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 June 30, 1997
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 August 4, 1997
----- --------------------------------
Common Stock, no par value 5,877,601
<PAGE>
PART I. FINANCIAL INFORMATION
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
--------- --------- ---------
(dollars in thousands)
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 35,169 $ 38,662 $ 30,238
Short-term investments:
Federal funds sold 2,800 17,350
Money market investments 356 285 260
Investment securities:
Available for sale 93,511 101,959 112,874
Held to maturity 13,530 18,662 20,483
Loans 622,655 598,623 568,904
Allowance for loan losses (8,698) (8,388) (7,786)
--------- --------- ---------
NET LOANS 613,957 590,235 561,118
Premises and equipment 25,540 24,679 23,666
Accrued interest receivable 5,527 5,208 5,575
Other assets 9,678 9,663 8,860
--------- --------- ---------
$ 800,068 $ 789,353 $ 780,424
========= ========= =========
LIABILITIES
Noninterest bearing deposits $ 72,807 $ 74,365 $ 68,402
Interest bearing deposits 623,764 601,743 618,785
--------- --------- ---------
TOTAL DEPOSITS 696,571 676,108 687,187
Federal Home Loan Bank advances 2,000
Federal funds purchased 16,015
Accrued interest payable 3,018 2,770 2,736
Other liabilities 9,057 7,847 7,943
--------- --------- ---------
TOTAL LIABILITIES 710,646 702,740 697,866
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized shares - 10,000,000
Shares issued and outstanding - 5,877,601 25,050 18,555 18,555
Retained earnings 64,554 68,343 65,408
Securities valuation (182) (285) (1,405)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 89,422 86,613 82,558
--------- --------- ---------
$ 800,068 $ 789,353 $ 780,424
========= ========= =========
</TABLE>
See notes to consolidated financial statements
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES IES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1997 1996 1997 1996
-------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 14,833 $ 13,567 $29,042 $27,048
Short-term investments 121 280 187 618
Investment securities:
Taxable 1,433 1,642 2,895 3,225
Tax-exempt 168 247 370 533
-------- -------- ------- -------
TOTAL INTEREST INCOME 16,555 15,736 32,494 31,424
Interest expense:
Deposits 6,458 6,083 12,568 12,236
Borrowings 28 1 119 1
-------- -------- ------- -------
TOTAL INTEREST EXPENSE 6,486 6,084 12,687 12,237
-------- -------- ------- -------
NET INTEREST INCOME 10,069 9,652 19,807 19,187
Provision for loan losses 454 330 658 530
-------- -------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,615 9,322 19,149 18,657
Noninterest income:
Trust department income 1,092 1,002 2,177 1,997
Fees for other customer services 941 801 1,771 1,531
Other 638 470 1,202 925
Investment securities losses (13) (13)
-------- -------- ------- -------
2,671 2,260 5,150 4,440
-------- -------- ------- -------
12,286 11,582 24,299 23,097
Noninterest expenses:
Salaries and employee benefits 4,645 4,508 9,339 9,055
Net occupancy 643 646 1,357 1,293
Furniture and equipment 488 406 970 817
Data processing 441 363 858 706
Advertising 345 418 637 726
Other 2,033 1,790 3,973 3,784
-------- -------- ------- -------
8,595 8,131 17,134 16,381
-------- -------- ------- -------
Income before income tax expense 3,691 3,451 7,165 6,716
Income tax expense 1,155 1,050 2,206 1,979
-------- -------- ------- -------
NET INCOME $ 2,536 $ 2,401 $ 4,959 $ 4,737
======== ======== ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 5,878 5,878 5,878 5,878
Per share data:
Net income $ .43 $ .41 $ .84 $ .81
======== ======== ======= =======
Dividends paid $ .19 $ .17 $ .38 $ .32
======== ======== ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,959 $ 4,737
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from sale of mortgage loans held
for sale 12,134 20,900
Origination of mortgage loans held for sale (10,800) (21,375)
Depreciation and amortization 1,027 898
Provision for loan losses 658 530
Realized gain on sale of loans (330) (101)
(Increase) decrease in interest receivable (319) 204
Increase (decrease) in interest payable 248 (100)
Amortization of investment securities premium 41 107
Realized investment securities losses 13
Other 1,092 (756)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,710 5,057
INVESTING ACTIVITIES
Net increase in loans (25,384) (7,770)
Proceeds from maturities of available for sale
securities 12,553 25,503
Proceeds from maturities of held to maturity
securities 5,132 4,362
Purchases of available for sale securities (3,988) (27,032)
Net (increase) decrease in short-term investments (2,871) 37
Purchases of premises and equipment (1,851) (1,697)
Proceeds from sale of available for sale securities 1,487
Proceeds from sale of premises and equipment 11 19
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (16,398) (5,091)
FINANCING ACTIVITIES
Net increase in deposits 20,463 33
Decrease in federal funds purchased (16,015)
Cash dividends (2,253) (1,904)
Federal Home Loan Bank advances 2,000
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 4,195 (1,871)
DECREASE IN CASH AND DUE FROM BANKS (3,493) (1,905)
-------- --------
Cash and due from banks at beginning of year 38,662 32,143
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 35,169 $ 30,238
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q, and therefore do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been reflected in the financial statements.
However, the results of operations for the three and six month periods ended
June 30, 1997 and 1996 are not necessarily indicative of the results to be
expected for the full year.
For further information, refer to the consolidated financial statements and
foot- notes included in the Company's annual report on Form 10-K for the year
ended December 31, 1996.
NOTE B - ACCOUNTING CHANGE
Effective January 1, 1997, the Company adopted Financial Accounting Standards
Board ("FASB") Statement 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Statement 125 revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. It is effective for
some transactions in 1997 and others in 1998. The statement is not expected to
have a material effect on the Company's consolidated financial position or
results of operations.
<PAGE>
NOTE C - PENDING ACCOUNTING CHANGE
In March 1997, the FASB revised the accounting requirements for calculating
earnings per share. Basic earnings per share beginning with year end 1997 will
be calculated solely on average common shares outstanding. Diluted earnings per
share will reflect the potential dilution of stock options. All prior
calculations will be restated to be comparable to the new methods. As the
Company has not had significant dilution from stock options, the new calculation
methods will not significantly affect future basic earnings per share and
diluted earnings per share.
NOTE D - INVESTMENT SECURITIES
A comparison of the carrying amount and approximate market value follows:
June 30, 1997 December 31, 1996
----------------------- -----------------------
Amortized Approximate Amortized Approximate
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
(in thousands)
Available for Sale
U.S. Treasury and
government agencies $68,432 $68,291 $ 71,447 $ 71,256
Mortgage-backed securities 21,331 21,181 27,090 26,828
Other securities 4,028 4,039 3,860 3,875
------- ------- -------- --------
TOTAL $93,791 $93,511 $102,397 $101,959
======= ======= ======== ========
Held to Maturity
State and political
subdivisions $13,530 $13,551 $18,662 $18,626
======= ======= ======== ========
NOTE E - STOCK DIVIDEND
On June 20, 1997, the Company issued 279,334 shares of common stock as a 5%
stock dividend. These shares had a value of $6,495,000 at the date of issuance.
<PAGE>
References to the number of shares of common stock in the financial statements
and all per share data have been adjusted for the stock dividend.
NOTE F - RECLASSIFICATIONS
Certain amounts in 1996 have been reclassified to conform with the
classifications in 1997.
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
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, 1996
to June 30, 1997
------------------------------
Amount of Percent
Increase Increase
(Decrease) (Decrease)
---------- ----------
Funding sources:
Deposits $ 20,463 3.0%
Federal Home Loan Bank advances 2,000 NMF
Federal funds purchased (16,015) NMF
Other sources, net 7,223 38.0
--------
$ 13,671 1.9%
======== ====
Funding uses:
Loans $ 24,380 4.1%
Investment securities (13,580) (11.3)
Short-term investments 2,871 NMF
--------
Total uses $ 13,671 1.9%
======== ====
Aggregate deposits, the primary source of funds, increased by $20,463,000 or
3.0% during the six months of 1997. Experience was mixed within the deposit
category, as shown below:
Increase
(Decrease) Percent
---------- -------
Demand $(1,558) (2.1)%
Savings 1,566 .5
Time-retail 13,186 4.8
Time-jumbo 7,269 22.3
-------
$20,463 3.0%
======= ====
<PAGE>
As a result, total deposit levels at June 30, 1997 showed an increase from the
end of 1996.
The loan portfolio increased by 4.1% during the first six months of 1997. The
largest increase was in the commercial loan area with the real estate mortgages
also increasing. The installment loan area showed a slight decrease.
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 Freddie Mac. At June 30, 1997 the
volume of Freddie Mac loans sold with servicing retained was $217 million. The
comparable figure one year earlier was $205 million. The ability of the Company
to sell these loans enables it to more effectively manage its funding
operations.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1997 there were no significant changes with respect to
the capital resources of the Company. Management feels that the liquidity
position of the Company as of June 30, 1997 is more than adequate to meet its
future cash flow needs. Management also closely monitors capital levels to
provide for normal business needs and to comply with regulatory requirements. As
summarized below, the Company's capital ratios were well in excess of the
regulatory requirements for classification as "Well Capitalized":
Regulatory
Minimum for June 30,
"Well Capitalized" 1997 1996
------------------ ---- ----
Total capital 10.0% 15.66% 15.84%
Tier I capital 6.0 14.41 14.59
Tier I leverage ratio 5.0 11.33 10.81
<PAGE>
RESULTS OF OPERATIONS
A summary of the period to period changes in the principal items included in the
consolidated statements of income is shown below in thousands of dollars, and as
a percent.
Comparison of
---------------------------------
Three months Six months
ended June 30, ended June 30,
1997 and 1996 1997 and 1996
-------------- --------------
Increase(Decrease)
Interest income $ 819 5.2% $1,070 3.4%
Interest expense 402 6.6 450 3.7
------- ------
Net interest income 417 4.3 620 3.2
Provision for loan losses 124 37.6 128 24.2
------- ------
Net interest income after provision
for loan losses 293 3.1 492 2.6
Noninterest income 411 18.2 710 16.0
Noninterest expenses 464 5.7 753 4.6
------- ------
Income before income tax expense 240 7.0 449 6.7
Income tax expense 105 10.0 227 11.5
------- ------
Net income $ 135 5.6% $ 222 4.7%
======= ======
Net Interest Income
The increase in net interest income during the second quarter and the first six
months of 1997 was due to the fact that while both interest income and interest
expense increased from the comparable periods in 1996, interest income increased
more. The increase in the loan to deposit ratio to 89.4% at June 30, 1997 from
82.8% at June 30, 1996 was the major reason for the increase in interest income.
Net interest income performance in future periods will be primarily dependent
upon general interest rate developments.
Provision for Loan Losses
The loan loss provision increased during both the second quarter and the first
six months of 1997 largely due to the larger loan portfolio. The larger
provision accounted for the increase in the allowance for loan losses of
$310,000 or 3.6% during the first half of 1997. Net loan charge-offs for the
first six months
<PAGE>
amounted to $348,000, up slightly from the amount of $333,000 for the comparable
period in 1996. On an annualized basis charge-offs amounted to .12% of average
loans outstanding for both 1997 and 1996. 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 held steady at 1.40%
at both year end 1996 and June 30, 1997. 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 half of 1997 by $957,000 or 26.3%. Total nonperforming assets, which
include other real estate, also continue at low levels despite an increase of
$958,000 or 17.8% from December 31, 1996.
The table below presents a comparison of nonperformings.
June 30, December 31,
1997 1996
-------- ------------
(in thousands)
Nonaccrual loans $2,312 $1,538
Loans past due
90 days or more 1,129 901
Restructured loans 1,150 1,195
------ ------
Total nonperforming loans 4,591 3,634
Other real estate 1,752 1,751
------ ------
Total nonperforming assets $6,343 $5,385
====== ======
Nonperforming loans
as a % of total loans .74% .61%
===== =====
Nonperforming assets
as a % of total assets .79% .68%
===== =====
On a percentage basis, the allowance for loan losses decreased from 230.8% of
nonperforming loans at the end of 1996 to 189.5% at June 30, 1997. Management
<PAGE>
intends to continue in its efforts toward maintaining the high quality of the
loan portfolio.
Noninterest Expenses
The increase 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 major components of other expenses
increased (decreased) as follows:
Three months Six months
ended ended
June 30, 1997 June 30, 1997
------------- -------------
Salaries and employee benefits 3.0% 3.1%
Occupancy, furniture and equipment 7.5 10.3
Data processing 21.5 21.5
Advertising (17.5) (12.3)
Other 13.6 5.0
A large part of the occupancy, furniture and equipment increase is due to a
complete upgrade and networking of the Company's personal computers. This
upgrade was started during the third quarter of 1996 and completed during the
first quarter of 1997. The increase in data processing is due to programming
charges, mainly for the combined statements now being issued, along with normal
increases. Future increases in this area will depend upon the amount of special
programming needed.
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 1997 income tax provision reported herein for the second quarter and the
first six months was mostly due to the increase in pre-tax income of the Company
for 1997, combined with a decrease in the portion of interest income which is
exempt from federal taxation.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit (27) Financial Data Schedule - The required financial data schedule
is filed as Exhibit 27 at page 14 of this report.
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for the three
months ended June 30, 1997
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: August 4, 1997 /s/ HOWARD L. COHODAS
------------------ ---------------------------------------
Howard L. Cohodas, Chairman
& President
(Chief Executive Officer)
Dated: August 4, 1997 /s/ KENNETH F. BECK
------------------ ---------------------------------------
Kenneth F. Beck, Senior Vice President,
Treasurer & Secretary
(Chief Financial Officer and
Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 35,169
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 93,511
<INVESTMENTS-CARRYING> 13,530
<INVESTMENTS-MARKET> 13,551
<LOANS> 622,655
<ALLOWANCE> 8,698
<TOTAL-ASSETS> 800,068
<DEPOSITS> 696,571
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 12,075
<LONG-TERM> 0
0
0
<COMMON> 25,050
<OTHER-SE> 64,372
<TOTAL-LIABILITIES-AND-EQUITY> 800,068
<INTEREST-LOAN> 29,042
<INTEREST-INVEST> 2,452
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 32,494
<INTEREST-DEPOSIT> 12,568
<INTEREST-EXPENSE> 12,687
<INTEREST-INCOME-NET> 19,807
<LOAN-LOSSES> 658
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17,134
<INCOME-PRETAX> 7,165
<INCOME-PRE-EXTRAORDINARY> 4,959
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,959
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
<YIELD-ACTUAL> 5.60
<LOANS-NON> 2,312
<LOANS-PAST> 1,129
<LOANS-TROUBLED> 1,150
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,388
<CHARGE-OFFS> 444
<RECOVERIES> 96
<ALLOWANCE-CLOSE> 8,698
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
