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, 1998
------------------------------
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
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MICHIGAN FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2011532
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
101 West Washington Street, Marquette, Michigan 49855
- ----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (906) 228-6940
-----------------------------
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days YES x No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding as of November 10, 1998
- ---------------------------------- ------------------------------------
Common Stock, no par value 6,173,268
- ---------------------------------- ------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
------------- ------------ -------------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 29,700 $ 33,208 $ 42,478
Short-term investments:
Federal funds sold 46,000 14,300
Money market investments 2,471 1,791 392
Investment securities:
Available for sale 90,913 76,981 83,807
Held to maturity 10,952 13,256
Loans 620,699 635,492 638,775
Allowance for loan losses (9,462) (9,533) (9,254)
--------- --------- ---------
NET LOANS 611,237 625,959 629,521
Premises and equipment 25,847 25,397 25,460
Accrued interest receivable 5,259 5,326 5,653
Other assets 12,610 10,482 9,908
--------- --------- ---------
$ 824,037 $ 804,396 $ 810,475
========= ========= =========
LIABILITIES
Noninterest bearing deposits $ 72,038 $ 69,687 $ 71,187
Interest bearing deposits 637,633 625,116 619,402
--------- --------- ---------
TOTAL DEPOSITS 709,671 694,803 690,589
Federal funds purchased 13,900
Federal Home Loan Bank advances 3,000 5,000 2,000
Accrued interest payable 3,608 3,309 3,467
Other liabilities 10,469 8,593 9,468
--------- --------- ---------
TOTAL LIABILITIES 726,748 711,705 719,424
STOCKHOLDERS' EQUITY Common stock, no par value:
Authorized shares - 10,000,000
Shares issued and outstanding - 6,173,268 in 1998
and 5,877,601 in 1997 35,741 25,050 25,050
Retained earnings 61,223 67,693 66,056
Accumulated other comprehensive income 325 (52) (55)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 97,289 92,691 91,051
--------- --------- ---------
$ 824,037 $ 804,396 $ 810,475
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 15,008 $ 15,397 $ 44,820 $ 44,439
Investment securities:
Taxable 1,286 1,339 3,623 4,234
Tax-exempt 79 152 301 522
Short-term investments 774 43 2,106 230
-------- -------- -------- --------
TOTAL INTEREST INCOME 17,147 16,931 50,850 49,425
Interest expense:
Deposits 6,938 6,514 20,542 19,082
Borrowings 44 87 163 206
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 6,982 6,601 20,705 19,288
-------- -------- -------- --------
NET INTEREST INCOME 10,165 10,330 30,145 30,137
Provision for loan losses 100 601 700 1,259
-------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,065 9,729 29,445 28,878
Noninterest income:
Trust department income 1,259 1,102 3,643 3,279
Fees for other customer services 984 927 2,912 2,698
Net gains on sale of loans 599 311 1,716 641
Net investment securities gains (losses) 0 59 (10) 59
Other 519 496 1,859 1,368
-------- -------- -------- --------
3,361 2,895 10,120 8,045
-------- -------- -------- --------
13,426 12,624 39,565 36,923
Noninterest expenses:
Salaries and employee benefits 4,970 4,693 14,841 14,032
Net occupancy 660 670 2,022 2,027
Furniture and equipment 550 527 1,581 1,497
Data processing 483 403 1,344 1,261
Advertising 322 314 984 951
Other 2,231 2,157 6,549 6,130
-------- -------- -------- --------
9,216 8,764 27,321 25,898
-------- -------- -------- --------
Income before income tax expense 4,210 3,860 12,244 11,025
Income tax expense 1,370 1,183 3,938 3,389
-------- -------- -------- --------
NET INCOME $ 2,840 $ 2,677 $ 8,306 $ 7,636
======== ======== ======== ========
Per share data:
Basic earnings $ .46 $ .43 $ 1.35 $ 1.24
Diluted earnings .46 .43 1.34 1.24
Dividends paid .23 .19 .67 .55
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Net income $ 2,840 $ 2,677 $ 8,306 $ 7,636
Other comprehensive income:
Unrealized gains on securities -
Unrealized holding gains arising
during period 404 255 496 413
Reclassification adjustment for (gains)
losses included in net income 0 (59) 10 (59)
------- ------- ------- -------
Other comprehensive income before
income tax 404 196 506 354
Income tax expense related to items
of other comprehensive income 141 69 177 124
------- ------- ------- -------
COMPREHENSIVE INCOME $ 3,103 $ 2,804 $ 8,635 $ 7,866
======= ======= ======= =======
</TABLE>
4
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES (in thousands)
Net income $ 8,306 $ 7,636
Adjustments to reconcile net income to net
cash provided by operating activities:
Proceeds from sale of mortgage loans held for sale 72,174 24,795
Origination of mortgage loans held for sale (70,829) (24,957)
Realized gain on sale of loans (1,716) (641)
Depreciation and amortization 1,704 1,609
Provision for loan losses 700 1,259
Other (554) 1,164
Increase in interest payable 299 697
(Increase) decrease in interest receivable 67 (445)
Net (accretion) amortization of investment securities (34) 58
Realized investment securities (gains) losses 10 (59)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,127 11,116
INVESTING ACTIVITIES
Purchases of available for sale securities (42,434) (5,464)
Proceeds from calls and maturities of available for sale securities 34,958 21,858
Net increase in short-term investments (32,380) (107)
Net (increase) decrease in loans 14,395 (39,742)
Proceeds from calls and maturities of held to maturity securities 4,269 5,611
Purchases of premises and equipment (2,079) (2,331)
Proceeds from sale of available for sale securities 831 2,113
Proceeds from sale of premises and equipment 22 30
Purchases of held to maturity securities (205)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (22,418) (18,237)
FINANCING ACTIVITIES
Net increase in deposits 14,868 14,481
Cash dividends (4,142) (3,429)
Federal Home Loan Bank advances (2,000) 2,000
Proceeds from exercise of stock options 57
Decrease in federal funds purchased (2,115)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,783 10,937
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (3,508) 3,816
-------- --------
Cash and due from banks at beginning of year 33,208 38,662
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 29,700 $ 42,478
======== ========
</TABLE>
See notes to consolidated financial statements
5
<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, 1998 and 1997 are not necessarily indicative of the results to be
expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report on Form 10-K for the year
ended December 31, 1997.
NOTE B - ACCOUNTING CHANGES
Effective July 1, 1998, the Company adopted Financial Accounting Standards Board
("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The statement establishes accounting and reporting standards for
derivatives, including derivative instruments embedded in other contracts, and
for hedging activities. Although the Company does not engage in the use of
derivative instruments, transition provisions allowed the Company to transfer
its remaining investment securities categorized as held-to-maturity to the
available-for-sale category. At July 1, 1998, the date of transfer, the
amortized cost of those securities was $6,672,000 and the unrealized gain on
those securities was $73,000, which is included in stockholders' equity, net of
income tax effect of $25,000. Statement No. 133 is not expected to have a
material effect on the Company's consolidated financial position or results of
operations.
6
<PAGE>
NOTE C - INVESTMENT SECURITIES
A comparison of the carrying amount and approximate market value follows:
September 30, 1998 December 31, 1997
------------------ -----------------
Amortized Approximate Amortized Approximate
Cost Market Value Cost Market Value
---- ------------ ---- ------------
(in thousands)
Available for Sale
U.S. Treasury and
government agencies $71,229 $71,592 $58,922 $58,883
Mortgage-backed securities 8,828 8,905 14,293 14,246
State and political
subdivisions 6,254 6,353
Other securities 4,103 4,063 3,847 3,852
------- ------- ------- -------
TOTAL $90,414 $90,913 $77,062 $76,981
======= ======= ======= =======
Held to Maturity
State and political
subdivisions $10,952 $11,054
======= =======
NOTE D - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the earnings per share
computations is presented below. Weighted-average share amounts are presented in
thousands.
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
Basic Earnings Per Share
Net income $2,840 $2,677 $8,306 $7,636
====== ====== ====== ======
Weighted-average common shares
outstanding 6,172 6,171 6,171 6,171
===== ===== ===== =====
Basic Earnings Per Share $.46 $.43 $1.35 $1.24
==== ==== ===== =====
Diluted Earnings Per Share
Net income $2,840 $2,677 $8,306 $7,636
====== ====== ====== ======
Weighted-average common shares
outstanding 6,172 6,171 6,171 6,171
Add dilutive effects of assumed
exercises under stock options 54 15 49 11
----- ----- ------ ------
Weighted-average common and dilutive
potential common shares outstanding 6,226 6,186 6,220 6,182
===== ===== ====== ======
Diluted Earnings Per Share $.46 $.43 $1.34 $1.24
==== ==== ===== =====
7
<PAGE>
NOTE E - COMPREHENSIVE INCOME
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income consists of the change in unrealized gains
and losses on investment securities available for sale.
NOTE F - STOCK DIVIDEND
On June 20, 1998, the Company issued 293,367 shares of common stock as a 5%
stock dividend. These shares had a value of $10,634,000 at the date of issuance.
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 G - RECLASSIFICATIONS
Certain amounts in 1997 have been reclassified to conform with the
classifications in 1998.
8
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND 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, 1997
to September 30, 1998
---------------------
Increase (Decrease)
-------------------
$ %
------ -----
Funding sources:
Deposits 14,868 2.1
Federal Home Loan Bank advances (2,000) (40.0)
Other sources, net 7,699 19.4
------
20,567 2.8
====== ====
Funding uses:
Loans (14,793) (2.3)
Investment securities 2,980 3.4
Short-term investments 32,380 201.2
------
Total uses 20,567 2.8
====== =====
Aggregate deposits, the primary source of funds, increased by $14,868,000 or
2.1% during the first nine months of 1998. Experience was mixed within the
deposit category, as shown below:
Increase (Decrease)
-------------------
$ %
------ ----
Time-retail 14,024 4.7
Savings (5,450) (1.9)
Time-jumbo 3,943 9.8
Demand 2,351 3.4
------
14,868 2.1
====== ====
As a result, total deposit levels at September 30, 1998 showed an increase from
the end of 1997.
9
<PAGE>
The loan portfolio decreased by 2.3% during the first nine months of 1998. The
commercial loan portfolio showed no variance while the real estate and
installment loan portfolios decreased by 2.3% and 7.2% respectively.
For liquidity purposes the excess funds generated during the period were mainly
placed in short-term investments.
In addition to the above trends in the sources and uses of funds, the Company
services loans for outside agencies, primarily Freddie Mac. At September 30,
1998 the volume of Freddie Mac loans sold with servicing retained was $298
million. The comparable figure one year earlier was $227 million. The ability of
the Company to sell these loans enables it to more effectively manage its
funding operations.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1998 there were no significant changes with respect to
the capital resources of the Company. Management feels that the liquidity
position of the Company as of September 30, 1998 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" 1998 1997
------------------ ---- ----
Total capital 10.0% 16.61% 15.65%
Tier I capital 6.0 15.36 14.40
Tier I leverage ratio 5.0 11.72 11.35
10
<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,
1998 and 1997 1998 and 1997
------------- -------------
Increase(Decrease)
Interest income $ 216 1.3% $1,425 2.9%
Interest expense 381 5.8 1,417 7.3
------ ------
Net interest income (165) (1.6) 8 0.0
Provision for loan losses (501) (83.4) (559) (44.4)
------- ------
Net interest income after provision
for loan losses 336 3.5 567 2.0
Noninterest income 466 16.1 2,075 25.8
Noninterest expenses 452 5.2 1,423 5.5
------ ------
Income before income tax expense 350 9.1 1,219 11.1
Income tax expense 187 13.6 549 16.2
------ ------
Net income $ 163 6.1% $ 670 8.8%
====== ======
Net Interest Income
Net interest income decreased by $165,000 or 1.6% during the third quarter of
1998 from the same period in 1997. The decrease was due to interest expense
increasing more than interest income. Despite the quarterly decrease, net
interest income for the first nine months of 1998 increased by $8,000, less than
.1%, from the comparable period of 1997. The loan to deposit ratio decreased to
87.5% at September 30, 1998 from 92.5% at September 30, 1997, however earning
assets grew faster than average rate-related liabilities resulting in an
increase in net interest income.
Provision for Loan Losses
The loan loss provision decreased during both the third quarter and the first
nine months of 1998 largely due to a smaller loan portfolio. The smaller
provision, combined with a higher net charge-off level, accounted for the
decrease in the allowance for loan losses of $71,000 or .7% during the first
nine months of 1998.
11
<PAGE>
Net loan charge-offs for the first nine months amounted to $771,000, up from the
amount of $393,000 for the comparable period in 1997. On an annualized basis net
charge-offs amounted to .17% of average loans outstanding for 1998 and .09% for
the comparable period in 1997.
Expressed as a percent of outstanding loans the allowance increased to 1.52% at
September 30, 1998, up from 1.50% at year end 1997 and 1.45% on September 30,
1997. The allowance level is subject to change during future periods as the
amounts provided during any given period are dependent upon management's ongoing
review process and assessment of the perceived loss exposure in the then
outstanding loan portfolio.
Nonperforming loans increased in the first nine months of 1998 by $1,288,000 or
34.1%. Total nonperforming assets, which include other real estate, increased by
$708,000 or 11.9% from December 31, 1997.
The table below presents a comparison of nonperformings.
September 30, December 31,
1998 1997
---- ----
(in thousands)
Nonaccrual loans $3,080 $1,594
Loans past due
90 days or more 734 1,068
Restructured loans 1,253 1,117
------ ------
Total nonperforming loans 5,067 3,779
Other real estate 1,572 2,152
------ ------
Total nonperforming assets $6,639 $5,931
====== ======
Nonperforming loans
as a % of total loans .82% .59%
=== ===
Nonperforming assets
as a % of total assets .81% .74%
=== ===
On a percentage basis, the allowance for loan losses decreased from 252.2% of
nonperforming loans at the end of 1997 to 186.7% at September 30, 1998. Although
higher than reported at year end 1997, nonperforming loans and nonperforming
assets decreased by $269,000 and $1,997,000 respectively in the last three
months and $583,000 and $2,788,000 in the last six months. Management intends to
continue
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<PAGE>
its efforts toward maintaining a high quality loan portfolio and anticipates
further improvement in this area.
Noninterest Income
Noninterest income increased by $466,000 or 16.1% in the third quarter and
$2,075,000 or 25.8% during the first nine months of 1998 compared to the same
periods last year. Exclusive of security transactions, noninterest income
increased by $525,000 or 18.5% for the quarter and $2,144,000 or 26.8% for the
first nine months of 1998. A large part of the increase is due to an increase in
net gains from the sale of loans of $288,000 for the quarter and $1,075,000 for
the first nine months of 1998. Also, fee-based income for the first nine months
increased $578,000 due to increases in trust fees and fees collected for
brokerage services.
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 as follows:
Three months Nine months
ended ended
September 30, 1998 September 30, 1998
------------------ ------------------
Salaries and employee benefits 5.9% 5.8%
Occupancy, furniture and equipment 1.1 2.2
Data processing 19.9 6.6
Advertising 2.5 3.5
Other 3.4 6.8
The 19.9% quarterly increase in data processing expense is due to the third
quarter in 1997 having been lower than normal.
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
13
<PAGE>
the 1998 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 1998, combined with a decrease in the portion of interest income
which is exempt from federal taxation.
Year 2000 Compliance
A significant issue has emerged in the banking industry and the economy overall
regarding how existing application software programs and operating systems can
accommodate the date value for the Year 2000. Programs and operating systems
using a two digit date rather than a four digit date may calculate incorrectly
or cease to operate after December 31, 1999. Initially this potential problem
was believed to be limited to software programs and data applications
(collectively referred to as "Information Technology" or "IT" systems) using
date-related fields during processing. The scope of concern has since been
expanded to include "non-IT" systems such as electronically controlled elevators
and security systems.
Since 1997, the Company has been engaged in a program to ensure that all
computer systems will continue to make accurate date-related computations on and
after January 1, 2000. Early in 1997, management appointed a team of individuals
that would develop and administer a plan to address the Company's Year 2000
risks. The plan was to address both "IT" and "non-IT" systems using the
following steps: (1) Inventory: identify all items to be included in the Year
2000 program; (2) Assessment: prioritize the inventory for review and determine
the scope of remediation and testing effort required; (3) Conversion: make all
the necessary changes to become Year 2000 compliant; (4) Testing: verify through
structured testing that all inventory is in fact Year 2000 compliant; (5)
Implementation: position the inventory items back into production after testing
is complete; and
14
<PAGE>
(6) Contingency Planning: design a contingency plan for all systems in the event
of other unforeseen circumstances. Another aspect included in the Year 2000
program, other than "IT" and "non-IT" computer systems, relates to the risks
posed to the Company by customers. Borrowers and depositors having significant
relationships with the Company have been identified in accordance with
regulatory guidelines. The risk to the Company arising from the failure of these
customers to address their Year 2000 concerns has been identified and is
included in the contingency plan for continuing operations.
As of September 30, 1998, the Company has completed the first two steps of its
Year 2000 plan. A complete inventory of all Year 2000 items has been documented
and a priority level has been assigned with regards to remediation and testing.
Steps 3 and 4, conversion and testing, are well underway for all Year 2000
items.
Three "IT" systems have been recognized by the Company as being "mission
critical" to its continuing operation. These systems received the highest
priority level for remediation and testing. The first such system is the data
processing service provided by Alltel Information Services, Inc. Alltel provides
deposit and loan data processing services to the bank subsidiaries of the
Company. Alltel is one of the nations major providers of such services to
financial institutions. In conjunction with Alltel, the Company believes it has
identified all processing applications which are date-sensitive and has
established timelines for testing and installing Year 2000 compliant software.
This conversion began in September of 1998 with completion anticipated in April
1999.
The second mission critical system identified by the Company is the payment
processing system used by the Company's banking subsidiaries. The Company
contracts with Wausau Financial Services to provide this service. All phases of
the Company's Year 2000 plan have been completed for this system and it has been
15
<PAGE>
tested and determined to be Year 2000 ready. The remediated software has been
placed into production and is being used as of September 30, 1998.
M&I Data Services, a subsidiary of Marshall & Ilsley Corporation, provides the
third mission critical system to the Corporation, Trust data processing and
investment services technology. The Year 2000 plan with regards to this system
is currently in the testing and conversion stages and is anticipated to be Year
2000 ready by April, 1999.
All other third-party vendors for in-house systems, primarily PC-based
applications, have been contacted to confirm that the Company's software is Year
2000 ready. Appropriate personnel within the Company have been assigned the
responsibility to test and verify vendor claims about Year 2000 readiness. The
Company expects to have all in-house systems, whether developed internally or
obtained from an outside supplier, converted by December 31, 1998. Vendors for
Year 2000 items noted as "non-IT" have also been contacted with regards to their
state of Year 2000 readiness. The Company acknowledges risk in this area as
failure with any of these systems is not under its control. The Company monitors
Year 2000 efforts by each of the "non-IT" vendors through scheduled reviews. At
this time, all "non-IT" vendors expect to be Year 2000 compliant prior to
December 31, 1999.
The Year 2000 program implemented by the Company follows closely the process
suggested by the Federal Financial Institutions Examination Council ("FFIEC").
The "FFIEC" is an interagency organization made up of regulatory agencies that
monitor the safety and soundness of banks and savings associations. The "FFIEC"
is responsible for supervising the efforts of financial institutions preparing
for the Year 2000. The regulatory agencies are conducting special examinations
of
16
<PAGE>
insured banks, including those subsidiaries of the Company, and savings
associations to verify efforts toward attaining Year 2000 readiness.
Costs to date for Year 2000 remediation have not been material to the financial
condition of the Company. All costs related to the Company's Year 2000 plan have
been expensed as incurred. Total expenses recognized to date are $197,000
including $89,000 in personnel expense and $108,000 in hardware and software
expense. Personnel expense relates to Year 2000 training, testing, customer
awareness of Year 2000 concerns and evaluation of Year 2000 efforts of
significant customers. Hardware and software costs include purchase/replacement
of equipment, upgrades to software, and vendor costs related to Year 2000
remediation. Future expenses for Year 2000, including personnel, hardware and
software expense, are estimated to be $160,000.
A complete business resumption plan is expected to be complete by December 31,
1998. Contingency plans have been developed for each of the "mission critical"
systems identified by the Company.
The Company has not identified any noncompliant systems for which a solution is
not available. However, due to the general uncertainty inherent in the Year 2000
problem, the Company is unable to ensure its systems will not be impacted by the
Year 2000. The failure to correct a material Year 2000 problem could result in
an interruption in, or failure of, certain normal business activities. Such
failures could materially affect the Company's results of operations and
financial condition. The Year 2000 program implemented by the Company is
expected to significantly reduce its level of uncertainty regarding Year 2000
exposure. Management believes that completion of the Year 2000 program as
currently scheduled will greatly reduce the possibility of significant
interruptions of normal operations.
17
<PAGE>
Quantitative and Qualitative Disclosures about Market Risk
No material changes.
18
<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 20 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, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Michigan Financial Corporation
(Registrant)
---------------------------------------
Dated: November 10, 1998 /s/ HOWARD L. COHODAS
------------------ ---------------------------------------
Howard L. Cohodas, Chairman
& President
(Chief Executive Officer)
Dated: November 10, 1998 /s/ KENNETH F. BECK
------------------ ---------------------------------------
Kenneth F. Beck, Senior Vice President,
Treasurer & Secretary
(Chief Financial Officer and
Chief Accounting Officer)
19
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