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 June 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
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 August 10, 1998
- ---------------------------------- ----------------------------------
Common Stock, no par value 6,170,968
- ---------------------------------- ----------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 35,041 $ 33,208 $ 35,169
Short-term investments:
Federal funds sold 49,200 14,300 2,800
Money market investments 2,474 1,791 356
Investment securities:
Available for sale 79,918 76,981 93,511
Held to maturity 6,672 10,952 13,530
Loans 615,022 635,492 622,655
Allowance for loan losses (9,502) (9,533) (8,698)
---------- ---------- ----------
NET LOANS 605,520 625,959 613,957
Premises and equipment 25,812 25,397 25,540
Accrued interest receivable 5,047 5,326 5,527
Other assets 12,541 10,482 9,678
---------- ---------- ----------
$ 822,225 $ 804,396 $ 800,068
========== ========== ==========
LIABILITIES
Noninterest bearing deposits $ 69,424 $ 69,687 $ 72,807
Interest bearing deposits 640,922 625,116 623,764
---------- ---------- ----------
TOTAL DEPOSITS 710,346 694,803 696,571
Federal Home Loan Bank advances 3,000 5,000 2,000
Accrued interest payable 3,222 3,309 3,018
Other liabilities 10,156 8,593 9,057
---------- ---------- ----------
TOTAL LIABILITIES 726,724 711,705 710,646
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized shares - 10,000,000
Shares issued and outstanding - 6,170,968 in 1998
and 5,877,601 in 1997 35,684 25,050 25,050
Retained earnings 59,803 67,693 64,554
Accumulated other comprehensive income 14 (52) (182)
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY 95,501 92,691 89,422
---------- ---------- ----------
$ 822,225 $ 804,396 $ 800,068
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 14,874 $ 14,833 $ 29,812 $ 29,042
Investment securities:
Taxable 1,192 1,433 2,337 2,895
Tax-exempt 95 168 222 370
Short-term investments 764 121 1,332 187
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 16,925 16,555 33,703 32,494
Interest expense:
Deposits 6,862 6,458 13,604 12,568
Borrowings 48 28 119 119
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 6,910 6,486 13,723 12,687
---------- ---------- ---------- ----------
NET INTEREST INCOME 10,015 10,069 19,980 19,807
Provision for loan losses 218 454 600 658
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,797 9,615 19,380 19,149
Noninterest income:
Trust department income 1,198 1,092 2,384 2,177
Fees for other customer services 998 941 1,928 1,771
Net gains on sale of loans 671 183 1,117 330
Net investment securities gains (losses) 30 (10)
Other 609 455 1,340 872
---------- ---------- ---------- ----------
3,506 2,671 6,759 5,150
---------- ---------- ---------- ----------
13,303 12,286 26,139 24,299
Noninterest expenses:
Salaries and employee benefits 4,966 4,645 9,871 9,339
Net occupancy 677 643 1,362 1,357
Furniture and equipment 521 488 1,031 970
Data processing 469 441 861 858
Advertising 328 345 662 637
Other 2,108 2,033 4,318 3,973
---------- ---------- ---------- ----------
9,069 8,595 18,105 17,134
---------- ---------- ---------- ----------
Income before income tax expense 4,234 3,691 8,034 7,165
Income tax expense 1,376 1,155 2,568 2,206
---------- ---------- ---------- ----------
NET INCOME $ 2,858 $ 2,536 $ 5,466 $ 4,959
========== ========== ========== ==========
Per share data:
Basic earnings $ .46 $ .41 $ .89 $ .80
Diluted earnings .46 .41 .88 .80
Dividends paid .22 .18 .44 .36
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Net income $ 2,858 $ 2,536 $ 5,466 $ 4,959
Other comprehensive income (expense):
Unrealized gains (losses) on securities -
Unrealized holding gains (losses) arising
during period (14) 867 92 158
Reclassification adjustment for (gains)
losses included in net income (30) 10
--------- --------- --------- ---------
Other comprehensive income (expense)
before income tax (44) 867 102 158
Income tax expense (credit) related to items
of other comprehensive income (15) 303 36 55
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 2,829 $ 3,100 $ 5,532 $ 5,062
========= ========= ========= =========
</TABLE>
4
<PAGE>
MICHIGAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES (in thousands)
Net income $ 5,466 $ 4,959
Adjustments to reconcile net income to net
cash provided by operating activities:
Origination of mortgage loans held for sale (50,668) (10,800)
Proceeds from sale of mortgage loans held for sale 47,922 12,134
Realized gain on sale of loans (1,117) (330)
Depreciation and amortization 1,108 1,027
Provision for loan losses 600 658
Other (595) 1,092
(Increase) decrease in interest receivable 279 (319)
Increase (decrease) in interest payable (87) 248
Net (accretion) amortization of investment securities (20) 41
Realized investment securities losses 10
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,898 8,710
INVESTING ACTIVITIES
Net increase in short-term investments (35,583) (2,871)
Purchases of available for sale securities (30,987) (3,988)
Proceeds from calls and maturities of available for sale securities 27,342 12,553
Net (increase) decrease in loans 23,702 (25,384)
Proceeds from calls and maturities of held to maturity securities 4,269 5,132
Purchases of premises and equipment (1,472) (1,851)
Proceeds from sale of available for sale securities 831
Proceeds from sale of premises and equipment 12 11
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (11,886) (16,398)
FINANCING ACTIVITIES
Net increase in deposits 15,543 20,463
Cash dividends (2,722) (2,253)
Federal Home Loan Bank advances (2,000) 2,000
Decrease in federal funds purchased (16,015)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,821 4,195
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 1,833 (3,493)
---------- ----------
Cash and due from banks at beginning of year 33,208 38,662
---------- ----------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 35,041 $ 35,169
========== ==========
</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 six month periods ended
June 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
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:
June 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 $65,905 $65,885 $58,922 $58,883
Mortgage-backed securities 10,031 10,059 14,293 14,246
Other securities 3,961 3,974 3,847 3,852
------- ------- ------- -------
TOTAL $79,897 $79,918 $77,062 $76,981
======= ======= ======= =======
Held to Maturity
State and political
subdivisions $ 6,672 $ 6,745 $10,952 $11,054
======= ======= ======= =======
6
<PAGE>
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 Six months ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Basic Earnings Per Share
Net income $2,858 $2,536 $5,466 $4,959
====== ====== ====== ======
Weighted-average common shares
outstanding 6,171 6,171 6,171 6,171
===== ===== ===== =====
Basic Earnings Per Share $.46 $.41 $.89 $.80
==== ==== ==== ====
Diluted Earnings Per Share
Net income $2,858 $2,536 $5,466 $4,959
====== ====== ====== ======
Weighted-average common shares
outstanding 6,171 6,171 6,171 6,171
Add dilutive effects of assumed
exercises under stock options 55 8 40 9
----- ----- ------ ------
Weighted-average common and dilutive
potential common shares outstanding 6,226 6,179 6,211 6,180
===== ===== ===== =====
Diluted Earnings Per Share $.46 $.41 $.88 $.80
==== ==== ==== ====
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.
NOTE E - 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.
7
<PAGE>
NOTE F - 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 June 30, 1998
-----------------------------
Increase (Decrease)
-------------------
$ %
------ -----
Funding sources:
Deposits 15,543 2.2
Federal Home Loan Bank advances (2,000) (40.0)
Other sources, net 227 .6
------
13,770 1.9
====== =====
Funding uses:
Loans (20,470) (3.2)
Investment securities (1,343) (1.5)
Short-term investments 35 583 221.1
------
Total uses 13,770 1.9
====== =====
Aggregate deposits, the primary source of funds, increased by $15,543,000 or
2.2% during the first six months of 1998. Experience was mixed within the
deposit category, as shown below:
Increase (Decrease)
-------------------
$ %
------ -----
Time-retail 9,505 3.2
Time-jumbo 3,478 8.6
Savings 2,823 1.0
Demand (263) (.4)
------
15,543 2.2
====== ====
As a result, total deposit levels at June 30, 1998 showed an increase from the
end of 1997.
9
<PAGE>
The loan portfolio decreased by 3.2% during the first six months of 1998. The
commercial, real estate and installment loan portfolios decreased by 2.5%, 2.8%
and 5.4%, 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 June 30, 1998 the
volume of Freddie Mac loans sold with servicing retained was $273 million. The
comparable figure one year earlier was $217 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 June 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 June 30,
"Well Capitalized" 1998 1997
------------------ ---- ----
Total capital 10.0% 16.52% 15.66%
Tier I capital 6.0 15.27 14.41
Tier I leverage ratio 5.0 11.62 11.33
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 Six months
ended June 30, ended June 30,
1998 and 1997 1998 and 1997
----------------- -----------------
Increase (Decrease)
Interest income $ 370 2.2% $1,209 3.7%
Interest expense 424 6.5 1,036 8.2
------ ------
Net interest income (54) (.5) 173 .9
Provision for loan losses (236) (52.0) (58) (8.8)
------ ------
Net interest income after provision
for loan losses 182 1.9 231 1.2
Noninterest income 835 31.3 1,609 31.2
Noninterest expenses 474 5.5 971 5.7
------ ------
Income before income tax expense 543 14.7 869 12.1
Income tax expense 221 19.1 362 41.7
------ ------
Net income $ 322 12.7% $ 507 10.2%
====== ======
Net Interest Income
Net interest income decreased by $54,000 or .5% during the second 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 six months of 1998 increased by $173,000 or .9%
from the comparable period of 1997. The loan to deposit ratio decreased to 86.8%
at June 30, 1998 from 89.4% at June 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 second quarter and the first
six 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 $31,000 or .3% during the first
half of 1998.
11
<PAGE>
Net loan charge-offs for the first six months amounted to $631,000, up from the
amount of $348,000 for the comparable period in 1997. On an annualized basis net
charge-offs amounted to .20% of average loans outstanding for 1998 and .12% for
the comparable period in 1997.
Expressed as a percent of outstanding loans the allowance increased to 1.54% at
June 30, 1998, up from 1.50% at year end 1997 and 1.40% on June 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 half of 1998 by $1,557,000 or 41.2%.
Total nonperforming assets, which include other real estate, increased by
$1,594,000 or 26.9% from December 31, 1997.
The table below presents a comparison of nonperformings.
June 30, December 31,
1998 1997
-------- ------------
(in thousands)
Nonaccrual loans $2,862 $1,594
Loans past due
90 days or more 1,263 1,068
Restructured loans 1,211 1,117
------ ------
Total nonperforming loans 5,336 3,779
Other real estate 2,189 2,152
------ ------
Total nonperforming assets $7,525 $5,931
====== ======
Nonperforming loans
as a % of total loans .87% .59%
=== ===
Nonperforming assets
as a % of total assets .92% .74%
=== ===
On a percentage basis, the allowance for loan losses decreased from 252.2% of
nonperforming loans at the end of 1997 to 178.1% at June 30, 1998. Although
higher then reported at year end 1997, nonperforming loans and nonperforming
assets decreased by $314,000 and $791,000 respectively in the last three months.
12
<PAGE>
Management intends to continue in its efforts toward maintaining a high quality
loan portfolio and anticipates further improvement in this area.
Noninterest Income
Noninterest income increased by $835,000 or 31.3% in the second quarter and
$1,609,000 or 31.2% during the first six months of 1998 compared to the same
periods last year. Exclusive of security transactions, noninterest income
increased by $805,000 or 23.2% for the quarter and $1,619,000 or 23.9% for the
first half of 1998. A large part of the increase is due to an increase in net
gains from the sale of loans of $488,000 for the quarter and $787,000 for the
first six months of 1998. Also, fee-based income for the first six months
increased $364,000 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 (decreased) as follows:
Three months Six months
ended ended
June 30, 1998 June 30, 1998
------------- -------------
Salaries and employee benefits 6.9% 5.7%
Occupancy, furniture and equipment 5.9 2.8
Data processing 6.3 .3
Advertising (4.9) 3.9
Other 3.7 8.7
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 second quarter and the
first six 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. Since 1997, the Corporation 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. The
Corporation has not identified any noncompliant systems for which a solution is
not available. Discussions with significant commercial clients of the
Corporation are taking place in regards to their Year 2000 readiness as well.
All Year 2000 costs to date have been expensed as incurred. Future expenses to
ensure Year 2000 compliance are not anticipated by management to be material to
the financial position, results of operation or cash flow of the Company.
Quantitative and Qualitative Disclosures about Market Risk
No material charges.
14
<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 June 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: August 10, 1998 /s/ HOWARD L. COHODAS
--------------------- ---------------------------------------
Howard L. Cohodas, Chairman
& President
(Chief Executive Officer)
Dated: August 10, 1998 /s/ KENNETH F. BECK
--------------------- ---------------------------------------
Kenneth F. Beck, Senior Vice President,
Treasurer & Secretary
(Chief Financial Officer and
Chief Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 35,041
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 49,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 79,918
<INVESTMENTS-CARRYING> 6,672
<INVESTMENTS-MARKET> 6,745
<LOANS> 615,022
<ALLOWANCE> 9,502
<TOTAL-ASSETS> 822,225
<DEPOSITS> 710,346
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 13,378
<LONG-TERM> 0
0
0
<COMMON> 36,684
<OTHER-SE> 59,803
<TOTAL-LIABILITIES-AND-EQUITY> 822,225
<INTEREST-LOAN> 29,812
<INTEREST-INVEST> 3,891
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 33,703
<INTEREST-DEPOSIT> 13,604
<INTEREST-EXPENSE> 13,723
<INTEREST-INCOME-NET> 19,980
<LOAN-LOSSES> 600
<SECURITIES-GAINS> (10)
<EXPENSE-OTHER> 18,105
<INCOME-PRETAX> 8,034
<INCOME-PRE-EXTRAORDINARY> 5,466
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,466
<EPS-PRIMARY> .89
<EPS-DILUTED> .88
<YIELD-ACTUAL> 5.41
<LOANS-NON> 2,862
<LOANS-PAST> 1,263
<LOANS-TROUBLED> 1,211
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,533
<CHARGE-OFFS> 765
<RECOVERIES> 134
<ALLOWANCE-CLOSE> 9,502
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>