UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 0-7515
MICHIGAN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2011532
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
101 West Washington Street, Marquette, Michigan 49855
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (906) 228-6940
Not applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days YES _x_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding as of April 29, 1996
- ----------------------------- --------------------------------
Common Stock, no par value 5,598,267
- ----------------------------- --------------------------------
PART I. FINANCIAL INFORMATION
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1996 1995 1995
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 29,507 $ 32,143 $ 30,698
Short-term investments:
Federal funds sold 26,810 17,350 15,525
Money market investments 282 297 182
--------- --------- ---------
27,092 17,647 15,707
Investment securities:
Available for sale 108,488 115,194 80,625
Held to maturity 24,471 24,537 74,532
Loans 559,083 560,891 537,917
Allowance for loan losses (7,669) (7,589) (6,760)
--------- --------- ---------
NET LOANS 551,414 553,302 531,157
Premises and equipment 23,053 22,857 22,860
Accrued interest receivable 5,568 5,779 5,356
Other assets 7,173 6,857 8,049
--------- --------- ---------
$ 776,766 $ 778,316 $ 768,984
========= ========= =========
LIABILITIES
Domestic deposits:
Noninterest bearing $ 63,414 $ 70,790 $ 74,371
Interest bearing 620,320 616,364 607,421
--------- --------- ---------
TOTAL DEPOSITS 683,734 687,154 681,792
Short-term borrowing 1,000
Accrued interest payable 3,182 2,836 2,816
Other liabilities 7,993 7,341 8,068
--------- --------- ---------
TOTAL LIABILITIES 694,909 697,331 693,676
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized shares - 10,000,000
Shares issued and outstanding - 5,598,267 18,555 18,555 18,555
Retained earnings 63,987 62,575 58,284
Securities valuation (685) (145) (1,531)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 81,857 80,985 75,308
--------- --------- ---------
$ 776,766 $ 778,316 $ 768,984
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three months ended
March 31
1996 1995
------- -------
(in thousands, except per share data)
Interest income:
Loans, including fees $13,481 $12,704
Short-term investments 338 121
Investment securities:
Taxable 1,583 1,764
Tax-exempt 286 383
------- -------
TOTAL INTEREST INCOME 15,688 14,972
Interest expense:
Deposits 6,153 5,422
Borrowings 60
------- -------
TOTAL INTEREST EXPENSE 6,153 5,482
------- -------
NET INTEREST INCOME 9,535 9,490
Provision for loan losses 200 220
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,335 9,270
Noninterest income:
Trust department income 995 879
Fees for other customer services 730 640
Net gains on sale of loans 57 28
Other 398 324
Investment securities losses (40)
------- -------
2,180 1,831
------- -------
11,515 11,101
Noninterest expenses:
Salaries and employee benefits 4,547 4,384
Net occupancy 647 616
Furniture and equipment 411 440
Data processing 343 362
Advertising 308 245
FDIC premiums 6 383
Other 1,988 1,943
------- -------
8,250 8,373
------- -------
Income before income tax expense 3,265 2,728
Income tax expense 929 746
------- -------
NET INCOME $ 2,336 $ 1,982
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 5,598 5,598
Per share data:
Net income $ .42 $ .35
======= =======
Dividends paid $ .165 $ .145
======= =======
See notes to consolidated financial statements.
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31
1996 1995
------- -------
(in thousands)
OPERATING ACTIVITIES
Net income $ 2,336 $ 1,982
Adjustments to reconcile net income to net
cash provided by operating activities:
Origination of mortgage loans held for sale (10,155) (4,172)
Proceeds from sale of mortgage loans held
for sale 9,680 3,902
Depreciation and amortization 440 435
Increase in interest payable 346 590
Provision for loan losses 200 220
Decrease (increase) in interest receivable 211 (192)
Amortization of investment securities premium 59 60
Realized gain on sale of loans (57) (28)
Realized investment securities losses 40
Other 613 513
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,673 3,350
INVESTING ACTIVITIES
Proceeds from maturities of available for sale
securities 17,699 26
Purchases of available for sale securities (12,191) (1,501)
Net increase in short-term investments (9,445) (11,148)
Net decrease in loans 2,220 3,061
Purchases of premises and equipment (640) (605)
Proceeds from maturities of held to maturity
securities 374 1,880
Proceeds from sale of premises and equipment 18 19
Proceeds from sale of available for sale
securities 6,459
------- -------
NET CASH USED BY INVESTING ACTIVITIES (1,965) (1,809)
FINANCING ACTIVITIES
Net decrease in deposits (3,420) (3,410)
Cash dividends (924) (811)
Increase in short-term borrowing 1,000
------- -------
NET CASH USED BY FINANCING ACTIVITIES (4,344) (3,221)
------- -------
DECREASE IN CASH AND DUE FROM BANKS (2,636) (1,680)
Cash and due from banks at beginning of year 32,143 32,378
------- -------
CASH AND DUE FROM BANKS AT END OF PERIOD $29,507 $30,698
======= =======
See notes to consolidated financial statements.
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q, and therefore do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been reflected in the financial statements.
However, the results of operations for the three month periods ended March 31,
1996 and 1995 are not necessarily indicative of the results to be expected for
the full year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report on Form 10-K for the year
ended December 31, 1995.
NOTE B - ACCOUNTING CHANGES
Effective January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement 122, "Accounting for Mortgage Servicing Rights." This statement
requires that separate assets be recognized for the rights to service mortgage
loans for others, however those rights are acquired. The adoption of Statement
122 has not had a material impact on the Company's financial position or results
of operations. Management believes that operating results will be positively
impacted by the adoption of this statement but the eventual results will depend
on loan sale volumes.
A comparison of the carrying amount and approximate market value follows:
March 31, 1996 December 31, 1995
----------------------- -----------------------
Amortized Approximate Amortized Approximate
Cost Market Value Cost Market Value
-------- -------- -------- --------
(in thousands)
Available for Sale
U.S. Treasury and
government agencies $ 70,566 $ 69,913 $ 75,607 $ 75,525
State and political
subdivisions 990 978 1,298 1,295
Mortgage-backed securities 34,097 33,689 34,622 34,455
Other securities 3,889 3,908 3,889 3,919
-------- -------- -------- --------
TOTAL $109,542 $108,488 $115,416 $115,194
======== ======== ======== ========
Held to Maturity
State and political
subdivisions $24,471 $24,364 $24,537 $24,269
======== ======== ======== ========
NOTE D - RECLASSIFICATIONS
Certain amounts in 1995 have been reclassified to conform with the
classifications in 1996.
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and earnings
during the periods included in the accompanying consolidated financial
statements.
FINANCIAL CONDITION
A summary of the period changes in principal sources and uses of funds is shown
below in thousands of dollars, and as a percent.
Change from December 31, 1995
to March 31, 1996
------------------------------
Amount of Percent
Increase Increase
(Decrease) (Decrease)
-------- --------
Funding sources:
Deposits $ (3,420) (.5)%
Other sources, net 4,405 18.7
--------
$ 985 .1%
======== ========
Funding uses:
Loans $ (1,688) (.3)%
Investment securities (6,772) (4.8)
Short-term investments 9,445 53.5
--------
Total uses $ 985 .1%
======== ========
Aggregate deposits, the primary source of funds, decreased by $3,420 or .5%
during the first quarter of 1996. Experience was mixed within the deposit
category, as shown below:
Increase
(Decrease) Percent
---------- -------
Demand $(7,376) (10.4)%
Savings 856 .3
Time-retail 623 .2
Time-jumbo 2,477 6.9
-------
$(3,420) (.5)%
======= =======
As a result, total deposit levels at March 31, 1996 showed a slight decrease
from the end of 1995.
The loan portfolio decreased slightly by .3% during the first quarter of 1996.
The commercial and real estate mortgage loan areas both decreased slightly
during the period while installment loans remained virtually level.
For liquidity purposes the excess funds generated during the period were mainly
placed in short-term investments.
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 March 31, 1996 the volume of Freddie Mac loans
sold with servicing being retained was $202 million. The comparable figure for
1995 was $193 million. The ability of the Company to sell these loans enables it
to more effectively manage its funding operations.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1996 there were no significant changes with respect
to the capital resources of the Company. Management feels that the liquidity
position of the Company as of March 31, 1996 is much more than adequate to meet
its future cash flow needs. Management also closely monitors capital levels to
provide for normal business needs and to comply with regulatory requirements. As
summarized below, the Company's capital ratios were well in excess of the
regulatory requirements for classification as "Well Capitalized":
Regulatory
Minimum for March 31,
"Well Capitalized" 1996 1995
------------------ ---- ----
Total capital 10.0% 15.83% 15.18%
Tier I capital 6.0 14.58 13.95
Tier I leverage ratio 5.0 10.62 10.02
RESULTS OF OPERATIONS
A summary of the period to period changes in the principal items included in the
consolidated statements of income is shown below in thousands of dollars, and as
a percent.
Comparison of
-----------------------
Three months ended
March 31, 1996 and 1995
-----------------------
Increase(Decrease)
Interest income $716 4.8%
Interest expense 671 12.2
------
Net interest income 45 .5
Provision for loan losses (20) (9.1)
------
Net interest income after
provision for loan losses 65 .7
Noninterest income 349 19.1
Noninterest expenses (123) (1.5)
------
Income before income tax expense 537 19.7
Income tax expense 183 24.5
------
Net income $354 17.9%
====== ======
Net Interest Income
The modest increase in net interest income during the first quarter of 1996 was
due to the fact that while both the interest income and the interest expense
increased from the first quarter in 1995 the interest income increased more. The
increase in the loan to deposit ratio to 81.8% at March 31, 1996 from 78.9% at
March 31, 1995 also contributed to the increase in net interest income. The
Company continues its ongoing process to match liabilities and assets for rate
sensitivity. Net interest income performance in future periods will be primarily
dependent upon general interest rate developments.
Provision for Loan Losses
The loan loss provision decreased during the first three months of 1996 due to
lower loan charge-offs at the member bank level. This lower loan loss provision
still allowed for an increase to the allowance for loan losses of $80,000 or
1.1% during the quarter. Net loan charge-offs for the quarter amounted to
$120,000, down from the amount of $161,000 for the comparable period in 1995. On
an annualized basis these charge-offs amounted to .09% of average loans
outstanding. This is a relatively low level on an internal historical basis as
well as in comparison to peer groups.
Expressed as a percent of outstanding loans the allowance increased from 1.35%
at year end 1995 to 1.37% at March 31, 1996. The allowance level will not
necessarily be maintained at this level during future periods as the amounts
provided during any given period are dependent upon management's ongoing review
process and assessment of the perceived loss exposure in the then outstanding
loan portfolio.
Nonperforming loans continue at low levels, although they did increase in the
first quarter of 1996 by $491,000 or 13.4%. Total nonperforming assets, which
include other real estate, also continue at low levels despite an increase of
$1,535,000 or 33.0% from December 31, 1995. The table below presents a
comparison of nonperformings.
March 31, December 31,
1996 1995
------- -------
(in thousands)
Nonaccrual loans $2,224 $2,061
Loans past due
90 days or more 1,252 915
Restructured loans 685 694
------- -------
Total nonperforming loans 4,161 3,670
Other real estate 2,030 986
------- -------
Total nonperforming assets $6,191 $4,656
======= =======
Nonperforming loans
as a % of total loans .74% .65%
======= =======
Nonperforming assets
as a % of total assets .80% .60%
======= =======
On a percentage basis, the allowance for loan losses decreased from 206.8% of
nonperforming loans at the end of 1995 to 184.3% at March 31, 1996. Management
intends to continue in its efforts toward maintaining the high quality of the
loan portfolio.
Noninterest Expenses
The decrease in noninterest expenses resulted from changes in its major
components as set forth below, indicative of the normal effects of inflation as
well as the growth of the organization. The primary reason for the overall
decrease in noninterest expenses is the substantial decrease in FDIC premium
expense of $377,000 from the first quarter of 1995 to the comparable period in
1996. The major components of other expenses increased (decreased) as follows:
Three months
ended
March 31, 1996
--------------
Salaries and employee benefits 3.7%
Occupancy, furniture and equipment .2
Data processing (5.2)
FDIC premiums NMF
Advertising 25.7
Other 2.3
The advertising increase is due to expanded marketing programs, including
MFC2000, a new strategic plan which will be introduced later this year. This
increase in advertising can be expected to continue throughout 1996.
Applicable Income Tax
Applicable income tax expense is based on income, less that portion which is
exempt from federal taxation, taxed at the statutory federal income tax rate of
35%. The provision is further reduced by other smaller items. The increase in
the 1996 income tax provision reported herein for the first quarter was mostly
due to the increase in pre-tax income of the Company for the first quarter 1996.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for the three
months ended March 31, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Michigan Financial Corporation
(Registrant)
Dated: April 29, 1996 /s/ HOWARD L. COHODAS
Howard L. Cohodas, Chairman
& President
(Chief Executive Officer)
Dated: April 29, 1996 /s/ KENNETH F. BECK
Kenneth F. Beck, Senior Vice
President, Treasurer & Secretary
(Chief Financial Officer and
Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 29,507
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 26,810
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,488
<INVESTMENTS-CARRYING> 24,471
<INVESTMENTS-MARKET> 24,364
<LOANS> 559,083
<ALLOWANCE> 7,669
<TOTAL-ASSETS> 776,766
<DEPOSITS> 683,734
<SHORT-TERM> 0
<LIABILITIES-OTHER> 11,175
<LONG-TERM> 0
0
0
<COMMON> 18,555
<OTHER-SE> 63,302
<TOTAL-LIABILITIES-AND-EQUITY> 776,766
<INTEREST-LOAN> 13,481
<INTEREST-INVEST> 2,207
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,688
<INTEREST-DEPOSIT> 6,153
<INTEREST-EXPENSE> 6,153
<INTEREST-INCOME-NET> 9,535
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,250
<INCOME-PRETAX> 3,265
<INCOME-PRE-EXTRAORDINARY> 2,336
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,336
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
<YIELD-ACTUAL> 5.43
<LOANS-NON> 2,224
<LOANS-PAST> 1,252
<LOANS-TROUBLED> 685
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,589
<CHARGE-OFFS> 168
<RECOVERIES> 48
<ALLOWANCE-CLOSE> 7,669
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
