UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 6, 1996
- ---------------------------------- ------------------------------------
Common Stock, no par value 5,598,267
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31, September 30,
1996 1995 1995
--------- --------- ---------
(dollars in thousands)
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 37,883 $ 32,143 $ 29,725
Short-term investments:
Federal funds sold 17,350 26,450
Money market investments 281 297 235
--------- --------- ---------
281 17,647 26,685
Investment securities:
Available for sale 108,988 115,194 74,790
Held to maturity 19,608 24,537 63,480
Loans 586,929 560,891 552,419
Allowance for loan losses (8,012) (7,589) (6,864)
--------- --------- ---------
NET LOANS 578,917 553,302 545,555
Premises and equipment 24,038 22,857 22,813
Accrued interest receivable 5,413 5,779 5,673
Other assets 8,742 6,857 6,599
--------- --------- ---------
$ 783,870 $ 778,316 $ 775,320
========= ========= =========
LIABILITIES
Domestic deposits:
Noninterest bearing $ 76,093 $ 70,790 $ 69,578
Interest bearing 595,782 616,364 615,100
--------- --------- ---------
TOTAL DEPOSITS 671,875 687,154 684,678
Short-term borrowings 16,350 333
Accrued interest payable 3,116 2,836 3,240
Other liabilities 8,107 7,341 7,953
--------- --------- ---------
TOTAL LIABILITIES 699,448 697,331 696,204
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 66,896 62,575 61,047
Securities valuation (1,029) (145) (486)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 84,422 80,985 79,116
--------- --------- ---------
$ 783,870 $ 778,316 $ 775,320
========= ========= =========
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended
September 30 September 30
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 14,024 $ 13,597 $ 41,072 $ 39,483
Short-term investments 83 428 701 844
Investment securities:
Taxable 1,663 1,629 4,888 5,058
Tax-exempt 224 301 757 1,010
-------- -------- -------- --------
TOTAL INTEREST INCOME 15,994 15,955 47,418 46,395
Interest expense:
Deposits 6,015 6,232 18,251 17,674
Borrowings 62 12 63 91
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 6,077 6,244 18,314 17,765
-------- -------- -------- --------
NET INTEREST INCOME 9,917 9,711 29,104 28,630
Provision for loan losses 616 144 1,146 671
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,301 9,567 27,958 27,959
Noninterest income:
Trust department income 1,037 900 3,034 2,672
Fees for other customer services 913 686 2,444 2,046
Other 440 426 1,365 1,219
Investment securities losses (4) (87) (17) (127)
-------- -------- -------- --------
2,386 1,925 6,826 5,810
-------- -------- -------- --------
11,687 11,492 34,784 33,769
Noninterest expenses:
Salaries and employee benefits 4,544 4,352 13,599 13,267
Net occupancy 597 593 1,890 1,810
Furniture and equipment 455 426 1,272 1,264
Data processing 395 330 1,101 1,039
Advertising 316 280 1,042 790
FDIC premiums 4 (37) 13 729
Other 1,816 2,134 5,591 5,903
-------- -------- -------- --------
8,127 8,078 24,508 24,802
-------- -------- -------- --------
Income before income tax expense 3,560 3,414 10,276 8,967
Income tax expense 1,093 1,033 3,072 2,597
-------- ======== -------- --------
NET INCOME $ 2,467 $ 2,381 $ 7,204 $ 6,370
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 5,598 5,598 5,598 5,598
Per share data:
Net income $ .44 $ .43 $ 1.29 $ 1.14
======== ======== ======== ========
Dividends paid $ .175 $ .145 $ .515 $ .435
======== ======== ======== ========
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES (in thousands)
Net income $ 7,204 $ 6,370
Adjustments to reconcile net income to net cash provided by operating
activities:
Origination of mortgage loans held for sale (31,701) (24,924)
Proceeds from sale of mortgage loans held
for sale 30,195 22,302
Depreciation and amortization 1,391 1,327
Provision for loan losses 1,146 671
(Increase) decrease in interest receivable 366 (509)
Increase in interest payable 280 1,014
Realized gain on sale of loans (161) (138)
Amortization of investment securities premium 150 211
Realized investment securities losses 17 127
Other (684) 1,284
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,203 7,735
INVESTING ACTIVITIES
Proceeds from maturities of available for sale
securities 31,655 7,251
Purchases of available for sale securities (29,768) (9,961)
Net increase in loans (25,094) (9,326)
Net (increase) decrease in short-term investments 17,366 (22,126)
Proceeds from maturities of held to maturity
securities 5,338 12,932
Purchases of premises and equipment (2,554) (1,428)
Proceeds from sale of available for sale
securitites 2,483 14,874
Purchases of held to maturity securities (101)
Proceeds from sale of premises and equipment 24 23
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (651) (7,761)
FINANCING ACTIVITIES
Increase in short-term borrowings 16,350 333
Net decrease in deposits (15,279) (524)
Cash dividends (2,883) (2,436)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (1,812) (2,627)
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 5,740 (2,653)
-------- --------
Cash and due from banks at beginning of year 32,143 32,378
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 37,883 $ 29,725
======== ========
See notes to consolidated financial statements
</TABLE>
MICHIGAN FINANCIAL CORPORATION, MEMBER BANKS AND INSURANCE SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q, and therefore do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been reflected in the financial statements.
However, the results of operations for the three and nine month periods ended
September 30, 1996 and 1995 are not necessarily indicative of the results to be
expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report on Form 10-K for the year
ended December 31, 1995.
NOTE B - ACCOUNTING CHANGES
Effective January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement 122, "Accounting for Mortgage Servicing Rights." This statement
requires that separate assets be recognized for the rights to service mortgage
loans for others, however those rights are acquired. The adoption of Statement
122 has not had a material impact on the Company's financial position or results
of operations. Management believes that operating results will be positively
impacted by the adoption of this statement but the eventual results will depend
on loan sale volumes.
NOTE C - INVESTMENT SECURITIES
A comparison of the carrying amount and approximate market value follows:
September 30, 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 $ 77,673 $ 76,776 $ 75,607 $ 75,525
State and political
subdivisions 100 99 1,298 1,295
Mortgage-backed securities 28,837 28,138 34,622 34,455
Other securities 3,961 3,975 3,889 3,919
-------- -------- -------- --------
TOTAL $110,571 $108,988 $115,416 $115,194
======== ======== ======== ========
Held to Maturity
State and political
subdivisions $19,608 $19,505 $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
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 September 30, 1996
Amount of Percent
Increase Increase
(Decrease) (Decrease)
Funding sources:
Deposits $(15,279) (2.2)%
Short-term borrowings 16,350 NMF
Other sources, net (2,811) (11.9)
--------
$ (1,740) (.2)%
======== ====
Funding uses:
Loans $ 26,761 4.8%
Investment securities (11,135) (8.0)
Short-term investments (17,366) (98.4)
--------
Total uses $ (1,740) (.2)%
======== ====
Aggregate deposits, the primary source of funds, decreased by $15,279,000 or
2.2% during the first nine months of 1996. Experience was mixed within the
deposit category, as shown below:
Increase
(Decrease) Percent
Demand $ 5,302 7.5%
Savings (14,095) (4.7)
Time-retail (2,433) (.9)
Time-jumbo (4,053) (11.4)
-------
($15,279) (2.2)%
======= ====
The decrease in the deposit categories can be mostly attributed to the expanding
use of Prime Vest Financial Services and also Cash Management accounts. The use
of these fee-based customer services facilitates deposit transfers to money
market and mutual funds. As a result, total deposit levels at September 30, 1996
were down compared to the end of 1995.
The loan portfolio increased by 4.6% during the first nine months of 1996. All
of the major loan areas showed increases during the period. Five of the
Company's seven member banks had an increase in real estate mortgages due to
strong demand. The commercial and installment loans increased at six of the
Company's member banks due to stable demand for these types of loans.
The increase in loan levels coupled with the decrease in deposits caused the
level of investments to decrease, and correspondingly caused the Company to
purchase federal funds. The Company's federal funds position in the future will
depend on loan demand and deposit levels.
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 September 30, 1996 the volume of Freddie Mac
loans sold with servicing being retained was $208 million. The comparable figure
for 1995 was $197 million. The ability of the Company to sell these loans
enables it to more effectively manage its funding operations.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 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 September 30, 1996 is much more than
adequate to meet its future cash flow needs. Management also closely monitors
capital levels to provide for normal business needs and to comply with
regulatory requirements. As summarized below, the Company's capital ratios were
well in excess of the regulatory requirements for classification as "Well
Capitalized":
Regulatory
Minimum for September 30,
"Well Capitalized" 1996 1995
Total capital 10.0% 15.79% 15.38%
Tier I capital 6.0 14.54 14.16
Tier I leverage ratio 5.0 11.04 10.23
RESULTS OF OPERATIONS
A summary of the period to period changes in the principal items included in the
consolidated statements of income is shown below in thousands of dollars, and as
a percent.
Comparison of
-------------
Three months Nine months
ended September 30, ended September 30,
1996 and 1995 1996 and 1995
------------- -------------
Increase(Decrease)
Interest income $ 39 .2% $1,023 2.2%
Interest expense (167) (2.7) 549 3.1
------ ------
Net interest income 206 2.1 474 1.7
Provision for loan losses 472 NMF 475 70.8
------ ------
Net interest income after provision
for loan losses (266) (2.8) (1) (.0)
Noninterest income 461 23.9 1,016 17.5
Noninterest expenses 49 .6 (294) (1.2)
------ ------
Income before income tax expense 146 4.3 1,309 14.6
Income tax expense 60 5.8 475 18.3
------ ------
Net income $ 86 3.6% $ 834 13.1%
====== ======
Net Interest Income
The modest increase in net interest income during the first nine months of 1996
was due to the fact that while both the interest income and the interest expense
increased from the comparable periods in 1995 the interest income increased
more. The increase in the loan to deposit ratio to 87.4% at September 30, 1996
from 80.7% at September 30, 1995 contributed to the increase in net interest
income. The net interest income for the third quarter of 1996 increased from the
comparable period in 1995 due to the interest income increasing slightly while
the interest expense decreased. Net interest income performance in future
periods will be primarily dependent upon general interest rate developments.
Provision for Loan Losses
The loan loss provision substantially increased during both the third quarter
and the first nine months of 1996 largely due to the larger loan portfolio. This
increased loan loss provision allowed for an increase to the allowance for loan
losses of $423,000 or 5.6% during the first nine months of 1996. Net loan
charge-offs for the first nine months amounted to $723,000, an increase of 42.3%
from the amount of $508,000 for the comparable period in 1995. On an annualized
basis these charge-offs amounted to .17% of average loans outstanding, up from
the .12% for the comparable period in 1995. These are relatively low levels on
an internal historical basis as well as in comparison to peer groups.
Expressed as a percent of outstanding loans the allowance increased from 1.35%
at year end 1995 to 1.37% at September 30, 1996. The allowance level will not
necessarily be maintained at this level during future periods as the amounts
provided during any given period are dependent upon management's ongoing review
process and assessment of the perceived loss exposure in the then outstanding
loan portfolio.
Nonperforming loans increased in the first nine months of 1996 by $1,396,000 or
38.0%, with the largest increase being a $876,000 increase in the loans past due
90 days or more. Total nonperforming assets, which includes other real estate,
increased $2,158,000 or 46.3% from December 31, 1995, with other real estate
increasing by $762,000. Management is concentrating its efforts on reducing
loans past due 90 days or more and other real estate.
The table below presents a comparison of nonperformings.
September 30, December 31,
1996 1995
(in thousands)
Nonaccrual loans $2,108 $2,061
Loans past due
90 days or more 1,791 915
Restructured loans 1,167 694
------ ------
Total nonperforming loans 5,066 3,670
Other real estate 1,748 986
------ ------
Total nonperforming assets $6,814 $4,656
====== ======
Nonperforming loans
as a % of total loans .86% .65%
=== ===
Nonperforming assets
as a % of total assets .87% .60%
=== ===
On a percentage basis, the allowance for loan losses decreased from 207% of
nonperforming loans at the end of 1995 to 158% at September 30, 1996. Management
intends to continue in its efforts toward maintaining the quality of the loan
portfolio.
Noninterest Income
Noninterest income increased by $1,016,000 or 17.5% from the first nine months
of 1995. Exclusive of securities losses, it increased by $906,000 or 15.3% for
the same time period. A large part of the increase in other income is due to an
increase of $240,000 in brokerage commissions from the first nine months of
1995. Strong performance in this fee-based area is expected to continue for the
remainder of the year. The other large increase is due to an increase of
$169,000 or 18.6% in trust income due to substantial growth in the amount of
trust assets under management. This increase can be expected to continue
throughout the year.
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 $716,000 from the first nine months of 1995 to the comparable period
in 1996. The major components of other expenses increased (decreased) as
follows:
Three months Nine months
ended ended
September 30, 1996 September 30, 1996
------------------ ------------------
Salaries and employee benefits 4.0% 2.7%
Occupancy, furniture and equipment 3.2 3.0
Advertising 12.9 31.9
Data processing 19.7 6.0
FDIC premiums NMF (98.2)
Other (14.9) (5.3)
The advertising increase is due to expanded marketing programs, including
MFC2000, a new strategic plan currently being introduced. 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 third quarter and the
first nine months was mostly due to the increase in pre-tax income of the
Company for 1996, combined with a decrease in the portion of interest income
which is exempt from federal taxation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for the three
months ended September 30, 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: November 6, 1996 /s/ HOWARD L. COHODAS
------------------ ---------------------
Howard L. Cohodas, Chairman
& President
(Chief Executive Officer)
Dated: November 6, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 37,883
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,988
<INVESTMENTS-CARRYING> 19,608
<INVESTMENTS-MARKET> 19,505
<LOANS> 586,929
<ALLOWANCE> 8,012
<TOTAL-ASSETS> 783,870
<DEPOSITS> 671,875
<SHORT-TERM> 16,350
<LIABILITIES-OTHER> 11,223
<LONG-TERM> 0
0
0
<COMMON> 18,555
<OTHER-SE> 65,867
<TOTAL-LIABILITIES-AND-EQUITY> 783,870
<INTEREST-LOAN> 41,072
<INTEREST-INVEST> 6,346
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 47,418
<INTEREST-DEPOSIT> 18,251
<INTEREST-EXPENSE> 18,314
<INTEREST-INCOME-NET> 29,104
<LOAN-LOSSES> 1,146
<SECURITIES-GAINS> (17)
<EXPENSE-OTHER> 24,508
<INCOME-PRETAX> 10,276
<INCOME-PRE-EXTRAORDINARY> 7,204
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,204
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 5.52
<LOANS-NON> 2,108
<LOANS-PAST> 1,791
<LOANS-TROUBLED> 1,167
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,589
<CHARGE-OFFS> 901
<RECOVERIES> 178
<ALLOWANCE-CLOSE> 8,012
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
