993, the Company also adopted FASB Statement 109
"Accounting for Income Taxes." Statement 109 required a change from the deferred
method of accounting for income taxes to an asset and liability method. Under
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The
cumulative effect of the change in accounting for income taxes at January 1,
1993, amounted to a $175,000 reduction of net deferred tax assets and a related
charge to earnings.
The following table summarizes the January 1, 1993 effects of these changes
in methods of accounting.
<TABLE>
<CAPTION>
Earnings
Net Income Per Share
Decrease Decrease
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Adoption of accounting standard on postretirement benefits,
net of income tax benefits of $527,000 $ (1,023) $(.18)
Adoption of accounting standard on income taxes (175) (.03)
- -----------------------------------------------------------------------------------------------------
$ (1,198) $(.21)
=====================================================================================================
</TABLE>
NOTE C - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
Member banks are required to maintain average reserve balances by the Federal
Reserve Bank. The amount of those average reserve balances required as of
December 31, 1995 was $4,867,000.
PAGE 27
NOTE D - INVESTMENT SECURITIES
The following is a summary of available for sale securities and held to maturity
securities:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1995 Available for Sale Securities
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $ 75,607 $ 334 $ (416) $ 75,525
Mortgage-backed 34,622 149 (316) 34,455
States and political subdivisions 1,298 9 (12) 1,295
Corporate 604 30 634
Other 3,285 3,285
- -----------------------------------------------------------------------------------------------------------------------------
$ 115,416 $ 522 $ (744) $115,194
=============================================================================================================================
Held to Maturity Securities
- -----------------------------------------------------------------------------------------------------------------------------
States and political subdivisions $ 24,537 $ 135 $ (403) $ 24,269
=============================================================================================================================
=============================================================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1994 Available for Sale Securities
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and government agencies $ 80,505 $ 20 $ (3,491) $ 77,034
Mortgage-backed 3,704 (248) 3,456
States and political subdivisions 408 (23) 385
Corporate 704 (5) 699
Other 3,199 3,199
- -----------------------------------------------------------------------------------------------------------------------------
$ 88,520 $ 20 $ (3,767) $ 84,773
=============================================================================================================================
Held to Maturity Securities
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and government agencies $ 4,218 $ (64) $ 4,154
Mortgage-backed 36,138 (2,123) 34,015
States and political subdivisions 35,565 $ 50 (1,138) 34,477
- -----------------------------------------------------------------------------------------------------------------------------
$ 75,921 $ 50 $ (3,325) $ 72,646
=============================================================================================================================
</TABLE>
Investment securities with a book value of $8,221,000 were pledged at
December 31, 1995 as collateral to secure public deposits and for other
purposes.
On November 15, 1995, the FASB staff issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with provisions in that Special Report,
the Company chose to reclassify certain securities from held to maturity to
available for sale. At December 1, 1995, the date of transfer, the amortized
cost of those securities was $34,299,000 and the unrealized loss on those
securities was $124,000, which is included in stockholders' equity, net of
income tax effect of $42,000.
During 1995 and 1994 available for sale securities with a fair value at the
date of sale of $14,874,000 and $4,603,000, respectively, were sold. The gross
realized gains were $0 and $3,000, respectively, and gross realized losses were
$127,000 and $137,000, respectively. Proceeds from sales of investments in debt
securities during 1993 were $7,625,000. Realized gross gains in 1993 were
$131,000 and realized gross losses were $163,000.
PAGE 28
The amortized cost and estimated fair value of investment securities at
December 31, 1995, 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 call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Available for sale:
Due in one year or less $ 17,740 $ 17,762
Due after one year through five years 59,250 59,160
Due after five years through ten years 419 432
Due after ten years 100 100
- ----------------------------------------------------------------------------------------
77,509 77,454
Mortgage-backed securities 34,622 34,455
Equity securities 3,285 3,285
- ----------------------------------------------------------------------------------------
$ 115,416 $ 115,194
========================================================================================
Estimated
Amortized Fair
Cost Value
- ----------------------------------------------------------------------------------------
Held to maturity:
Due in one year or less $ 6,296 $ 6,267
Due after one year through five years 15,737 15,600
Due after five years through ten years 1,699 1,744
Due after ten years 805 658
- ----------------------------------------------------------------------------------------
$ 24,537 $ 24,269
========================================================================================
</TABLE>
NOTE E - LOANS AND THE ALLOWANCE FOR LOAN LOSSES
A summary of loans outstanding follows:
<TABLE>
<CAPTION>
December 31 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 246,134 $ 248,785
Real estate-mortgage 191,066 175,923
Real estate-construction 10,095 9,175
Consumer 113,596 106,958
- ----------------------------------------------------------------------------------------
$ 560,891 $ 540,841
========================================================================================
</TABLE>
The following table presents changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 6,701 $ 6,553 $ 5,868
Provision for loan losses 1,583 1,121 1,159
Recoveries 250 296 352
Loans charged-off (945) (1,269) (826)
- ---------------------------------------------------------------------------------------------
Balance at end of year $ 7,589 $ 6,701 $ 6,553
=============================================================================================
</TABLE>
PAGE 29
At December 31, 1995, the recorded investment in loans that are considered to be
impaired under FASB Statement 114 was $1,433,000 (of which $1,359,000 was on a
nonaccrual basis). Included in this amount is $460,000 of impaired loans for
which the related allowance for loan losses is $245,000 and $1,000 of impaired
loans that as a result of write-downs do not have an allowance for loan losses.
The average recorded investment in impaired loans during the year ended December
31, 1995 was approximately $1,505,000. For the year ended December 31, 1995, the
Company recognized interest income on those impaired loans of $21,000, all of
which was recognized using the cash basis method of income recognition. Total
nonaccrual loans were $2,061,000 and $2,374,000 at December 31, 1995 and 1994,
respectively.
NOTE F - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and its significant
member banks, including their immediate families and companies in which they are
principal owners, are loan customers of the member banks. Such loans are made in
the ordinary course of business at the banks' normal credit terms, including
interest rate and collateralization, and do not represent more than a normal
risk of collection. The aggregate dollar amount of loans to these 42 persons was
$18,815,000 and $20,490,000 at December 31, 1995 and 1994, respectively. During
1995, $4,562,000 of new loans were made and repayments totaled $6,237,000.
NOTE G - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31 1995 1994
- ---------------------------------------------------------------------
Land $ 2,740 $ 2,706
Buildings and improvements 22,769 22,158
Furniture, fixtures and equipment 13,433 13,486
Construction in progress 720 380
- ---------------------------------------------------------------------
39,662 38,730
Accumulated depreciation (16,805) (16,035)
- ---------------------------------------------------------------------
$ 22,857 $ 22,695
=====================================================================
NOTE H - UNDISTRIBUTED INCOME OF MEMBER BANKS AND INSURANCE SUBSIDIARY AND
DIVIDEND LIMITATION
Included in stockholders' equity at December 31, 1995, is undistributed net
income of the member banks and insurance subsidiary of $51,468,000 of which
$12,377,000 was available at that date for distribution as dividends without the
prior approval of regulatory authorities. The remaining amount of net assets of
the member banks and insurance subsidiary of $27,257,000 was restricted as to
payments to the parent company.
In 1996, the member banks and insurance subsidiary may pay to the parent
company $10,075,000 in dividends in addition to their 1996 net income without
obtaining prior approval from regulatory agencies.
NOTE I - EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN: The Company established a stock option plan in 1994 under
which shares of common stock are reserved for the grant of nonincentive stock
options to officers and key employees. The plan provides that option prices will
not be less than the fair market value of the stock at the grant date. The date
on which the options are first exercisable, normally three years from the grant
date, is determined by the Personnel Committee of the Board of Directors. The
options expire no later than ten years from the grant date.
In 1994, 47,000 options were granted at a price of $19 per share and in
1995, an additional 47,000 options were granted at a price of $28 per share. At
December 31, 1995, none of the options were exercisable and options for 186,000
shares were available for future grant.
PAGE 30
PENSION PLAN: The Company and its member banks have a noncontributory defined
benefit pension plan covering all qualified employees who have at least one year
of service and have attained age twenty one. In addition, prior to 1995 one of
the member banks had its own noncontributory defined benefit pension plan
covering all qualified employees who had at least one year of service. This plan
was merged into the Company's plan as of December 31, 1994. Pension costs
charged to operations by the member bank for its previous plan during 1994 and
1993 were immaterial. Benefits are based on years of service and the employee's
highest average earnings during any consecutive five year period of employment.
The Company's funding policy is to contribute annually the maximum amount that
can be deducted for federal income tax purposes. Contributions are intended to
provide for benefits attributed to service to date and for benefits expected to
be earned in the future.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated
balance sheets:
<TABLE>
<CAPTION>
December 31 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$8,766,000 in 1995 and $6,713,000 in 1994 $ 8,922 $ 6,835
=============================================================================================================================
Projected benefit obligation for service rendered to date $ 14,401 $ 10,635
Plan assets at fair value, primarily U.S. Government and corporate bonds,
listed stocks and mutual funds 11,732 9,404
- -----------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets 2,669 1,231
- -----------------------------------------------------------------------------------------------------------------------------
Unrecognized net loss from past experience different from that assumed
and effects of changes in assumptions (1,861) (144)
Prior service cost not yet recognized in net periodic pension cost (1,233) (1,333)
Unrecognized net asset at January 1 being recognized over 20 years 525 577
- -----------------------------------------------------------------------------------------------------------------------------
Accrued pension cost $ 100 $ 331
=============================================================================================================================
Net pension cost included the following components:
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 595 $ 759 $ 595
Interest cost on projected benefit obligation 880 789 681
Actual return on plan assets (1,985) 258 (294)
Net amortization and deferral 1,097 (1,003) (385)
- --------------------------------------------------------------------------------------------------
Net pension cost $ 587 $ 803 $ 597
==================================================================================================
</TABLE>
Assumptions used in the accounting were:
<TABLE>
<CAPTION>
December 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7.25% 8.50% 7.00%
Rate of increase in future compensation levels 6.00% 6.00% 6.00%
Expected long-term rate of return on plan assets 9.00% 9.00% 9.00%
</TABLE>
EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN: Prior to 1995, the Company and its
member banks also had a noncontributory qualified Employee Stock Ownership Plan
(ESOP) covering all qualified employees who had at least one year of service and
had attained age twenty one. Contributions to the ESOP, which were expensed to
operations during the year accrued, were made on a discretionary basis and
amounted to $100,000 in 1994 and $91,000 in 1993.
PAGE 31
As of January 1, 1995, the plan was amended and restated as a contributory
qualified Employee Savings and Stock Ownership Plan (KSOP) which functions as an
ESOP/401(k) plan. During 1995, employees could contribute up to 4% of their
compensation and the Company and its member banks matched 25% of the amount of
such employee contributions. In addition, each employee could contribute amounts
in excess of the 4% limit, up to the lesser of 15% of compensation or federal
tax limits, with no Company or member bank participation. The matching
contribution formula is determined annually and requires approval of the
Company's Board of Directors. For 1995, $82,000 was expensed for this plan. At
December 31, 1995, the KSOP owned 95,741 shares of the outstanding common stock
of the Company.
NOTE J - POSTRETIREMENT BENEFIT PLAN
The Company and its member banks provide certain health care and life insurance
benefits for retired employees through an unfunded plan. Substantially all
employees who retired on or before December 31, 1994 became eligible for these
benefits provided they reached age 65 with at least ten years of credited
service while still working for the Company or a member bank. Substantially all
employees retiring after 1994 will be provided life insurance benefits and will
be allowed to participate in the health care plan provided they reach age 65
with at least 15 years of credited service after age 45 while still working for
the Company or a member bank. These and similar benefits for active employees
are provided through insurance companies whose premiums are based on the
benefits paid during the year.
The following table presents the postretirement benefit plan's unfunded
status reconciled with amounts recognized in the Company's consolidated balance
sheets:
December 31 1995 1994
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 1,194 $ 812
Fully eligible active plan participants 38 233
Other active plan participants 242 318
- --------------------------------------------------------------------------------
Total unfunded obligation 1,474 1,363
Unrecognized prior service cost 97 (31)
Unrecognized net gain 136 309
- --------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 1,707 $ 1,641
================================================================================
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 41 $ 49 $ 51
Interest cost 117 104 108
Amortization and deferral (5)
Other 30 (30)
- -------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 153 $ 183 $ 129
===========================================================================================
</TABLE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 8.5% at December 31, 1995 and
1994 respectively. The weighted-average annual assumed rate of increase in the
per capita cost of covered benefits (i.e., health care cost trend rate) is
10.31% for 1996 (11.01% for 1995) and is assumed to decrease uniformly each year
to 7% by the year 2005 and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by one percent in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1995 and 1994 by 10.16% and 10.68%, respectively, and the aggregate
of the service and interest cost components of net periodic postretirement
benefit for 1995 by 14.16%.
PAGE 32
NOTE K - INCOME TAX
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities recorded in the Company's
consolidated balance sheets are as follows:
December 31 1995 1994
- ----------------------------------------------------------------------------
Deferred tax assets:
Book over tax loan losses $ 2,580 $ 2,201
Postretirement benefit obligation 574 534
Deferred compensation and director fees 464 384
Unrealized gains and losses 78 1,274
Other 527 503
- ----------------------------------------------------------------------------
4,223 4,896
- ----------------------------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation 973 833
Other 242 231
- ----------------------------------------------------------------------------
1,215 1,064
- ----------------------------------------------------------------------------
Net deferred tax assets $ 3,008 $ 3,832
============================================================================
Income tax expense is composed of the following amounts:
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable $ 3,768 $ 3,199 $ 3,119
Deferred tax (credit) (284) 7 (339)
- ----------------------------------------------------------------------------------------------------------------
Income tax on income before income tax 3,484 3,206 2,780
Deferred credit on cumulative effect of adoption of new
accounting standard for postretirement benefits (527)
Cumulative effect of change in accounting standard for income taxes 175
- ----------------------------------------------------------------------------------------------------------------
$ 3,484 $ 3,206 $ 2,428
================================================================================================================
</TABLE>
Applicable income tax credits on investment securities losses amounted to
$44,000, $46,000 and $11,000 in 1995, 1994 and 1993, respectively, and are
included in income tax expense. The components of income tax expense for 1994
and 1993 have been reclassified to reflect the tax returns as filed.
The reasons for the difference between income tax expense and the amount
computed by applying the statutory federal income tax rate to income before
income tax are as follows:
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income tax and cumulative effect of changes
in accounting principles $ 12,193 $ 11,358 $ 9,856
===========================================================================================================
Federal income tax computed at 35% in 1995
and 34% in 1994 and 1993 $ 4,268 $ 3,862 $ 3,351
Add (deduct) effect of:
Tax-exempt bond and loan interest income (757) (869) (715)
Other items-net (27) 213 144
- -----------------------------------------------------------------------------------------------------------
Income tax expense on income before income tax 3,484 3,206 2,780
Income tax benefit (net) of cumulative effect of changes
in accounting principles (352)
- -----------------------------------------------------------------------------------------------------------
$ 3,484 $ 3,206 $ 2,428
===========================================================================================================
</TABLE>
PAGE 33
NOTE L - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Loan commitments are made to accommodate the financial needs of customers of the
member banks. Standby letters of credit commit the banks to make payments on
behalf of customers when certain specified future events occur. Both
arrangements have credit risk essentially the same as that involved in extending
loans to customers and are subject to normal credit policies. Collateral is
obtained based on management's credit assessment of the customer.
The maximum exposure to credit loss for unfunded loans and unused lines of
credit, substantially all of which are at adjustable rates of interest, and
standby letters of credit outstanding at December 31, 1995 follows:
Loan Standby
Expiration Date Commitments Letters of Credit
- ---------------------------------------------------------
1996 $ 83,984 $ 5,216
1997 8,214 1,555
1998 431 1,551
1999 1,205 162
2000 283 163
Thereafter 2,079 70
- ---------------------------------------------------------
$ 96,196 $ 8,717
=========================================================
NOTE M - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 49,790 $ 49,790 $ 36,937 $ 36,937
Investment securities -
Available for sale 115,194 115,194 84,773 84,773
Held to maturity 24,537 24,269 75,921 72,646
Loans, less allowance 553,302 568,769 534,140 545,537
Financial liabilities:
Deposits $ 687,154 $ 694,853 $ 685,202 $ 691,930
</TABLE>
PAGE 34
NOTE N - MICHIGAN FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 1,685 $ 983
Investment in member banks 77,279 70,207
Investment in nonbank subsidiary 1,673 1,402
Premises and equipment 1,762 1,972
Other assets 703 753
- -------------------------------------------------------------------------------------
TOTAL ASSETS $83,102 $ 75,317
=====================================================================================
LIABILITIES
Accrued expenses and other liabilities $ 2,117 $ 2,122
- -------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 80,985 73,195
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,102 $ 75,317
=====================================================================================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from member banks $ 5,500 $ 4,300 $ 3,200
Fees from member banks 4,690 1,851 2,122
Interest from member banks 18 24 41
Other 21 10 7
- --------------------------------------------------------------------------------------------------------------
TOTAL INCOME 10,229 6,185 5,370
Expenses:
Salaries and employee benefits 2,927 1,201 954
Data processing 1,167 1,400 1,714
Interest 36
Other operating expenses 1,794 847 649
- --------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 5,924 3,448 3,317
- --------------------------------------------------------------------------------------------------------------
Income before income tax, equity in undistributed net
income of member banks and insurance subsidiary and
cumulative effect of changes in accounting principles 4,305 2,737 2,053
Income tax credit (389) (502) (391)
- --------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of member
banks and insurance subsidiary and cumulative effect of
changes in accounting principles 4,694 3,239 2,444
Equity in undistributed net income of:
Member banks 3,841 4,723 4,467
Insurance subsidiary 174 190 165
- --------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles 8,709 8,152 7,076
Cumulative effect of changes in accounting principles (1,198)
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 8,709 $ 8,152 $ 5,878
==============================================================================================================
</TABLE>
PAGE 35
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,709 $ 8,152 $ 5,878
Adjustments to reconcile net income to net cash provided by operating
activities:
Undistributed earnings of member banks and insurance subsidiary (4,015) (4,913) (4,632)
Cumulative effect of changes in accounting principles 1,198
Depreciation and amortization 205 48 44
Deferred income tax (credit) 10 (21) (24)
Other 266 49 263
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,175 3,315 2,727
INVESTING ACTIVITIES
Investment in member bank (1,000) (500)
Purchases of premises and equipment (267) (1,635)
Proceeds from sale of premises and equipment 15 3 2
Payments received on land contract for sale of assets 26 2 3
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (1,226) (1,630) (495)
FINANCING ACTIVITIES
Cash dividends (3,247) (2,792) (2,459)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (3,247) (2,792) (2,459)
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 702 (1,107) (227)
Cash at beginning of year 983 2,090 2,317
- ------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 1,685 $ 983 $ 2,090
==============================================================================================================================
</TABLE>
NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Interest income $ 14,972 $ 15,468 $ 15,955 $ 16,098
Net interest income 9,490 9,429 9,711 9,850
Provision for loan losses 220 307 144 912
Investment securities losses (40) (87)
Noninterest income 1,871 2,054 2,012 2,262
Noninterest expense 8,373 8,351 8,078 7,974
Income tax expense 746 818 1,033 887
Net income 1,982 2,007 2,381 2,339
Net income per share .35 .36 .43 .42
1994
Interest income $ 13,437 $ 13,857 $ 14,567 $ 14,883
Net interest income 8,686 9,219 9,754 9,824
Provision for loan losses 129 170 168 654
Investment securities losses (6) (5) (123)
Noninterest income 1,956 1,965 1,909 1,923
Noninterest expense 8,048 8,213 8,234 8,128
Income tax expense 675 823 926 782
Net income 1,790 1,972 2,330 2,060
Net income per share .32 .35 .42 .37
</TABLE>
PAGE 36
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Michigan Financial Corporation
We have audited the accompanying consolidated balance sheets of Michigan
Financial Corporation, member banks and insurance subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements, based on our audits.
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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Michigan
Financial Corporation, member banks and insurance subsidiary at December 31,
1995 and 1994, and the consolidated results of their operations, and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
January 19, 1996
MANAGEMENT REPORT
Management is responsible for the preparation, content and integrity of all
financial information included in this annual report. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles.
The Company maintains a system of internal controls designed to provide
reasonable assurance as to the integrity of financial records and the protection
of assets. The system of internal controls includes written policies and
procedures, proper delegation of authority and organizational division of
responsibilities, and the careful selection and training of qualified personnel.
In addition, an effective internal audit function periodically tests the system
of internal controls.
Management recognizes that the cost of a system of internal controls should
not exceed the benefits derived and that there are inherent limitations to be
considered in the potential effectiveness of any system. However, management
believes that the system of internal controls provides reasonable assurances
that financial transactions are recorded properly to permit the preparation of
reliable financial statements.
The Audit Committee of the Board of Directors is composed of outside
directors and has the responsibility for the recommendation of the independent
auditors for the Company. The committee meets regularly with the independent
auditors and internal auditors to review the scope of their audits and audit
reports and to discuss any action to be taken. The independent auditors and the
internal auditors have free access to the Audit Committee.
/s/ Howard L. Cohodas /s/ Kenneth F. Beck
Howard L. Cohodas Kenneth F. Beck, CPA
Chairman and President Senior Vice President, Treasurer
and Secretary
Marquette, Michigan
January 19, 1996
PAGE 37
INVESTOR INFORMATION
EXECUTIVE OFFICES
101 West Washington St. P.O. Box 10
Marquette, Michigan 49855
Telephone 906/228-6940
STOCK TRANSFER AGENT
Norwest Bank Minnesota, N.A.,
Stock Transfer Department
161 North Concord Exchange P.O. Box 738
South St. Paul, Minnesota 55075-0738
LEGAL COUNSEL
Foster, Swift, Collins & Smith, P.C.
313 South Washington Square
Lansing, Michigan 48933-2193
INDEPENDENT AUDITORS
Ernst & Young LLP
111 E. Kilbourn Avenue Suite 900
Milwaukee, Wisconsin 53202
ANNUAL MEETING
The annual stockholders' meeting will be held on Tuesday, April 30, 1996 at the
Ramada Inn, 412 West Washington Street, Marquette, Michigan at 1:30 p.m. local
time.
Management urges all stockholders to vote their shares so they may
participate in the important decisions that will be made at this meeting.
MARKET MAKERS
The following firms are currently the primary market makers for Michigan
Financial Corporation stock:
Robert W. Baird & Co., Inc.
First of Michigan Corporation
Herzog, Heine, Geduld, Inc.
John G. Kinnard & Co., Inc.
Paine Webber Inc.
Roney & Company
FORM 10-K
Copies of the Company's annual Form 10-K report filed with the Securities and
Exchange Commission may be obtained without charge by written request to Kenneth
F. Beck, Secretary.
DIVIDEND REINVESTMENT PLAN
Stockholders may acquire additional stock in the Company free of service fees
and brokerage commissions by automatic reinvestment of their dividends. For
further information, please contact:
Norwest Bank Minnesota, N.A.,
Stock Transfer Department
161 North Concord Exchange, P.O. Box 738
South St. Paul, Minnesota 55075-0738
800/468-9716 or 612/450-4064
MARKET PRICE AND DIVIDEND INFORMATION
Dividends Paid
Per Share High Low Close
- ---------------------------------------------------------------
1994
First quarter $ .125 $ 14.63 $ 13.00 $ 13.63
Second quarter .125 16.50 13.00 16.50
Third quarter .125 19.25 15.50 19.25
Fourth quarter .125 20.00 17.50 19.00
1995
First quarter $ .145 $ 21.00 $ 18.00 $ 19.50
Second quarter .145 21.75 19.50 21.75
Third quarter .145 25.50 20.50 24.75
Fourth quarter .145 29.00 24.50 28.38
The Company's common stock trades on The Nasdaq Stock Market under the symbol
MFCB. Stock price quotations can be found in major daily newspapers and in The
Wall Street Journal. The range of high and low prices for the eight quarters
ended December 31, 1995 is shown above, along with the closing prices. All
amounts have been adjusted to reflect the two-for-one stock split effective
October 20, 1994.
At December 31, 1995, there were 5,598,267 shares outstanding and
approximately 1,830 stockholders of record. Inasmuch as many stockholders retain
their shares in "street name," the number of individual stockholders is larger
than the number of registered stockholders.
PAGE 40
Exhibit 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-8 No. 33-86882 pertaining to the Michigan Financial Corporation Employee
Savings and Stock Ownership Plan and No. 033-59425 pertaining to the Michigan
Financial Corporation Stock Option Plan of our report dated January 19, 1996,
with respect to the consolidated financial statements of Michigan Financial
Corporation, member banks and insurance subsidiary incorporated by reference in
the Annual Report (Form 10-K) for the year ended December 31, 1995.
Ernst & Young LLP
Milwaukee, Wisconsin
March 22, 1996
Exhibt 24
POWER OF ATTORNEY
The undersigned directors of Michigan Financial Corporation, a Michigan
corporation, hereby constitute and appoint Howard L. Cohodas and Kenneth F.
Beck, and each of them, the true and lawful agents and attorneys-in-fact of the
undersigned, with full power and authority in said agents and attorneys-in-fact,
and any one or more of them, to sign for the undersigned and in their respective
names as directors of Michigan Financial Corporation, the Form l0-K Annual
Report to be filed with the Securities and Exchange Commission, Washington,
D.C., pursuant to Section l3 or l5 (d) of the Securities Act of l934 for the
fiscal year ended December 3l, l995.
Dated January 15, 1996 /s/ ALFRED J. ANGELI
Alfred J. Angeli
Dated January 15, 1996 /s/ GARY L. BUTRYN
Gary L. Butryn
Dated January 15, 1996 /s/ WILLARD M. CARNE
Willard M. Carne
Dated January 15, 1996 /s/ WILLARD L. COHODAS
Willard L. Cohodas
Dated February 13, 1996 /s/ CLARENCE R. FISHER
Clarence R. Fisher
Dated January 15, 1996 /s/ HUGH C. HIGLEY, JR
Hugh C. Higley, Jr.
Dated January 15, 1996 /s/ DAVID HOLLI
David Holli
Dated January 15, 1996 /s/ DANIEL H. LORI
Daniel H. Lori
Dated January 15, 1996 /s/ FRED M. SAIGH
Fred M. Saigh
Dated January 15, 1996 /s/ JAMES L. SMITH
James L. Smith
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 32,143
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,194
<INVESTMENTS-CARRYING> 24,537
<INVESTMENTS-MARKET> 24,269
<LOANS> 560,891
<ALLOWANCE> 7,589
<TOTAL-ASSETS> 778,316
<DEPOSITS> 687,154
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,177
<LONG-TERM> 0
0
0
<COMMON> 18,555
<OTHER-SE> 62,430
<TOTAL-LIABILITIES-AND-EQUITY> 778,316
<INTEREST-LOAN> 53,297
<INTEREST-INVEST> 9,196
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 62,493
<INTEREST-DEPOSIT> 23,917
<INTEREST-EXPENSE> 24,013
<INTEREST-INCOME-NET> 38,480
<LOAN-LOSSES> 1,583
<SECURITIES-GAINS> (127)
<EXPENSE-OTHER> 32,776
<INCOME-PRETAX> 12,193
<INCOME-PRE-EXTRAORDINARY> 8,709
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,709
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.56
<YIELD-ACTUAL> 5.49
<LOANS-NON> 2,061
<LOANS-PAST> 915
<LOANS-TROUBLED> 694
<LOANS-PROBLEM> 12,321
<ALLOWANCE-OPEN> 6,701
<CHARGE-OFFS> 945
<RECOVERIES> 250
<ALLOWANCE-CLOSE> 7,589
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
