UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
MICHIGAN FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2011532
- ------------------------------- ----------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
101 West Washington Street, Marquette, Michigan 49855
- ----------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (906) 228-6940
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days YES _x_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding as of May 8, 1998
- --------------------------------- -----------------------------------
Common Stock, no par value 5,877,601
- --------------------------------- -----------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 35,355 $ 33,208 $ 33,671
Short-term investments:
Federal funds sold 52,300 14,300 2,900
Money market investments 2,235 1,791 323
Investment securities:
Available for sale 72,811 76,981 94,767
Held to maturity 10,566 10,952 17,990
Loans 615,915 635,492 605,219
Allowance for loan losses (9,636) (9,533) (8,476)
--------- --------- ---------
NET LOANS 606,279 625,959 596,743
Premises and equipment 25,455 25,397 24,832
Accrued interest receivable 5,208 5,326 5,475
Other assets 11,354 10,482 9,188
--------- --------- ---------
$ 821,563 $ 804,396 $ 785,889
========= ========= =========
LIABILITIES
Noninterest bearing deposits $ 69,106 $ 69,687 $ 68,024
Interest bearing deposits 640,331 625,116 616,637
--------- --------- ---------
TOTAL DEPOSITS 709,437 694,803 684,661
Federal Home Loan Bank advances 5,000 5,000 2,000
Accrued interest payable 3,644 3,309 3,218
Other liabilities 9,440 8,593 8,555
--------- --------- ---------
TOTAL LIABILITIES 727,521 711,705 698,434
STOCKHOLDERS' EQUITY Common stock, no par value:
Authorized shares - 10,000,000
Shares issued and outstanding - 5,877,601
at March 31, 1998 and December 31, 1997,
5,598,267 at March 31, 1997 25,050 25,050 18,555
Retained earnings 68,949 67,693 69,646
Accumulated other comprehensive income 43 (52) (746)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 94,042 92,691 87,455
--------- --------- ---------
$ 821,563 $ 804,396 $ 785,889
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended
March 31
1998 1997
-------- --------
(in thousands, except per share data)
Interest income:
Loans, including fees $ 14,938 $ 14,209
Investment securities:
Taxable 1,145 1,462
Tax-exempt 127 202
Short-term investments 568 66
-------- --------
TOTAL INTEREST INCOME 16,778 15,939
Interest expense:
Deposits 6,742 6,110
Borrowings 71 91
-------- --------
TOTAL INTEREST EXPENSE 6,813 6,201
-------- --------
NET INTEREST INCOME 9,965 9,738
Provision for loan losses 382 204
-------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,583 9,534
Noninterest income:
Trust department income 1,186 1,085
Fees for other customer services 930 829
Net gains on sale of loans 446 147
Investment securities losses (40)
Other 731 418
-------- --------
3,253 2,479
-------- --------
12,836 12,013
Noninterest expenses:
Salaries and employee benefits 4,905 4,694
Net occupancy 685 714
Furniture and equipment 510 482
Data processing 392 417
Advertising 334 292
Other 2,210 1,940
-------- --------
9,036 8,539
-------- --------
Income before income tax expense 3,800 3,474
Income tax expense 1,192 1,051
-------- --------
NET INCOME $ 2,608 $ 2,423
======== ========
Per share data:
Basic earnings $ .44 $ .41
Diluted earnings .44 .41
Dividends paid .23 .19
See notes to consolidated financial statements.
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended
March 31
1998 1997
------- -------
(in thousands)
Net income $ 2,608 $ 2,423
Other comprehensive income (expense):
Unrealized gains (losses) on securities -
Unrealized holding gains (losses) arising
during period 106 (709)
Plus: reclassification adjustment for
losses included in net income 40
------- -------
Other comprehensive income (expense)
before income tax 146 (709)
Income tax expense (credit) related to items
of other comprehensive income 51 (248)
------- -------
COMPREHENSIVE INCOME $ 2,703 $ 1,962
======= =======
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
March 31
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES (in thousands)
Net income $ 2,608 $ 2,423
Adjustments to reconcile net income to net
cash provided by operating activities:
Origination of mortgage loans held for sale (25,133) (4,053)
Proceeds from sale of mortgage loans held for sale 24,179 3,991
Depreciation and amortization 553 508
Realized gain on sale of loans (446) (147)
Provision for loan losses 382 204
Increase in interest payable 335 448
(Increase) decrease in interest receivable 118 (267)
Other (107) 1,407
Realized investment securities losses 40
Amortization of investment securities premium 1 29
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,530 4,543
INVESTING ACTIVITIES
Net increase in short-term investments (38,444) (2,938)
Net (increase) decrease in loans 20,698 (6,503)
Proceeds from calls and maturities of available for sale securities 13,552 10,442
Purchases of available for sale securities (9,315) (3,988)
Purchases of premises and equipment (590) (637)
Proceeds from calls and maturities of held to maturity securities 379 672
Proceeds from sale of available for sale securities 45
Proceeds from sale of premises and equipment 10
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (13,665) (2,952)
FINANCING ACTIVITIES
Net increase in deposits 14,634 8,553
Cash dividends (1,352) (1,120)
Decrease in federal funds purchased (16,015)
Federal Home Loan Bank advances 2,000
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 13,282 (6,582)
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 2,147 (4,991)
-------- --------
Cash and due from banks at beginning of year 33,208 38,662
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 35,355 $ 33,671
======== ========
</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 month periods ended March 31,
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
foot notes included in the Company's annual report on Form 10-K for the year
ended December 31, 1997.
NOTE B - INVESTMENT SECURITIES
A comparison of the carrying amount and approximate market value follows:
March 31, 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 $56,281 $56,306 $58,922 $58,883
Mortgage-backed securities 12,650 12,678 14,293 14,246
Other securities 3,815 3,827 3,847 3,852
------- ------- ------- -------
TOTAL $72,746 $72,811 $77,062 $76,981
======= ======= ======= =======
<PAGE>
Held to Maturity
State and political
subdivisions $10,566 $10,660 $10,952 $11,054
======= ======= ======= =======
NOTE C - 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
March 31
1998 1997
------ ------
Basic Earnings Per Share
Net income $2,608 $2,423
====== ======
Weighted-average common shares
outstanding 5,878 5,878
====== ======
Basic Earnings Per Share $.44 $.41
====== ======
Diluted Earnings Per Share
Net income $2,608 $2,423
====== ======
Weighted-average common shares
outstanding 5,878 5,878
Add dilutive effects of assumed
exercises under stock options 30 9
------ ------
Weighted-average common and dilutive
potential common shares outstanding 5,908 5,887
====== ======
Diluted Earnings Per Share $.44 $.41
====== ======
NOTE D - 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.
<PAGE>
NOTE E - PENDING STOCK DIVIDEND
On April 28, 1998, the board of directors of the Company declared a 5% stock
dividend, payable on June 22, 1998, to stockholders of record as of June 5,
1998. The pro forma effect of this pending transaction on the consolidated
statements of income would be as follows:
Three months ended
March 31
1998 1997
----- -----
(in thousands, except per share data)
WEIGHTED AVERAGE SHARES OUTSTANDING 6,173 6,173
Per share data:
Basic earnings $.42 $.39
Diluted earnings $.42 $.39
Dividends paid $.22 $.18
NOTE F - RECLASSIFICATIONS
Certain amounts in 1997 have been reclassified to conform with the
classifications in 1998.
<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, 1997
to March 31, 1998
-----------------------------
Increase (Decrease)
-------------------
$ %
------ -----
Funding sources:
Deposits 14,634 2.1
Other sources, net (323) (.8)
------
14,311 1.9
====== =====
Funding uses:
Loans (19,577) (3.1)
Investment securities (4,556) (5.2)
Money market investments 38 444 238.9
------
Total uses 14,311 1.9
====== =====
Aggregate deposits, the primary source of funds, increased by $14,634,000 or
2.1% during the first quarter of 1998. Experience was mixed within the deposit
category, as shown below:
Increase (Decrease)
-------------------
$ %
------ ---
Time-retail 7,552 2.5
Savings 5,445 1.9
Time-jumbo 2,218 5.5
Demand (581) (.8)
------
14,634 2.1
====== ===
As a result, total deposit levels at March 31, 1998 showed an increase from the
end of 1997.
<PAGE>
The loan portfolio decreased by 3.1% during the first quarter of 1998. The
commercial, real estate and installment loan portfolios decreased by 2%, 2.9%,
and 4.7%, 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 March 31, 1998
the volume of Freddie Mac loans sold with servicing being retained was $252
million. The comparable figure one year earlier was $215 million. The ability of
the Company to sell these loans enables it to more effectively manage its
funding operations.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 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 March 31, 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 March 31,
"Well Capitalized" 1998 1997
----------------- ----- -----
Total capital 10.0% 16.21% 15.92%
Tier I capital 6.0 14.96 14.67
Tier I leverage ratio 5.0 11.53 11.30
<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 ended
March 31, 1998 and 1997
-----------------------
Increase (Decrease)
Interest income $ 839 5.3%
Interest expense 612 3.8
------
Net interest income 227 2.3
Provision for loan losses 178 87.3
------
Net interest income after provision
for loan losses 49 .5
Noninterest income 774 31.2
Noninterest expenses 497 5.8
------
Income before income tax expense 326 9.4
Income tax expense 141 13.4
------
Net income $ 185 7.6%
======
Net Interest Income
The increase in net interest income during the first quarter of 1998 was due to
the fact that while both interest income and interest expense increased from the
first quarter in 1997, interest income increased more. The loan to deposit ratio
decreased to 86.8% at March 31, 1998 from 88.4% at March 31, 1997, however other
earnings assets grew faster than average rate-related liabilities resulting in
an increase in net interest income. Net interest income performance in future
periods will be primarily dependent upon general interest rate developments.
Provision for Loan Losses
The loan loss provision increased significantly during the first three months of
1998. This increased provision allowed for an increase to the allowance for loan
losses of $103,000 or 1.1% during the quarter. Net loan charge-offs for the
quarter amounted to $279,000, up from the amount of $116,000 for the comparable
<PAGE>
period in 1997. On an annualized basis these charge-offs amounted to .18% of
average loans outstanding, up from the .08% for the comparable period in 1997.
Expressed as a percent of outstanding loans the allowance increased to 1.56%
compared to 1.40% at the same time last year. 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 quarter of 1998 by $1,871,000 or
49.5%. Total nonperforming assets, which include other real estate, increased by
$2,385,000 or 40.2% from December 31, 1997.
The table below presents a comparison of nonperformings.
March 31, December 31,
1998 1997
------ ------
(in thousands)
Nonaccrual loans $3,458 $1,594
Loans past due
90 days or more 1,603 1,068
Restructured loans 589 1,117
------ ------
Total nonperforming loans 5,650 3,779
Other real estate 2,666 2,152
------ ------
Total nonperforming assets $8,316 $5,931
====== ======
Nonperforming loans
as a % of total loans .92% .59%
====== ======
Nonperforming assets
as a % of total assets 1.01% .74%
====== ======
On a percentage basis, the allowance for loan losses decreased from 252.2% of
nonperforming loans at the end of 1997 to 170.6% at March 31, 1998. Management
intends to continue in its efforts toward maintaining a high quality loan
portfolio and anticipates improvement in the nonperforming area during the
second quarter.
<PAGE>
Noninterest Income
Noninterest income increased by $774,000 or 31.2% from the first three months of
1997. Exclusive of securities transactions, it increased by $814,000 or 32.8%
for the same period. A large part of the increase in other income is due to an
increase of $299,000 in net gains from the sale of loans over the first three
months of 1997. Fee-based income rose $202,000 compared to the same period last
year due to increases in trust fees and fees collected for brokerage services.
Trust fees increased primarily due to growth in trust assets under management.
Noninterest Expenses
The increase in noninterest expenses resulted from changes in its major
components as set forth below, indicative of the normal effects of inflation as
well as the growth of the organization. The major components of other expenses
increased (decreased) as follows:
Three months
ended
March 31, 1998
--------------
Salaries and employee benefits 4.5%
Occupancy, furniture and equipment NMF
Data processing (6.0)
Advertising 14.4
Other 13.9
The increase in advertising expense is due to a timing difference in advertising
campaigns between 1998 and 1997. The increase in other expenses is largely due
to three factors; 1) other real estate expenses recognized in connection with
properties owned through foreclosure 2) impairment losses incurred on mortgage
servicing rights and 3) miscellaneous losses recognized due to fraudulent check
activity.
<PAGE>
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 1998 income tax provision reported herein for the first quarter was mostly
due to the increase in pre-tax income of the Company for the first quarter of
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 for the economy
overall regarding how existing application software programs and operating
systems can accommodate the date value for the year 2000. The financial impact
to the Company to ensure year 2000 compliance is not anticipated by management
to be material to the financial position, results of operations or cash flow of
the Company.
<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 16 of this report.
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for the
three months ended March 31, 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: May 8, 1998 /s/ HOWARD L. COHODAS
------------------ --------------------------------------------
Howard L. Cohodas, Chairman
& President
(Chief Executive Officer)
Dated: May 8, 1998 /s/ KENNETH F. BECK
------------------ --------------------------------------------
Kenneth F. Beck, Senior Vice President,
Treasurer & Secretary
(Chief Financial Officer and
Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 35,355
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 52,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,811
<INVESTMENTS-CARRYING> 10,566
<INVESTMENTS-MARKET> 10,660
<LOANS> 615,915
<ALLOWANCE> 9,636
<TOTAL-ASSETS> 821,563
<DEPOSITS> 709,437
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 13,084
<LONG-TERM> 0
0
0
<COMMON> 25,050
<OTHER-SE> 68,949
<TOTAL-LIABILITIES-AND-EQUITY> 821,563
<INTEREST-LOAN> 14,938
<INTEREST-INVEST> 1,840
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,778
<INTEREST-DEPOSIT> 6,742
<INTEREST-EXPENSE> 6,813
<INTEREST-INCOME-NET> 9,965
<LOAN-LOSSES> 382
<SECURITIES-GAINS> (40)
<EXPENSE-OTHER> 9,036
<INCOME-PRETAX> 3,800
<INCOME-PRE-EXTRAORDINARY> 2,608
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,608
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<YIELD-ACTUAL> 5.45
<LOANS-NON> 3,458
<LOANS-PAST> 1,603
<LOANS-TROUBLED> 589
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,533
<CHARGE-OFFS> 319
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 9,636
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
