UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number 0-7515
--------
MICHIGAN FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2011532
- ------------------------------- ---------------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
101 West Washington Street, Marquette, Michigan 49855
- ----------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (906) 228-6940
-----------------------------
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days YES x No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding as of October 31, 1997
- ---------------------------------- -----------------------------------
Common Stock, no par value 5,877,601
- ---------------------------------- -----------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------------ ----------- ------------
(dollars in thousands)
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 42,478 $ 38,662 $ 37,883
Money market investments 392 285 281
Investment securities:
Available for sale 83,807 101,959 108,988
Held to maturity 13,256 18,662 19,608
Loans 638,775 598,623 586,929
Allowance for loan losses (9,254) (8,388) (8,012)
--------- --------- ---------
NET LOANS 629,521 590,235 578,917
Premises and equipment 25,460 24,679 24,038
Accrued interest receivable 5,653 5,208 5,413
Other assets 9,908 9,663 8,742
--------- --------- ---------
$ 810,475 $ 789,353 $ 783,870
========= ========= =========
LIABILITIES
Noninterest bearing deposits $ 71,187 $ 74,365 $ 76,093
Interest bearing deposits 619,402 601,743 595,782
--------- --------- ---------
TOTAL DEPOSITS 690,589 676,108 671,875
Federal funds purchased 13,900 16,015 16,350
Federal Home Loan Bank advances 2,000
Accrued interest payable 3,467 2,770 3,116
Other liabilities 9,468 7,847 8,107
--------- --------- ---------
TOTAL LIABILITIES 719,424 702,740 699,448
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized shares - 10,000,000
Shares issued and outstanding - 5,877,601 25,050 18,555 18,555
Retained earnings 66,056 68,343 66,896
Securities valuation (55) (285) (1,029)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 91,051 86,613 84,422
--------- --------- ---------
$ 810,475 $ 789,353 $ 783,870
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1997 1996 1997 1996
------ ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $15,397 $14,024 $44,439 $41,072
Short-term investments 43 83 230 701
Investment securities:
Taxable 1,339 1,663 4,234 4,888
Tax-exempt 152 224 522 757
------- ------- ------- -------
TOTAL INTEREST INCOME 16,931 15,994 49,425 47,418
Interest expense:
Deposits 6,514 6,015 19,082 18,251
Borrowings 87 62 206 63
------- ------- ------- -------
TOTAL INTEREST EXPENSE 6,601 6,077 19,288 18,314
------- ------- ------- -------
NET INTEREST INCOME 10,330 9,917 30,137 29,104
Provision for loan losses 601 616 1,259 1,146
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,729 9,301 28,878 27,958
Noninterest income:
Trust department income 1,102 1,037 3,279 3,034
Fees for other customer services 927 913 2,698 2,444
Net gains on sale of loans 310 60 641 161
Net investment securities gains (losses) 59 (4) 59 (17)
Other 497 380 1,368 1,204
------- ------- ------- -------
2,895 2,386 8,045 6,826
------- ------- ------- -------
12,624 11,687 36,923 34,784
Noninterest expenses:
Salaries and employee benefits 4,693 4,544 14,032 13,599
Net occupancy 670 597 2,027 1,890
Furniture and equipment 527 455 1,497 1,272
Data processing 403 395 1,261 1,101
Advertising 314 316 951 1,042
Other 2,157 1,820 6,130 5,604
------- ------- ------- -------
8,764 8,127 25,898 24,508
------- ------- ------- -------
Income before income tax expense 3,860 3,560 11,025 10,276
Income tax expense 1,183 1,093 3,389 3,072
------- ------- ------- -------
NET INCOME $ 2,677 $ 2,467 $ 7,636 $ 7,204
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 5,878 5,878 5,878 5,878
Per share data:
Net income $.46 $.42 $1.30 $1.23
======= ======= ======= =======
Dividends paid $.20 $.17 $.58 $.49
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,636 $ 7,204
Adjustments to reconcile net income to net cash provided by operating
activities:
Origination of mortgage loans held for sale (24,957) (31,701)
Proceeds from sale of mortgage loans held
for sale 24,795 30,195
Depreciation and amortization 1,609 1,391
Provision for loan losses 1,259 1,146
Increase (decrease) in interest payable 697 280
Realized gain on sale of loans (641) (161)
(Increase) decrease in interest receivable (445) 366
Realized investment securities (gains)losses (59) 17
Amortization of investment securities premium 58 150
Other 1,164 (684)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,116 8,203
INVESTING ACTIVITIES
Net increase in loans (39,742) (25,094)
Proceeds from maturities of available for sale
securities 21,858 31,655
Proceeds from maturities of held to maturity
securities 5,611 5,338
Purchases of available for sale securities (5,464) (29,768)
Purchases of premises and equipment (2,331) (2,554)
Proceeds from sale of available for sale securities 2,113 2,483
Purchases of held to maturity securities (205) (101)
Net (increase) decrease in short-term investments (107) 17,366
Proceeds from sale of premises and equipment 30 24
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (18,237) (651)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 14,481 (15,279)
Cash dividends (3,429) (2,883)
Decrease in federal funds purchased (2,115)
Federal Home Loan Bank advances 2,000
Increase in short-term borrowings 16,350
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 10,937 (1,812)
DECREASE IN CASH AND DUE FROM BANKS 3,816 5,740
-------- --------
Cash and due from banks at beginning of year 38,662 32,143
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 42,478 $ 37,883
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q, and therefore do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been reflected in the financial statements.
However, the results of operations for the three and nine month periods ended
September 30, 1997 and 1996 are not necessarily indicative of the results to be
expected for the full year.
For further information, refer to the consolidated financial statements and
foot- notes included in the Company's annual report on Form 10-K for the year
ended December 31, 1996.
NOTE B - ACCOUNTING CHANGE
Effective January 1, 1997, the Company adopted Financial Accounting Standards
Board ("FASB") Statement 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Statement 125 revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. It is effective for
some transactions in 1997 and others in 1998. The statement is not expected to
have a material effect on the Company's consolidated financial position or
results of operations.
<PAGE>
NOTE C - PENDING ACCOUNTING CHANGE
In March 1997, the FASB revised the accounting requirements for calculating
earnings per share. Basic earnings per share beginning with year end 1997 will
be calculated solely on average common shares outstanding. Diluted earnings per
share will reflect the potential dilution of stock options. All prior
calculations will be restated to be comparable to the new methods. As the
Company has not had significant dilution from stock options, the new calculation
methods will not significantly affect future basic earnings per share and
diluted earnings per share.
NOTE D - INVESTMENT SECURITIES
A comparison of the carrying amount and approximate market value follows:
September 30, 1997 December 31, 1996
----------------------- -----------------------
Amortized Approximate Amortized Approximate
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
(in thousands)
Available for Sale
U.S. Treasury and
government agencies $61,934 $61,874 $ 71,447 $ 71,256
Mortgage-backed securities 17,920 17,885 27,090 26,828
Other securities 4,037 4,048 3,860 3,875
------- ------- -------- --------
TOTAL $83,891 $83,807 $102,397 $101,959
======= ======= ======== ========
Held to Maturity
State and political
subdivisions $13,256 $13,284 $18,662 $18,626
======= ======= ======= =======
NOTE E - STOCK DIVIDEND
On June 20, 1997, the Company issued 279,334 shares of common stock as a 5%
stock dividend. These shares had a value of $6,495,000 at the date of issuance.
<PAGE>
References to the number of shares of common stock in the financial statements
and all per share data have been adjusted for the stock dividend.
NOTE F - RECLASSIFICATIONS
Certain amounts in 1996 have been reclassified to conform with the
classifications in 1997.
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION RESULTS OF
OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and earnings
during the periods included in the accompanying consolidated financial
statements.
FINANCIAL CONDITION
A summary of the period changes in principal sources and uses of funds is shown
below in thousands of dollars, and as a percent.
Change from December 31, 1996
to September 30, 1997
-----------------------------
Increase (Decrease)
-----------------------------
$ %
------ -----
Funding sources:
Deposits 14,481 2.1
Federal funds purchased (2,115) 13.2
Federal Home Loan Bank advances 2,000 NMF
Other sources, net 2,335 12.3
------
16,701 2.3
====== =====
Funding uses:
Loans 40,152 6.7
Investment securities (23,558) (19.5)
Money market investments 107 37.5
------
Total uses 16,701 2.3
====== =====
Aggregate deposits, the primary source of funds, increased by $14,481,000 or
2.1% during the nine months of 1997. Experience was mixed within the deposit
category, as shown below:
Increase (Decrease)
-------- ----------
$ %
--- ---
Time-retail 17,393 6.3
Time-jumbo 6,281 19.3
Savings (6,015) (2.1)
Demand (3,178) (4.3)
------
14,481 2.1
====== ====
<PAGE>
As a result, total deposit levels at September 30, 1997 showed an increase from
the end of 1996.
The loan portfolio increased by 6.7% during the first nine months of 1997. The
largest increase was in the commercial loan area with real estate mortgages also
increasing. The installment loan area showed a modest decrease of 2.3%.
In addition to the above trends in the sources and uses of funds, the Company
services loans for outside agencies, primarily Freddie Mac. At September 30,
1997 the volume of Freddie Mac loans sold with servicing retained was $227
million. The comparable figure one year earlier was $208 million. The ability of
the Company to sell these loans enables it to more effectively manage its
funding operations.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997 there were no significant changes with
respect to the capital resources of the Company. Liquidity is largely unchanged
from year end 1996. Management feels that the liquidity position of the Company
as of September 30, 1997 is more than adequate to meet its future cash flow
needs. Management also closely monitors capital levels to provide for normal
business needs and to comply with regulatory requirements. As summarized below,
the Company's capital ratios were well in excess of the regulatory requirements
for classification as "Well Capitalized":
Regulatory
Minimum for September 30,
"Well Capitalized" 1997 1996
------------------ ----- -----
Total capital 10.0% 15.65% 15.79%
Tier I capital 6.0 14.40 14.54
Tier I leverage ratio 5.0 11.35 11.04
<PAGE>
RESULTS OF OPERATIONS
A summary of the period to period changes in the principal items included in the
consolidated statements of income is shown below in thousands of dollars, and as
a percent.
Comparison of
--------------------------------------------
Three months Nine months
ended September 30, ended September 30,
1997 and 1996 1997 and 1996
------------------- -------------------
Increase(Decrease)
Interest income $ 937 5.9% $2,007 4.2%
Interest expense 524 8.6 974 5.3
------ ------
Net interest income 413 4.2 1,033 3.5
Provision for loan losses (15) (2.4) 113 9.9
------ ------
Net interest income after provision
for loan losses 428 4.6 920 3.3
Noninterest income 509 21.3 1,219 17.9
Noninterest expenses 637 7.8 1,390 5.7
------ ------
Income before income tax expense 300 8.4 749 7.3
Income tax expense 90 8.2 317 10.3
------ ------
Net income $ 210 8.5 $ 432 6.0
====== ======
Net Interest Income
The increase in net interest income during the third quarter and the first nine
months of 1997 was due to the fact that while both interest income and interest
expense increased from the comparable periods in 1996, interest income increased
more. The increase in the loan to deposit ratio to 92.5% at September 30, 1997
from 87.4% at September 30, 1996 was the major reason for the increase in
interest income. Net interest income performance in future periods will be
primarily dependent upon general interest rate developments.
Provision for Loan Losses
The loan loss provision for the third quarter of 1997 was slightly lower than in
1996 due to moderate loan loss experience during the quarter, while the
provision increased during the first nine months of 1997 largely due to the
larger loan portfolio. The larger provision accounted for the increase in the
allowance for
<PAGE>
loan losses of $866,000 or 10.3% during the nine months of 1997. This is a
faster growth rate than for that of the loan portfolio itself. Net loan
charge-offs for the first nine months amounted to $393,000, down sharply from
the amount of $723,000 for the comparable period in 1996. On an annualized basis
charge-offs amounted to .09% of average loans outstanding for the first nine
months of 1997 and .17% for the same period in 1996. These are relatively low
levels on an internal historical basis as well as in comparison to peer groups.
Expressed as a percent of outstanding loans the allowance increased to 1.45% at
September 30, 1997 from a level of 1.40% at the beginning of the year. The
allowance level will not necessarily be maintained at this level during future
periods as the amounts provided during any given period are dependent upon
management's ongoing review process and assessment of the perceived loss
exposure in the then outstanding loan portfolio.
Nonperforming loans continue at relatively low levels, although they increased
during the first nine months of 1997 by $1,838,000 or 50.6%. Total nonperforming
assets, which include other real estate, also continue at relatively low levels
by internal historical standards.
The table below presents a comparison of nonperformings.
September 30, December 31,
1997 1996
------------- ------------
(in thousands)
Nonaccrual loans $2,911 $1,538
Loans past due
90 days or more 1,427 901
Restructured loans 1,134 1,195
------ ------
Total nonperforming loans 5,472 3,634
Other real estate 1,615 1,751
------ ------
Total nonperforming assets $7,087 $5,385
====== ======
Nonperforming loans
as a % of total loans .86% .61%
=== ===
Nonperforming assets
as a % of total assets .87% .68%
=== ===
<PAGE>
On a percentage basis, the allowance for loan losses decreased from 230.8% of
nonperforming loans at the end of 1996 to 169.1% at September 30, 1997.
Management intends to continue in its efforts toward maintaining the high
quality of the loan portfolio.
Noninterest Income
Noninterest income increased by $1,219,000 or 17.9% from the first nine months
of 1996. Exclusive of securities transactions, it increased by $1,143,000 or
16.7% for the same period. A large part of the increase in other income is due
to an increase of $480,000 in net gains from the sale of loans over the first
nine months of 1996. Strong performance in the fee-based area came from trust
department and retail brokerage activities. Trust income was $245,000 or 8.1%
higher during the first nine months of 1997, primarily due to substantial growth
in the amount of trust assets under management. This increase is expected to
continue during the fourth quarter.
Noninterest Expenses
The increase in noninterest expenses resulted from changes in its major
components as set forth below, indicative of the normal effects of inflation as
well as the growth of the organization. The major components of other expenses
increased (decreased) as follows:
Three months Nine months
ended ended
September 30, 1997 September 30, 1997
------------------ ------------------
Salaries and employee benefits 3.3% 3.2%
Occupancy, furniture and equipment 13.8 11.4
Data processing 2.0 14.5
Advertising (.6) (8.7)
Other 18.5 9.4
<PAGE>
A large part of the occupancy, furniture and equipment increase is due to a
complete upgrade and networking of the Company's personal computers. This
upgrade was started during the third quarter of 1996 and completed during the
first quarter of 1997. The increase in data processing is due to programming
charges, mainly for the combined statements now being issued, along with normal
increases. Future increases in this area will depend upon the amount of special
programming needed.
Applicable Income Tax
Applicable income tax expense is based on income, less that portion which is
exempt from federal taxation, taxed at the statutory federal income tax rate of
35%. The provision is further reduced by other smaller items. The increase in
the 1997 income tax provision reported herein for the third quarter and the
first nine months was mostly due to the increase in pre-tax income of the
Company for 1997, combined with a decrease in the portion of interest income
which is exempt from federal taxation.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit (27) Financial Data Schedule - The required financial data schedule
is filed as Exhibit 27 at page 15 of this report.
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for the three
months ended September 30, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Michigan Financial Corporation
-------------------------------------
(Registrant)
Dated: October 31, 1997 /s/ HOWARD L. COHODAS
-------------------- -------------------------------------
Howard L. Cohodas, Chairman
& President
(Chief Executive Officer)
Dated: October 31, 1997 /s/ KENNETH F. BECK
-------------------- -------------------------------------
Kenneth F. Beck, Senior Vice President,
Treasurer & Secretary
(Chief Financial Officer and
Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 42,478
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 83,807
<INVESTMENTS-CARRYING> 13,256
<INVESTMENTS-MARKET> 13,284
<LOANS> 638,775
<ALLOWANCE> 9,254
<TOTAL-ASSETS> 810,475
<DEPOSITS> 690,589
<SHORT-TERM> 15,900
<LIABILITIES-OTHER> 12,935
<LONG-TERM> 0
0
0
<COMMON> 25,050
<OTHER-SE> 66,001
<TOTAL-LIABILITIES-AND-EQUITY> 810,475
<INTEREST-LOAN> 44,439
<INTEREST-INVEST> 4,986
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 49,425
<INTEREST-DEPOSIT> 19,082
<INTEREST-EXPENSE> 19,288
<INTEREST-INCOME-NET> 30,137
<LOAN-LOSSES> 1,259
<SECURITIES-GAINS> 59
<EXPENSE-OTHER> 25,898
<INCOME-PRETAX> 11,025
<INCOME-PRE-EXTRAORDINARY> 7,636
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,636
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 5.63
<LOANS-NON> 2,911
<LOANS-PAST> 1,427
<LOANS-TROUBLED> 1,134
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,388
<CHARGE-OFFS> 623
<RECOVERIES> 230
<ALLOWANCE-CLOSE> 9,254
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
