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, 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 May 5, 1997
- ---------------------------------- ----------------------------------
Common Stock, no par value 5,598,267
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31, March 31,
1997 1996 1996
---------- ------------ ---------
(dollars in thousands)
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 33,671 $ 38,662 $ 29,507
Short-term investments:
Federal funds sold 2,900 26,810
Money market investments 323 285 282
Investment securities:
Available for sale 94,767 101,959 108,488
Held to maturity 17,990 18,662 24,471
Loans 605,219 598,623 559,083
Allowance for loan losses (8,476) (8,388) (7,669)
--------- --------- ---------
NET LOANS 596,743 590,235 551,414
Premises and equipment 24,832 24,679 23,053
Accrued interest receivable 5,475 5,208 5,568
Other assets 9,188 9,663 7,173
--------- --------- ---------
$ 785,889 $ 789,353 $ 776,766
========= ========= =========
LIABILITIES
Noninterest bearing deposits $ 68,024 $ 74,365 $ 63,414
Interest bearing deposits 616,637 601,743 620,320
--------- --------- ---------
TOTAL DEPOSITS 684,661 676,108 683,734
Federal Home Loan Bank advances 2,000
Federal funds purchased 16,015
Accrued interest payable 3,218 2,770 3,182
Other liabilities 8,555 7,847 7,993
--------- --------- ---------
TOTAL LIABILITIES 698,434 702,740 694,909
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 69,646 68,343 63,987
Securities valuation (746) (285) (685)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 87,455 86,613 81,857
--------- --------- ---------
$ 785,889 $ 789,353 $ 776,766
========= ========= =========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended
March 31
1997 1996
------- -------
(in thousands, except per share data)
<S> <C> <C>
Interest income:
Loans, including fees $14,209 $13,481
Short-term investments 66 338
Investment securities:
Taxable 1,462 1,583
Tax-exempt 202 286
------- -------
TOTAL INTEREST INCOME 15,939 15,688
Interest expense:
Deposits 6,110 6,153
Borrowings 91
------- -------
TOTAL INTEREST EXPENSE 6,201 6,153
------- -------
NET INTEREST INCOME 9,738 9,535
Provision for loan losses 204 200
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,534 9,335
Noninterest income:
Trust department income 1,085 995
Fees for other customer services 830 730
Other 564 455
------- -------
2,479 2,180
------- -------
12,013 11,515
Noninterest expenses:
Salaries and employee benefits 4,694 4,547
Net occupancy 714 647
Furniture and equipment 482 411
Data processing 417 343
Advertising 292 308
Other 1,940 1,994
------- -------
8,539 8,250
------- -------
Income before income tax expense 3,474 3,265
Income tax expense 1,051 929
------- -------
NET INCOME $ 2,423 $ 2,336
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 5,598 5,598
Per share data:
Net income $ .43 $ .42
======= =======
Dividends paid $ .20 $ .165
======= =======
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,423 $ 2,336
Adjustments to reconcile net income to net
cash provided by operating activities:
Origination of mortgage loans held for sale (4,053) (10,155)
Proceeds from sale of mortgage loans held
for sale 3,991 9,680
Depreciation and amortization 508 440
Increase in interest payable 448 346
(Increase) decrease in interest receivable (267) 211
Provision for loan losses 204 200
Realized gain on sale of loans (147) (57)
Amortization of investment securities premium 29 59
Other 1,407 613
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,543 3,673
INVESTING ACTIVITIES
Proceeds from maturities of available for sale
securities 10,442 17,699
Net (increase) decrease in loans (6,503) 2,220
Purchases of available for sale securities (3,988) (12,191)
Net increase in short-term investments (2,938) (9,445)
Proceeds from maturities of held to maturity
securities 672 374
Purchases of premises and equipment (637) (640)
Proceeds from sale of premises and equipment 18
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (2,952) (1,965)
FINANCING ACTIVITIES
Decrease in federal funds purchased (16,015)
Net increase (decrease) in deposits 8,553 (3,420)
Federal Home Loan Bank advances 2,000
Cash dividends (1,120) (924)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (6,582) (4,344)
DECREASE IN CASH AND DUE FROM BANKS (4,991) (2,636)
-------- --------
Cash and due from banks at beginning of year 38,662 32,143
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 33,671 $ 29,507
======== ========
See notes to consolidated financial statements
</TABLE>
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 month periods ended March 31,
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.
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:
March 31, 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 $67,942 $67,228 $ 71,447 $ 71,256
Mortgage-backed securities 24,112 23,671 27,090 26,828
Other securities 3,860 3,868 3,860 3,875
------- ------- -------- --------
TOTAL $95,914 $94,767 $102,397 $101,959
======= ======= ======== ========
Held to Maturity
State and political
subdivisions $17,990 $17,937 $18,662 $18,626
======= ======= ======= =======
NOTE E - PENDING STOCK DIVIDEND
On April 29, 1997, the board of directors of the Company declared a 5% stock
dividend, payable on June 20, 1997, to stockholders of record as of June 5,
1997. The pro forma effect of this pending transaction on the consolidated
statements of income would be as follows:
Three months ended
March 31
1997 1996
---- ----
(in thousands, except per share data)
WEIGHTED AVERAGE SHARES OUTSTANDING 5,878 5,878
Per share data:
Net income $.41 $.40
Dividends paid $.19 $.16
NOTE F - RECLASSIFICATIONS
Certain amounts in 1996 have been reclassified to conform with the
classifications in 1997.
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 March 31, 1997
------------------------------
Amount of Percent
Increase Increase
(Decrease) (Decrease)
----------- ----------
Funding sources:
Deposits $ 8,553 1.3%
Federal Home Loan Bank advances 2,000 NMF
Federal funds purchased (16,015) NMF
Other sources, net 7,248 38.1
--------
$ 1,786 .2%
======== ====
Funding uses:
Loans $ 6,712 1.1%
Investment securities (7,864) (6.5)
Short-term investments 2,938 NMF
--------
Total uses $ 1,786 .2%
======== ====
Aggregate deposits, the primary source of funds, increased by $8,553,000 or 1.3%
during the first quarter of 1997. Experience was mixed within the deposit
category, as shown below:
Increase
(Decrease) Percent
---------- -------
Demand $(6,341) (8.5)%
Savings (644) (.2)
Time-retail 9,645 3.5
Time-jumbo 5,893 18.1
-------
$ 8,553 1.3%
======= ====
As a result, total deposit levels at March 31, 1997 showed an increase from the
end of 1996.
The loan portfolio increased slightly by 1.1% during the first quarter of 1997.
The commercial loan area increased during the period while real estate mortgages
and installment loans decreased.
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, 1997 the volume of Freddie Mac loans
sold with servicing being retained was $215 million. The comparable figure one
year earlier was $202 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 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 March 31, 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 March 31,
"Well Capitalized" 1997 1996
------------------ ---- ----
Total capital 10.0% 15.92% 15.83%
Tier I capital 6.0 14.67 14.58
Tier I leverage ratio 5.0 11.30 10.62
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, 1997 and 1996
-----------------------
Increase (Decrease)
Interest income $ 251 1.6%
Interest expense 48 .8
------
Net interest income 203 2.1
Provision for loan losses 4 2.0
------
Net interest income after provision
for loan losses 199 2.1
Noninterest income 299 13.7
Noninterest expenses 289 3.5
------
Income before income tax expense 209 6.4
Income tax expense 122 13.1
------
Net income $ 87 3.7%
======
Net Interest Income
The increase in net interest income during the first quarter of 1997 was due to
the fact that while both interest income and interest expense increased from the
first quarter in 1996, interest income increased more. The increase in the loan
to deposit ratio to 88.4% at March 31, 1997 from 81.8% at March 31, 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 slightly during the first three months of 1997
largely due to the larger loan portfolio. This increased loan loss provision
allowed for an increase to the allowance for loan losses of $88,000 or 1.0%
during the quarter. Net loan charge-offs for the quarter amounted to $116,000,
down from the amount of $120,000 for the comparable period in 1996. On an
annualized basis these charge-offs amounted to .08% of average loans
outstanding, down from the .09% for the comparable period in 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%
for both year end 1996 and March 31, 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 quarter of 1997 by $618,000 or 17.0%. Total nonperforming assets, which
include other real estate, also continue at low levels despite an increase of
$578,000 or 10.7% from December 31, 1996.
The table below presents a comparison of nonperformings.
March 31, December 31,
1997 1996
---- ----
(in thousands)
Nonaccrual loans $1,982 $1,538
Loans past due
90 days or more 1,083 901
Restructured loans 1,187 1,195
------ ------
Total nonperforming loans 4,252 3,634
Other real estate 1,711 1,751
------ ------
Total nonperforming assets $5,963 $5,385
====== ======
Nonperforming loans
as a % of total loans .70% .61%
=== ===
Nonperforming assets
as a % of total assets .76% .68%
=== ===
On a percentage basis, the allowance for loan losses decreased from 230.8% of
nonperforming loans at the end of 1996 to 199.3% at March 31, 1997. Management
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
ended
March 31, 1997
--------------
Salaries and employee benefits 3.2%
Occupancy, furniture and equipment 13.0
Data processing 21.6
Advertising (5.2)
Other (2.7)
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 first quarter was mostly
due to the increase in pre-tax income of the Company for the first quarter of
1997, combined with a decrease in the portion of interest income which is exempt
from federal taxation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) 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 March 31, 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: May 5, 1997 /s/ HOWARD L. COHODAS
------------------ ---------------------------------------
Howard L. Cohodas, Chairman
& President
(Chief Executive Officer)
Dated: May 5, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 33,671
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94,767
<INVESTMENTS-CARRYING> 17,990
<INVESTMENTS-MARKET> 17,937
<LOANS> 605,219
<ALLOWANCE> 8,476
<TOTAL-ASSETS> 785,889
<DEPOSITS> 684,661
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 11,773
<LONG-TERM> 0
0
0
<COMMON> 18,555
<OTHER-SE> 68,900
<TOTAL-LIABILITIES-AND-EQUITY> 785,889
<INTEREST-LOAN> 14,209
<INTEREST-INVEST> 1,730
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,939
<INTEREST-DEPOSIT> 6,110
<INTEREST-EXPENSE> 6,201
<INTEREST-INCOME-NET> 9,738
<LOAN-LOSSES> 204
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,539
<INCOME-PRETAX> 3,474
<INCOME-PRE-EXTRAORDINARY> 2,423
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,423
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
<YIELD-ACTUAL> 5.59
<LOANS-NON> 1,982
<LOANS-PAST> 1,083
<LOANS-TROUBLED> 1,187
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,388
<CHARGE-OFFS> 160
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 8,476
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
