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, 1996
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. [ ]
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 February 28, 1997. $69,130,477
----------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of February 28, 1997.
Common Stock, no par value - 5,598,267
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual stockholders report for the year ended December 31, 1996
are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual stockholders meeting to be held
April 29, 1997 are incorporated by reference into Part III.
PART I
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 tenth 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 32 banking offices in eight counties of
Michigan's Upper Peninsula: Alger, Delta, Dickinson, Gogebic, Houghton, Iron,
Marquette and Menominee. The banks also operate 32 automated teller machines
("ATMs") in several market areas. All the banks have a retail banking
orientation and compete vigorously with other Upper Peninsula commercial banks,
savings banks, 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 in Note J, beginning on
page 29, in the annual stockholders report for the year ended December 31, 1996
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 668 people
as of December 31, 1996.
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 1994 through 1996 (1992 through 1996 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.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and
Interest Differential
<TABLE>
<CAPTION>
1996 1995 1994
----------- -------- --------- ----------- -------- --------- ----------- -------- ---------
Average Interest Average Interest Average Interest
Amount Earned Yield or Amount Earned Yield or Amount Earned Yield or
Outstanding or Paid Rate Paid Outstanding or Paid Rate Paid Outstanding or Paid Rate Paid
----------- -------- --------- ----------- -------- --------- ----------- -------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Time deposits in other banks $7 $0 5.15% $14 $1 5.88% $163 $6 3.54%
Federal funds sold 13,460 717 5.33% 20,604 1,205 5.85% 18,211 715 3.93%
Other short-term investments 267 13 4.85% 207 10 4.98% 4,792 156 3.26%
Investment securities:
U. S. Treasury 17,672 1,002 5.67% 29,695 1,611 5.43% 33,013 1,675 5.07%
U. S. Government agencies
and corporations 88,269 5,145 5.83% 84,528 4,707 5.57% 92,495 4,763 5.15%
States and political
subdivisions 21,861 964 6.30% 29,465 1,300 6.16% 37,966 1,604 5.89%
Other 4,769 342 7.17% 4,927 362 7.34% 5,369 321 5.99%
Loans 575,115 55,561 9.74% 547,264 53,297 9.81% 515,410 47,504 9.29%
-------- ------- ----- -------- ------- ----- -------- ------- -----
TOTAL EARNING ASSETS 721,420 63,744 8.95% 716,704 62,493 8.84% 707,419 56,744 8.17%
Noninterest earning assets:
Cash and due from banks 28,387 28,939 30,837
Premises and equipment 23,645 21,531 21,280
Other assets 11,418 11,637 11,505
Allowance for loan losses (7,906) (6,847) (6,589)
-------- -------- --------
TOTAL ASSETS $776,964 $771,964 $764,452
======== ======== ========
Interest bearing liabilities:
Demand deposits 133,639 2,848 2.13% 117,759 2,499 2.12% 93,674 1,418 1.51%
Savings deposits 165,152 4,283 2.59% 189,464 5,176 2.73% 229,666 5,597 2.44%
Time deposits under $100,000 277,142 15,222 5.49% 268,144 14,213 5.30% 247,519 11,181 4.52%
Time deposits over $100,000 34,099 1,940 5.69% 34,804 2,029 5.83% 22,765 1,027 4.51%
Short-term borrowings 4,465 252 5.65% 985 60 6.13% 779 38 4.95%
Other debt 415 36 8.55%
-------- ------- ----- -------- ------- ----- -------- ------- -----
TOTAL INTEREST
BEARING LIABILITIES 614,497 24,545 3.99% 611,571 24,013 3.93% 594,403 19,261 3.24%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Noninterest bearing liabilities
and Shareholders' equity:
Demand deposits 68,492 72,601 88,488
Other liabilities 11,134 11,077 9,403
Shareholders' equity 82,841 76,715 72,158
-------- -------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $776,964 $771,964 $764,452
======== ======== ========
NET INTEREST INCOME $39,199 $38,480 $37,483
======= ======= =======
NET YIELD ON EARNING ASSETS 5.55% 5.49% 5.44%
===== ===== =====
All of the above percentages are computed on a fully taxable
statutory rate of 35% for 1996 and 1995, and 34% for 1994.
The average balance of Loans includes nonaccrual loans.
</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 1996
as compared with 1995. 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 $(1) $(388) $3 $(483) $(385) $2,633 $1,379
Rate - (100) - 292 49 (369) (128)
--- ----- -- ----- ----- ------ ------
Net Change $(1) $(488) $3 $(191) $(336) $2,264 $1,251
=== ===== == ===== ===== ====== ======
</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 $337 $(638) $455 $197 $(36) $315
Rate 12 (255) 465 (5) - 217
---- ----- ---- ---- ---- ----
Net Change $349 $(893) $920 $192 $(36) $532
==== ===== ==== ==== ==== ====
</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 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>
INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities at
the dates indicated:
December 31
------------------------
1996 1995 1994
------- ------- ------
(in thousands)
Available for Sale Securities:
U.S. Treasury and government agencies $ 71,256 $ 75,525 $77,034
Mortgage-backed 26,828 34,455 3,456
States and political subdivisions 517 1,295 385
Other 3,358 3,919 3,898
-------- ------- -------
$101,959 $115,194 $84,773
======== ======== =======
Held to Maturity Securities:
U.S. Treasury and government agencies $ 4,218
Mortgage-backed 36,138
States and political subdivisions $18,662 $24,537 35,565
------- ------- -------
$18,662 $24,537 $75,921
======= ======= =======
The table on the following page sets forth the maturities of investment
securities at December 31, 1996, 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> <C>
U.S. Treasury and U.S. Government
agencies $ 9,723 5.65% $61,533 5.94% $ - - % $ - - %
Mortgage-backed 8,170 5.84 13,928 5.84 866 6.67 3,864 6.49
Other - - 517 8.00 - - 3,358 1.46
------- ---- ------- ---- ---- ---- ------ ----
Total Available for Sale Securities $17,893 5.74% $75,978 5.94% $866 6.67% $7,222 4.15%
======= ==== ======= ==== ==== ==== ====== ====
Held to Maturity Securities:
States and political subdivisions $ 7,052 5.95% $ 9,599 6.85% $1,411 8.56% $ 600 7.00%
======= ==== ======= ==== ====== ==== ====== ====
Tax-equivalent adjustment for
calculation of yield $147 $230 $42 $15
==== ==== === ===
</TABLE>
Weighted average yields on tax-exempt obligations have been computed on a fully
tax-equivalent basis assuming a tax rate of 35 percent.
LOAN PORTFOLIO
The amounts of loans outstanding at the indicated dates are shown in the
following table according to type of loan.
December 31
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
Commercial, financial, and
agricultural $247,344 $246,134 $248,785 $230,924 $201,086
Real estate-construction 12,771 10,095 9,175 8,521 9,289
Real estate-mortgage 218,144 191,066 175,923 166,852 172,079
Consumer 120,364 113,596 106,958 96,667 97,204
-------- -------- -------- -------- --------
$598,623 $560,891 $540,841 $502,964 $479,658
======== ======== ======== ======== ========
The following table shows the amounts of loans (excluding real estate mortgages
and consumer loans) outstanding as of December 31, 1996, which, based on
remaining scheduled repayments of principal, are due in the periods indicated.
Maturing
----------------------------------------------------
Within After One But After
One Year Within Five Years Five Years Total
-------- ----------------- ---------- -----
(in thousands)
Commercial, financial, and
agricultural $71,610 $128,691 $47,043 $247,344
Real estate-construction 10,959 1,348 464 12,771
------- -------- ------- --------
$82,569 $130,039 $47,507 $260,115
======= ======== ======= ========
Included in the loans which are due after one year are $89,006,000 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
----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
Nonaccrual loans $1,538 $2,061 $2,374 $2,445 $2,651
Accruing loans past
due 90 days or more 901 915 830 962 1,059
Restructured loans 1,195 694 592 222 255
The 1996 and 1995 nonaccrual loan amounts include $1,124,000 and $1,359,000,
respectively, 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, 1996 which
is incorporated herein by reference.
Additional information with respect to nonaccrual and restructured loans for the
two years ended December 31, 1996 is as follows:
1996 1995
---- ----
(in thousands)
Gross interest income that would have been
recorded if the loans had been current
in accordance with their original terms $194 $261
Interest income that was included in net
income 72 73
The Company's policy with respect to nonaccrual loans and the recognition of
loan interest income is explained on page 24 of the annual stockholders report
for the year ended December 31, 1996 which is incorporated herein by reference.
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 $16,348,000 at
December 31, 1996, 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 $14,360 $14,084
Real estate - construction - -
Real estate - mortgage 1,845 1,835
Consumer 143 114
------- -------
$16,348 $16,033
======= =======
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Company's loan loss experience for the five
years ended December 31, 1996.
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
Balance of allowance for
loan losses at beginning
of period $7,589 $6,701 $6,553 $5,868 $6,065
Loans charged-off:
Commercial, financial, and
agricultural 746 409 691 131 831
Real estate-construction - - - - -
Real estate-mortgage 99 125 93 107 161
Consumer 545 411 485 588 817
------ ------ ------ ------ ------
Total loans charged-off 1,390 945 1,269 826 1,809
Recoveries of loans previously
charged-off:
Commercial, financial, and
agricultural 66 79 106 162 84
Real estate-construction - - - - -
Real estate-mortgage 12 21 28 31 21
Consumer 182 150 162 159 192
------ ------ ------ ------ ------
Total recoveries 260 250 296 352 297
------ ------ ------ ------ ------
Net loans charged-off 1,130 695 973 474 1,512
Additions to allowance charged
to expense* 1,929 1,583 1,121 1,159 1,315
------ ------ ------ ------ ------
Balance at end of period $8,388 $7,589 $6,701 $6,553 $5,868
====== ====== ====== ====== ======
Ratio of net charge-offs
during period to average
loans outstanding .20% .13% .19% .10% .32%
* 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, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- -----------------
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 $1,813 41.3% $2,228 43.9% $2,127 46.0%
Real estate-
construction - 2.1 - 1.8 - 1.7
Real estate-
mortgage 321 36.5 439 34.1 470 32.5
Consumer 795 20.1 973 20.2 985 19.8
Not allocated 5,459 n/a 3,949 n/a 3,119 n/a
------ ----- ------ ----- ------ -----
$8,388 100.0% $7,589 100.0% $6,701 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
December 31, 1993 December 31, 1992
----------------- -----------------
Percent of Percent of
Type of Loans Type of Loans
Allowance to Total Loans Allowance to Total Loans
--------- -------------- --------- --------------
Commercial,
financial and
agricultural $1,940 45.9% $1,633 41.9%
Real estate-
construction - 1.7 14 1.9
Real estate-
mortgage 208 33.2 747 35.9
Consumer 1,036 19.2 810 20.3
Not allocated 3,369 n/a 2,664 n/a
------ ----- ------ -----
$6,553 100.0% $5,868 100.0%
====== ===== ====== =====
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
------------------- -----------------------
1996 1995 1994 Well Capitalized Minimum
---- ---- ---- ---------------- -------
Leverage 11.12% 10.46% 9.88% 5.0% 4.0%
Tier 1 14.58 14.31 13.73 6.0 4.0
Tier 1 + Tier 2 15.83 15.56 14.94 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, 1996 is incorporated herein by reference.
ITEM 2. PROPERTIES
The Company owns seven member banks and one nonbank subsidiary, and has a total
of 32 banking offices, all of which are located in the Upper Peninsula of
Michigan. The Company owns 27 and leases 5 of these banking offices. The Company
also owns all 32 of its ATM's. 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 29, 1997.
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
Howard L. Cohodas 52 Chairman and President
Kenneth F. Beck 59 Senior Vice President, Treasurer
and Secretary
Ward L. Rantala 45 Vice President - Human Resources
Howard L. Cohodas has been Chairman and President of the Company since prior to
March, 1992.
Kenneth F. Beck has been Senior Vice President, Treasurer and Secretary of the
Company since prior to March, 1992.
Ward L. Rantala has been Vice President - Human Resources of the Company since
prior to March, 1992.
Terms of office for the executive officers expire April 29, 1997, 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, 1996 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, 1996 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, 1996 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, 1996, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 1 and 2 of the Company's Proxy Statement
dated March 24, 1997, 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
24, 1997, 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 8 and 9 of the Company's Proxy Statement
dated March 24, 1997, 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
24, 1997, 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 1996 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
(3a) Articles of Incorporation
(3b) Bylaws
(10) Material contracts - executive incentive plan*
(13) Incorporated portions from the annual report to security
holders
*Management contract or compensatory plan or arrangement
(21) Subsidiaries of the registrant
(23) Consents 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 1996.
(c) Exhibits
(3a) Articles of Incorporation--A copy of the Company's articles of
incorporation is filed as Exhibit 3(a) to the Company's
Registration Statement on Form S-4 (Registration #33-73064) filed
with the Commission on December 20, 1993 and incorporated herein
by this reference.
(3b) Bylaws--A copy of the Company's bylaws is filed as Exhibit 3(b)
to the Company's Registration Statement on Form S-4 (Registration
#33-73064) filed with the Commission on December 20, 1993 and
incorporated herein by this reference.
(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, 1996 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 21, 1997.
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 21, 1997.
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
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, 1996 22
23 Consents of independent auditors 23
24 Power of attorney 24
27 Financial data schedule 25
<TABLE>
<CAPTION>
CONSOLIDATED SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income $ 39,199 $ 38,480 $ 37,483 $ 34,690 $ 34,522 $ 32,269
Provision for loan losses 1,929 1,583 1,121 1,159 1,315 1,915
Noninterest income 9,547 8,072 7,619 8,019 6,603 5,778
Noninterest expenses 33,078 32,776 32,623 31,694 29,861 27,345
Income tax expense 4,106 3,484 3,206 2,780 2,936 2,528
Net operating income 9,633 8,709 8,152 7,076 7,013 6,259
Accounting changes (1,198)
Net income 9,633 8,709 8,152 5,878 7,013 6,259
- --------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net operating income $ 1.72 $ 1.56 $ 1.46 $ 1.26 $ 1.26 $ 1.13
Net income 1.72 1.56 1.46 1.05 1.26 1.13
Cash dividends .69 .58 .50 .44 .38 .34
Stockholders' equity 15.47 14.47 13.07 12.55 11.91 11.07
- --------------------------------------------------------------------------------------------------------------------
YEAR END BALANCES
Total assets $ 789,353 $ 778,316 $ 767,573 $ 781,155 $ 782,613 $ 768,032
Investment securities 120,621 139,731 160,694 164,942 144,021 143,630
Loans receivable 598,623 560,891 540,841 502,964 479,658 476,098
Deposits 676,108 687,154 685,202 702,367 707,720 698,315
Debt 16,015 1,200
Stockholders' equity 86,613 80,985 73,195 70,257 66,668 61,560
- --------------------------------------------------------------------------------------------------------------------
STATISTICAL SUMMARY (PERCENTAGES)
Return on average
total assets* 1.24% 1.13% 1.07% .91% .91% .83%
Return on average
stockholders' equity* 11.63 11.35 11.30 10.47 11.03 10.70
Dividend payout ratio* 40.12 37.18 34.25 34.92 30.16 30.09
Average stockholders' equity
to average total assets 10.66 9.94 9.44 8.65 8.24 7.78
- --------------------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL RATIOS
Total risk-based capital 15.83% 15.56% 14.94% 14.68% 14.80% 14.34%
Tier 1 risk-based capital 14.58 14.31 13.73 13.43 13.60 13.09
Leverage ratio 11.12 10.46 9.88 9.05 8.66 8.05
- --------------------------------------------------------------------------------------------------------------------
* Before accounting changes
</TABLE>
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------
SOURCES AND USES OF FUNDS TRENDS 1996 1995 1994
AVERAGE INCREASE (DECREASE) AVERAGE INCREASE (DECREASE) AVERAGE
- ---------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS) BALANCE AMOUNT % BALANCE AMOUNT % BALANCE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FUNDING SOURCES:
Demand deposits-
Noninterest bearing $ 68,492 $ (4,109) (5.7) $ 72,601 $(15,887) (18.0) $ 88,488
Interest bearing 133,639 15,880 13.5 117,759 24,085 25.7 93,674
Savings deposits 165,152 (24,312) (12.8) 189,464 (40,202) (17.5) 229,666
Time deposits 311,241 8,293 2.7 302,948 32,664 12.1 270,284
Short-term borrowings 4,465 3,480 NMF 985 206 26.4 779
Other debt (415) (100.0) 415 415 NMF
Other 38,431 5,899 18.1 32,532 8,004 32.6 24,528
- ---------------------------------------------------------------------------------------------------------------------
Total sources $ 721,420 $ 4,716 0.7 $ 716,704 $ 9,285 1.3 $707,419
=====================================================================================================================
FUNDING USES:
Loans $ 575,115 $ 27,851 5.1 $ 547,264 $31,854 6.2 $515,410
Taxable investment
securities 110,710 (8,440) (7.1) 119,150 (11,727) (9.0) 130,877
Tax-exempt
investment securities 21,861 (7,604) (25.8) 29,465 (8,501) (22.4) 37,966
Federal funds sold 13,460 (7,144) (34.7) 20,604 2,393 13.1 18,211
Interest bearing deposits
in other banks 7 (7) (50.0) 14 (149) (91.4) 163
Other short-term
investments 267 60 29.0 207 (4,585) (95.7) 4,792
- ---------------------------------------------------------------------------------------------------------------------
Total uses $ 721,420 $ 4,716 0.7 $ 716,704 $ 9,285 1.3 $707,419
=====================================================================================================================
</TABLE>
[BAR GRAPH]
NET INCOME
(In Millions of Dollars)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$7.01 $5.88 $8.15 $8.71 $9.63
[BAR GRAPH]
NET INTEREST INCOME
(In Millions of Dollars)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$34.5 $34.7 $37.5 $38.5 $39.2
[BAR GRAPH]
Net Income Per Share
(In Millions of Dollars)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$1.26 $1.05 $1.46 $1.56 $1.72
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 above
indicates how the Company has managed its sources and uses of funds.
As the primary source of funds, aggregate average deposits decreased by
$4,248,000, or .6%, in 1996 after increasing by $660,000, or .1%, in 1995.
Although total deposits decreased slightly for 1996, there was significant
movement within the different categories of deposits. There was a continued
switch between noninterest bearing deposits and interest bearing deposits as the
Company continued to promote the line of deposit products which had been
introduced in 1995 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. Both savings and time
deposits continue to be major sources of funds for the Company. Included in the
time deposits category are $34.1 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.
The Company entered into a short-term borrowing arrangement with an
unaffiliated bank in March of 1995 which was paid off in November of 1995. There
are no plans to resume this activity.
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 1996 increased by $27.9 million or 5.1%, after
increasing $31.9 million or 6.2% in 1995.
The increase in loans caused the aggregate of all other earning assets,
representing alternative uses of funds, to decrease by $23.1 million, or 13.7%
in 1996 and by $22.6 million, or 11.8% in 1995. 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 1996 the volume of Freddie Mac loans
sold with servicing being retained and without recourse was $213 million. The
comparable figure for 1995 was $199 million. The ability of the Company to sell
these loans in large block amounts enables it to more effectively manage its
funding operations.
[BAR GRAPH]
EQUITY CAPITAL AT YEAR END
(In Millions of Dollars)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Equity Capital $66.7 $70.3 $73.2 $81.0 $86.6
Percentage of Total Assets 8.52% 8.99% 9.54% 10.41% 10.97%
[BAR GRAPH]
EARNINGS AND DIVIDENDS
PER SHARE*
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Earnings $1.26 $1.26 $1.46 $1.56 $1.72
Dividends $ .38 $ .44 $ .50 $ .58 $ .69
* Before Accounting Changes
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.
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 $16,775,000 at December 31, 1996, down from the $24,058,000 at
December 31, 1995. The Company decreased its holdings of mortgage-backed
securities to $26,828,000 at December 31, 1996 from $34,455,000 at December 31,
1995. Other types of short-term assets such as federal funds sold and money
market investments are additional sources of liquidity. At December 31, 1996 the
Company's position in short-term investments amounted to $285,000, down
substantially from the $17,647,000 at the end of 1995.
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, money market
certificates and federal funds purchased 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.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maturing in:
3 months or less $ 12,914 $ 10,956 $ 8,100
Over 3 through 6 months 7,992 9,135 5,323
Over 6 through 12 months 7,156 7,769 4,250
Over 12 months 9,119 11,013 11,154
- ------------------------------------------------------------------------------------
$ 37,181 $ 38,873 $ 28,827
====================================================================================
As a percent of deposits 5.50% 5.66% 4.21%
====================================================================================
</TABLE>
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, 1996.
<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>
Loans $ 175,143 $ 66,756 $ 241,899 $ 312,283 $ 44,441
Investment securities 5,159 11,616 16,775 71,649 5,369
Mortgage-backed securities 1,531 6,639 8,170 13,928 4,730
Other assets 285 - 285 - -
- ---------------------------------------------------------------------------------------------------------------
Rate sensitive assets 182,118 85,011 267,129 397,860 54,540
Deposits:
$100,000 or more 12,914 15,148 28,062 9,119 -
Other time 57,114 91,188 148,302 124,160 -
Savings 292,100 - 292,100 - -
Other liabilities 16,015 - 16,015 - -
- ---------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities 378,143 106,336 484,479 133,279 -
- ---------------------------------------------------------------------------------------------------------------
Interest rate sensitivity
gap-period $ (196,025) $ (21,325) $ (217,350) $ 264,581 $ 54,540
===============================================================================================================
Interest rate sensitivity
gap-cumulative $ (217,350) $ (217,350) $ 47,231 $ 101,771
===============================================================================================================
</TABLE>
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 $217 million at December 31,
1996.
Included in the $484,479,000 of rate sensitive liabilities indicated as
maturing within one year are $292,100,000 of NOW, savings and money market
deposits which do not reprice in the same proportion as rate sensitive assets.
If core deposits of $192,620,000 consisting of NOW and savings deposits were not
included as rate sensitive liabilities, the Company's negative gap would be less
than $25 million or less than four percent of earning assets.
[BAR GRAPH]
NET INTEREST INCOME
(In Millions of Dollars)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
INTEREST INCOME $63.2 $57.1 $56.7 $62.5 $63.7
NET INTEREST INCOME $34.5 $34.7 $37.5 $38.5 $39.2
CAPITAL RESOURCES
Total equity growth has surpassed total asset growth over the past several years
and amounted to 6.9% in 1996, 10.6% in 1995, and 4.2% in 1994. The equity
increase due to operations was $5,768,000, $5,462,000 and $5,360,000 for 1996,
1995 and 1994, respectively. Equity was also impacted by security valuations
each of these years. For 1996, equity decreased by $140,000 due to investment
security valuations. During 1995 equity increased by $2,328,000 due to security
valuations, while 1994 valuations caused equity to decrease by $2,422,000.
Stockholders' equity increased from 10.41% of total assets at the end of 1995 to
a level of 10.97% at the end of 1996.
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:
<TABLE>
<CAPTION>
RELATIONSHIP BETWEEN SIGNIFICANT FINANCIAL RATIOS
INTERNAL
RETURN EARNINGS CAPITAL
ON EQUITY RETAINED GROWTH
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 11.63% X 59.88% = 6.96%
1995 11.35 X 62.82 = 7.13
1994 11.30 X 65.75 = 7.43
</TABLE>
Management decided to increase the dividend payout during 1996 for the eighth
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 6.96%. 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, 1996, 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 $13.7 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.
[BAR GRAPH]
ALLOWANCE FOR LOAN LOSSES
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Allowance to loans at year end 1.22% 1.30% 1.24% 1.35% 1.40%
Net charge-offs to average loans .32% .10% .19% .13% .20%
RESULTS OF OPERATIONS
Net interest income increased by $719,000 in 1996, $997,000 in 1995 and
$2,793,000 in 1994 or by 1.9%, 2.7% and 8.1%, respectively. On a fully taxable
equivalent basis the annual rates of increase would have been 1.7% in 1996, 2.2%
in 1995 and 8.4% in 1994.
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) 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average earning assets $ 721,420 $ 716,704 $ 707,419
Yields earned (fully taxable equivalent) 8.95% 8.84% 8.17%
Average interest bearing liabilities $ 614,497 $ 611,571 $ 594,403
Rates paid 3.99% 3.93% 3.24%
Net yield on earning assets 5.55 5.49 5.44
</TABLE>
Rates were flat during 1996 after falling the second half of 1995. They had
increased steadily during 1994. As discussed above, management of the Company's
gap allowed the yield on earning assets to increase by .11%, while allowing
rates paid on interest bearing liabilities to increase by only .06%. The result
was an increase in net yield for 1996 of .06%. During 1995 the increase in net
yield was .05%, due to the increase in average earning assets.
Average earning assets, interest income, interest expense and net interest
income all increased during 1996. This was due to the increase in loans
outstanding. For 1995, the increase in net interest income resulted from rising
rates and the increase in loans outstanding. Performance at the net interest
income level in future periods will still be primarily dependent upon general
interest rate developments.
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 1996, over $38 million in loans were sold
with the Company retaining servicing rights. The amount of loans sold with
retained servicing rights was nearly $32 million during 1995. All of the loans
sold are without recourse and as discussed in Note A to the Consolidated
Financial Statements, the Company has adopted Financial Accounting Standards
Board Statement 122 "Accounting for Mortgage Servicing Rights," effective
January 1, 1996. At the end of 1996 and 1995, loans being held for sale amounted
to $5.3 million and $4.2 million, respectively. The Company plans to continue
this activity in the future but the level of activity will largely depend upon
external market factors.
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 inherent losses based on an evaluation of portfolio
risk, collateral value, and certain economic factors. The provision was
$1,929,000 in 1996 compared to $1,583,000 in 1995 and $1,121,000 in 1994. Net
loan losses were $1,130,000, in 1996, $695,000 in 1995 and $973,000 in 1994. On
a percentage basis the net charge-offs to average loans increased to .20% in
1996 from the levels of .13% in 1995 and .19% in 1994.
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, 1996 stood at $8,388,000 or 1.40% of outstanding
loans, compared to $7,589,000 or 1.35% in 1995 and $6,701,000 or 1.24% in 1994.
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 1996. On a percentage basis, nonperforming
loans decreased to .61% of total loans at December 31, 1996, a continued
reduction from the previous year end of .65% and a level of .70% in 1994.
Coverage of nonperformings by the allowance stood at 231% at year end 1996, up
from the 207% coverage level attained in 1995 and the level of 177% in 1994.
Management intends to continue in its efforts toward improving the quality of
the loan portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $1,538 $2,061 $2,374
Accruing loans past due
90 days or more 901 915 830
Restructured loans 1,195 694 592
- --------------------------------------------------------------------------------
Total nonperforming loans $3,634 $3,670 $3,796
================================================================================
Nonperforming loans/total loans .61% .65% .70%
Loan loss allowance/
nonperforming loans 231% 207% 177%
</TABLE>
[BAR GRAPH]
NONPERFORMING LOANS
TO TOTAL LOANS
(As of December 31)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
.83% .72% .70% .65% .61%
[BAR GRAPH]
RETURN ON ASSETS* (ROA)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
.91% .91% 1.07% 1.13% 1.24%
* Before Accounting Changes
The gross interest income that would have been recorded in 1996 for
nonaccrual and restructured loans as of December 31, 1996, assuming interest had
been accrued throughout the year in accordance with original terms, is $194,000.
The comparable 1995 total for these loan categories was $261,000. The amount of
interest income recorded on these loans and included in income was $72,000 in
1996 and $73,000 in 1995. The combined effect of these changes was to lower net
interest income in 1996 by $66,000 from the prior year.
Noninterest income increased $1,475,000 in 1996 after an increase of $453,000
in 1995 and a decrease of $400,000 in 1994. Exclusive of securities losses, it
increased $1,434,000 in 1996, increased $446,000 in 1995 and decreased $298,000
in 1994. Nearly one third of the 1996 increase was due to gains from the sale of
loans, which were $488,000 higher than during the prior year. The comparable
gains had decreased by $38,000 in 1995 and $471,000 in 1994. The large increase
in 1996 was primarily due to the adoption of Financial Accounting Standards
Board Statement 122 "Accounting for Mortgage Servicing Rights" as of January 1,
1996. See Notes A and F to the Financial Statements for further information
about this change. The effect on future noninterest income will be dependent on
the level of additional mortgage loans serviced for others, offset by the
amortization of loan servicing rights. Noninterest income was also affected by
the increase in trust services income of $404,000 in 1996. During 1995 and 1994,
trust income had risen $280,000 and $215,000, respectively. Much of the decrease
in noninterest income during 1994 had been due to the decrease in gains on sale
of loans.
Noninterest expense increased $302,000 in 1996, $153,000 in 1995 and $929,000
during 1994. The salaries and employee benefits expense for 1996 increased
$631,000 from the prior year. For 1995 and 1994 the increases over prior year
for salaries and employee benefits was $557,000 and $1,216,000, respectively.
The increase in noninterest expense for 1996 was not as large as it might have
been due to substantial reductions in FDIC premiums the last two years. The 1996
FDIC premium was down $786,000 from the level of 1995, which had decreased from
1994 by $754,000.
The income tax provision increased by $622,000, $278,000, and $426,000,
respectively, for 1996, 1995, and 1994, mainly due to improved pretax income
each year.
Results of operations can be measured by various ratio analyses. Two widely
recognized performance indicators are return on equity and return on assets. As
indicated by the table of consolidated selected financial data, the Company's
return on equity was 11.63%, up from the 11.35% during 1995 and the 11.30%
achieved during 1994. The return on assets for 1996 increased to 1.24%, up from
the levels of 1.13% in 1995 and 1.07% in 1994. Management believes that the
Company's fundamental operations have been improving, as the results of the last
three years have shown.
ISSUED BUT NOT YET ADOPTED ACCOUNTING POLICIES
See Note A to the Consolidated Financial Statements for a discussion of an
accounting pronouncement issued by the Financial Accounting Standards Board
which the Corporation is not required to implement until periods subsequent to
December 31, 1996.
EFFECTS OF INFLATION
The impact of inflation on the reported earnings of financial institutions is
principally related to the possible understatement of depreciation charges for
fixed asset values. Inflation, however, does have an important impact on the
growth of total assets and the resulting need to increase equity capital.
Management recognizes the need to control growth and to maintain a reasonable
dividend policy to allow for the adequate internal growth of capital.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
($ -- in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 55,561 $ 53,297 $ 47,504
Short-term investments 730 1,216 877
Investment securities:
Taxable 6,489 6,680 6,759
Tax-exempt 964 1,300 1,604
- --------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 63,744 62,493 56,744
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 24,293 23,917 19,223
Borrowings 252 96 38
- --------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 24,545 24,013 19,261
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 39,199 38,480 37,483
Provision for loan losses 1,929 1,583 1,121
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 37,270 36,897 36,362
Noninterest income:
Trust department income 4,158 3,754 3,474
Fees for other customer services 3,305 2,782 2,571
Other 2,170 1,663 1,708
Net investment securities losses (86) (127) (134)
- --------------------------------------------------------------------------------------------------------------------
9,547 8,072 7,619
- --------------------------------------------------------------------------------------------------------------------
46,817 44,969 43,981
Noninterest expenses:
Salaries and employee benefits 18,084 17,453 16,896
Net occupancy 2,523 2,445 2,308
Furniture and equipment 1,774 1,717 1,642
Data processing 1,510 1,376 1,617
Advertising 1,379 1,128 1,036
Single business tax 513 581 653
FDIC premiums 11 797 1,551
Other 7,284 7,279 6,920
- --------------------------------------------------------------------------------------------------------------------
33,078 32,776 32,623
- --------------------------------------------------------------------------------------------------------------------
Income before income tax expense 13,739 12,193 11,358
Income tax expense 4,106 3,484 3,206
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 9,633 $ 8,709 $ 8,152
====================================================================================================================
Net income per share $ 1.72 $ 1.56 $ 1.46
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
($ -- in thousands)
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 38,662 $ 32,143
Short-term investments:
Federal funds sold 17,350
Money market investments 285 297
Investment securities:
Available for sale 101,959 115,194
Held to maturity (fair value:
1996 - $18,626; 1995 - $24,269) 18,662 24,537
Loans 598,623 560,891
Allowance for loan losses (8,388) (7,589)
- --------------------------------------------------------------------------------------------------------------------
NET LOANS 590,235 553,302
Premises and equipment 24,679 22,857
Accrued interest receivable 5,208 5,779
Other assets 9,663 6,857
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 789,353 $ 778,316
====================================================================================================================
LIABILITIES
Deposits:
Noninterest bearing $ 74,365 $ 70,790
Interest bearing 601,743 616,364
- --------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 676,108 687,154
Federal funds purchased 16,015
Accrued interest payable 2,770 2,836
Other liabilities 7,847 7,341
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 702,740 697,331
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 68,343 62,575
Securities valuation (285) (145)
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 86,613 80,985
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 789,353 $ 778,316
====================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
($ -- in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------
Common Retained Securities
Stock Earnings Valuation Total
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 $ 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
Net income for the year 9,633 9,633
Change in unrealized gains and losses,
net of income tax benefits of $76 (140) (140)
Cash dividends, $.69 per share (3,865) (3,865)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ 18,555 $ 68,343 $ (285) $ 86,613
====================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ -- in thousands)
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,633 $ 8,709 $ 8,152
Adjustments to reconcile net income to net cash
provided by operating activities:
Origination of mortgage loans held for sale (39,505) (34,237) (52,592)
Proceeds from sale of mortgage loans held for sale 38,452 31,745 49,750
Provision for loan losses 1,929 1,583 1,121
Depreciation and amortization 1,880 1,805 1,674
(Increase) decrease in other real estate (963) 183 979
Realized gain on sale of loans (695) (207) (245)
(Increase) decrease in interest receivable 571 (615) (439)
Amortization of investment securities premium 188 269 423
Deferred income tax (credit) (255) (331) 7
Realized net investment securities losses 86 127 134
Increase (decrease) in interest payable (66) 610 66
Other (1,067) 371 1,050
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,188 10,012 10,080
INVESTING ACTIVITIES
Net increase in loans (37,114) (18,046) (35,763)
Proceeds from maturities of held to maturity securities 35,483 18,226 20,501
Purchases of available for sale securities (32,041) (19,366) (27,869)
Net (increase) decrease in short-term investments 17,362 (13,088) 51,404
Proceeds from sale of available for sale securities 8,995 14,874 4,603
Proceeds from maturities of available for sale securities 6,379 11,008 15,114
Purchases of premises and equipment (3,853) (1,963) (3,417)
Proceeds from sale of premises and equipment 212 53 26
Purchases of held to maturity securities (196) (650) (12,405)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (4,773) (8,952) 12,194
FINANCING ACTIVITIES
Increase in federal funds purchased 16,015
Net increase (decrease) in deposits (11,046) 1,952 (17,165)
Cash dividends (3,865) (3,247) (2,792)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,104 (1,295) (19,957)
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 6,519 (235) 2,317
Cash and due from banks at beginning of year 32,143 32,378 30,061
- --------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 38,662 $ 32,143 $ 32,378
====================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 24,265 $ 23,403 $ 19,195
====================================================================================================================
Income taxes paid $ 4,581 $ 3,444 $ 3,650
====================================================================================================================
NONCASH TRANSACTIONS:
Investment securities transferred to available for sale $ 0 $ 34,299 $ 84,833
====================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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 eight 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.
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 C 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 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.
MORTGAGE BANKING ACTIVITIES: The Company routinely originates mortgage loans for
sale to the secondary market, and sells the loans and retains the right to
service them. Effective January 1, 1996 the Company adopted Financial Accounting
Standards Board ("FASB") Statement 122, "Accounting for Mortgage Servicing
Rights," on accounting for mortgage servicing rights, which requires the cost of
rights to service mortgage loans to be capitalized, regardless of whether those
rights were acquired through a purchase transaction or through loan origination
activities. Prior to adoption of Statement 122, only those loan servicing rights
acquired through purchase were required to be capitalized, and the Company had
no such activity.
Beginning in 1996, the total cost of mortgage loans originated with the
intent to sell is allocated between the loan servicing right and the mortgage
loan without servicing based on their relative fair values at the date of sale.
The capitalized cost of loan servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenue. For this purpose, estimated
servicing revenues include late charges and other ancillary income. Estimated
servicing costs include direct costs associated with performing the servicing
function and appropriate allocations of other costs.
The unamortized cost of loan servicing rights is periodically evaluated for
impairment. For purposes of measuring impairment, the mortgage servicing rights
are stratified based on the predominant risk characteristic of the underlying
loans. These risk characteristics including loan type (conventional or
government insured, fixed or adjustable rate), term (15 year or 30 year), and
note rate. Impairment represents the amount by which the unamortized cost of an
individual stratum exceeds its fair value, and is recognized through a valuation
allowance.
Fair value for individual stratum is based on quoted market prices.
Estimates of fair value include assumptions about prepayment, default and
interest rates, and other factors which are subject to change over time. Changes
in these underlying assumptions could cause the fair value of loan servicing
rights, and the related valuation allowance, to change significantly in the
future.
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 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 may be performing. Under the new
standard, the 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. These
assets are reviewed for impairment under FASB Statement 121 when events indicate
the carrying amount may not be recoverable.
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.
STOCK COMPENSATION: Expense for employee compensation under stock option plans
is based on Accounting Principles Board Opinion 25, with expense reported only
if options are granted below market price at grant date. Pro forma disclosures
of net income and earnings per share are provided as if the fair value method of
FASB Statement 123 were used for stock-based compensation.
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 1996, 1995 and 1994.
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 O. 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.
PENDING ACCOUNTING CHANGES: In 1996, the FASB issued 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 B - 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, 1996 and 1995, respectively, was $5,884,000 and $4,867,000.
NOTE C - INVESTMENT SECURITIES
The following is a summary of available for sale securities and held to maturity
securities:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 AVAILABLE FOR SALE SECURITIES
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $ 71,447 $ 213 $ (404) $ 71,256
Mortgage-backed 27,090 103 (365) 26,828
Corporate 502 15 517
Other 3,358 3,358
- --------------------------------------------------------------------------------------------------------------------
$ 102,397 $ 331 $ (769) $ 101,959
====================================================================================================================
HELD TO MATURITY SECURITIES
- --------------------------------------------------------------------------------------------------------------------
States and political subdivisions $ 18,662 $ 106 $ (142) $ 18,626
====================================================================================================================
DECEMBER 31, 1995 AVAILABLE FOR SALE SECURITIES
- --------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================
</TABLE>
Investment securities with a book value of $9,708,000 were pledged at
December 31, 1996 as collateral to secure public deposits and for other
purposes.
During 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.
Sales of available for sale securities were as follows:
YEAR ENDED DECEMBER 31 1996 1995 1994
- -------------------------------------------------------------------------------
Total proceeds $ 8,995 $ 14,874 $ 4,603
Gross realized gains 13 3
Gross realized losses 99 127 137
The amortized cost and estimated fair value of investment securities at
December 31, 1996, 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.
AMORTIZED FAIR
COST VALUE
- --------------------------------------------------------------------------------
Available for sale:
Due in one year or less $ 9,719 $ 9,723
Due after one year through five years 62,230 62,050
- --------------------------------------------------------------------------------
71,949 71,773
Mortgage-backed securities 27,090 26,828
Equity securities 3,358 3,358
- --------------------------------------------------------------------------------
$ 102,397 $ 101,959
================================================================================
AMORTIZED FAIR
COST VALUE
- --------------------------------------------------------------------------------
Held to maturity:
Due in one year or less $ 7,052 $ 7,007
Due after one year through five years 9,599 9,580
Due after five years through ten years 1,411 1,450
Due after ten years 600 589
- --------------------------------------------------------------------------------
$ 18,662 $ 18,626
================================================================================
NOTE D - LOANS AND THE ALLOWANCE FOR LOAN LOSSES
A summary of loans outstanding follows:
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 247,344 $ 246,134
Real estate-mortgage 218,144 191,066
Real estate-construction 12,771 10,095
Consumer 120,364 113,596
- --------------------------------------------------------------------------------
$ 598,623 $ 560,891
================================================================================
The following table presents changes in the allowance for loan losses:
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------
Balance at beginning of year $ 7,589 $ 6,701 $ 6,553
Provision for loan losses 1,929 1,583 1,121
Recoveries 260 250 296
Loans charged-off (1,390) (945) (1,269)
- --------------------------------------------------------------------------------
Balance at end of year $ 8,388 $ 7,589 $ 6,701
================================================================================
Information regarding impaired loans follows:
1996 1995
- --------------------------------------------------------------------------------
Year end loans with no allowance for loan losses allocated $ 631 $ 973
Year end loans with allowance for loan losses allocated 646 460
Amount of the allowance allocated 369 245
Average of impaired loans during the year 1,426 1,505
Interest income recognized during impairment 20 21
Cash basis interest income recognized 13 21
NOTE E - 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 41 persons was
$17,681,000 and $14,998,000 at December 31, 1996 and 1995, respectively. During
1996, $9,723,000 of new loans were made and repayments totaled $7,040,000.
NOTE F - LOAN SERVICING
The unpaid principal balance of mortgage loans serviced for others was
$224,812,000 at December 31, 1996. These loans are not included in the
consolidated balance sheet. Custodial escrow balances maintained in connection
with the serviced loans, and included in demand deposits, was $309,000 at
December 31, 1996.
The carrying value of loan servicing rights was $459,000 as of December 31,
1996 and the fair value was $491,000. No valuation allowance was necessary
during the year.
Following is an analysis of the activity for loan servicing rights for 1996:
UNAMORTIZED COST
- --------------------------------------------------------------------------------
Balance at January 1 $ 0
Additions 481
Amortization (22)
Sales 0
- --------------------------------------------------------------------------------
Balance at December 31 $ 459
================================================================================
NOTE G - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------
Land $ 2,823 $ 2,740
Buildings and improvements 24,164 22,769
Furniture, fixtures and equipment 15,001 13,433
Construction in progress 441 720
- --------------------------------------------------------------------------------
42,429 39,662
Accumulated depreciation (17,750) (16,805)
- --------------------------------------------------------------------------------
$ 24,679 $ 22,857
================================================================================
NOTE H - DEPOSITS
The aggregate amount of short-term jumbo CD's, each with a minimum denomination
of $100,000, was approximately $37,181,000 and $38,873,000 at December 31, 1996
and 1995, respectively.
At December 31, 1996, the scheduled maturities of CD's are as follows:
- --------------------------------------------------------------------------------
1997 $ 176,350
1998 89,170
1999 23,824
2000 13,987
2001 and thereafter 6,312
- --------------------------------------------------------------------------------
$ 309,643
================================================================================
NOTE I - UNDISTRIBUTED INCOME OF MEMBER BANKS AND INSURANCE SUBSIDIARY
AND DIVIDEND LIMITATION
Included in stockholders' equity at December 31, 1996, is undistributed net
income of the member banks and insurance subsidiary of $55,133,000 of which
$13,739,000 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 $27,116,000 was restricted as to
payments to the parent company.
In 1997, the member banks and insurance subsidiary may pay to the parent
company $8,951,000 in dividends in addition to their 1997 net income without
obtaining prior approval from regulatory agencies.
NOTE J - REGULATORY CAPITAL
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth below) of
total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1996, that the Company meets all capital
adequacy requirements to which it is subject.
The Company's actual and capital amounts and rates are presented below:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total capital (to risk-weighted assets) $ 94,300 15.8% $ 47,653 8% $ 59,567 10%
Tier I capital (to risk-weighted assets) 86,854 14.6 23,827 4 35,740 6
Tier I capital (to average assets) 86,854 11.1 31,254 4 39,067 5
As of December 31, 1995
Total capital (to risk-weighted assets) $ 88,172 15.6% $ 45,344 8% $ 56,680 10%
Tier I capital (to risk-weighted assets) 81,087 14.3 22,672 4 34,008 6
Tier I capital (to average assets) 81,087 10.5 30,994 4 38,743 5
</TABLE>
NOTE K - 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.
Options have been granted as follows:
NUMBER EXERCISE FAIR
OF OPTIONS PRICE VALUE
- -------------------------------------------------------------------------------
1994 47,000 $ 19 not applicable
1995 47,000 28 $ 13
1996 47,000 231|4 11
As of December 31, 1996, none of the options were exercisable and options for
139,000 shares were available for future grant.
The Company applies Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plan. Accordingly, no compensation cost has been recognized for the plan. Had
compensation cost for the Company's plan been determined based on the fair value
at the grant dates for awards under the plan consistent with the method of FASB
Statement 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
- --------------------------------------------------------------------------------
Net income As reported $ 9,633 $ 8,709
Pro forma 9,499 8,704
Earnings per share As reported $ 1.72 $ 1.56
Pro forma 1.70 1.55
================================================================================
In future years the pro forma effects on net income are expected to increase
as additional options are granted. The fair value of options granted during 1996
and 1995 is estimated using the following weighted-average information:
risk-free interest rate of 6.26% and 5.45%, expected life of 7 years, expected
volatility of stock price of 56% and 58%, and expected dividends of 3.1% per
year.
PENSION PLAN: The Company and its member banks have a noncontributory defined
benefit pension plan covering all 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 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 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$9,681,000 in 1996 and $8,766,000 in 1995 $ 9,852 $ 8,922
===============================================================================================================
Projected benefit obligation for service rendered to date $ 15,992 $ 14,401
Plan assets at fair value, primarily U.S. Government and corporate bonds,
listed stocks and mutual funds 13,839 11,732
- ---------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets 2,153 2,669
Unrecognized net loss from past experience different from that assumed
and effects of changes in assumptions (1,381) (1,861)
Prior service cost not yet recognized in net periodic pension cost (1,133) (1,233)
Unrecognized net asset at January 1 being recognized over 20 years 472 525
- ---------------------------------------------------------------------------------------------------------------
Accrued pension cost $ 111 $ 100
===============================================================================================================
Net pension cost included the following components:
YEAR ENDED DECEMBER 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Service cost--benefits earned during the year $ 867 $ 595 $ 759
Interest cost on projected benefit obligation 1,037 880 789
Actual return on plan assets (1,662) (1,985) 258
Net amortization and deferral 660 1,097 (1,003)
- ---------------------------------------------------------------------------------------------------------------
Net pension cost $ 902 $ 587 $ 803
===============================================================================================================
Assumptions used in the accounting were:
DECEMBER 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Weighted average discount rate 7.25% 7.25% 8.50%
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 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.
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. During 1996, the match levels were increased to 6%
and 30%, respectively. In addition, each employee could contribute amounts in
excess of the 4% and 6% limits, 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. Expense for this plan was $141,000 for 1996 and
$82,000 for 1995. At December 31, 1996, the KSOP owned 118,299 shares of the
outstanding common stock of the Company.
NOTE L - 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 1996 1995
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 1,352 $ 1,194
Fully eligible active plan participants 39 38
Other active plan participants 416 242
- --------------------------------------------------------------------------------
Total unfunded obligation 1,807 1,474
Unrecognized prior service cost 92 97
Unrecognized net gain (loss) (138) 136
- --------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 1,761 $ 1,707
================================================================================
Net periodic postretirement benefit cost included the following components:
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $ 68 $ 41 $ 49
Interest cost 126 117 104
Amortization and deferral (4) (5)
Other 30
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 190 $ 153 $ 183
================================================================================
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at December 31, 1996 and 1995. The
weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 9.75% for 1997 (10.31%
for 1996) and is assumed to decrease uniformly each year to 5.25% 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, 1996 and 1995 by 10.79% and 10.16%, respectively, and the aggregate of the
service and interest cost components of net periodic postretirement benefit for
1996 by 15.24%.
NOTE M - 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 1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 2,597 $ 2,580
Postretirement benefit obligation 598 574
Deferred compensation and director fees 475 464
Net unrealized losses 100 78
Other 521 527
- --------------------------------------------------------------------------------
4,291 4,223
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation 1,051 973
Other 137 242
- --------------------------------------------------------------------------------
1,188 1,215
- --------------------------------------------------------------------------------
Net deferred tax assets $ 3,103 $ 3,008
================================================================================
Income tax expense is composed of the following amounts:
YEAR ENDED DECEMBER 31 1996 1995 1994
- ------------------------------------------------------------------------------
Currently payable $ 4,361 $ 3,815 $ 3,199
Deferred tax (credit) (255) (331) 7
- ------------------------------------------------------------------------------
Income tax on income before income tax $ 4,106 $ 3,484 $ 3,206
==============================================================================
Applicable income tax benefits on investment securities losses amounted to
$30,000, $44,000 and $46,000 in 1996, 1995 and 1994, respectively, and are
included in income tax expense. The components of income tax expense for 1995
and 1994 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:
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------
Income before income tax expense $ 13,739 $ 12,193 $ 11,358
================================================================================
Federal income tax computed at 35%
in 1996 and 1995 and 34% in 1994 $ 4,809 $ 4,268 $ 3,862
Add (deduct) effect of:
Tax-exempt bond and
loan interest income (662) (757) (869)
Other items-net (41) (27) 213
- --------------------------------------------------------------------------------
$ 4,106 $ 3,484 $ 3,206
================================================================================
NOTE N - 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, 1996 follows:
STANDBY
LOAN LETTERS
EXPIRATION DATE COMMITMENTS OF CREDIT
- --------------------------------------------------------------------------------
1997 $ 85,101 $ 4,779
1998 12,135 2,583
1999 780 327
2000 217 206
2001 607 390
Thereafter 2,309 95
- --------------------------------------------------------------------------------
$ 101,149 $ 8,380
================================================================================
NOTE O - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and short-term investments $ 38,947 $ 38,947 $ 49,790 $ 49,790
Investment securities -
Available for sale 101,959 101,959 115,194 115,194
Held to maturity 18,662 18,626 24,537 24,269
Loans, less allowance 590,235 597,873 553,302 561,180
Financial liabilities:
Deposits $ 676,108 $ 684,019 $ 687,154 $ 694,853
Federal funds purchased 16,015 16,015
</TABLE>
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, 1996 and 1995.
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.
NOTE P - MICHIGAN FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 3,692 $ 1,685
Investment in member banks 80,644 77,279
Investment in nonbank subsidiary 1,833 1,673
Premises and equipment 1,732 1,762
Other assets 1,320 703
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 89,221 $ 83,102
===============================================================================================================
LIABILITIES
Accrued expenses and other liabilities $ 2,608 $ 2,117
- ---------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 86,613 80,985
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 89,221 $ 83,102
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from member banks $ 6,900 $ 5,500 $ 4,300
Fees from member banks 4,909 4,690 1,851
Interest from member banks 44 18 24
Interest from investment securities 37
Investment securities gains 13
Other 13 21 10
- ---------------------------------------------------------------------------------------------------------------
TOTAL INCOME 11,916 10,229 6,185
Expenses:
Salaries and employee benefits 3,211 2,927 1,201
Data processing 1,285 1,167 1,400
Interest 36
Other 1,966 1,794 847
- ---------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 6,462 5,924 3,448
Income before income tax, equity in undistributed net
income of member banks and insurance subsidiary 5,454 4,305 2,737
Income tax credit (514) (389) (502)
- ---------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of member
banks and insurance subsidiary 5,968 4,694 3,239
Equity in undistributed net income of:
Member banks 3,473 3,841 4,723
Insurance subsidiary 192 174 190
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $ 9,633 $ 8,709 $ 8,152
===============================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 9,633 $ 8,709 $ 8,152
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of member banks and
insurance subsidiary (3,665) (4,015) (4,913)
Depreciation and amortization 189 205 48
Realized investment securities gains (13)
Deferred income tax (credit) 4 10 (21)
Accretion of investment securities discount (2)
Other (161) 266 49
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,985 5,175 3,315
INVESTING ACTIVITIES
Purchases of available for sale securities (981)
Proceeds from sale of available for sale securities 996
Investment in member bank (1,000)
Purchases of premises and equipment (130) (267) (1,635)
Proceeds from sale of premises and equipment 2 15 3
Payments received on land contract for sale of assets 26 2
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (113) (1,226) (1,630)
FINANCING ACTIVITIES
Cash dividends (3,865) (3,247) (2,792)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (3,865) (3,247) (2,792)
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 2,007 702 (1,107)
Cash at beginning of year 1,685 983 2,090
- ---------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 3,692 $ 1,685 $ 983
===============================================================================================================
</TABLE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Michigan Financial Corporation
Marquette, Michigan
We have audited the accompanying consolidated balance sheet of Michigan
Financial Corporation, member banks and insurance subsidiary as of December 31,
1996 and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
consolidated financial statements of the Corporation as of December 31, 1995 and
1994 were audited by other auditors whose report dated January 19, 1996
expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Michigan
Financial Corporation, member banks and insurance subsidiary as of December 31,
1996, and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ CROWE, CHIZEK AND COMPANY LLP
CROWE, CHIZEK AND COMPANY LLP
Grand Rapids, Michigan
January 16, 1997
<TABLE>
<CAPTION>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
1996 1995
- ------------------------------------------------------------------------ -------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------ -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 15,688 $ 15,736 $ 15,994 $ 16,326 $ 14,972 $ 15,468 $ 15,955 $ 16,098
Net interest income 9,535 9,652 9,917 10,095 9,490 9,429 9,711 9,850
Provision for loan losses 200 330 616 783 220 307 144 912
Investment securities losses 13 4 69 40 87
Noninterest income 2,180 2,273 2,390 2,790 1,871 2,054 2,012 2,262
Noninterest expense 8,250 8,131 8,127 8,570 8,373 8,351 8,078 7,974
Income tax expense 929 1,050 1,093 1,034 746 818 1,033 887
Net income 2,336 2,401 2,467 2,429 1,982 2,007 2,381 2,339
Net income per share .42 .43 .44 .43 .35 .36 .43 .42
</TABLE>
INVESTOR INFORMATION
EXECUTIVE OFFICES
101 West Washington St. P.O. Box 10
Marquette, Michigan 49855
Telephone 906/228-6940
Fax 906/228-1328
MFC ON THE WEB
Interested parties with access to the World Wide Web may review the Company's
corporate information, including news releases, on MFC's home page.
http://www.mfcb.com
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
Crowe, Chizek and Company LLP
Riverfront Plaza Building
55 Campau Avenue, N.W.
Grand Rapids, Michigan 49503-2613
ANNUAL MEETING
The annual stockholders' meeting will be held on Tuesday, April 29, 1997 at the
Holiday Inn, U.S. Highway 41 West, 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.
Paine Webber Inc.
Roney & Company
M.A. Schapiro & Co., Inc.
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
- --------------------------------------------------------
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
1996
First quarter $.165 $ 30.50 $ 27.50 $ 28.50
Second quarter .175 29.50 22.25 22.75
Third quarter .175 25.38 21.00 21.50
Fourth quarter .175 25.50 22.00 24.00
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, 1996 is shown above, along with the closing prices.
At December 31, 1996, there were 5,598,267 shares outstanding and
approximately 1,838 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.
EXHIBIT 23
CONSENT OF 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 16, 1997, on
the 1996 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, 1996.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 21, 1997
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Michigan Financial Corporation of our report dated January 19, 1996, included
in the 1996 Annual Report to Shareholders of Michigan Financial Corporation.
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, 1996.
Ernst & Young LLP
Milwaukee, Wisconsin
March 21, 1997
EXHIBIT 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, l996.
Dated January 20, 1997 /s/ GARY L. BUTRYN
--------------------------------
Gary L. Butryn
Dated January 20, 1997 /s/ WILLARD M. CARNE
--------------------------------
Willard M. Carne
Dated January 20, 1997 /s/ WILLARD L. COHODAS
--------------------------------
Willard L. Cohodas
Dated January 20, 1997 /s/ CLARENCE R. FISHER
--------------------------------
Clarence R. Fisher
Dated January 20, 1997 /s/ HUGH C. HIGLEY, JR
--------------------------------
Hugh C. Higley, Jr.
Dated January 20, 1997 /s/ DAVID HOLLI
--------------------------------
David Holli
Dated January 20, 1997 /s/ DANIEL H. LORI
--------------------------------
Daniel H. Lori
Dated January 20, 1997 /s/ FRED M. SAIGH
--------------------------------
Fred M. Saigh
Dated January 20, 1997 /s/ JAMES L. SMITH
--------------------------------
James L. Smith
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 38,662
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 101,959
<INVESTMENTS-CARRYING> 18,662
<INVESTMENTS-MARKET> 18,626
<LOANS> 598,623
<ALLOWANCE> 8,388
<TOTAL-ASSETS> 789,353
<DEPOSITS> 676,108
<SHORT-TERM> 16,015
<LIABILITIES-OTHER> 10,617
<LONG-TERM> 0
0
0
<COMMON> 18,555
<OTHER-SE> 68,058
<TOTAL-LIABILITIES-AND-EQUITY> 789,353
<INTEREST-LOAN> 55,561
<INTEREST-INVEST> 8,183
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 63,744
<INTEREST-DEPOSIT> 24,243
<INTEREST-EXPENSE> 24,545
<INTEREST-INCOME-NET> 39,199
<LOAN-LOSSES> 1,929
<SECURITIES-GAINS> (86)
<EXPENSE-OTHER> 33,078
<INCOME-PRETAX> 13,739
<INCOME-PRE-EXTRAORDINARY> 9,633
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,633
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.72
<YIELD-ACTUAL> 5.55
<LOANS-NON> 1,538
<LOANS-PAST> 901
<LOANS-TROUBLED> 1,195
<LOANS-PROBLEM> 16,348
<ALLOWANCE-OPEN> 7,589
<CHARGE-OFFS> 1,390
<RECOVERIES> 260
<ALLOWANCE-CLOSE> 8,388
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
