UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
or the transition period from ___________________ to __________________
Commission file number 0-7515
MICHIGAN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2011532
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
101 West Washington Street, Marquette, Michigan 49855
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (906) 228-6940
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 2, 1998. $94,017,856
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of March 2, 1998.
Common Stock, no par value - 5,877,601
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual stockholders report for the year ended December 31, 1997
are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual stockholders meeting to be held
April 28, 1998 are incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
Michigan Financial Corporation, a Michigan corporation, (the "Company") is a
registered bank holding company under the Bank Holding Company Act of 1956. The
Company was incorporated on June 29, 1972. The Company has seven subsidiary
banks, all wholly owned, as follows:
MFC First National Bank, Escanaba
MFC First National Bank, Houghton
MFC First National Bank, Iron Mountain
MFC First National Bank, Iron River
MFC First National Bank, Ironwood
MFC First National Bank, Marquette
MFC First National Bank, Menominee
The Company's only nonbank subsidiary is Michigan Financial Life Insurance
Company ("MFLIC"). MFLIC, an Arizona Corporation, underwrites, as a reinsurer,
credit life and credit accident and health insurance directly related to
extensions of credit by the Company's subsidiary banks.
The Company is one of the ten largest commercial bank holding companies
headquartered in the State of Michigan and operates primarily in the Upper
Peninsula of the state. One of its banks also operates a loan production office
in northeastern Wisconsin.
The Company provides advice and services to its subsidiary banks and coordinates
their activities in such areas as lending, investment policies, business
development, auditing, public relations, data processing, financial reporting,
budgetary planning and compliance with government regulations. Each bank
operates under the day-to-day management of its own officers and directors.
The seven subsidary banks of the Company, either individually or in the
aggregate, provide full banking and trust services, including commercial and
savings deposit account and safe deposit facilities, for individuals,
partnerships, corporations and governmental units. Through their commercial loan
departments, the banks provide funds for business and industry, both short-term
(accounts receivable, inventory, working capital and floor-planning) and
long-term (leasehold improvements and building construction) as well as funds
for individuals. The installment loan departments of the banks extend loans to
individuals and businesses to purchase consumer goods such as automobiles,
household goods and materials for home modernization. The mortgage loan
departments provide both residential and commercial real estate loans. The trust
departments administer trust assets for individual trusts and estates as well as
for pension and profit sharing trusts.
The Company's seven subsidiary banks have 32 banking offices in eight counties
of Michigan's Upper Peninsula: Alger, Delta, Dickinson, Gogebic, Houghton, Iron,
Marquette and Menominee. The banks also operate 37 automated teller machines
("ATMs") in several market areas. One of its banks also operates a loan
production office in northeastern Wisconsin. All the banks have a retail banking
orientation and compete vigorously with other commercial banks,
<PAGE>
savings banks, various finance companies, and public, religious and private
credit unions. The banks receive direct banking competition from other banks
with offices in the same cities.
The Company also competes with a much larger multi-bank holding company from the
Lower Peninsula which has banking offices located in the same market areas as
six of the Company's banks and operates additional banking offices in other
areas not served by the Company's banks. The Company also competes with smaller
holding companies located in its market areas.
The Company is subject to supervision and regulation by the Federal Reserve
Board under the Bank Holding Company Act of 1956, as amended. Since it is a bank
holding company, the services provided by the subsidiary banks and the
operations of the corporation are required to be closely related to the business
of banking or related financial services.
The deposits of all the Company's banks are insured by the Federal Deposit
Insurance Corporation, and the banks are subject to supervision, examination and
regulation by the Office of the Comptroller of the Currency (the "OCC").
The OCC has issued guidelines which impose upon national banks certain
risk-based capital and leverage standards. These guidelines, as well as the
capital requirements of bank regulators, are discussed in Note J, beginning on
page 28, in the annual stockholders report for the year ended December 31, 1997
which is incorporated herein by reference. Failure to meet applicable capital
guidelines could subject a national bank to a variety of enforcement remedies
available to the federal regulatory authorities. Depending upon circumstances,
the regulatory agencies may require an institution to surpass minimum capital
ratios established and may also take more restrictive action.
No material part of the business of the Company or its subsidiaries is dependent
upon a single customer. The loss of any one or any few customers would have no
material adverse effect on the business of the Company.
Because banks do not have any backlog of orders, backlog has no effect on the
business of the Company.
The business of the Company is not dependent on raw materials.
The business of the Company is not materially affected by the duration of
patents, trademarks, licenses, franchises, or concessions.
The Company does not have a research and development department. No funds have
been expended in this area during either of the last three fiscal years and
there are no people employed by the Company in research and development.
The Company does not have any commitments requiring the investment of a material
amount of total assets.
<PAGE>
It is not expected that compliance with federal, state, or local provisions
regulating the discharge of materials into the environment or otherwise relating
to protection of the environment will have any material effect upon the capital
expenditures, earnings, and competitive position of the Company and its
subsidiaries.
The Company and its subsidiaries employed 678 people as of December 31, 1997.
No material portion of the Company's business is seasonal.
The commercial banking business, constituting one line of business, represents
substantially all of the business conducted by the Company and its subsidiaries,
and all revenues of the Company are derived from that one line of business,
commercial banking.
Neither the Company nor any of its subsidiaries is engaged in foreign
operations.
CONSOLIDATED FINANCIAL AND STATISTICAL INFORMATION
The tables set forth on the next nine pages of this report contain selected
consolidated statistical information for the Company and its subsidiaries for
the years 1995 through 1997 (1993 through 1997 for certain loan portfolio and
loan loss information). The financial and statistical data presented in these
tables provide a detailed review of the Company's business activities.
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and
Interest Differential
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- --------- ----------- --------- --------- ---------- --------- ---------
Average Interest Average Interest Average Interest
Amount Earned Yield or Amount Earned Yield or Amount Earned Yield or
Outstanding or Paid Rate Paid Outstanding or Paid Rate Paid Outstanding or Paid Rate Paid
----------- --------- --------- ----------- --------- --------- ----------- ---------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Time deposits in other banks $7 $0 5.44% $7 $0 5.15% $14 $1 5.88%
Federal funds sold 7,204 391 5.43% 13,460 717 5.33% 20,604 1,205 5.85%
Other short-term investments 439 20 4.55% 267 13 4.85% 207 10 4.98%
Investment securities:
U. S. Treasury 7,805 444 5.69% 17,672 1,002 5.67% 29,695 1,611 5.43%
U. S. Government agencies
and corporations 77,551 4,658 6.01% 88,269 5,145 5.83% 84,528 4,707 5.57%
States and political
subdivisions 14,392 656 6.54% 21,861 964 6.30% 29,465 1,300 6.16%
Other 4,624 335 7.25% 4,769 342 7.17% 4,927 362 7.34%
Loans 620,302 60,039 9.75% 575,115 55,561 9.74% 547,264 53,297 9.81%
----------- --------- -------- ------------ --------- --------- ---------- ---------- --------
TOTAL EARNING ASSETS 732,324 66,543 9.19% 721,420 63,744 8.95% 716,704 62,493 8.84%
Noninterest earning assets:
Cash and due from banks 29,582 28,387 28,939
Premises and equipment 25,226 23,645 21,531
Other assets 13,400 11,418 11,637
Allowance for loan losses (8,772) (7,906) (6,847)
----------- ------------ ----------
TOTAL ASSETS $791,760 $776,964 $771,964
=========== ============ ==========
Interest bearing liabilities:
Demand deposits 139,592 3,160 2.26% 133,639 2,848 2.13% 117,759 2,499 2.12%
Savings deposits 150,440 3,968 2.64% 165,152 4,283 2.59% 189,464 5,176 2.73%
Time deposits under $100,000 290,284 16,483 5.68% 277,142 15,222 5.49% 268,144 14,213 5.30%
Time deposits over $100,000 38,137 2,145 5.62% 34,099 1,940 5.69% 34,804 2,029 5.83%
Short-term borrowings 2,191 126 5.76% 4,465 252 5.65% 985 60 6.13%
Other debt 2,093 120 5.75% 415 36 8.55%
----------- --------- -------- ------------ --------- --------- ---------- --------- --------
TOTAL INTEREST
BEARING LIABILITIES 622,737 26,002 4.18% 614,497 24,545 3.99% 611,571 24,013 3.93%
----------- --------- -------- ------------ --------- --------- ---------- --------- --------
Noninterest bearing liabilities
and Shareholders' equity:
Demand deposits 68,128 68,492 72,601
Other liabilities 12,140 11,134 11,077
Stockholders' equity 88,755 82,841 76,715
----------- ------------ ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $791,760 $776,964 $771,964
=========== ============ ==========
NET INTEREST INCOME $40,541 $39,199 $38,480
========= ========= =========
NET YIELD ON EARNING ASSETS 5.64% 5.55% 5.49%
======== ========= ========
</TABLE>
All of the above percentages are computed on a fully taxable statutory rate of
35%
The average balance of Loans includes nonaccrual loans.
<PAGE>
The table below sets forth a summary of the reasons for changes in interest
earned and interest paid due to changes in volume and changes in rates for 1997
as compared with 1996. The change in interest due to both rate and volume has
been allocated proportionally to change due to volume and to change due to rate.
<TABLE>
<CAPTION>
INTEREST EARNED ON
------------------------------------------------------------------------------------
Other Total
Time deposits Federal short-term Taxable Tax-exempt earning
in other banks funds sold investments securities securities Loans assets
-------------- ---------- ----------- ---------- ---------- ----- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ - $(339) $ 7 $(1,246) $(371) $4,420 $2,471
Rate - 13 (1) 194 64 58 328
--- ----- ---- ------ ----- ------ ------
Net Change $ - $(326) $ 6 $(1,052) $(307) $4,478 $2,799
=== ===== === ======= ===== ====== ======
INTEREST PAID ON
------------------------------------------------------------------------------------
Total
Demand Savings Time Short-term Other interest bearing
deposits deposits deposits borrowings debt liabilities
-------- -------- -------- ---------- ---- -----------
(in thousands)
Increase (decrease) due to:
Volume $132 $(394) $ 960 $(131) $120 $ 687
Rate 180 80 505 5 - 770
---- ----- ------ ----- ---- ------
Net Change $312 $(314) $1,465 $(126) $120 $1,457
==== ===== ====== ===== ==== ======
</TABLE>
<PAGE>
The table below sets forth a summary of the reasons for changes in interest
earned and interest paid due to changes in volume and changes in rates for 1996
as compared with 1995. The change in interest due to both rate and volume has
been allocated proportionally to change due to volume and to change due to rate.
<TABLE>
<CAPTION>
INTEREST EARNED ON
------------------------------------------------------------------------------------
Other Total
Time deposits Federal short-term Taxable Tax-exempt earning
in other banks funds sold investments securities securities Loans assets
-------------- ---------- ----------- ---------- ---------- ----- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $(1) $(388) $3 $(483) $(385) $2,633 $1,379
Rate - (100) - 292 49 (369) (128)
--- ----- -- ----- ----- ------ ------
Net Change $(1) $(488) $3 $(191) $(336) $2,264 $1,251
=== ===== == ===== ===== ====== ======
INTEREST PAID ON
------------------------------------------------------------------------------------
Total
Demand Savings Time Short-term Other interest bearing
deposits deposits deposits borrowings debt liabilities
-------- -------- -------- ---------- ---- -----------
(in thousands)
Increase (decrease) due to:
Volume $337 $(638) $455 $197 $(36) $315
Rate 12 (255) 465 (5) - 217
---- ----- ---- ---- ---- ----
Net Change $349 $(893) $920 $192 $(36) $532
==== ===== ==== ==== ==== ====
</TABLE>
<PAGE>
INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities at
the dates indicated:
December 31
-----------------
1997 1996 1995
------- ------- ------
(in thousands)
Available for Sale Securities:
U.S. Treasury and government agencies $58,883 $ 71,256 $ 75,525
Mortgage-backed 14,246 26,828 34,455
States and political subdivisions 305 517 1,295
Other 3,547 3,358 3,919
------- ------- --------
$76,981 $101,959 $115,194
======= ======== ========
Held to Maturity Securities:
States and political subdivisions $10,952 $18,662 $24,537
------- ------- -------
$10,952 $18,662 $24,537
======= ======= =======
The table on the following page sets forth the maturities of investment
securities at December 31, 1997, the weighted average yields of such securities
(calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security) and the tax-equivalent adjustment used in
calculating the yields.
<PAGE>
MATURITIES
(Amounts in thousands)
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
--------------- ----------------- ---------------- ---------------
Available for Sale Securities:
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
agencies $12,910 5.17% $45,973 6.32% $ - - % $ - - %
Mortgage-backed 5,608 5.32 8,060 6.29 - - 578 5.86
Other 200 9.38 105 8.75 - - 3,547 1.38
------- ---- ------- ---- ---- ---- ------ ----
Total Available for Sale Securities $18,718 5.26% $54,138 6.32% $ - - % $4,125 2.01%
======= ==== ======= ==== ==== ==== ====== ====
Held to Maturity Securities:
States and political subdivisions $ 5,477 5.97% $ 4,226 7.47% $1,249 8.63% $ - - %
======= ==== ======= ==== ====== ==== ====== ====
Tax-equivalent adjustment for
calculation of yield $ 94 $102 $37 $ -
==== ==== === ===
</TABLE>
Weighted average yields on tax-exempt obligations have been computed on a fully
tax-equivalent basis assuming a tax rate of 35 percent.
<PAGE>
LOAN PORTFOLIO
The amounts of loans outstanding at the indicated dates are shown in the
following table according to type of loan.
December 31
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
Commercial, financial, and
agricultural $263,727 $247,344 $246,134 $248,785 $230,924
Real estate-construction 13,648 12,771 10,095 9,175 8,521
Real estate-mortgage 240,399 218,144 191,066 175,923 166,852
Consumer 117,718 120,364 113,596 106,958 96,667
------- ------- ------- ------- ------
$635,492 $598,623 $560,891 $540,841 $502,964
======== ======== ======== ======== ========
The following table shows the amounts of loans (excluding real estate mortgages
and consumer loans) outstanding as of December 31, 1997, which, based on
remaining scheduled repayments of principal, are due in the periods indicated.
Maturing
--------------------------------------------------
Within After One But After
One Year Within Five Years Five Years Total
-------- ----------------- ---------- -----
(in thousands)
Commercial, financial, and
agricultural $82,243 $139,768 $41,716 $263,727
Real estate-construction 12,041 1,183 424 13,648
------- -------- ------- --------
$94,284 $140,951 $42,140 $277,375
======= ======== ======= ========
Included in the loans which are due after one year are $113,902,000 of loans
with floating or adjustable interest rates. All other loans have fixed interest
rates.
Nonaccrual, Past Due and Restructured Loans
The following table summarizes the Company's nonaccrual, past due and
restructured loans:
December 31
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
Nonaccrual loans $1,594 $1,538 $2,061 $2,374 $2,445
Accruing loans past
due 90 days or more 1,068 901 915 830 962
Restructured loans 1,117 1,195 694 592 222
<PAGE>
The 1997 and 1996 nonaccrual loan amounts include $1,302,000 and $1,124,000,
respectively, for loans considered impaired under Financial Accounting Standards
Board Statement 114. This statement was adopted in 1995 and is explained on page
23 of the annual stockholders report for the year ended December 31, 1997 which
is incorporated herein by reference.
Additional information with respect to nonaccrual and restructured loans for the
two years ended December 31, 1997 is as follows:
1997 1996
---- ----
(in thousands)
Gross interest income that would have been
recorded if the loans had been current
in accordance with their original terms $223 $194
Interest income that was included in net
income 89 72
The Company's policy with respect to nonaccrual loans and the recognition of
loan interest income is explained on page 22 of the annual stockholders report
for the year ended December 31, 1997 which is incorporated herein by reference.
Potential Problem Loans
Loans not past due but about which management has doubt as to the ability of the
borrowers to comply with present repayment terms amounted to $17,967,000 at
December 31, 1997, as detailed below. Management feels that the degree of risk
associated with these loans is not significant enough to require them to be
placed on a nonaccrual basis. These loans are subject to constant management
attention and their classification is reviewed at least quarterly.
Potential
Problem $ Amount
Loans Collateralized
----- --------------
(in thousands)
Commercial $15,826 $15,686
Real estate - construction - -
Real estate - mortgage 1,786 1,786
Consumer 355 307
------- -------
$17,967 $17,779
======= =======
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Company's loan loss experience for the five
years ended December 31, 1997.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
Balance of allowance for
loan losses at beginning
of period $8,388 $7,589 $6,701 $6,553 $5,868
Loans charged-off:
Commercial, financial, and
agricultural 339 746 409 691 131
Real estate-construction - - - - -
Real estate-mortgage 3 99 125 93 107
Consumer 637 545 411 485 588
------ ------ ------ ------ ------
Total loans charged-off 979 1,390 945 1,269 826
Recoveries of loans previously
charged-off:
Commercial, financial, and
agricultural 187 66 79 106 162
Real estate-construction - - - - -
Real estate-mortgage 4 12 21 28 31
Consumer 152 182 150 162 159
------ ------ ------ ------ ------
Total recoveries 343 260 250 296 352
------ ------ ------ ------ ------
Net loans charged-off 636 1,130 695 973 474
Additions to allowance charged
to expense* 1,781 1,929 1,583 1,121 1,159
------ ------ ------ ------ ------
Balance at end of period $9,533 $8,388 $7,589 $6,701 $6,553
====== ====== ====== ====== ======
Ratio of net charge-offs
during period to average
loans outstanding .10% .20% .13% .19% .10%
* Management reviews the loan portfolios on a regular quarterly basis to
determine the adequacy of the allowance for loan losses and to ensure that a
proper provision for loan losses is being recognized. The amount charged to
expense by each member bank is based on several factors, including the
following: (a) analytical reviews of loan loss experience, by major loan
category, in relation to loans outstanding to determine the minimum allowance
for loan losses required for performing loans; (b) continuing reviews of problem
or nonperforming loans and overall portfolio quality; (c) assumptions with
respect to current and expected economic conditions and (d) the exercise of
management judgment.
<PAGE>
The following table shows an allocation of the allowance for loan losses at each
of the five dates indicated:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
Percent of Percent of Percent of
Type of Loans Type of Loans Type of Loans
Allowance to Total Loans Allowance to Total Loans Allowance to Total Loans
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural $2,654 41.5% $1,813 41.3% $2,228 43.9%
Real estate-
construction -- 2.2 -- 2.1 -- 1.8
Real estate-
mortgage .... 250 37.8 321 36.5 439 34.1
Consumer ..... 1,283 18.5 795 20.1 973 20.2
Not allocated 5,346 n/a 5,459 n/a 3,949 n/a
------ ---- ------ ---- ------ ----
$9,533 100.0% $8,388 100.0% $7,589 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
December 31, 1994 December 31, 1993
----------------- -----------------
Percent of Percent of
Type of Loans Type of Loans
Allowance to Total Loans Allowance to Total Loans
--------- -------------- --------- --------------
Commercial,
financial and
agricultural $2,127 46.0% $1,940 45.9%
Real estate-
construction -- 1.7 -- 1.7
Real estate-
mortgage .... 470 32.5 208 33.2
Consumer ..... 985 19.8 1,036 19.2
Not allocated 3,119 n/a 3,369 n/a
------ ----- ------ -----
$6,701 100.0% $6,553 100.0%
====== ===== ====== =====
The above allocation is bas ed on estimates and subjec tive judgment and is not
necessarily indicative of t he specific amo unts on loa n categories in which
losses may ultimately occur, nor does it necessarily reflect actual historical
charge-off experience.
<PAGE>
REGULATORY CAPITAL RATIOS
Capital adequacy regulations require minimum capital ratios. As summarized
below, the Company's capital ratios at December 31 were well in excess of the
regulatory minimum, as well as the levels for well capitalized institutions.
The Company Regulatory Requirements
----------- -----------------------
1997 1996 1995 Well Capitalized Minimum
---- ---- ---- ---------------- -------
Leverage 11.6% 11.1% 10.5% 5.0% 4.0%
Tier 1 14.6 14.6 14.3 6.0 4.0
Tier 1 + Tier 2 15.8 15.8 15.6 10.0 8.0
RETURN ON EQUITY AND ASSETS
The "Statistical Summary" on page 8 of the annual stockholders report for the
year ended December 31, 1997 is incorporated herein by reference.
ITEM 2. PROPERTIES
The Company owns seven subsidiary banks and one nonbank subsidiary, and has a
total of 32 banking offices, all of which are located in the Upper Peninsula of
Michigan. The Company owns 27 and leases five of these banking offices. The
Company also owns all 37 of its ATM's. The owned properties are unencumbered.
Four of the leases can be terminated or renewed at no longer than five-year
intervals at the lessees' option, with the other lease having a ten-year term
and none of these being materially significant to their businesses.
The Company's bank subsidiary in Menominee also operates a loan production
office located in Marinette, Wisconsin. This facility uses leased office and
retail space in a local supermarket. The lease is for one year and is renewable
on a year-to-year basis, at the option of the lessee.
The Company also owns its item processing center in Kingsford, Michigan. This is
a noncustomer facility that was constructed during 1994 and is the site for
consolidated processing and operational functions. The executive offices of the
Company are located in office space owned by and leased annually from the MFC
First National Bank, Marquette, Michigan. The Company considers all of its
facilities to be well maintained and in generally good operating condition and
suitable for the purposes for which they are intended.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any litigation other than
ordinary routine litigation incidental to the business conducted by the banks.
None of the litigation is expected to result in adverse judgments materially
affecting the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
EXECUTIVE OFFICERS
OF THE REGISTRANT
Pursuant to instruction G(3), the following information is included as an
unnumbered Item in Part I of this report in lieu of being included in the proxy
statement for the annual stockholders' meeting to be held on April 28, 1998.
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
Howard L. Cohodas 53 Chairman and President
Kenneth F. Beck 60 Senior Vice President, Treasurer
and Secretary
Ward L. Rantala 46 Vice President - Human Resources
Howard L. Cohodas has been Chairman and President of the Company since prior to
March, 1993.
Kenneth F. Beck has been Senior Vice President, Treasurer and Secretary of the
Company since prior to March, 1993.
Ward L. Rantala has been Vice President - Human Resources of the Company since
prior to March, 1993.
Terms of office for the executive officers expire April 28, 1998, the scheduled
date of the annual reorganizational meeting of the Company. The officers serve
at the pleasure of the Board of Directors.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The "Market Price and Dividend Information" on page 40 of the annual
stockholders report for the year ended December 31, 1997 is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Consolidated Selected Financial Data" on page 8 of the annual stockholders
report for the year ended December 31, 1997 is incorporated herein by reference.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 9 through 15 of the annual stockholders report for the year
ended December 31, 1997 are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The "Quantitative and Qualitative Disclosures about Market Risk" on pages 16 and
17 of the annual stockholders report for the year ended December 31, 1997, are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements included on pages 18 through 37 of the
annual stockholders report for the year ended December 31, 1997, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 1 and 2 of the Company's Proxy Statement
dated March 23, 1998, with respect to directors and executive officers of the
Company, is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on page 3 of the Company's Proxy Statement dated March
23, 1998, with respect to executive compensation and transactions, is
incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 8 and 9 of the Company's Proxy Statement
dated March 23, 1998, with respect to security ownership of certain beneficial
owners and management, is incorporated herein by reference in response to this
item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 6 of the Company's Proxy Statement dated March
23, 1998, with respect to certain relationships and related transactions, is
incorporated herein by reference in response to this item.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
The following documents are filed as a part of this report:
(1) Financial Statements as required by Item 8 of this Form
incorporated by reference herein from the 1997 annual report to
stockholders attached hereto as Exhibit 13:
Item Location
Consolidated Balance Sheets Annual report under the caption
"Consolidated Balance Sheets."
Consolidated Statements of
Income Annual report under the caption
"Consolidated Statements of
Income."
Consolidated Statements of
Cash Flows Annual report under the caption
"Consolidated Statements of Cash
Flows."
Consolidated Statements of
Shareholders' Equity Annual report under the caption
"Consolidated Statements of Changes
in Stockholders' Equity."
Notes to Consolidated
Financial Statements Annual report under the caption
"Notes to Consolidated Financial
Statements."
Report of Independent
Accountants Annual report under the caption
"Report of Independent Auditors."
(3) Listing of exhibits
(3a) Articles of Incorporation
(3b) Bylaws
(10) Material contracts - executive incentive plan*
(13) Incorporated portions from the annual report to security
holders
*Management contract or compensatory plan or arrangement
<PAGE>
(21) Subsidiaries of the registrant
(23) Consents of independent auditors
(24) Power of attorney
(27) Financial data schedule
(b) No reports on Form 8-K were filed in the fourth quarter of 1997.
(c) Exhibits
(3a) Articles of Incorporation--A copy of the Company's articles of
incorporation is filed as Exhibit 3(a) to the Company's
Registration Statement on Form S-4 (Registration #33-73064) filed
with the Commission on December 20, 1993 and incorporated herein
by this reference.
(3b) Bylaws--A copy of the Company's bylaws is filed as Exhibit 3(b)
to the Company's Registration Statement on Form S-4 (Registration
#33-73064) filed with the Commission on December 20, 1993 and
incorporated herein by this reference.
(10) Material contracts--A description of the Company's executive
incentive plan is filed as Exhibit 10 to the Company's Report on
Form 10-K for 1993 filed with the Commission on March 25, 1994
and incorporated herein by this reference.
(13) Annual report to security holders--Incorporated portions from the
Company's annual stockholders report for the year ended December
31, 1997 are filed as Exhibit 13 at page 22 of this report.
(21) Subsidiaries of the registrant--The information required for this
Exhibit is included in Item 1, page 2, of this report.
(23) Consent of independent auditors--The consent of independent
auditors is filed as Exhibit 23 at page 23 of this report.
(24) Power of attorney--Powers of attorney from those directors whose
names appear on pages 19 and 20 hereof followed by an asterisk
are filed as Exhibit 24 at page 24 of this report.
(27) Financial data schedule--The required financial data schedule is
filed as Exhibit 27 at page 25 of this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 20, 1998.
MICHIGAN FINANCIAL CORPORATION
(Registrant)
By: /s/ KENNETH F. BECK
KENNETH F. BECK, Senior Vice President
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 20, 1998.
Signature Title
--------- -----
Howard L. Cohodas
/s/ HOWARD L. COHODAS Chairman, President (Principal
- ------------------------------- Executive Officer) and Director
Kenneth F. Beck
/s/ KENNETH F. BECK Senior Vice President (Principal
- ------------------------------- Financial and Accounting Officer),
Treasurer, Secretary and Director
Gary L. Butryn
/s/ GARY L. BUTRYN * Director
- -------------------------------
Willard M. Carne
/s/ WILLARD M. CARNE * Director
- -------------------------------
Willard L. Cohodas
/s/ WILLARD L. COHODAS * Director
- -------------------------------
<PAGE>
Clarence R. Fisher
/s/ CLARENCE R. FISHER * Director
- -------------------------------
Hugh C. Higley, Jr.
/s/ HUGH C. HIGLEY, JR * Director
- -------------------------------
David Holli
/s/ DAVID HOLLI * Director
- -------------------------------
Daniel H. Lori
/s/ DANIEL H. LORI * Director
- -------------------------------
Wayne L. Nasi
/s/ WAYNE L. NASI * Director
- -------------------------------
Fred M. Saigh
/s/ FRED M. SAIGH * Director
- -------------------------------
James L. Smith
/s/ JAMES L. SMITH * Director
- -------------------------------
*By Kenneth F. Beck as Attorney-in-Fact pursuant to Powers of Attorney
executed by the directors listed above, which powers of Attorney have been filed
with the Securities and Exchange Commission.
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ----------- ----
13 Incorporated portions from the
annual stockholders report
for the year ended
December 31, 1997 22
23 Consents of independent auditors 23
24 Power of attorney 24
27 Financial data schedule 25
CONSOLIDATED SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net interest income $ 40,541 $ 39,199 $ 38,480 $ 37,483 $ 34,690
Provision for loan losses 1,781 1,929 1,583 1,121 1,159
Noninterest income 11,027 9,547 8,072 7,619 8,019
Noninterest expenses 34,636 33,078 32,776 32,623 31,694
Income tax expense 4,702 4,106 3,484 3,206 2,780
Net operating income 10,449 9,633 8,709 8,152 7,076
Accounting changes (1,198)
Net income 10,449 9,633 8,709 8,152 5,878
========= ========= ========= ========= =========
PER SHARE DATA*
Basic earnings $ 1.78 $ 1.64 $ 1.48 $ 1.39 $ 1.00
Diluted earnings 1.77 1.64 1.48 1.39 1.00
Cash dividends .78 .66 .55 .48 .42
Stockholders' equity 15.77 14.74 13.78 12.45 11.95
========= ========= ========= ========= =========
YEAR END BALANCES
Total assets $ 804,396 $ 789,353 $ 778,316 $ 767,573 $ 781,155
Investment securities 87,933 120,621 139,731 160,694 164,942
Loans receivable 635,492 598,623 560,891 540,841 502,964
Deposits 694,803 676,108 687,154 685,202 702,367
Debt 5,000 16,015
Stockholders' equity 92,691 86,613 80,985 73,195 70,257
========= ========= ========= ========= =========
STATISTICAL SUMMARY
(PERCENTAGES)
Return on average total assets 1.32% 1.24% 1.13% 1.07% .75%
Return on average stockholders' equity 11.77 11.63 11.35 11.30 8.70
Dividend payout ratio 43.82 40.24 37.16 34.53 42.0
Average stockholders' equity
to average total assets 11.21 10.66 9.94 9.44 8.65
========= ========= ========= ========= =========
REGULATORY CAPITAL RATIOS
Total risk-based capital 15.82% 15.83% 15.56% 14.94% 14.68%
Tier 1 risk-based capital 14.57 14.58 14.31 13.73 13.43
Leverage ratio 11.55 11.12 10.46 9.88 9.05
========= ========= ========= ========= =========
</TABLE>
* Adjusted to reflect 5% stock dividend paid on June 20, 1997
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and Results of Operations
<TABLE>
<CAPTION>
SOURCES AND USES OF FUNDS TRENDS 1997 1996
Increase (Decrease) Increase (Decrease) 1995
Average ------------------- Average ------------------- Average
(Amounts in thousands) Balance Amount % Balance Amount % Balance
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FUNDING SOURCES:
Demand deposits-
Noninterest bearing $ 68,128 $ (364) (0.5) $ 68,492 $ (4,109) (5.7) $ 72,601
Interest bearing 139,592 5,953 4.5 133,639 15,880 13.5 117,759
Savings deposits 150,440 (14,712) (8.9) 165,152 (24,312) (12.8) 189,464
Time deposits 328,421 17,180 5.5 311,241 8,293 2.7 302,948
Short-term borrowings 2,191 (2,274) (50.9) 4,465 3,480 353.3 985
Other debt 2,093 2,093 NMF 0 (415) (100.0) 415
Other 41,459 3,028 7.9 38,431 5,899 18.1 32,532
-------- -------- ----- -------- -------- ----- --------
Total sources $732,324 $ 10,904 1.5 $721,420 $ 4,716 0.7 $716,704
======== ======== ===== ======== ======== ===== ========
FUNDING USES:
Loans $620,302 $ 45,187 7.9 $575,115 $ 27,851 5.1 $547,264
Taxable investment securities 89,980 (20,730) (18.7) 110,710 (8,440) (7.1) 119,150
Tax-exempt investment securities 14,392 (7,469) (34.2) 21,861 (7,604) (25.8) 29,465
Federal funds sold 7,204 (6,256) (46.5) 13,460 (7,144) (34.7) 20,604
Interest bearing deposits
in other banks 7 0 0.0 7 (7) (50.0) 14
Other short-term investments 439 172 64.4 267 60 29.0 207
-------- -------- ----- -------- -------- ----- --------
Total uses $732,324 $ 10,904 1.5 $721,420 $ 4,716 0.7 $716,704
======== ======== ===== ======== ======== ===== ========
</TABLE>
[BAR GRAPH] [BAR GRAPH]
NET INCOME NET INTEREST INCOME
(In Millions of Dollars) (In Millions of Dollars)
1993 $5.88 1993 $34.7
1994 $8.15 1994 $37.5
1995 $8.71 1995 $38.5
1996 $9.63 1996 $39.2
1997 $10.50 1997 $40.5
[BAR GRAPH]
NET INCOME PER SHARE (BASIC)
(In Millions of Dollars)
1993 $1.00
1994 $1.39
1995 $1.48
1996 $1.64
1997 $1.78
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and Results of Operations
FINANCIAL CONDITION
The Company functions as a financial intermediary, along with its seven
subsidiary banks, and as such its financial condition should be examined in
terms of trends in its sources and uses of funds. The comparison of average
balances shown on the preceding page indicates how the Company has managed its
sources and uses of funds.
As the primary source of funds, aggregate average deposits increased by
$8,057,000, or 1.2%, in 1997 after decreasing by $4,248,000, or .6%, in 1996.
Total deposits increased in 1997 due to continued growth in both the interest
bearing demand and time deposit categories. The Company continues to have
success promoting the use of its interest bearing checking account, the "Right
Account." The greatest volume decrease was in the savings deposit category. Part
of the decrease can be attributed to the expanding use of in house brokerage
services and cash management accounts. The use of these fee-based customer
services facilitates deposit transfers to money market and mutual funds. Savings
were also moved by depositors to the time deposit area as rates in that area
became more attractive. Both savings and time deposits continue to be major
sources of funds for the Company. Included in the time deposits category are
$38.1 million in jumbo certificates of deposit. The Company's use of jumbo
certificates is discussed in the "Liquidity and Interest Rate Sensitivity
Management" section.
At various times during the past three years, some of the subsidiary banks
purchased federal funds. These purchases may or may not continue in the future.
The Company entered into a borrowing arrangement with the Federal Home Loan
Bank in January and again in December of 1997. Details on these borrowings are
discussed in Note I to the Consolidated Financial Statements.
The Company's primary use of funds traditionally is in the lending area.
Funds not required to meet loan demand are invested in other earning assets.
Average outstanding loans during 1997 increased by $45.2 million or 7.9%, after
increasing $27.9 million or 5.1% in 1996.
The increase in loans caused the aggregate of all other earning assets,
representing alternative uses of funds, to decrease by $34.3 million, or 23.4%
in 1997 and by $23.1 million, or 13.7% in 1996. Any excess funds generated
during the period were mainly used to increase federal funds sold.
In addition to the above trends in the sources and uses of funds, the
Company services loans for outside agencies, primarily Freddie Mac. At the end
of 1997 the volume of Freddie Mac loans sold with servicing being retained and
without recourse was $239 million. The comparable figure for 1996 was $213
million. The ability of the Company to sell these loans in large block amounts
enables it to more effectively manage its funding operations.
[BAR/LINE GRAPH]
EQUITY CAPITAL AT YEAR END
(In Millions of Dollars)
PERCENTAGE
AMOUNT OF ASSETS
------ ---------
1993 $70.3 8.99
1994 $73.2 9.54
1995 $81.0 10.41
1996 $86.6 10.97
1997 $92.7 11.52
[BAR/LINE GRAPH]
EARNINGS AND DIVIDENDS PER SHARE
(In Millions of Dollars)
BASIC DILUTED
EARNINGS EARNINGS DIVIDENDS
-------- -------- ---------
1993 $1.00 $1.00 $.42
1994 $1.39 $1.39 $.48
1995 $1.48 $1.48 $.55
1996 $1.64 $1.64 $.66
1997 $1.78 $1.77 $.78
10
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and interest bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity management seeks to avoid fluctuating net interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates by matching sources and uses of funds having common maturity
dates and acceptable interest spreads. The Company has no investments in, and is
not a party to, transactions involving derivative investments.
Marketable investment securities, particularly those of shorter maturities,
are the principal source of asset liquidity along with the Company's excess
funds position at any given time. Securities maturing in one year or less had a
carrying value of $18,730,000 at December 31, 1997, up from the $16,775,000 at
December 31, 1996. The Company decreased its holdings of mortgage-backed
securities to$14,246,000 at December 31, 1997 from $26,828,000 at December 31,
1996. Other types of short-term assets such as federal funds sold and money
market investments are additional sources of liquidity. At December 31, 1997 the
Company's position in short-term investments amounted to $16,091,000, up
substantially from the $285,000 at the end of 1996.
Historically, the Company's liquidity has been enhanced by a significant
concentration of core deposits. However, there has been a continuing change in
the deposit base over the last several years so that less stable short-term
funding sources such as large denomination time deposits, money market
certificates and federal funds purchased have also been used. The ability to
acquire these funds as needed assists the Company in its management of
liquidity. This necessitates having the ability to meet market interest rate
levels at the time the funds are acquired and involves maintenance of an
appropriate maturity distribution of purchased funds.
The following table shows a comparison of the maturity distribution of jumbo
certificates of deposit (those in amounts of $100,000 or more) for each of the
last three years and also compares them as a percentage of total deposits
outstanding. These certificates can be more expensive than traditional sources
of deposits since availability is dependent upon market supply and demand.
December 31,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Maturing in:
3 months or less $ 13,812 $ 12,914 $ 10,956
Over 3 through 6 months 10,715 7,992 9,135
Over 6 through 12 months 8,586 7,156 7,769
Over 12 months 12,960 9,119 11,013
-------- -------- --------
$ 46,073 $ 37,181 $ 38,873
======== ======== ========
As a percent of deposits 6.63% 5.50% 5.66%
======== ======== ========
Interest rate sensitivity varies with different types of interest earning
assets and interest bearing liabilities. Overnight federal funds on which rates
change daily and loans which are tied to the prime rate differ considerably from
long-term investment securities and fixed rate loans. Similarly, jumbo
certificates and money market certificates are much more rate sensitive than
savings accounts. The shorter term interest rate sensitivities are the key to
management of the interest sensitivity gap, the difference between interest
sensitive earning assets and interest bearing liabilities.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and Results of Operations
The following table presents information for the Company relative to the
maturity structure for total interest bearing assets and liabilities at December
31, 1997.
<TABLE>
<CAPTION>
Over 3 Total Over 1
3 Months through within through Over
(In thousands) or less 12 months 1 year 5 years 5 years
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans $ 188,645 $ 69,495 $ 258,140 $ 339,079 $ 38,273
Investment securities 6,033 12,554 18,587 50,304 4,796
Mortgage-backed securities 309 5,299 5,608 8,060 578
Other assets 16,091 -- 16,091 -- --
--------- --------- --------- --------- ---------
Rate sensitive assets 211,078 87,348 298,426 397,443 43,647
Deposits:
$100,000 or more 13,812 19,301 33,113 12,960 --
Other time 46,385 115,956 162,341 132,058 --
Savings 284,644 -- 284,644 -- --
Other liabilities 2,000 3,000 5,000 -- --
--------- --------- --------- --------- ---------
Rate sensitive liabilities 346,841 138,257 485,098 145,018 --
--------- --------- --------- --------- ---------
Interest rate sensitivity
gap-period $(135,763) $ (50,909) $(186,672) $ 252,425 $ 43,647
========= ========= ========= ========= =========
Interest rate sensitivity
gap-cumulative $(186,672) $(186,672) $ 65,753 $ 109,400
========= ========= ========= =========
</TABLE>
Positive gap is the excess of assets which can be repriced by maturity
within a specified time frame over interest bearing liabilities of similar
maturity. The Company has focused on the imbalance of financing fixed rate
assets with rate sensitive liabilities in an effort to manage its immediate gap,
and avoid fluctuations in earnings during periods of volatile interest rates. A
negative gap position favors the Company's operating results during periods of
declining interest rates but has an unfavorable impact during periods of rising
rates. The Company's current gap within one year is a negative $187 million at
December 31, 1997.
Included in the $485,098,000 of rate sensitive liabilities indicated as
maturing within one year are $284,644,000 of NOW, savings and money market
deposits which do not reprice in the same proportion as rate sensitive assets.
If core deposits of $192,550,000 consisting of NOW and savings deposits were not
included as rate sensitive liabilities, the Company would report a positive gap
of $5.9 million or less than 1 percent of earning assets.
CAPITAL RESOURCES
Total equity growth has surpassed total asset growth over the past several years
and amounted to 7.0% in 1997, 6.9% in 1996, and 10.6% in 1995. The equity
increase due to operations was $5,845,000, $5,768,000 and $5,462,000 in 1997,
1996 and 1995 respectively. Equity was also impacted by security valuations each
of these years. For 1997, equity increased by $233,000 due to investment
security valuations. During 1996 equity decreased by $140,000 due to security
valuations, while 1995 valuations caused equity to increase by $2,328,000.
Stockholders' equity increased from 10.97% of total assets at the end of 1996 to
a level of 11.52% at the end of 1997.
The Company's primary means of maintaining capital adequacy is through
internal capital growth. Management has established an objective to increase the
rate of this growth. The rate of return on equity times the percent of earnings
retained equals the internal capital growth percentage. The following table
illustrates this relationship:
[BAR/LINE GRAPH]
NET INTEREST INCOME
(In Millions of Dollars)
INTEREST INTEREST NET INTEREST
INCOME EXPENSE INCOME
-------- -------- ------------
1993 $57.1 $ $34.7
1994 $56.7 $ $37.5
1995 $62.5 $ $38.5
1996 $63.7 $ $39.2
1997 $66.5 $ $40.5
12
<PAGE>
RELATIONSHIP BETWEEN SIGNIFICANT FINANCIAL RATIOS
Internal
Return Earnings capital
on equity retained growth
- --------------------------------------------------------------------------
1997 11.77% X 55.94% = 6.58%
1996 11.63 X 59.88 = 6.96
1995 11.35 X 62.72 = 7.12
Management decided to increase the dividend payout during 1997 for the ninth
year in a row while maintaining a minimum rate of internal capital growth of
6.0%. As shown above, the Company achieved an actual rate of 6.58%. Management
plans to continue to maintain a minimum 6.0% internal capital growth rate, while
providing a dividend payout ratio that is consistent with banking industry
standards.
The ability of the Company to obtain funds for its cash requirements,
including the payment of dividends, is largely dependent on the dividends which
may be declared by its subsidiaries. At December 31, 1997, the aggregate amount
which could be paid to the Company by its subsidiaries as dividends, without
obtaining prior approval from regulatory agencies, was in excess of $12.4
million. These regulatory restrictions have had no impact, and are expected to
have none in the future, on the ability of the Company to meet its cash
obligations.
RESULTS OF OPERATIONS
Net interest income increased by $1,342,000 in 1997, $719,000 in 1996 and
$997,000 in 1995 or by 3.4%, 1.9% and 2.7%, respectively. On a fully taxable
equivalent basis the annual rates of increase would have been3.1% in 1997, 1.7%
in 1996 and 2.2% in 1995.
[BAR/LINE GRAPH]
ALLOWANCE FOR LOAN LOSSES
(In Millions of Dollars)
ALLOWANCE TO LOANS NET CHARGE-OFFS
AT YEAR END TO AVERAGE LOANS
------------------ ----------------
1993 1.30% .10%
1994 1.24% .19%
1995 1.35% .13%
1996 1.40% .20%
1997 1.50% .10%
As was discussed earlier, changes in net interest income result from changes
in the mix of average earning assets and interest bearing liabilities during a
period, as well as from changes in the related yields earned and rates paid.
Average balances, yields and rates for the three most recent years are set forth
in the following table:
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Average earning assets $ 732,324 $ 721,420 $ 716,704
Yields earned (fully taxable equivalent) 9.19% 8.95% 8.84%
Average interest bearing liabilities $ 622,737 $ 614,497 $ 611,571
Rates paid 4.18% 3.99% 3.93%
Net yield on earning assets 5.64 5.55 5.49
Rates increased slightly in the first quarter of 1997 after a year of flat
rates in 1996. Rates had decreased in the second half of 1995. As discussed
above, management of the Company's gap allowed the yield on earning assets to
increase by .24%, while allowing rates paid on interest bearing liabilities to
increase by only .19%. The result was an increase in net yield for 1997 of .09%.
During 1996, the increase in net yield was .06%.
Average earning assets, interest income, interest expense and net interest
income all increased during 1997. This was due to the increase in loans
outstanding and higher interest rates. For 1996, the increase in net interest
income resulted from an increase in loans outstanding. Performance at the net
interest income level in future periods will still be primarily dependent upon
general interest rate developments.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and Results of Operations
To lessen the impact of interest rate fluctuations, the Company has
increased the volume of single family fixed rate loans sold, as discussed in the
"Financial Condition" section. During 1997, over $40 million in loans were sold
with the Company retaining servicing rights. The amount of loans sold with
retained servicing rights was over $38 million during 1996. All of the loans
sold are without recourse and as discussed in Note A to the Consolidated
Financial Statements, the Company has adopted Statement of Financial Accounting
Standards No. 122 "Accounting for Mortgage Servicing Rights" effective January
1, 1996. At the end of 1997 and 1996, loans being held for sale amounted to $5.2
million and $5.3 million, respectively. The Company plans to continue this
activity in the future but the level of activity will largely depend upon
external market factors.
The provision for loan losses which is charged to operations is based on the
growth of the loan portfolio, the amount of the net loan losses incurred and
management's estimation of inherent losses based on an evaluation of portfolio
risk, collateral value, and certain economic factors. The provision was
$1,781,000 in 1997 compared to $1,929,000 in 1996 and $1,583,000 in 1995. Net
loan losses were $636,000, in 1997, $1,130,000 in 1996 and $695,000 in 1995. On
a percentage basis the net charge-offs to average loans decreased to .10% in
1997 from the levels of .20% in 1996 and .13% in 1995.
The provision for loan losses is determined by management on an ongoing
basis in order to maintain the allowance for loan losses at an adequate level.
The allowance at December 31, 1997 stood at $9,533,000 or 1.50% of outstanding
loans, compared to $8,388,000 or 1.40% in 1996 and $7,589,000 or 1.35% in 1995.
The amounts provided during any given period are dependent upon management's
review process and assessment of the perceived loss exposure in the then
outstanding loan portfolio.
[BAR GRAPH]
NONPERFORMING LOANS TO TOTAL LOANS
(As of December 31)
1993 .72%
1994 .70%
1995 .65%
1996 .61%
1997 .59%
[BAR GRAPH]
RETURN ON ASSETS (ROA)
1993 .75%
1994 1.07%
1995 1.13%
1996 1.24%
1997 1.32%
As shown in the following table, management was again able to improve the
quality of the loan portfolio during 1997. On a percentage basis, nonperforming
loans decreased to .59% of total loans at December 31, 1997, a continued
reduction from the previous year end of .61% and a level of .65% in 1995.
Coverage of nonperformings by the allowance stood at252% at year end 1997, up
from the 231% coverage level attained in 1996 and the level of 207% in 1995.
Management intends to continue in its efforts toward improving the quality of
the loan portfolio.
December 31,
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------
Nonaccrual loans $1,594 $ 1,538 $ 2,061
Accruing loans past due
90 days or more 1,068 901 915
Restructured loans 1,117 1,195 694
------ ------- -------
Total nonperforming loans $3,779 $ 3,634 $ 3,670
====== ======= =======
Nonperforming loans/total loans .59% .61% .65%
Loan loss allowance/
nonperforming loans 252% 231% 207%
The gross interest income that would have been recorded in 1997 for
nonaccrual and restructured loans as of December 31, 1997, assuming interest had
been accrued throughout the year in accordance with original terms, is $223,000.
The comparable 1996 total for these loan categories was $194,000. The amount of
14
<PAGE>
interest income recorded on these loans and included in income was $89,000 in
1997 and $72,000 in 1996.
Noninterest income increased $1,480,000 in 1997 after increases of
$1,475,000 in 1996 and $453,000 in 1995. Exclusive of securities gains and
losses, it increased $1,314,000 in 1997, $1,434,000 in 1996, and $446,000 in
1995. Gains from the sale of loans continued to grow in 1997, increasing by
$280,000. Gains on loan sales had increased $488,000 in 1996 compared to a
decrease of $38,000 in 1995. The large increase in 1996 and continued growth in
1997 is primarily due to the adoption of Financial Accounting Standards Board
Statement 122 "Accounting for Mortgage Servicing Rights" as of January 1, 1996.
See Notes A and F to the Financial Statements for further information about this
change. The effect on future noninterest income will be dependent on the level
of additional mortgage loans serviced for others, offset by the amortization of
loan servicing rights. Noninterest income was also affected by the increase in
trust services income of $325,000 in 1997. During 1996 and 1995, trust income
had risen $404,000 and $280,000, respectively.
Noninterest expense increased $1,558,000 in 1997, $302,000 in 1996 and
$153,000 during 1995. The salaries and employee benefits expense for 1997
increased $461,000 from the prior year. For 1996 and 1995 the increases over
prior year for salaries and employee benefits was $631,000 and $557,000,
respectively. A substantial reduction in FDIC premiums in 1996 helped to
moderate the increase in noninterest expense for that year. The 1996 FDIC
premium was down $786,000 from that of 1995.
[BAR GRAPH]
RETURN ON EQUITY (ROE)
1993 8.70%
1994 11.30%
1995 11.35%
1996 11.63%
1997 11.77%
The income tax provision for 1997 and 1996 increased by $596,000 and
$622,000, respectively, mainly due to improved pretax income.
Results of operations can be measured by various ratio analyses. Two widely
recognized performance indicators are return on equity and return on assets. As
indicated by the table of consolidated selected financial data, the Company's
return on equity was 11.77%, up from the 11.63% during 1996 and the 11.35%
achieved during 1995. The return on assets for 1997 increased to 1.32%, up from
the levels of 1.24% in 1996 and 1.13% in 1995. Management believes that the
Company's fundamental operations have been improving, as the results of the last
three years have shown.
ISSUED BUT NOT YET ADOPTED ACCOUNTING POLICIES
See Note A to the Consolidated Financial Statements for a discussion of
accounting pronouncements issued by the Financial Accounting Standards Board
which the Company is not required to implement until periods subsequent to
December31, 1997.
EFFECTS OF INFLATION
The impact of inflation on the reported earnings of financial institutions is
principally related to the possible understatement of depreciation charges for
fixed asset values. Inflation, however, does have an important impact on the
growth of total assets and the resulting need to increase equity capital.
Management recognizes the need to control growth and to maintain a reasonable
dividend policy to allow for the adequate internal growth of capital.
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.
15
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are denominated
in U.S. dollars with no specific foreign exchange exposure. The Company has only
limited agricultural loan assets and therefore has no significant exposure to
changes in commodity prices. Any impacts that changes in foreign exchange rates
and commodity prices would have on interest rates are assumed to be
insignificant.
Interest rate risk ("IRR") is the exposure of a banking organization's
financial condition to adverse movements in interest rates. Accepting this risk
can be an important source of profitability and stockholder value, however
excessive levels of IRR could pose a significant threat to the Company's
earnings and capital base. Accordingly, effective risk management that maintains
IRR at prudent levels is essential to the Company's safety and soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organization's quantitative level of exposure. When assessing the
IRR management process, the Company seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place to
maintain IRR at prudent levels with consistency and continuity. Evaluating the
quantitative level of IRR exposure requires the Company to assess the existing
and potential future effects of changes in interest rates on its consolidated
financial condition, including capital adequacy, earnings, liquidity, and, where
appropriate, asset quality.
The Federal Reserve Board, together with the Office of the Comptroller of
the Currency and the Federal Deposit Insurance Corporation, adopted a Joint
Agency Policy Statement on IRR, effective June 26, 1996. The policy statement
provides guidance to examiners and bankers on sound practices for managing IRR,
which will form the basis for ongoing evaluation of the adequacy of IRR
management at supervised institutions. The policy statement also outlines
fundamental elements of sound management that have been identified in prior
Federal Reserve guidance and discusses the importance of these elements in the
context of managing IRR. Specifically, the guidance emphasizes the need for
active board of director and senior management oversight and a comprehensive
risk management process that effectively identifies, measures, and controls IRR.
Financial institutions derive their income primarily from the excess of
interest collected over interest paid. The rates of interest an institution
earns on its assets and owes on its liabilities generally are established
contractually for a period of time. Since market interest rates change over
time, an institution is exposed to lower profit margins (or losses) if it cannot
adapt to interest rate changes. For example, assume that an institution's assets
carry intermediate- or long-term fixed rates and that those assets are funded
with short-term liabilities. If market interest rates rise by the time the
short-term liabilities must be refinanced, the increase in the institution's
interest expense on its liabilities may not be sufficiently offset if assets
continue to earn at the long-term fixed rates. Accordingly, an institution's
profits could decrease on existing assets because the institution will either
have lower net interest income or, possibly, net interest expense. Similar risks
exist when assets are subject to contractual interest rate ceilings, or rate
sensitive assets are funded by longer-term, fixed-rate liabilities in a
decreasing rate environment.
Various techniques might be used by an institution to minimize IRR. One
approach used by the Company is to periodically analyze its assets and
liabilities and make future financing and investment decisions based on payment
streams, interest rates, contractual maturities, and estimated sensitivity to
actual or potential changes in market interest rates. Such activities fall under
the broad definition of asset/liability management. The Company's primary
asset/liability management technique is the measurement of its asset/liability
gap. That is, the difference between the cash flow amounts of interest-sensitive
assets and liabilities that will be refinanced or repriced during a given
period. For example, if the asset amount to be repriced exceeds the
corresponding liability amount for a certain day, month, year, or longer period,
the institution is in an asset-sensitive gap position. In this situation, net
interest income would increase if market interest rates rose or decrease if
market interest rates fell. If, alternatively, more liabilities than assets will
reprice, the institution is in a liability-sensitive position. Accordingly, net
interest income would decline when rates rose and increase when rates fell.
Also, these examples assume that interest rate changes for assets and
liabilities are of the same magnitude, whereas actual interest rate changes
generally differ in magnitude for assets and liabilities.
Several ways an institution can manage IRR include: selling existing assets
or repaying certain liabilities; matching repricing periods for new assets and
liabilities for example, by shortening terms of new loans or investments; and
hedging
16
<PAGE>
existing assets, liabilities, or anticipated transactions. An institution might
also invest in more complex financial instruments intended to hedge or otherwise
change IRR. Interest rate swaps, futures contracts, options on futures, and
other such derivative financial instruments often are used for this purpose.
Because these instruments are sensitive to interest rate changes, they require
management expertise to be effective. The Company has not purchased derivative
financial instruments in the past and does not presently intend to purchase such
instruments.
Financial institutions are also subject to prepayment risk in falling rate
environments. For example, mortgage loans and other financial assets may be
prepaid by a debtor so that the debtor may refund its obligations at new, lower
rates. Prepayments of assets carrying higher rates reduce the Company's interest
income and overall asset yields. Certain portions of an institution's
liabilities may be short-term or due on demand, while most of its assets may be
invested in long-term loans or investments. Accordingly, the Company seeks to
have in place sources of cash to meet short-term demands. These funds can be
obtained by increasing deposits, borrowing, or selling assets. Also, Federal
Home Loan Bank advances and short-term borrowings provide additional sources of
liquidity for the Company.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1997. The Company had no derivative financial instruments, or trading portfolio,
as of that date. The expected maturity date values for loans receivable,
mortgage-backed securities, and investment securities were calculated without
adjusting the instrument's contractual maturity date for expectations of
prepayments. Expected maturity date values for interest-bearing core deposits
were not based upon estimates of the period over which the deposits would be
outstanding, but rather the opportunity for repricing. Similarly, with respect
to its variable rate instruments, the Company believes that repricing dates, as
opposed to expected maturity dates may be more relevant in analyzing the value
of such instruments and are reported as such in the following table. Company
borrowings are also reported based on conversion or repricing dates.
QUANTITATIVE DISCLOSURES OF MARKET RISK
<TABLE>
<CAPTION>
Principal Amount Maturing in:
-------------------------------------------------------------------------- Fair Value
1998 1999 2000 2001 2002 Thereafter Total 12/31/97
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Fixed interest rate loans $133,464 $114,957 $127,370 $56,719 $37,969 $31,282 $501,761 $503,464
Average interest rate 9.36% 8.95% 9.24% 8.94% 9.01% 8.17% 9.09%
Variable interest rate loans $124,676 $ 496 $ 877 $ 36 $ 655 $ 6,991 $133,731 133,484
Average interest rate 9.57% 9.66% 9.43% 9.82% 8.90% 9.88% 9.58%
Fixed interest rate securities $ 24,195 $ 12,050 $ 25,987 $16,332 $ 1,703 $ 5,281 $ 85,548 85,650
Average interest rate 5.04% 5.82% 6.33% 6.24% 6.64% 6.86% 5.92%
Variable interest rate securities -- -- $ 126 -- $ 2,166 $ 93 $ 2,385 2,385
Average interest rate -- -- 6.41% -- 6.87% 6.11% 6.82%
Other interest bearing assets $ 16,091 -- -- -- -- -- $ 16,091 16,091
Average interest rate 5.45% -- -- -- -- -- 5.45%
Rate sensitive liabilities:
Savings & interest
bearing checking $284,644 -- -- -- -- -- $284,644 284,644
Average interest rate 2.53% -- -- -- -- -- 2.53%
Time deposits $195,454 $ 99,589 $ 21,657 $15,485 $ 8,287 -- $340,472 348,242
Average interest rate 5.77% 5.77% 5.91% 6.11% 6.19% -- 29.75%
Variable interest
rate borrowings $ 5,000 -- -- -- -- -- $ 5,000 4,804
Average interest rate 5.67% -- -- -- -- -- 5.67%
</TABLE>
17
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Interest income:
Loans, including fees $60,039 $ 55,561 $ 53,297
Investment securities:
Taxable 5,437 6,489 6,680
Tax-exempt 656 964 1,300
Short-term investments 411 730 1,216
------- -------- --------
TOTAL INTEREST INCOME 66,543 63,744 62,493
Interest expense:
Deposits 25,755 24,293 23,917
Borrowings 247 252 96
------- -------- --------
TOTAL INTEREST EXPENSE 26,002 24,545 24,013
------- -------- --------
NET INTEREST INCOME 40,541 39,199 38,480
Provision for loan losses 1,781 1,929 1,583
------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 38,760 37,270 36,897
Noninterest income:
Trust department income 4,483 4,158 3,754
Fees for other customer services 3,689 3,305 2,782
Net gains on sale of loans 975 695 207
Net investment securities gains (losses) 80 (86) (127)
Other 1,800 1,475 1,456
------- -------- --------
11,027 9,547 8,072
------- -------- --------
49,787 46,817 44,969
Noninterest expenses:
Salaries and employee benefits 18,545 18,084 17,453
Net occupancy 2,699 2,523 2,445
Furniture and equipment 2,049 1,774 1,717
Data processing 1,736 1,510 1,376
Advertising 1,225 1,379 1,128
fdic premiums 90 11 797
Other 8,292 7,797 7,860
------- -------- --------
34,636 33,078 32,776
------- -------- --------
Income before income tax expense 15,151 13,739 12,193
Income tax expense 4,702 4,106 3,484
------- -------- --------
NET INCOME $10,449 $ 9,633 $ 8,709
======= ======== ========
Earnings per share:
Basic $ 1.78 $ 1.64 $ 1.48
Diluted 1.77 1.64 1.48
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 33,208 $ 38,662
Short-term investments:
Federal funds sold 14,300
Money market investments 1,791 285
Investment securities:
Available for sale 76,981 101,959
Held to maturity (fair value:
1997 - $11,054; 1996 - $18,626) 10,952 18,662
Loans 635,492 598,623
Allowance for loan losses (9,533) (8,388)
--------- ---------
NET LOANS 625,959 590,235
Premises and equipment 25,397 24,679
Accrued interest receivable 5,326 5,208
Other assets 10,482 9,663
--------- ---------
TOTAL ASSETS $ 804,396 $ 789,353
========= =========
LIABILITIES
Noninterest bearing deposits $ 69,687 $ 74,365
Interest bearing deposits 625,116 601,743
--------- ---------
TOTAL DEPOSITS 694,803 676,108
Federal Home Loan Bank advances 5,000
Federal funds purchased 16,015
Accrued interest payable 3,309 2,770
Other liabilities 8,593 7,847
--------- ---------
TOTAL LIABILITIES 711,705 702,740
STOCKHOLDERS' EQUITY
Common stock, no par value:
Authorized shares - 10,000,000
Shares issued and outstanding - 5,877,601 in 1997
and 5,598,267 in 1996 25,050 18,555
Retained earnings 67,693 68,343
Securities valuation (52) (285)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 92,691 86,613
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 804,396 $ 789,353
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share data)
<TABLE>
<CAPTION>
Common Retained Securities
Stock Earnings Valuation Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $ 18,555 $ 57,113 $(2,473) $73,195
Net income for the year 8,709 8,709
Cash dividends, $.55 per share (3,247) (3,247)
Net unrealized holding losses on
securities transferred from the held to
maturity category to the available for sale
category, net of income tax benefits of $42 (82) (82)
Change in unrealized gains and losses,
net of income taxes of $1,298 2,410 2,410
-------- -------- ------- -------
BALANCE AT DECEMBER 31, 1995 18,555 62,575 (145) 80,985
Net income for the year 9,633 9,633
Cash dividends, $.66 per share (3,865) (3,865)
Change in unrealized gains and losses,
net of income tax benefit of $76 (140) (140)
-------- -------- ------- -------
BALANCE AT DECEMBER 31, 1996 18,555 68,343 (285) 86,613
Net income for the year 10,449 10,449
Cash dividends, $.78 per share (4,591) (4,591)
Common stock issued in payment of
5% stock dividend - 279,334 shares
(cash in lieu of fractionals - $13) 6,495 (6,508) (13)
Change in unrealized gains and losses,
net of income taxes of $125 233 233
-------- -------- ------- -------
BALANCE AT DECEMBER 31, 1997 $ 25,050 $ 67,693 $ (52) $92,691
======== ======== ======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,449 $ 9,633 $ 8,709
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from sale of mortgage loans held for sale 40,030 38,452 31,745
Origination of mortgage loans held for sale (39,920) (39,505) (34,237)
Depreciation and amortization 2,174 1,880 1,805
Provision for loan losses 1,781 1,929 1,583
Realized gain on sale of loans (975) (695) (207)
Other 757 (1,150) 371
(Increase) decrease in other real estate (651) (963) 183
Increase (decrease) in interest payable 539 (66) 610
Deferred income tax (credit) (410) (172) (331)
(Increase) decrease in interest receivable (118) 571 (615)
Amortization of investment securities premium 89 188 269
Realized net investment securities (gains) losses (80) 86 127
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,665 10,188 10,012
INVESTING ACTIVITIES
Net increase in loans (36,640) (37,114) (18,046)
Proceeds from maturities of available for sale securities 30,669 35,483 11,008
Net (increase) decrease in short-term investments (15,806) 17,362 (13,088)
Purchases of available for sale securities (8,915) (32,041) (19,366)
Proceeds from maturities of held to maturity securities 7,871 6,379 18,226
Proceeds from sale of available for sale securities 3,617 8,995 14,874
Purchases of premises and equipment (2,859) (3,853) (1,963)
Purchases of held to maturity securities (205) (196) (650)
Proceeds from sale of premises and equipment 73 212 53
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (22,195) (4,773) (8,952)
-------- -------- --------
FINANCING ACTIVITIES
Increase (decrease) in federal funds purchased (16,015) 16,015
Net increase (decrease) in deposits 18,695 (11,046) 1,952
Increase in Federal Home Loan borrowings 5,000
Cash dividends (4,604) (3,865) (3,247)
-------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 3,076 1,104 (1,295)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (5,454) 6,519 (235)
Cash and due from banks at beginning of year 38,662 32,143 32,378
-------- -------- --------
CASH AND DUE FROM BANKS AT END OF YEAR $ 33,208 $ 38,662 $ 32,143
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 25,463 $ 24,611 $ 23,403
======== ======== ========
Income taxes paid $ 5,047 $ 4,581 $ 3,444
======== ======== ========
NONCASH TRANSACTIONS:
Investment securities transferred to available for sale $ 0 $ 0 $ 34,299
======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands, except per share
data)
NOTE A - ACCOUNTING POLICIES
ORGANIZATION: Michigan Financial Corporation (the "Company"), is a bank holding
company operating primarily in the Upper Peninsula of Michigan. The Company,
through its seven subsidiary banks and one insurance subsidiary, provides a full
range of banking and trust services to eight of the fifteen counties in the
Upper Peninsula. One of its banks also operates a loan production office in
northeastern Wisconsin.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned.
Significant intercompany balances and transactions have been eliminated in
preparing the consolidated financial statements.
USE OF ESTIMATES: In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the consolidated balance sheets and
statements of income. If events occur in a future period which affect the
underlying assumptions and estimates, actual results could differ significantly
from those estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the allowance
for losses on loans and certain factors related to future employee benefits.
INVESTMENT SECURITIES: Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date (see also Note C regarding special reclassifications as
of December 1, 1995). Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Held to maturity securities are stated at amortized cost.
Debt securities not classified as held to maturity are classified as
available for sale. Available for sale securities are stated at fair value, with
the unrealized gains and losses, net of taxes, reported in a separate component
of stockholders' equity.
The amortized cost of debt securities classified as held to maturity or
available for sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization and interest and dividends are
included in interest income from investments. Realized gains and losses, and
declines in value judged to be other than temporary are included in net
securities losses. The cost of securities sold is based on the specific
identification method.
LOAN INTEREST RECOGNITION: Interest income on loans is accrued and credited to
operations based on the principal amount outstanding. The accrual of interest
income is generally discontinued when a loan becomes 90 days past due as to
principal or interest and/or when, in the opinion of management, full collection
is unlikely. When interest accruals are discontinued, interest credited to
income in the current year is reversed and interest accrued in the prior year is
charged to the allowance for loan losses. Management may elect to continue the
accrual of interest when the loan is in the process of collection and the fair
value of collateral is sufficient to cover the principal balance and accrued
interest (cash basis method). Interest received on nonaccrual loans generally is
either applied against principal or reported as interest income, according to
management's judgment as to the collectibility of principal. Generally, loans
are restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period of
time and the ultimate collectibility of the total contractual principal and
interest is no longer in doubt.
LOAN FEES AND RELATED COSTS: Loan origination and commitment fees and certain
direct loan origination costs are deferred and the net amount amortized as an
adjustment of the related loan's yield. The Company amortizes these amounts over
the contractual life of the related loans using a method which approximates the
level yield method. Unamortized net deferred amounts are recorded in income when
the underlying loans are sold or repaid. Fees related to standby letters of
credit are recognized over the commitment period.
22
<PAGE>
MORTGAGE BANKING ACTIVITIES: The Company routinely originates mortgage loans for
sale to the secondary market, and sells the loans and retains the right to
service them. Effective January 1, 1996 the Company adopted Financial Accounting
Standards Board ("FASB") Statement 122, "Accounting for Mortgage Servicing
Rights," which requires the cost of rights to service mortgage loans to be
capitalized, regardless of whether those rights were acquired through a purchase
transaction or through loan origination activities. Prior to adoption of
Statement 122, only those loan servicing rights acquired through purchase were
required to be capitalized, and the Company had no such activity.
Beginning in 1996, the total cost of mortgage loans originated with the
intent to sell is allocated between the loan servicing right and the mortgage
loan without servicing based on their relative fair values at the date of sale.
The capitalized cost of loan servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenue. For this purpose, estimated
servicing revenues include late charges and other ancillary income. Estimated
servicing costs include direct costs associated with performing the servicing
function and appropriate allocations of other costs.
The unamortized cost of loan servicing rights is periodically evaluated for
impairment. For purposes of measuring impairment, the mortgage servicing rights
are stratified based on the predominant risk characteristic of the underlying
loans. These risk characteristics include loan type (conventional or government
insured, fixed or adjustable rate), term (15 year or 30 year), and note rate.
Impairment represents the amount by which the unamortized cost of an individual
stratum exceeds its fair value, and is recognized through a valuation allowance.
Fair value for individual stratum is based on quoted market prices.
Estimates of fair value include assumptions about prepayment, default and
interest rates, and other factors which are subject to change over time. Changes
in these underlying assumptions could cause the fair value of loan servicing
rights, and the related valuation allowance, to change significantly in the
future.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral and other relevant factors. This evaluation is
inherently subjective as it requires material estimates including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change. The allowance is increased by
provisions for loan losses charged against income.
Beginning in 1995, the Company adopted FASB Statement 114, "Accounting by
Creditors for Impairment of a Loan." Statement 114 only applies to the Company's
nonhomogeneous loan portfolios including certain commercial, financial and
agricultural loans, multifamily and commercial real estate loans and multifamily
and commercial real estate construction loans. A nonhomogeneous loan is
considered impaired when there is serious doubt about further collectibility of
principal and interest, even though the loan may be performing. Under the new
standard, the allowance for loan losses related to loans that are identified for
evaluation in accordance with Statement 114 is based on discounted cash flows
using the loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. Prior to 1995, the allowance
for loan losses related to these loans was based on undiscounted cash flows or
the fair value of the collateral for collateral dependent loans.
Overall, concentrations of credit for loans and loan commitments are to
customers located primarily in the local areas served by the subsidiary banks,
all of which are in the Upper Peninsula of Michigan.
PREMISES AND EQUIPMENT: Land is stated at cost. Buildings, furniture and
equipment are stated at cost, less accumulated depreciation. The provisions for
depreciation are predominantly computed on the straight-line method over the
useful lives of the assets. The estimated useful lives are generally 40 years
for buildings and 3 to 10 years for furniture, fixtures and equipment. These
assets are reviewed for impairment under FASB Statement 121 when events indicate
the carrying amount may not be recoverable.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands, except per share
data)
PENSION PLAN: The Company and its subsidiary banks have a noncontributory
defined benefit pension plan covering all qualified employees who have at least
one year of service. Annual costs charged against income are computed using the
projected unit credit actuarial cost method.
STOCK COMPENSATION: Expense for employee compensation under stock option plans
is based on Accounting Principles Board Opinion 25, with expense reported only
if options are granted below market price at grant date. Pro forma disclosures
of net income and earnings per share are provided as if the fair value method of
FASB Statement 123 were used for stock-based compensation.
PER SHARE CALCULATIONS: Basic and diluted earnings per share are computed under
FASB Statement 128, "Earnings Per Share," a new accounting standard effective in
the quarter ended December 31, 1997. All prior amounts have been restated to be
comparable. Basic earnings per share is based on net income divided by the
weighted-average number of shares outstanding during the period. Diluted
earnings per share shows the dilutive effect of additional common shares
issuable under stock options.
CASH AND CASH EQUIVALENTS: For the purpose of presentation in the Statements of
Cash Flows, cash and cash equivalents are defined as those amounts included in
the balance sheet captions "Cash" and "Cash and Due from Banks." These items
have an original maturity of three months or less and are generally due on
demand.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value is presented in Note Q. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Certain financial
instruments and all nonfinancial instruments are excluded. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
PENDING ACCOUNTING CHANGES: In 1997, the FASB issued Statement 130, "Reporting
Comprehensive Income," which will require future reporting of comprehensive
income (net income plus changes in holding gains and losses on available for
sale securities) and Statement 131, "Disclosures about Segments of an Enterprise
and Related Information," which may require redetermination of industry segment
financial information.
24
<PAGE>
NOTE B - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
Subsidiary banks are required to maintain average reserve balances by the
Federal Reserve Bank. The amount of those average reserve balances required as
of December 31, 1997 and 1996, respectively, was $6,945,000 and $5,884,000.
NOTE C - INVESTMENT SECURITIES
The following is a summary of available for sale securities and held to maturity
securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
December 31, 1997 Available for Sale Securities
- --------------------------------------------------------------------------------
U.S. Treasury and government agencies $58,922 $ 174 $ (213) $58,883
Mortgage-backed 14,293 60 (107) 14,246
Corporate 300 5 305
Other 3,547 3,547
------- ------- -------- -------
$77,062 $ 239 $ (320) $76,981
======= ======= ======== =======
Held to Maturity Securities
----------------------------------------
States and political subdivisions $10,952 $ 125 $ (23) $11,054
======= ======= ======== =======
December 31, 1996 Available for Sale Securities
- --------------------------------------------------------------------------------
U.S. Treasury and government agencies $71,447 $ 213 $ (404) $ 71,256
Mortgage-backed 27,090 103 (365) 26,828
Corporate 502 15 517
Other 3,358 3,358
$102,397 $ 331 $ (769) $101,959
======== ======= ======== ========
Held to Maturity Securities
----------------------------------------
States and political subdivisions $18,662 $ 106 $ (142) $18,626
======= ======= ======== =======
Investment securities with a book value of $10,449,000 were pledged at
December 31, 1997 as collateral to secure public deposits and for other
purposes.
During 1995, the FASB staff issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with provisions in that Special Report,
the Company chose to reclassify certain securities from held to maturity to
available for sale. At December 1, 1995, the date of transfer, the amortized
cost of those securities was $34,299,000 and the unrealized loss on those
securities was $124,000, which is included in stockholders' equity, net of
income tax effect of $42,000.
Sales of available for sale securities were as follows:
1997 1996 1995
- ---------------------------------------------------------------------------
Total proceeds $ 3,617 $ 8,995 $ 14,874
Gross realized gains 126 13
Gross realized losses 46 99 127
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands, except per share
data)
The amortized cost and estimated fair value of investment securities at
December 31, 1997, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Available for sale:
Due in one year or less $13,253 $13,110
Due after one year through five years 45,969 46,078
------- -------
59,222 59,188
Mortgage-backed securities 14,293 14,246
Equity securities 3,547 3,547
------- -------
$77,062 $76,981
======= =======
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Held to maturity:
Due in one year or less $ 5,477 $ 5,488
Due after one year through five years 4,226 4,269
Due after five years through ten years 1,249 1,297
------- -------
$10,952 $11,054
======= =======
NOTE D - LOANS AND THE ALLOWANCE FOR LOAN LOSSES
A summary of loans outstanding follows:
December 31 1997 1996
- --------------------------------------------------------------------------------
Commercial, financial, and agricultural $263,727 $247,344
Real estate-mortgage 240,399 218,144
Real estate-construction 13,648 12,771
Consumer 117,718 120,364
-------- --------
$635,492 $598,623
======== ========
The following table presents changes in the allowance for loan losses:
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Balance at beginning of year $ 8,388 $ 7,589 $ 6,701
Provision for loan losses 1,781 1,929 1,583
Recoveries 343 260 250
Loans charged-off (979) (1,390) (945)
------- ------- -------
Balance at end of year $ 9,533 $ 8,388 $ 7,589
======= ======= =======
26
<PAGE>
Information regarding impaired loans follows:
1997 1996
- --------------------------------------------------------------------------------
Year end loans with no allowance for loan losses allocated $ 988 $ 631
Year end loans with allowance for loan losses allocated 730 646
Amount of the allowance allocated 231 369
Average of impaired loans during the year 1,937 1,426
Interest income recognized during impairment 107 20
Cash basis interest income recognized 99 13
NOTE E - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and its significant
subsidiary banks, including their immediate families and companies in which they
are principal owners, are loan customers of the subsidiary banks. Such loans are
made in the ordinary course of business at the banks' normal credit terms,
including interest rate and collateralization, and do not represent more than a
normal risk of collection. The aggregate dollar amount of loans to these 44
persons was $19,982,000 and $17,217,000 at December 31, 1997 and 1996,
respectively. During 1997, $8,820,000 of new loans were made and repayments
totaled $6,055,000.
NOTE F - LOAN SERVICING
The unpaid principal balance of mortgage loans serviced for others was
$352,936,000 at December 31, 1997 and $224,012,000 at December 31, 1996. These
loans are not included in the consolidated balance sheet. Custodial escrow
balances maintained in connection with the serviced loans, and included in
demand deposits, were $1,655,000 at December 31, 1997 and $309,000 at December
31, 1996.
The carrying value of loan servicing rights was $1,076,000 and $459,000 as
of December 31, 1997 and 1996 respectively, and the fair value was $1,089,000
and $491,000 at those respective dates. During 1997, a valuation allowance was
established and $17,000 was charged to expense. At December 31, 1997 the
allowance amounted to $17,000. No allowance was necessary during 1996.
Activity for capitalized loan servicing rights was as follows:
1997 1996
- --------------------------------------------------------------------------------
Balance at January 1 $ 459 $ 0
Additions 700 481
Amortization (83) (22)
Sales 0 0
-------- -------
Balance at December 31 $ 1,076 $ 459
======== =======
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands, except per share
data)
NOTE G - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31 1997 1996
- --------------------------------------------------------------------------------
Land $ 2,866 $ 2,823
Buildings and improvements 25,476 24,164
Furniture, fixtures and equipment 15,540 15,001
Construction in progress 363 441
--------- ---------
44,245 42,429
Accumulated depreciation (18,848) (17,750)
--------- ---------
$ 25,397 $ 24,679
========= =========
NOTE H - DEPOSITS
The aggregate amount of short-term jumbo CD's, each with a minimum denomination
of $100,000, was approximately $46,073,000 and $37,181,000 at December 31, 1997
and 1996, respectively.
At December 31, 1997, the scheduled maturities of CD's are as follows:
- --------------------------------------------------------------------------------
1998 $ 195,454
1999 99,589
2000 21,657
2001 15,485
2002 and thereafter 8,287
---------
$ 340,472
=========
NOTE I - FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank of Indianapolis (the "FHLB") were as
follows at December 31, 1997:
- --------------------------------------------------------------------------------
5.65% advance, due January 1999 $ 2,000
5.686% advance, due December 2000 3,000
---------
$ 5,000
=========
The fixed interest rates apply until January 20, 1998 for the $2,000,000
advance and until December 10, 1998 for the $3,000,000. On those dates or at any
three month interval thereafter, the FHLB has the option to convert either or
both advances to an adjustable rate. After conversion the three month LIBOR rate
would apply for the remaining term until maturity.
Investment securities with a book value of $5,525,000 were pledged at
December 31, 1997 as collateral for the advances.
NOTE J - REGULATORY CAPITAL
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
28
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth below) of
total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1997, that the Company meets all capital
adequacy requirements to which it is subject.
The Company's actual and capital amounts and rates are presented below:
<TABLE>
<CAPTION>
Minimum To Be Well
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total capital (to risk-weighted assets) $ 100,567 15.8% $ 50,850 8% $ 63,563 10%
Tier I capital (to risk-weighted assets) 92,621 14.6 25,425 4 38,138 6
Tier I capital (to average assets) 92,621 11.6 32,073 4 40,091 5
</TABLE>
NOTE K - EMPLOYEE BENEFIT PLANS
PENSION PLAN: The Company and its subsidiary banks have a noncontributory
defined benefit pension plan covering all employees who have at least one year
of service and have attained age twenty one. Benefits are based on years of
service and the employee's highest average earnings during any consecutive five
year period of employment. The Company's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. Contributions are intended to provide for benefits attributed to
service to date and for benefits expected to be earned in the future.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
December 31 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$11,038,000 in 1997 and $9,681,000 in 1996 $ 11,204 $ 9,852
======== ========
Projected benefit obligation for service rendered to date $ 16,674 $ 15,992
Plan assets at fair value, primarily U.S. Government and corporate bonds,
listed stocks and mutual funds 16,511 13,839
-------- --------
Projected benefit obligation in excess of plan assets 163 2,153
Unrecognized net gain (loss) from past experience different from that assumed
and effects of changes in assumptions 1,139 (1,381)
Prior service cost not yet recognized in net periodic pension cost (1,033) (1,133)
Unrecognized net asset at January 1 being recognized over 20 years 420 472
-------- --------
Accrued pension cost $ 689 $ 111
======== ========
</TABLE>
Net pension cost included the following components:
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost--benefits earned during the year $ 788 $ 867 $ 595
Interest cost on projected benefit obligation 1,041 1,037 880
Actual return on plan assets (3,023) (1,662) (1,985)
Net amortization and deferral 1,893 660 1,097
------- ------- -------
Net pension cost $ 699 $ 902 $ 587
======= ======= =======
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands, except per share
data)
Assumptions used in the accounting were:
December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Weighted average discount rate 7.00% 7.25% 7.25%
Rate of increase in future compensation levels 5.00% 6.00% 6.00%
Expected long-term rate of return on plan assets 9.00% 9.00% 9.00%
EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN: The Company and its subsidiary banks
also have a contributory qualified Employee Savings and Stock Ownership Plan
(KSOP) covering all qualified employees who have at least one year of service
and have attained age twenty one, which functions as an ESOP/401(k) plan. During
1995, employees could contribute up to 4% of their compensation and the Company
and its subsidiary banks matched 25% of the amount of such employee
contributions. During 1996, the match levels were increased to 6% and 30%,
respectively, and in 1997 to 6% and 35% respectively. In addition, each employee
could contribute amounts in excess of the 4% and 6% limits, up to the lesser of
15% of compensation or federal tax limits, with no Company or member bank
participation. The matching contribution formula is determined annually and
requires approval of the Company's Board of Directors. Expense for this plan was
$174,000 for 1997, $141,000 for 1996 and $82,000 for 1995. At December 31, 1997,
the KSOP owned 151,707 shares of the outstanding common stock of the Company.
NOTE L - POSTRETIREMENT BENEFIT PLAN
The Company and its subsidiary banks provide certain health care and life
insurance benefits for retired employees through an unfunded plan. Substantially
all employees who retired on or before December 31, 1994 became eligible for
these benefits provided they reached age 65 with at least ten years of credited
service while still working for the Company or a subsidiary bank. Substantially
all employees retiring after1994 will be provided life insurance benefits and
will be allowed to participate in the health care plan provided they reach age
65 with at least 15 years of credited service after age 45 while still working
for the Company or a subsidiary bank. These and similar benefits for active
employees are provided through insurance companies whose premiums are based on
the benefits paid during the year.
The following table presents the postretirement benefit plan's unfunded
status reconciled with amounts recognized in the Company's consolidated balance
sheets:
December 31 1997 1996
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 1,319 $1,352
Fully eligible active plan participants 90 39
Other active plan participants 505 416
------- ------
Total unfunded obligation 1,914 1,807
Unrecognized prior service cost 180 92
Unrecognized net loss (276) (138)
------- ------
Accrued postretirement benefit cost $ 1,818 $1,761
======= ======
Net periodic postretirement benefit cost included the following components:
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 76 $ 68 $ 41
Interest cost 132 126 117
Amortization and deferral (7) (4) (5)
------- ------- ------
Net periodic postretirement benefit cost $ 201 $ 190 $ 153
======= ======= ======
30
<PAGE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.00% at December 31, 1997, and 7.25% at
December 31, 1996. The weighted-average annual assumed rate of increase in the
per capita cost of covered benefits (i.e., health care cost trend rate) is 9.25%
for 1998 (9.75% for 1997) and is assumed to decrease uniformly each year to
5.25% by the year 2005 and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. For
example, increasing the assumed health care cost trend rates by one percent in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1997 and 1996 by 10.55% and 10.79%, respectively, and the aggregate
of the service and interest cost components of net periodic postretirement
benefit for 1997 by 14.57%.
NOTE M - INCOME TAX
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities recorded in the Company's
consolidated balance sheets are as follows:
December 31 1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 2,902 $ 2,597
Postretirement benefit obligation 616 598
Deferred compensation and director fees 482 475
Net unrealized losses 28 100
Other 625 521
-------- --------
4,653 4,291
-------- --------
Deferred tax liabilities:
Accumulated book depreciation 1,178 1,051
Other 298 137
-------- --------
1,476 1,188
-------- --------
Net deferred tax assets $ 3,177 $ 3,103
======== ========
Income tax expense is composed of the following amounts:
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Currently payable $ 5,112 $ 4,278 $ 3,815
Deferred tax credit (410) (172) (331)
-------- -------- --------
Income tax on income before income tax $ 4,702 $ 4,106 $ 3,484
======== ======== ========
Applicable income taxes (benefits) on investment securities transactions
amounted to $28,000, $[30,000], and $[44,000] in 1997, 1996 and 1995,
respectively, and are included in income tax expense. The components of income
tax expense for 1996 and 1995 have been reclassified to reflect the tax returns
as filed.
The reasons for the difference between income tax expense and the amount
computed by applying the statutory federal income tax rate to income before
income tax are as follows:
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Income before income tax expense $ 15,151 $ 13,739 $ 12,193
======== ======== ========
Federal income tax computed at 35% $ 5,303 $ 4,809 $ 4,268
Deduct effect of:
Tax-exempt bond and loan interest income (593) (662) (757)
Other items-net (8) (41) (27)
-------- -------- --------
$ 4,702 $ 4,106 $ 3,484
======== ======== ========
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands, except per share
data)
NOTE N - STOCK OPTIONS
FASB Statement 123, "Accounting for Stock-Based Compensation," became effective
in 1996 and requires pro forma disclosures for companies that do not adopt its
fair value accounting method for stock-based employee compensation. Accordingly,
the following pro forma information presents net income and earnings per share
had this statement's fair value method been used to measure compensation cost
for stock option plans. Compensation cost actually recognized for stock options
was $0 for 1997, 1996, and 1995.
1997 1996 1995
- --------------------------------------------------------------------------------
Net income as reported $ 10,449 $ 9,633 $ 8,709
Pro forma net income 10,205 9,499 8,704
Basic earnings per share as reported $ 1.78 $ 1.64 $ 1.48
Pro forma basic earnings per share 1.74 1.62 1.48
Diluted earnings per share as reported 1.77 1.64 1.48
Pro forma diluted earnings per share 1.73 1.61 1.48
In future years, the pro forma effect of not applying this standard is expected
to increase as additional options are granted.
Stock option plans are used to reward key employees and provide them with
an additional equity interest. Options are issued for 10 year periods, with
vesting occurring after the first three years. At year end 1997, 145,950 shares
were authorized for future grants. Information about option grants follows.
Number Weighted-average Weighted-average
of options exercise price fair value of grants
- --------------------------------------------------------------------------------
Outstanding, beginning of 1995 49,350 $ 18.09 $ 18.09
Granted 49,350 26.66 12.38
-------
Outstanding, end of 1995 98,700 22.38 15.24
Granted 49,350 22.14 10.48
-------
Outstanding, end of 1996 148,050 22.30 13.65
Granted NONE
-------
Outstanding, end of 1997 148,050 22.30 13.65
=======
Options exercisable at year end are as follows:
Number Weighted-average
of options exercise price
- --------------------------------------------------------------------------------
1995 NONE
1996 NONE
1997 49,350 $ 18.09
The fair value of options granted during 1996 and 1995 is estimated using
the following weighted-average information: risk-free interest rate of 6.26% and
5.45%, expected life of 7 years, expected volatility of stock price of 56% and
58%, and expected dividends of 3.1% per year.
32
<PAGE>
At year end 1997 options outstanding were as follows:
- --------------------------------------------------------------------------------
Number of options 148,050
Range of exercise price $18.09 - $26.66
Weighted-average exercise price $22.30
Weighted-average remaining option life 7.96 years
For options now exercisable: Number 49,350
Weighted-average exercise price $18.09
On January 23, 1998, an additional 48,000 options were granted at a price of
$28.50.
NOTE O - 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.
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Basic Earnings Per Share
Net income $10,449 $9,633 $8,709
======= ====== ======
Weighted-average common shares outstanding 5,878 5,878 5,878
======= ====== ======
Basic Earnings Per Share $ 1.78 $ 1.64 $ 1.48
======= ====== ======
Diluted Earnings Per Share
Net income $10,449 $9,633 $8,709
======= ====== ======
Weighted-average common shares outstanding 5,878 5,878 5,878
Add dilutive effects of assumed exercises
under stock options 13 8 6
------- ------ ------
Weighted-average common and dilutive
potential common shares outstanding 5,891 5,886 5,884
======= ====== ======
Diluted Earnings Per Share $ 1.77 $ 1.64 $ 1.48
Stock options for 49,350 shares of common stock granted during 1995 were not
considered in the computations above because they were antidilutive.
NOTE P - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Loan commitments are made to accommodate the financial needs of customers of the
subsidiary banks. Standby letters of credit commit the banks to make payments on
behalf of customers when certain specified future events occur. Both
arrangements have credit risk essentially the same as that involved in extending
loans to customers and are subject to normal credit policies. Collateral is
obtained based on management's credit assessment of the customer.
The maximum exposure to credit loss for unfunded loans and unused lines of
credit, substantially all of which are at adjustable rates of interest, and
standby letters of credit outstanding at December 31, 1997 follows:
Loan Standby Letters
Expiration Date Commitments of Credit
- --------------------------------------------------------------------------------
1998 $ 101,113 $ 3,106
1999 10,444 5,375
2000 542 449
2001 474 539
2002 9,482 96
Thereafter 886 480
--------- ---------
$ 122,941 $ 10,045
========= =========
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands, except per share
data)
NOTE Q - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
DECEMBER 31, 1997 December 31, 1996
CARRYING FAIR Carrying- Fair
AMOUNT VALUE Amount Value
- --------------------------------------------------------------------------------
Financial assets:
Cash and short-term investments $ 49,299 $ 49,299 $ 38,947 $ 38,947
Investment securities -
Available for sale 76,981 76,981 101,959 101,959
Held to maturity 10,952 11,054 18,662 18,626
Loans, less allowance 625,959 627,415 590,235 597,873
Financial liabilities:
Deposits $694,803 $702,573 $676,108 $684,019
Federal Home Loan Bank advances 5,000 4,804
Federal funds purchased 16,015 16,015
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
balance sheet for cash and due from banks and short-term investments
approximate those assets' fair values.
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES): Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
LOANS: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for certain mortgage loans (e.g., one-to-four family
residential), consumer loan and other loans (e.g., commercial real estate
and rental property mortgage loans, commercial and industrial loans,
financial institution loans, and agricultural loans) are estimated using
discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Company's
off-balance-sheet instruments (lending commitments and standby letters of
credit) are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standing (loan commitments) and discounted cash
flow analyses (standby letters of credit). The fair value of these
off-balance-sheet items approximates the recorded amounts of the related
fees and is not material at December 31, 1997 and 1996.
DEPOSITS: The fair values disclosed for demand deposits (e.g., interest and
noninterest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposits
approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
FEDERAL HOME LOAN BANK ADVANCES: Fair values are estimated using discounted
cash flow based on current borrowing rates for similar arrangements.
34
<PAGE>
NOTE R - MICHIGAN FINANCIAL CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
The Company's primary source of funds to pay dividends to stockholders is the
dividends it receives from the subsidiary banks. The subsidiary banks are
subject to certain restrictions on the amount of dividends that they may declare
without prior regulatory approval. At December 31, 1997, $12,491,000 of retained
earnings was available for dividend declaration without prior regulatory
approval.
Following are condensed parent company financial statements.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 6,946 $ 3,692
Investment in bank subsidiaries 84,333 80,644
Investment in insurance subsidiary 1,920 1,833
Premises and equipment 1,576 1,732
Other assets 946 1,320
-------- --------
TOTAL ASSETS $ 95,721 $ 89,221
======== ========
LIABILITIES
Accrued expenses and other liabilities $ 3,030 $ 2,608
STOCKHOLDERS' EQUITY 92,691 86,613
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 95,721 $ 89,221
======== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks $ 7,700 $ 6,900 $ 5,500
Fees from subsidiary banks 5,702 4,909 4,690
Interest from subsidiary banks 130 44 18
Investment securities gains 109 13
Interest from investment securities 20 37
Other 46 13 21
-------- -------- --------
TOTAL INCOME 13,707 11,916 10,229
Expenses:
Salaries and employee benefits 3,414 3,211 2,927
Data processing 1,488 1,285 1,167
Interest 36
Other 2,314 1,966 1,794
-------- -------- --------
TOTAL EXPENSES 7,216 6,462 5,924
Income before income tax and equity in
undistributed net income of subsidiaries 6,491 5,454 4,305
Income tax credit (414) (514) (389)
-------- -------- --------
Income before equity in undis-tributed
net income of subsidiaries 6,905 5,968 4,694
Equity in undistributed net income of:
Bank subsidiaries 3,453 3,473 3,841
Insurance subsidiary 91 192 174
-------- -------- --------
NET INCOME $ 10,449 $ 9,633 $ 8,709
======== ======== ========
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts presented in the tables are in thousands, except per share
data)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,449 $ 9,633 $ 8,709
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiaries (3,544) (3,665) (4,015)
Decrease in other real estate 250
Depreciation and amortization 248 189 205
Realized investment securities gains (109) (13)
Accretion of investment securities discount (20) (2)
Deferred income tax (credit) (7) 4 10
Other 477 (161) 266
-------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 7,744 5,985 5,175
INVESTING ACTIVITIES
Proceeds from sale of available for sale securities 1,356 996
Purchases of available for sale securities (1,227) (981)
Purchases of premises and equipment (15) (130) (267)
Investment in subsidiary bank (1,000)
Proceeds from sale of premises and equipment 2 15
Payments received on land contract for sale of assets 26
-------- -------- --------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES 114 (113) (1,226)
FINANCING ACTIVITIES
Cash dividends (4,604) (3,865) (3,247)
-------- -------- --------
NET CASH USED BY
FINANCING ACTIVITIES (4,604) (3,865) (3,247)
-------- -------- --------
INCREASE IN CASH 3,254 2,007 702
Cash at beginning of year 3,692 1,685 983
-------- -------- --------
CASH AT END OF YEAR $ 6,946 $ 3,692 $ 1,685
======== ======== ========
</TABLE>
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Michigan Financial Corporation
Marquette, Michigan
We have audited the accompanying consolidated balance sheets of Michigan
Financial Corporation and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The consolidated
financial statements of the Corporation as of December 31, 1995 were audited by
other auditors whose report dated January 19, 1996 expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Michigan
Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ CROWE, CHIZEK AND COMPANY LLP
CROWE, CHIZEK AND COMPANY LLP
Grand Rapids, Michigan
January 16, 1998
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- ---------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 15,939 $ 16,555 $16,931 $ 17,118 $ 15,688 $ 15,736 $ 15,994 $ 16,326
Net interest income 9,738 10,069 10,330 10,404 9,535 9,652 9,917 10,095
Provision for loan losses 204 454 601 522 200 330 616 783
Investment securities gains (losses) 59 21 (13) (4) (69)
Noninterest income 2,479 2,671 2,836 2,961 2,180 2,273 2,390 2,790
Noninterest expense 8,539 8,595 8,745 8,757 8,250 8,131 8,127 8,570
Income tax expense 1,051 1,155 1,202 1,294 929 1,050 1,093 1,034
Net income 2,423 2,536 2,677 2,813 2,336 2,401 2,467 2,429
Basic earnings per share .41 .43 .46 .48 .40 .41 .42 .41
Diluted earnings per share .41 .43 .45 .48 .40 .41 .42 .41
</TABLE>
Per share amounts have been adjusted to reflect a 5% stock dividend paid on
June 20, 1997.
37
<PAGE>
INVESTOR INFORMATION
EXECUTIVE OFFICES
101 West Washington St. P.O. Box 10
Marquette, Michigan 49855
Telephone 906/228-6940
Fax 906/228-1328
MFC ON THE WEB
Interested parties with access to the World Wide Web may review the Company's
corporate information, including news releases, on MFC's home page.
http://www.mfcb.com
STOCK TRANSFER AGENT
Norwest Bank Minnesota, N.A.,
Stock Transfer Department
161 North Concord Exchange P.O. Box 738
South St. Paul, Minnesota 55075-0738
LEGAL COUNSEL
Foster, Swift, Collins & Smith, P.C.
313 South Washington Square
Lansing, Michigan 48933-2193
INDEPENDENT AUDITORS
Crowe, Chizek and Company llp
Riverfront Plaza Building
55 Campau Avenue, N.W.
Grand Rapids, Michigan 49503-2613
ANNUAL MEETING
The annual stockholders' meeting will be held on Tuesday, April 28, 1998 at the
Holiday Inn, U.S. Highway 41 West, Marquette, Michigan at 1:30 p.m. local time.
Management urges all stockholders to vote their shares so they may
participate in the important decisions that will be made at this meeting.
MARKET MAKERS
The following firms are currently the primary market makers for- Michigan
Financial- Corporation stock:
First of Michigan Corporation
Herzog, Heine, Geduld, Inc.
Paine Webber Inc.
Roney & Company
FORM 10-K
Copies of the Company's annual Form 10-k report filed with the Securities and
Exchange Commission may be obtained without charge by written request to Kenneth
F. Beck, Secretary.
DIVIDEND REINVESTMENT PLAN
Stockholders may acquire additional stock in the Company free of service fees
and brokerage commissions by automatic reinvestment of their dividends. For
further information, please- contact:
Norwest Bank Minnesota, N.A.,
Stock Transfer Department
161 North Concord Exchange, P.O. Box 738
South St. Paul, Minnesota 55075-0738
800/468-9716 or 612/450-4064
MARKET PRICE AND
DIVIDEND INFORMATION
Dividends
per share High Low Close
- -----------------------------------------------------
1996
First quarter $0.16 $29.05 $26.19 $27.14
Second quarter 0.17 28.10 21.19 21.67
Third quarter 0.17 24.17 20.00 20.48
Fourth quarter 0.17 24.29 20.95 22.86
1997
First quarter $0.19 $24.52 $22.86 $23.69
Second quarter 0.19 23.81 21.67 23.38
Third quarter 0.20 30.00 23.00 30.00
Fourth quarter 0.20 32.88 28.00 31.75
Amounts have been adjusted to reflect 5% stock dividend paid on June 20, 1997.
The Company's common stock trades on The Nasdaq Stock MarketSM under the
symbol MFCB. Stock price quotations can be found in major daily newspapers and
in The Wall Street Journal. The range of high and low prices for the eight
quarters ended December 31, 1997 is shown above, along with the closing prices.
At December 31, 1997, there were 5,877,601 shares outstanding and
approximately 1,818 stockholders of record. Inasmuch as many stockholders retain
their shares in "street name," the number of individual stockholders is larger
than the number of registered stockholders.
40
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 No. 33-86882 pertaining to the Michigan Financial Corporation Employee
Savings and Stock Ownership Plan and No. 033-59425 pertaining to the Michigan
Financial Corporation Stock Option Plan of our report dated January 16, 1998, on
the 1997 consolidated financial statements of Michigan Financial Corporation and
subsidiaries incorporated by reference in the Annual Report on Form 10-K for the
year ended December 31, 1997.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 20, 1998
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Michigan Financial Corporation of our report dated January 19, 1996, included
in the 1997 Annual Report to Shareholders of Michigan Financial Corporation.
We consent to the incorporation by reference in the Registration Statements on
Form S-8 No. 33-86882 pertaining to the Michigan Financial Corporation Employee
Savings and Stock Ownership Plan and No. 033-59425 pertaining to the Michigan
Financial Corporation Stock Option Plan of our report dated January 19, 1996,
with respect to the consolidated financial statements of Michigan Financial
Corporation, member banks, and insurance subsidiary incorporated by reference in
the Annual Report (Form 10-K) for the year ended December 31, 1997.
Ernst & Young LLP
Milwaukee, Wisconsin
March 20, 1998
EXHIBIT 24
POWER OF ATTORNEY
The undersigned directors of Michigan Financial Corporation, a Michigan
corporation, hereby constitute and appoint Howard L. Cohodas and Kenneth F.
Beck, and each of them, the true and lawful agents and attorneys-in-fact of the
undersigned, with full power and authority in said agents and attorneys-in-fact,
and any one or more of them, to sign for the undersigned and in their respective
names as directors of Michigan Financial Corporation, the Form l0-K Annual
Report to be filed with the Securities and Exchange Commission, Washington,
D.C., pursuant to Section l3 or l5 (d) of the Securities Act of l934 for the
fiscal year ended December 3l, l997.
Dated January 19, 1998 /s/ GARY L. BUTRYN
-------------------------------------
Gary L. Butryn
Dated January 19, 1998 /s/ WILLARD M. CARNE
-------------------------------------
Willard M. Carne
Dated January 19, 1998 /s/ WILLARD L. COHODAS
-------------------------------------
Willard L. Cohodas
Dated January 19, 1998 /s/ CLARENCE R. FISHER
-------------------------------------
Clarence R. Fisher
Dated January 19, 1998 /s/ HUGH C. HIGLEY, JR
-------------------------------------
Hugh C. Higley, Jr.
Dated January 19, 1998 /s/ DAVID HOLLI
-------------------------------------
David Holli
<PAGE>
Dated January 19, 1998 /s/ DANIEL H. LORI
-------------------------------------
Daniel H. Lori
Dated January 19, 1998 /s/ WAYNE L. NASI
-------------------------------------
Wayne L. Nasi
Dated January 19, 1998 /s/ FRED M. SAIGH
-------------------------------------
Fred M. Saigh
Dated January 19, 1998 /s/ JAMES L. SMITH
-------------------------------------
James L. Smith
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,208
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76,981
<INVESTMENTS-CARRYING> 10,952
<INVESTMENTS-MARKET> 11,054
<LOANS> 635,492
<ALLOWANCE> 9,533
<TOTAL-ASSETS> 804,396
<DEPOSITS> 694,803
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 11,902
<LONG-TERM> 0
0
0
<COMMON> 25,050
<OTHER-SE> 67,641
<TOTAL-LIABILITIES-AND-EQUITY> 804,396
<INTEREST-LOAN> 60,039
<INTEREST-INVEST> 6,504
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 66,543
<INTEREST-DEPOSIT> 25,755
<INTEREST-EXPENSE> 26,002
<INTEREST-INCOME-NET> 40,541
<LOAN-LOSSES> 1,781
<SECURITIES-GAINS> 80
<EXPENSE-OTHER> 34,636
<INCOME-PRETAX> 15,151
<INCOME-PRE-EXTRAORDINARY> 10,449
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,449
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.77
<YIELD-ACTUAL> 5.64
<LOANS-NON> 1,594
<LOANS-PAST> 1,068
<LOANS-TROUBLED> 1,117
<LOANS-PROBLEM> 17,967
<ALLOWANCE-OPEN> 8,388
<CHARGE-OFFS> 979
<RECOVERIES> 343
<ALLOWANCE-CLOSE> 9,533
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<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> 1.29
<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>
