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, 1998
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. [X]
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 1, 1999. $92,593,974
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of March 1, 1999.
Common Stock, no par value - 6,173,268
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual stockholders report for the year ended December 31, 1998
are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual stockholders meeting to be held
April 27, 1999 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, nonprofit organizations, 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 33 banking offices in nine counties of
Michigan's Upper Peninsula: Alger, Delta, Dickinson, Gogebic, Houghton, Iron,
Marquette, Menominee, and Schoolcraft. The banks also operate 41 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
2
<PAGE>
commercial banks, 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 out-of-state multi-bank holding
company which has banking offices located in the same market areas as five 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 29, in the annual stockholders report for the year ended December 31, 1998
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.
3
<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 657 people as of December 31, 1998.
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 substantially 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 1996 through 1998 (1994 through 1998 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.
4
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and
Interest Differential
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- -------------------------------- --------------------------------
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 5.22% $ 7 $ 0 5.44% $ 7 $ 0 5.15%
Federal funds sold 50,239 2,675 5.32% 7,204 391 5.43% 13,460 717 5.33%
Other short-term investments 2,643 124 4.68% 439 20 4.55% 267 13 4.85%
Investment securities:
U. S. Treasury 3,568 191 5.36% 7,805 444 5.69% 17,672 1,002 5.67%
U. S. Government agencies
and corporations 72,361 4,397 6.08% 77,551 4,658 6.01% 88,269 5,145 5.83%
States and political
subdivisions 7,560 370 6.95% 14,392 656 6.54% 21,861 964 6.30%
Other 4,167 344 8.24% 4,624 335 7.25% 4,769 342 7.17%
Loans 620,347 59,828 9.72% 620,302 60,039 9.75% 575,115 55,561 9.74%
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL EARNING ASSETS 760,892 67,929 9.01% 732,324 66,543 9.19% 721,420 63,744 8.95%
Noninterest earning assets:
Cash and due from banks 30,354 29,582 28,387
Premises and equipment 25,671 25,226 23,645
Other assets 15,648 13,400 11,418
Allowance for loan losses (9,474) (8,772) (7,906)
-------- -------- --------
TOTAL ASSETS $823,091 $791,760 $776,964
======== ======== ========
Interest bearing liabilities:
Demand deposits 149,786 3,493 2.33% 139,592 3,160 2.26% 133,639 2,848 2.13%
Savings deposits 137,255 3,523 2.57% 150,440 3,968 2.64% 165,152 4,283 2.59%
Time deposits under $100,000 309,716 17,843 5.76% 290,284 16,483 5.68% 277,142 15,222 5.49%
Time deposits over $100,000 42,457 2,548 6.00% 38,137 2,145 5.62% 34,099 1,940 5.69%
Short-term borrowings 0 0 0.00% 2,191 126 5.76% 4,465 252 5.65%
Other debt 3,597 207 5.75% 2,093 120 5.75% 0 0 0.00%
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL INTEREST
BEARING LIABILITIES 642,811 27,614 4.30% 622,737 26,002 4.18% 614,497 24,545 3.99%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest bearing liabilities
and Shareholders' equity:
Demand deposits 72,045 68,128 68,492
Other liabilities 13,365 12,140 11,134
Stockholders' equity 94,870 88,755 82,841
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $823,091 $791,760 $776,964
======== ======== ========
NET INTEREST INCOME $ 40,315 $ 40,541 $ 39,199
======== ======== ========
NET YIELD ON EARNING ASSETS 5.38% 5.64% 5.55%
======== ======== ========
</TABLE>
All of the above percentages are computed on a fully taxable statutory rate of
35%
The average balance of Loans includes nonaccrual loans.
5
<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 1998
as compared with 1997. 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 $ -- $ 2,291 $ 103 $ (334) $ (329) $ 5 $ 1,736
Rate -- (8) 1 (171) 43 (215) (350)
------- ------- ------- ------- ------- ------- -------
Net Change $ -- $ 2,283 $ 104 $ (505) $ (286) $ (210) $ 1,386
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
INTEREST PAID ON
-------------------------------------------------------------------------------
Total
Demand Savings Time Short-term Other interest bearing
deposits deposits deposits borrowings debt liabilities
-------- -------- -------- ---------- ----- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Volume $ 234 $ (342) $1,365 $ (126) $ 86 $1,217
Rate 99 (103) 399 -- -- 395
------ ------ ------ ------ ------ ------
Net Change $ 333 $ (445) $1,764 $ (126) $ 86 $1,612
====== ====== ====== ====== ====== ======
</TABLE>
6
<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
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
INTEREST PAID ON
-------------------------------------------------------------------------------
Total
Demand Savings Time Short-term Other interest bearing
deposits deposits deposits borrowings debt liabilities
-------- -------- -------- ---------- ----- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
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>
7
<PAGE>
INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities at
the dates indicated:
December 31
--------------------------------
1998 1997 1996
------- ------- -------
(in thousands)
Available for Sale Securities:
U.S. Treasury and government agencies $78,848 $58,883 $ 71,256
Mortgage-backed 7,773 14,246 26,828
States and political subdivisions 5,259 -- --
Other 4,168 3,852 3,875
------- ------ --------
$96,048 $76,981 $101,959
======= ======= ========
Held to Maturity Securities:
States and political subdivisions $10,952 $18,662
------- -------
$10,952 $18,662
======= =======
The table on the following page sets forth the maturities of investment
securities at December 31, 1998, 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.
8
<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>
U.S. Treasury and U.S. Government
agencies $ 4,661 6.13% $74,187 5.82% $ -- --% $ -- --%
Mortgage-backed 1,633 3.73 5,472 6.15 -- -- 668 5.79
States and political subdivisions 2,555 6.94 1,672 7.95 1,032 8.57 -- --
Other 103 8.75 -- -- -- -- 4,065 1.20
------- ------- ------- ------- ------- ------- ------- -------
Total Available for Sale Securities $ 8,952 5.95% $81,331 5.89% $ 1,032 8.57% $ 4,733 1.85%
======== ======= ======= ======= ======= ======= ======= =======
Tax-equivalent adjustment for
calculation of yield $ 58 $ 43 $ 30 $ --
======= ======= ======= =======
</TABLE>
Weighted average yields on tax-exempt obligations have been computed on a fully
tax-equivalent basis assuming a tax rate of 35 percent.
9
<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
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
Commercial, financial, and
agricultural $260,360 $263,727 $247,344 $246,134 $248,785
Real estate-construction 13,450 13,648 12,771 10,095 9,175
Real estate-mortgage 228,379 235,228 212,863 186,838 174,186
Consumer 105,926 117,718 120,364 113,596 106,958
Leases 579 -- -- -- --
-------- -------- -------- -------- --------
$608,694 $630,321 $593,342 $556,663 $539,104
======== ======== ======== ======== ========
The following table shows the amounts of loans (excluding real estate mortgages,
consumer loans and leases) outstanding as of December 31, 1998, 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 $79,855 $146,041 $34,464 $260,360
Real estate-construction 11,755 1,023 672 13,450
------- -------- ------- --------
$91,610 $147,064 $35,136 $273,810
======= ======== ======= ========
Included in the loans which are due after one year are $117,953,000 of loans
with floating or adjustable interest rates. All other loans due after one year
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
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
Nonaccrual loans $3,701 $1,594 $1,538 $2,061 $2,374
Accruing loans past
due 90 days or more 1,152 1,068 901 915 830
Restructured loans 540 1,117 1,195 694 592
10
<PAGE>
The 1998 and 1997 nonaccrual loan amounts include $3,389,000 and $1,302,000,
respectively, for loans considered impaired. Impaired loans are discussed
further on page 25 of the annual stockholders report for the year ended December
31, 1998 which is incorporated herein by reference.
Additional information with respect to nonaccrual and restructured loans for the
two years ended December 31, 1998 is as follows:
1998 1997
---- ----
(in thousands)
Gross interest income that would have been
recorded if the loans had been current
in accordance with their original terms $331 $223
Interest income that was included in net
income 93 89
The Company's policy with respect to nonaccrual loans and the recognition of
loan interest income is explained on page 23 of the annual stockholders report
for the year ended December 31, 1998 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 $19,076,000 at
December 31, 1998, 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 $16,642 $16,116
Real estate - construction 82 82
Real estate - mortgage 2,136 2,083
Consumer 216 193
Leases -- --
------- -------
$19,076 $18,474
======= =======
11
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Company's loan loss experience for the five
years ended December 31, 1998.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
Balance of allowance for
loan losses at beginning
of period $9,533 $8,388 $7,589 $6,701 $6,553
Loans charged-off:
Commercial, financial, and
agricultural 762 339 746 409 691
Real estate-construction -- -- -- -- --
Real estate-mortgage 103 3 99 125 93
Consumer 563 637 545 411 485
Leases -- -- -- -- --
------ ------ ------ ------ ------
Total loans charged-off 1,428 979 1,390 945 1,269
Recoveries of loans previously
charged-off:
Commercial, financial, and
agricultural 292 187 66 79 106
Real estate-construction -- -- -- -- --
Real estate-mortgage 7 4 12 21 28
Consumer 152 152 182 150 162
Leases -- -- -- -- --
------ ------ ------ ------ ------
Total recoveries 451 343 260 250 296
------ ------ ------ ------ ------
Net loans charged-off 977 636 1,130 695 973
Additions to allowance charged
to expense* 905 1,781 1,929 1,583 1,121
------ ------ ------ ------ ------
Balance at end of period $9,461 $9,533 $8,388 $7,589 $6,701
====== ====== ====== ====== ======
Ratio of net charge-offs
during period to average
loans outstanding .16% .10% .20% .13% .19%
* Management reviews the loan portfolios on a 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.
12
<PAGE>
The following table shows an allocation of the allowance for loan losses at each
of the five dates indicated:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Type of Type of Type of Type of Type
of Loans to of Loans to of Loans to of Loans to of Loans to
Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans
--------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural $3,019 42.8% $2,654 41.5% $1,813 41.3% $2,228 43.9% $2,127 46.0%
Real estate-
construction -- 2.2 -- 2.2 -- 2.1 -- 1.8 -- 1.7
Real estate-
mortgage 295 37.5 250 37.8 321 36.5 439 34.1 470 32.5
Consumer 974 17.4 1,283 18.5 795 20.1 973 20.2 985 19.8
Leases -- .1 -- -- -- -- -- -- -- --
Not allocated 5,173 n/a 5,346 n/a 5,459 n/a 3,949 n/a 3,119 n/a
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$9,461 100.0% $9,533 100.0% $8,388 100.0% $7,589 100.0% $6,701 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The above allocation is based on estimates and subjective judgment and is not
necessarily indicative of the specific amounts on loan categories in which
losses may ultimately occur, nor does it necessarily reflect actual historical
charge-off experience.
13
<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
----------------------- ---------------------------
1998 1997 1996 Well Capitalized Minimum
---- ---- ---- ---------------- -------
Leverage 11.7% 11.6% 11.1% 5.0% 4.0%
Tier 1 15.4 14.6 14.6 6.0 4.0
Tier 1 + Tier 2 16.6 15.8 15.8 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, 1998 is incorporated herein by reference.
ITEM 2. PROPERTIES
The Company owns seven subsidiary banks and one nonbank subsidiary, and has a
total of 33 banking offices, all of which are located in the Upper Peninsula of
Michigan. The Company owns 28 and leases five of these banking offices. The
Company also owns all 41 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
14
<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 27, 1999.
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
Howard L. Cohodas 54 Chairman and President
Kenneth F. Beck 61 Senior Vice President, Treasurer
and Secretary
Ward L. Rantala 47 Vice President - Human Resources
Howard L. Cohodas has been Chairman and President of the Company since prior to
March, 1994.
Kenneth F. Beck has been Senior Vice President, Treasurer and Secretary of the
Company since prior to March, 1994.
Ward L. Rantala has been Vice President - Human Resources of the Company since
prior to March, 1994.
Terms of office for the executive officers expire April 27, 1999, 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 44 of the annual
stockholders report for the year ended December 31, 1998 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, 1998 is incorporated herein by reference.
15
<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, 1998 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, 1998, are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements included on pages 18 through 41 of the
annual stockholders report for the year ended December 31, 1998, 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 22, 1999, 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
22, 1999, 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 22, 1999, 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
22, 1999, with respect to certain relationships and related transactions, is
incorporated herein by reference in response to this item.
16
<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 1998 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
Comprehensive Income Annual report under the caption
"Consolidated Statements of
Comprehensive 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*
*Management contract or compensatory plan or arrangement
17
<PAGE>
(13) Incorporated portions from the annual report to security
holders
(21) Subsidiaries of the registrant
(23) Consent 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 1998.
(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, 1998 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 on pages 24 and 25 of this report.
(27) Financial data schedule--The required financial data schedule is
filed as Exhibit 27 at page 26 of this report.
18
<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 17, 1999.
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 17, 1999.
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
- -----------------------------
19
<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
- -----------------------------
William C. Verrette
/s/ WILLIAM C. VERRETTE * 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.
20
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Page
- ----------- ----------- ----
13 Incorporated portions from the
annual stockholders report
for the year ended
December 31, 1998 22
23 Consent of independent auditors 23
24 Power of attorney 24
27 Financial data schedule 26
21
EXHIBIT 13
Consolidated Selected Financial Data
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net interest income $ 40,315 $ 40,541 $ 39,199 $ 38,480 $ 37,483
Provision for loan losses 905 1,781 1,929 1,583 1,121
Noninterest income 13,948 11,027 9,547 8,072 7,619
Noninterest expenses 36,828 34,636 33,078 32,776 32,623
Income tax expense 5,353 4,702 4,106 3,484 3,206
Net income 11,177 10,449 9,633 8,709 8,152
Per Share Data*
Basic earnings $ 1.81 $ 1.69 $ 1.56 $ 1.41 $ 1.32
Diluted earnings 1.80 1.69 1.56 1.41 1.32
Cash dividends 0.90 0.74 0.63 0.53 0.46
Stockholders' equity 15.97 15.02 14.03 13.12 11.86
Year End Balances
Total assets $ 843,493 $ 804,396 $ 789,353 $ 778,316 $ 767,573
Investment securities 96,048 87,933 120,621 139,731 160,694
Loans receivable 608,694 630,321 593,342 560,891 540,841
Deposits 728,660 694,803 676,108 687,154 685,202
Debt 3,000 5,000 16,015
Stockholders' equity 98,605 92,691 86,613 80,985 73,195
Other Managed Assets
Trust assets $ 1,378,436 $ 1,218,190 $ 1,052,475 $ 960,094 $ 780,651
Brokerage investment balances 153,348 101,328 69,760
Cash management accounts 97,022 61,832 53,299
Statistical Summary (percentages)
Return on average total assets 1.36% 1.32% 1.24% 1.13% 1.07%
Return on average stockholders' equity 11.78 11.77 11.63 11.35 11.30
Dividend payout ratio 49.72 43.78 40.38 37.59 34.85
Average stockholders' equity
to average total assets 11.53 11.21 10.66 9.94 9.44
Regulatory Capital Ratios
Total risk-based capital 16.6% 15.8% 15.8% 15.6% 14.9%
Tier 1 risk-based capital 15.4 14.6 14.6 14.3 13.7
Leverage ratio 11.7 11.6 11.1 10.5 9.9
</TABLE>
* Adjusted to reflect stock dividends paid in 1998 and 1997.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
<TABLE>
<CAPTION>
Sources and Uses of Funds Trends 1998 1997 1996
Average Increase (Decrease) Average Increase (Decrease) Average
(Amounts in thousands) Balance Amount % Balance Amount % Balance
<S> <C> <C> <C> <C> <C> <C> <C>
Funding sources:
Demand deposits-
Noninterest bearing $ 72,045 $ 3,917 5.7 $ 68,128 $ (364) (0.5) $ 68,492
Interest bearing 149,786 10,194 7.3 139,592 5,953 4.5 133,639
Savings deposits 137,255 (13,185) (8.8) 150,440 (14,712) (8.9) 165,152
Time deposits 352,173 23,752 7.2 328,421 17,180 5.5 311,241
Short-term borrowings 0 (2,191) (100.0) 2,191 (2,274) (50.9) 4,465
Other debt 3,597 1,504 71.9 2,093 2,093 NMF 0
Other 46,036 4,577 11.0 41,459 3,028 7.9 38,431
Total sources $ 760,892 $ 28,568 3.9 $ 732,324 $ 10,904 1.5 $ 721,420
Funding uses:
Loans $ 620,347 $ 45 0.0 $ 620,302 $ 45,187 7.9 $ 575,115
Taxable investment
securities 80,096 (9,884) (11.0) 89,980 (20,730) (18.7) 110,710
Tax-exempt investment
securities 7,560 (6,832) (47.5) 14,392 (7,469) (34.2) 21,861
Federal funds sold 50,239 43,035 597.4 7,204 (6,256) (46.5) 13,460
Interest bearing deposits
in other banks 7 0 0.0 7 0 0.0 7
Other short-term
investments 2,643 2,204 502.1 439 172 64.4 267
Total uses $ 760,892 $ 28,568 3.9 $ 732,324 $ 10,904 1.5 $ 721,420
</TABLE>
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 above indicates how the Company has managed its sources and uses
of funds.
As the primary source of funds, aggregate average deposits increased by
$24,678,000, or 3.6%, in 1998 after increasing by $8,057,000, or 1.2%, in 1997.
Total deposits increased in 1998 due to continued growth in demand, both
interest bearing and noninterest bearing, 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, and annuity-based products. 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.
<PAGE>
Included in the time deposits category are $42.5 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 December of 1997. Details of this borrowing 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 1998 remained consistent with 1997 levels after
increasing $45.2 million or 7.9% in 1997.
With loan levels stable, the aggregate of all other earning assets,
representing alternative uses of funds, increased by $28.5 million, or 25.5% in
1998. All other earning assets decreased by $34.3 million or 23.4% in 1997. 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 1998 the volume of Freddie Mac loans sold with servicing being retained and
without recourse was $321 million. The comparable figure for 1997 was $239
million. The large increase in loan sales during 1998 effectively supports the
changes in funding uses. Loan growth was offset by loan sales thus providing
funds to increase other earning assets. The ability of the Company to sell these
loans in large block amounts enables it to more effectively manage its funding
operations.
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 $7,319,000 at December 31, 1998, down from the $18,730,000 at
December 31, 1997. The Company decreased its holdings of mortgage-backed
securities to $7,773,000 at December 31, 1998 from $14,246,000 at December 31,
1997. Other types of short-term assets such as federal funds sold and money
market investments are additional sources of liquidity. At December 31, 1998 the
Company's position in short-term investments amounted to $51,114,000, up
substantially from the $16,091,000 at the end of 1997.
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.
<TABLE>
<CAPTION>
December 31,
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
Maturing in:
3 months or less $ 12,805 $ 13,812 $ 12,914
Over 3 through 6 months 8,878 10,715 7,992
Over 6 through 12 months 9,537 8,586 7,156
Over 12 months 19,363 12,960 9,119
$ 50,583 $ 46,073 $ 37,181
As a percent of deposits 6.94% 6.63% 5.50%
</TABLE>
<PAGE>
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.
The following table presents information for the Company relative to the
maturity structure for total interest bearing assets and liabilities at December
31, 1998.
<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 $ 171,992 $ 76,621 $ 248,613 $ 323,696 $ 36,385
Mortgage loans held-for-sale - - - - 17,186
Investment securities 4,662 2,657 7,319 75,859 5,097
Mortgage-backed securities 1,013 620 1,633 5,472 668
Other assets 51,114 - 51,114 - -
Rate sensitive assets 228,781 79,898 308,679 405,027 59,336
Deposits:
$100,000 or more 12,805 18,415 31,220 19,363 -
Other time 47,400 102,726 150,126 155,948 -
Savings 296,044 - 296,044 - -
Other liabilities - 3,000 3,000 - -
Rate sensitive liabilities 356,249 124,141 480,390 175,311 -
Interest rate sensitivity
gap-period $ (127,468) $ (44,243) $ (171,711) $ 229,716 $ 59,336
Interest rate sensitivity
gap-cumulative $ (171,711) $ (171,711) $ 58,005 $ 117,341
</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 $172 million at
December 31, 1998.
Included in the $480,390,000 of rate sensitive liabilities indicated as
maturing within one year are $296,044,000 of NOW, savings and money market
deposits which do not reprice in the same proportion as rate sensitive assets.
If core deposits of $210,740,000 consisting of NOW and savings deposits were not
included as rate sensitive liabilities, the Company would report a positive gap
of $39.0 million or 5.2 percent of earning assets.
Capital Resources
Total equity growth has surpassed total asset growth over the past several years
and amounted to 6.4% in 1998, 7.0% in 1997, and 6.9% in 1996. The equity
increase due to operations was $5,672,000, $5,845,000 and $5,768,000 in 1998,
1997 and 1996 respectively. Equity was also impacted by security valuations each
of these years. For 1998, equity increased by $242,000 due to investment
security valuations including $48,000 on securities transferred from the
held-to-maturity category to the available-for-sale category. During 1997 equity
increased by $233,000 due to security valuations, while 1996 valuations caused
equity to decrease by $140,000. Stockholders' equity increased from 11.52% of
total assets at the end of 1997 to a level of 11.69% at the end of 1998.
<PAGE>
The Company's primary means of maintaining capital adequacy is through
internal capital 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:
Relationship Between Significant Financial Ratios
Internal
Return Earnings capital
on equity retained growth
19-98 11.78% X 50.24% = 5.92%
19-97 11.77 X 55.94 = 6.58
19-96 11.63 X 59.88 = 6.96
Management decided to increase the dividend payout during 1998 for the
tenth year in a row. As shown above, the Company achieved an internal
capital growth rate of 5.92%. Management continues to target 6% for
internal capital growth, 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 subsidiary banks. At December 31, 1998, the aggregate
amount which could be paid to the Company by its subsidiary banks and insurance
subsidiary as dividends, without obtaining prior approval from regulatory
agencies, was in excess of $10.5 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 decreased by $226,000 or .6% in 1998. This contrasts with
increases of $1,342,000 in 1997 and $719,000 in 1996 or 3.4% and 1.9%,
respectively. On a fully taxable equivalent basis the annual rate of increase
(decrease) would have been (.1)% in 1998, 3.1% in 1997 and 1.7% in 1996.
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:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
<S> <C> <C> <C>
Average earning assets $ 760,892 $ 732,324 $ 721,420
Yields earned (fully taxable equivalent) 9.01% 9.19% 8.95%
Average interest bearing liabilities $ 642,811 $ 622,737 $ 614,497
Rates paid 4.30% 4.18% 3.99%
Net yield on earning assets 5.38 5.64 5.55
</TABLE>
Rates remained flat for the first three quarters of 1998 then dropped
sharply in the fourth quarter. Rates had increased slightly in the first quarter
of 1997 after a year of flat rates in 1996. The yield on earning assets
decreased by .18% in 1998 while rates paid on interest bearing liabilities
increased by .12%. As a result, the net yield on earning assets decreased by
.26%. During 1997, the net yield had increased by .09%.
Average earning assets, interest income, interest bearing liabilities and
interest expense all increased during 1998. Net interest income, however,
decreased as the yield on earning assets dropped and the rates paid on
liabilities increased. For 1997, the increase in net interest income resulted
from an increase in loans outstanding and higher interest rates. Performance at
the net interest income level in future periods will still be primarily
dependent upon general interest rate developments.
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 1998, over $108 million in loans were sold
with the Company retaining servicing rights. The amount of loans sold with
retained servicing rights was over $40 million during 1997. All of the loans
sold are without recourse. At the end of 1998 and 1997, loans being held for
sale amounted to $17.2
<PAGE>
million and $5.2 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 $905,000
in 1998 compared to $1,781,000 in 1997 and $1,929,000 in 1996. Net loan losses
were $977,000, in 1998, $636,000 in 1997 and $1,130,000 in 1996. On a percentage
basis the net charge-offs to average loans increased to .16% in 1998 from .10%
in 1997 but down from .20% in 1996.
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, 1998 stood at $9,461,000 or 1.55% of outstanding
loans, compared to $9,533,000 or 1.51% in 1997 and $8,388,000 or 1.41% in 1996.
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.
As shown in the following table, nonperforming loans increased to .89% of
total loans at December 31, 1998, up from the previous year end of .60% and a
level of .61% in 1996. Coverage of nonperformings by the allowance stood at 175%
at year end 1998, down from the 252% coverage level attained in 1997 and the
level of 231% in 1996.
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1998 1997 1996
<S> <C> <C> <C>
Nonaccrual loans $ 3,701 $ 1,594 $ 1,538
Accruing loans past due:
90 days or more 1,152 1,068 901
Restructured loans 540 1,117 1,195
Total nonperforming loans $ 5,393 $ 3,779 $ 3,634
Nonperforming loans/total loans .89% .60% .61%
Loan loss allowance/
nonperforming loans 175% 252% 231%
</TABLE>
The gross interest income that would have been recorded in 1998 for
nonaccrual and restructured loans as of December 31, 1998, assuming interest had
been accrued throughout the year in accordance with original terms, is $331,000.
The comparable 1997 total for these loan categories was $223,000. The amount of
interest income recorded on these loans and included in income was $93,000 in
1998 and $89,000 in 1997.
Noninterest income increased $2,921,000 in 1998 after increases of
$1,480,000 in 1997 and $1,475,000 in 1996. Exclusive of securities gains and
losses, it increased $3,011,000 in 1998, $1,314,000 in 1997, and $1,434,000 in
1996. Gains from the sale of loans increased by $1,635,000 or 168% in 1998.
Gains on loan sales had increased $280,000 in 1997 and $488,000 in 1996. The
increase in gains on loan sales during 1998 is primarily due to the increased
volume of loans sold in that period. 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. Fees recognized for
investment services increased $418,000 or 67.6% in 1998 compared to an increase
of $113,000 or 22.4% in 1997. Noninterest income was also affected by the
increase in trust services income of $653,000 in 1998. During 1997 and 1996,
trust income had risen $325,000 and $404,000, respectively.
Noninterest expense increased $2,192,000 in 1998, $1,558,000 in 1997 and
$302,000 during 1996. The salaries and employee benefits expense for 1998
increased $1,074,000 from the prior year. For 1997 and 1996 the increases over
prior year for salaries and employee benefits was $461,000 and $631,000,
respectively.
The income tax provision for 1998 and 1997 increased by $651,000 and
$596,000, 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 during 1998 was 11.78%, up from the 11.77% during 1997 and the
11.63% achieved during 1996. The return on assets for 1998 increased to 1.36%,
up from the levels of 1.32% in 1997 and 1.24% in 1996. Management believes that
the Company's fundamental operations have been improving, as the results of the
last three years have shown.
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
<PAGE>
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 the economy overall
regarding how existing application software programs and operating systems can
accommodate the date value for the Year 2000. Programs and operating systems
using a two digit date rather than a four digit date may calculate incorrectly
or cease to operate after December 31, 1999. Initially this potential problem
was believed to be limited to software programs and data applications
(collectively referred to as "Information Technology" or "IT" systems) using
date-related fields during processing. The scope of concern has since been
expanded to include "non-IT" systems such as electronically controlled elevators
and security systems.
Since 1997, the Company has been engaged in a program to ensure that all
computer systems will continue to make accurate date-related computations on and
after January 1, 2000. Early in 1997, management appointed a team of individuals
that would develop and administer a plan to address the Company's Year 2000
risks. The plan was to address both "IT" and "non-IT" systems using the
following steps: (1) Inventory: identify all items to be included in the Year
2000 program; (2) Assessment: prioritize the inventory for review and determine
the scope of remediation and testing effort required; (3) Conversion: make all
the necessary changes to become Year 2000 compliant; (4) Testing: verify through
structured testing that all inventory is in fact Year 2000 compliant; (5)
Implementation: position the inventory items back into production after testing
is complete; and (6) Contingency Planning: design a contingency plan for all
systems in the event of other unforeseen circumstances.
As of December 31, 1998, the Company has completed the first two steps of
its Year 2000 plan as well as step 6, contingency planning. A complete inventory
of all Year 2000 items has been documented and a priority level has been
assigned with regards to remediation and testing. Steps 3 and 4, conversion and
testing, are well underway for all Year 2000 items and step 5, implementation,
is completed as systems are designated as Year 2000 ready.
Three "IT" systems have been recognized by the Company as being "mission
critical" to its continuing operation. These systems received the highest
priority level for remediation and testing. The first such system is the data
processing service provided by Alltel Information Services, Inc. Alltel provides
deposit and loan data processing services to the bank subsidiaries of the
Company. Alltel is one of the nation's major providers of such services to
financial institutions. In conjunction with Alltel, the Company believes it has
identified all processing applications which are date-sensitive and has
established timelines for testing and installing Year 2000 compliant software.
This conversion began in September of 1998 with completion anticipated by April
30, 1999.
The second mission critical system identified by the Company is the payment
processing system used by the Company's banking subsidiaries. The Company
contracts with Wausau Financial Services to provide this service. All phases of
the Company's Year 2000 plan have been completed for this system and it has been
tested and determined to be Year 2000 ready. The remediated software has been in
production since September 1998.
M&I Data Services, a subsidiary of Marshall & Ilsley Corporation, provides
the third mission critical system to the Company, trust data processing and
investment services technology. The Year 2000 plan with regards to this system
is currently in the testing and conversion stages and is anticipated to be Year
2000 ready by April 30, 1999.
All other third-party vendors for in-house systems, primarily PC-based
applications, have been contacted to confirm that the Company's software is Year
2000 ready. Appropriate personnel within the Company have been assigned the
responsibility to test and verify vendor claims about Year 2000 readiness. As of
December 31, 1998, 90% of all in-house systems have been tested, converted and
determined to be Year 2000 ready. The remaining systems are in the testing stage
and are expected to be Year 2000 ready by June 30, 1999. Vendors for Year 2000
items noted as "non-IT" have also been contacted in regard to their state of
Year 2000 readiness. The Company acknowledges risk in this area as failure with
any of these systems is not under its control. The Company monitors Year 2000
efforts by each of the "non-IT" vendors through scheduled reviews. At this time,
all "non-IT" vendors expect to be Year 2000 compliant prior to December 31,
1999.
Another aspect included in the Year 2000 program, other than "IT" and
"non-IT" computer systems, relates to the risks posed to the Company by
customers. Borrowers and depositors having significant relationships with the
Company have been identified in accordance with regulatory guidelines. The risk
to the Company arising from the failure of these customers to address their Year
2000 concerns has been identified and is included in the contingency plan for
continuing operations.
The Year 2000 program implemented by the Company follows closely the process
suggested by the Federal Financial Institutions Examination Council ("FFIEC").
The "FFIEC" is an interagency organization made up of regulatory agencies
<PAGE>
that monitor the safety and soundness of banks and savings associations. The
"FFIEC" is responsible for supervising the efforts of financial institutions
preparing for the Year 2000. The regulatory agencies are conducting special
examinations of insured banks, including those subsidiaries of the Company, and
savings associations to verify efforts toward attaining Year 2000 readiness.
Costs to date for Year 2000 remediation have not been material to the financial
condition of the Company. All costs related to the Company's Year 2000 plan have
been expensed as incurred. Total expenses recognized to date are $478,000
including $95,000 in personnel expense and $383,000 in hardware and software
expense. Personnel expense relates to Year 2000 training, testing, customer
awareness of Year 2000 concerns and evaluation of Year 2000 efforts of
significant customers. Hardware and software costs include purchase/replacement
of equipment, upgrades to software, and vendor costs related to Year 2000
remediation. Future expenses for Year 2000, including personnel, hardware and
software expense, are estimated to be $180,000.
The Company has not identified any noncompliant systems for which a solution is
not available. However, due to the general uncertainty inherent in the Year 2000
problem, the Company is unable to ensure its systems will not be impacted by the
Year 2000. The failure to correct a material Year 2000 problem could result in
an interruption in, or failure of, certain normal business activities. Such
failures could materially affect the Company's results of operations and
financial condition. The Year 2000 program implemented by the Company is
expected to significantly reduce its level of uncertainty regarding Year 2000
exposure. Management believes that completion of the Year 2000 program as
currently scheduled will greatly reduce the possibility of significant
interruptions of normal operations.
Forward-Looking Statements
Except for the historical information contained in this report, certain
statements made herein are forward-looking statements that involve risks and
uncertainties and are subject to various factors that could cause actual results
to differ materially from these statements. Factors that might cause such a
difference include, but are not limited to, regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities, and competitive and regulatory
factors.
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
<PAGE>
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 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,
1998. 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. The Company
does not believe that there has been a material change in the nature of the
Company's primary market risk exposures from 1997 to 1998.
<TABLE>
<CAPTION>
Quantitative Disclosures of Market Risk
Principal Amount Maturing in: Fair Value
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Rate sensitive assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed interest rate loans $125,967 $ 97,175 $123,655 $56,650 $38,312 $47,813 $ 489,572 $493,066
Average interest rate 8.76% 9.08% 9.02% 8.92% 8.72% 7.35% 8.77%
Variable interest rate loans $122,648 $ 703 $ 2,341 $ 1,822 $ 151 $ 8,643 $136,308 $136,140
Average interest rate 9.09% 8.51% 8.70% 9.04% 9.48% 9.49% 9.11%
Fixed interest rate securities $ 8,951 $ 4,996 $ 20,470 $36,923 $17,347 $ 5,595 $ 94,282 $ 94,282
Average interest rate 5.31% 5.90% 5.90% 5.75% 5.91% 6.33% 5.81%
Variable interest rate securities -- -- $ 730 $ 866 -- $ 170 $ 1,766 $ 1,766
Average interest rate -- -- 6.03% 6.11% -- 6.03% 6.07%
Other interest bearing assets $ 51,114 -- -- -- -- -- $ 51,114 $ 51,114
Average interest rate 4.64% -- -- -- -- -- 4.64%
Rate sensitive liabilities:
Savings & interest
bearing checking $296,044 -- -- -- -- -- $296,044 $296,044
Average interest rate 2.34% -- -- -- -- -- 2.34%
Time deposits $181,346 $131,629 $ 22,876 $16,411 $ 4,395 -- $356,657 $367,515
Average interest rate 5.65% 5.72% 5.94% 6.09% 5.94% -- 5.72%
Variable interest
rate borrowings $ 3,000 -- -- -- -- -- $ 3,000 $ 2,989
Average interest rate 5.69% -- -- -- -- -- 5.69%
</TABLE>
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 59,828 $ 60,039 $ 55,561
Investment securities:
Taxable 4,932 5,437 6,489
Tax-exempt 370 656 964
Short-term investments 2,799 411 730
Total Interest Income 67,929 66,543 63,744
Interest expense:
Deposits 27,407 25,755 24,293
Borrowings 207 247 252
Total Interest Expense 27,614 26,002 24,545
Net Interest Income 40,315 40,541 39,199
Provision for loan losses 905 1,781 1,929
Net Interest Income After Provision for Loan Losses 39,410 38,760 37,270
Noninterest income:
Trust department 5,136 4,483 4,158
Fees for other customer services 2,860 3,071 2,800
Net gains on sale of loans 2,610 975 695
Investment services 1,036 618 505
Net securities gains (losses) (10) 80 (86)
Other 2,316 1,800 1,475
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
13,948 11,027 9,547
53,358 49,787 46,817
Noninterest expenses:
Salaries and employee benefits 19,619 18,545 18,084
Net occupancy 2,699 2,699 2,523
Furniture and equipment 2,147 2,049 1,774
Data processing 1,943 1,736 1,510
Advertising 1,476 1,225 1,379
Other 8,944 8,382 7,808
36,828 34,636 33,078
Income before income tax expense 16,530 15,151 13,739
Income tax expense 5,353 4,702 4,106
Net Income $ 11,177 $ 10,449 $ 9,633
Earnings per share:
Basic $ 1.81 $ 1.69 $ 1.56
Diluted 1.80 1.69 1.56
</TABLE>
See notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Net income $ 11,177 $ 10,449 $ 9,633
Other comprehensive income (expense):
Unrealized gains (losses) on securities -
Unrealized holding gains (losses) arising
during period 362 438 (301)
Reclassification adjustment for (gains) losses
included in net income 10 (80) 86
Other comprehensive income (expense)
before income tax 372 358 (215)
Income tax expense (credit) related to items
of other comprehensive income 130 125 (75)
Other comprehensive income (expense),
net of income tax 242 233 (140)
Comprehensive Income $ 11,419 $ 10,682 $ 9,493
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C>
Assets
Cash and due from banks $ 36,863 $ 33,208
Short-term investments:
Federal funds sold 46,450 14,300
Money market investments 4,664 1,791
Mortgage loans held for sale 17,186 5,171
Securities:
Available for sale 96,048 76,981
Held to maturity (fair value - $11,054 in 1997) 10,952
Loans 608,694 630,321
Allowance for loan losses (9,461) (9,533)
Net Loans 599,233 620,788
Premises and equipment 25,752 25,397
Accrued interest receivable 4,769 5,326
Other assets 12,528 10,482
Total Assets $ 843,493 $ 804,396
Liabilities
Noninterest bearing deposits $ 75,959 $ 69,687
Interest bearing deposits 652,701 625,116
Total Deposits 728,660 694,803
Federal Home Loan Bank advances 3,000 5,000
Accrued interest payable 3,238 3,309
Other liabilities 9,990 8,593
Total Liabilities 744,888 711,705
Stockholders' Equity
Common stock, no par value:
Authorized shares - 10,000,000
Shares issued and outstanding - 6,173,268 in 1998 and 5,877,601 in 1997 35,741 25,050
Retained earnings 62,674 67,693
Accumulated other comprehensive income 190 (52)
Total Stockholders' Equity 98,605 92,691
Total Liabilities and Stockholders' Equity $ 843,493 $ 804,396
</TABLE>
See notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
(dollars in thousands, except per share data)
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income Total
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 18,555 $ 62,575 $ (145) $ 80,985
Net income for the year 9,633 9,633
Cash dividends, $.63 per share (3,865) (3,865)
Unrealized losses on securities (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, $.74 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)
Unrealized gains on securities 233 233
Balance at December 31, 1997 25,050 67,693 (52) 92,691
Net income for the year 11,177 11,177
Cash dividends, $.90 per share (5,543) (5,543)
Common stock issued:
Payment of 5% stock dividend - 293,367
shares (cash in lieu of fractionals - $19) 10,634 (10,653) (19)
Exercise of stock options, including
related tax benefit - 2,300 shares 57 57
Net unrealized holding gains on securities
transferred from the held to maturity
category to the available for sale category,
net of income taxes of $25 48 48
Unrealized gains on securities 194 194
Balance at December 31, 1998 $ 35,741 $ 62,674 $ 190 $ 98,605
</TABLE>
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Operating Activities
Net income $ 11,177 $ 10,449 $ 9,633
Adjustments to reconcile net income to net cash
provided by operating activities:
Origination of mortgage loans held for sale (117,681) (39,920) (39,505)
Proceeds from sale of mortgage loans held for sale 108,276 40,030 38,452
Realized gain on sale of loans (2,610) (975) (695)
Depreciation and amortization 2,347 2,174 1,880
Other (1,617) 671 (1,150)
Provision for loan losses 905 1,781 1,929
(Increase) decrease in other real estate 582 (651) (963)
(Increase) decrease in interest receivable 557 (118) 571
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Deferred income tax (credit) 116 (324) (172)
Increase (decrease) in interest payable (71) 539 (66)
Net (accretion) amortization of investment securities premium (50) 89 188
Realized net investment securities (gains) losses 10 (80) 86
Net Cash Provided by Operating Activities 1,941 13,665 10,188
Investing Activities
Purchases of available for sale securities (67,167) (8,915) (32,041)
Proceeds from calls and maturities of available for sale securities 54,360 30,669 35,483
Net (increase) decrease in short-term investments (35,023) (15,806) 17,362
Net (increase) decrease in loans 20,650 (36,640) (37,114)
Proceeds from calls and maturities of held to maturity securities 4,269 7,871 6,379
Purchases of premises and equipment (2,634) (2,859) (3,853)
Proceeds from sale of available for sale securities 836 3,617 8,995
Proceeds from sale of premises and equipment 71 73 212
Purchases of held to maturity securities (205) (196)
Net Cash Used by Investing Activities (24,638) (22,195) (4,773)
Financing Activities
Net increase (decrease) in deposits 33,857 18,695 (11,046)
Cash dividends (5,562) (4,604) (3,865)
Increase (decrease) in Federal Home Loan borrowings (2,000) 5,000
Proceeds from exercise of stock options 57
Increase (decrease) in federal funds purchased (16,015) 16,015
Net Cash Provided by Financing Activities 26,352 3,076 1,104
Increase (Decrease) in Cash and -Due from Banks 3,655 (5,454) 6,519
Cash and due from banks at beginning of year 33,208 38,662 32,143
Cash and Due from Banks at End of Year $ 36,863 $ 33,208 $ 38,662
Supplemental Cash Flow Information:
Interest paid $ 27,685 $ 25,463 $ 24,611
Income taxes paid $ 4,945 $ 5,047 $ 4,581
Noncash Transactions:
Held to maturity securities transferred to available for sale $ 6,672 $ 0 $ 0
</TABLE>
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share
data)
Note A - Summary of Significant 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.
<PAGE>
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.
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
July 1, 1998). 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 gains and losses. The cost of securities sold is based on the
specific identification method.
Loans: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs. Loans held for sale are reported at the lower of cost or
market, on an aggregate basis.
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 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.
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. 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.
<PAGE>
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.
Pension Plan: The Company and its subsidiary banks have a noncontributory
defined benefit pension plan. 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 to be 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.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Per Share Calculations: 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. All per share data have been restated to reflect
stock dividends.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, and is also recognized as a separate
component of equity. FASB Statement 130, "Reporting Comprehensive Income," the
new accounting standard that requires reporting comprehensive income, first
applies for 1998, with prior information restated to be comparable.
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 P. 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
<PAGE>
financial instruments and all nonfinancial instruments are excluded.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Management estimates the allowance
balance required using past loan loss experience, known and inherent risks in
the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's judgment,
should be charged-off.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
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.
Reclassifications: Certain prior year amounts have been reclassified to conform
with the current year's presentation.
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, 1998 and 1997, respectively, was $3,554,000 and $3,334,000.
Note C - Securities
The following is a summary of available for sale securities and held to maturity
securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1998 Available for Sale Securities
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $ 78,710 $ 280 $ (142) $ 78,848
Mortgage-backed 7,733 50 (10) 7,773
States and political subdivisions 5,158 101 5,259
Corporate 100 3 103
Other 4,055 10 4,065
$ 95,756 $ 444 $ (152) $ 96,048
<CAPTION>
December 31, 1997 Available for Sale Securities
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $ 58,922 $ 174 $ (213) $ 58,883
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Mortgage-backed 14,293 60 (107) 14,246
Corporate 300 5 305
Other 3,547 3,547
$ 77,062 $ 239 $ (320) $ 76,981
<CAPTION>
Held to Maturity Securities
<S> <C> <C> <C> <C>
States and political subdivisions $ 10,952 $ 125 $ (23) $ 11,054
</TABLE>
Investment securities with a book value of $9,869,000 were pledged at
December 31, 1998 as collateral to secure public deposits and for other
purposes.
As of July 1, 1998, the Company adopted FASB Statement 133, "Accounting for
Derivative Instruments and Hedging Activities." In accordance with provisions in
that statement, the Company chose to reclassify certain securities from held to
maturity to available for sale. The amortized cost of those securities was
$6,672,000 and the unrealized net gain was $73,000, which is included in
stockholders' equity, net of income tax effect of $25,000. None of these
securities were sold subsequent to the transfer. The Company has no derivative
securities.
Sales of available for sale securities were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Total proceeds $ 836 $ 3,617 $ 8,995
Gross realized gains 30 126 13
Gross realized losses 40 46 99
</TABLE>
The amortized cost and estimated fair value of securities at December 31,
1998, 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.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Available for sale:
Due in one year or less $ 7,294 $ 7,319
Due after one year through five years 75,692 75,859
Due after five years through ten years 982 1,032
83,968 84,210
Mortgage-backed securities 7,733 7,773
Other 4,055 4,065
$ 95,756 $ 96,048
</TABLE>
Note D - Loans and the Allowance for Loan Losses
A summary of loans outstanding follows:
<TABLE>
<CAPTION>
December 31 1998 1997
<S> <C> <C>
Commercial, financial, and agricultural $ 260,939 $ 263,727
Real estate-mortgage 228,379 235,228
Real estate-construction 13,450 13,648
Consumer 105,926 117,718
$ 608,694 $ 630,321
</TABLE>
<PAGE>
The following table presents changes in the allowance for loan losses:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 9,533 $ 8,388 $ 7,589
Provision for loan losses 905 1,781 1,929
Recoveries 451 343 260
Loans charged-off (1,428) (979) (1,390)
Balance at end of year $ 9,461 $ 9,533 $ 8,388
</TABLE>
Information regarding impaired loans follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Year end loans with no allowance for loan losses allocated $ 644 $ 988 $ 631
Year end loans with allowance for loan losses allocated 2,858 730 646
Amount of the allowance allocated 551 231 369
Average of impaired loans during the year 3,377 1,937 1,426
Interest income recognized during impairment 110 107 20
Cash basis interest income recognized 101 99 13
</TABLE>
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 40
persons was $19,199,000 and $19,754,000 at December 31, 1998 and 1997,
respectively. During 1998, $7,507,000 of new loans were made and repayments
totaled $8,062,000.
Note F - Loan Servicing
The unpaid principal balance of mortgage loans serviced for others was
$335,663,000 at December 31, 1998 and $256,102,000 at December 31, 1997. 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 $356,000 at December 31, 1998 and $344,000 at December 31,
1997.
Activity for capitalized mortgage servicing rights and the related valuation
allowance was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Servicing rights -
Beginning of year $ 1,076 $ 459 $ 0
Additions 1,831 700 481
Amortized to expense (707) (83) (22)
End of year $ 2,200 $ 1,076 $ 459
Valuation allowance -
Beginning of year $ 17 $ 0
Additions expensed 470 17
Reductions credited to expense (352) 0
End of year $ 135 $ 17
</TABLE>
<PAGE>
Note G - Premises and Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31 1998 1997
<S> <C> <C>
Land $ 2,959 $ 2,866
Buildings and improvements 26,662 25,476
Furniture, fixtures and equipment 16,113 15,540
Construction in progress 276 363
46,010 44,245
Accumulated depreciation (20,258) (18,848)
$ 25,752 $ 25,397
</TABLE>
Note H - Deposits
The aggregate amount of short-term jumbo CD's, each with a minimum denomination
of $100,000, was approximately $50,583,000 and $46,073,000 at December 31, 1998
and 1997, respectively.
At December 31, 1998, the scheduled maturities of CD's are as follows:
1999 $ 181,346
2000 131,629
2001 22,876
2002 16,411
2003 4,395
$ 356,657
Note I - Federal Home Loan Bank Advances
At year-end, advances from the Federal Home Loan Bank of Indianapolis (the
"FHLB") were as follows:
1998 1997
5.686% advance, due December 2000 $ 3,000 $ 3,000
5.65% advance, due January 1999 2,000
$ 5,000
The $2,000,000 advance was repaid during April, 1998. The fixed interest
rate applies until March 10, 1999 for the $3,000,000. On that date or at any
three month interval thereafter, the FHLB has the option to convert the advance
to an adjustable rate. After conversion the three month LIBOR rate would apply
for the remaining term until maturity.
The advances were collateralized by securities with a book value of
$3,500,000 at December 31, 1998 and $5,525,000 at December 31, 1997.
Note J - Regulatory Capital
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
<PAGE>
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth below) of
total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1998, that the Company meets all capital
adequacy requirements to which it is subject. The capital ratios of the Company
and of each of its subsidiary banks exceed the requirements to be well
capitalized.
The Company's actual and capital amounts and ratios are presented below:
<TABLE>
<CAPTION>
Minimum To Be Well
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total capital (to risk-weighted assets)$ 105,615 16.6% $ 50,913 8% $ 63,641 10%
Tier I capital (to risk-weighted assets) 97,660 15.4 25,457 4 38,185 6
Tier I capital (to average assets) 97,660 11.7 33,278 4 41,598 5
</TABLE>
Note K - Employee Benefit Plans
Pension Plan: The Company and its subsidiary banks have a noncontributory
defined benefit pension plan. 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.
Postretirement Benefit Plan: The Company and its subsidiary banks provide health
care and life insurance benefits for certain retired employees through an
unfunded plan. These benefits are provided through insurance companies whose
premiums are based on the benefits paid during the year.
Information about the plans was as follows:
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
Change in benefit obligation
<S> <C> <C> <C> <C>
Beginning benefit obligation $ 16,674 $ 15,992 $ 1,914 $ 1,807
Service cost 922 788 86 76
Interest cost 1,168 1,041 138 132
Actuarial (gain) loss 1,424 (675) 147 43
Benefits paid (455) (472) (197) (144)
Ending benefit obligation $ 19,733 $ 16,674 2,088 1,914
Change in plan assets, at fair value
Beginning plan assets $ 16,511 $ 13,839
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Actual return on plan assets 561 3,023
Employer contribution 292 121
Benefits paid (455) (472)
Ending plan assets $ 16,909 $ 16,511
Unfunded status $ (2,824) $ (163) $ (2,088) $ (1,914)
Unrecognized net transition asset (368) (420)
Unrecognized prior service cost 933 1,033 (170) (180)
Unrecognized net (gain) loss 1,006 (1,139) 416 276
Accrued benefit cost $ (1,253) $ (689) $ (1,842) $ (1,818)
<CAPTION>
Postretirement
Pension Benefits Benefits
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions
as of December 31
Discount rate 6.50% 7.00% 7.25% 6.50% 7.00% 7.25%
Expected return on plan assets 9.00 9.00 9.00
Rate of compensation increase 5.00 5.00 6.00
</TABLE>
For measurement purposes, an 8.64% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate
was assumed to decrease gradually to 4.50% for 2005 and remain at that
level thereafter.
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 922 $ 788 $ 866 $ 86 $ 76 $ 68
Interest cost 1,168 1,041 1,037 138 132 126
Expected return on plan assets (1,282) (1,178) (1,081)
Amortization of prior service cost 100 100 100 (9) (10) (4)
Amortization of unrecognized
transition asset (52) (52) (52)
Amortization of unrecognized
net loss 32
Recognition of unrecognized
net loss 7 3
Net periodic benefit cost $ 856 $ 699 $ 902 $ 222 $ 201 $ 190
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement benefit plan. A one-percentage-point
change in assumed health care cost trend rates would have the following effects
for 1998:
<TABLE>
<CAPTION>
1-Percentage- 1-Perentage-
Point Increase Point Decrease
<S> <C> <C>
Effect on aggregate of service and interest cost components 14.74% (11.88)%
Effect on ending postretirement benefit obligation 10.28% (8.63)%
</TABLE>
Employee Savings and Stock Ownership Plan: The Company and its subsidiary banks
also have a contributory qualified employee Savings and Stock Ownership Plan
(KSOP), which functions as an ESOP/401(k) plan. Qualified employees can
contribute up to 6% of their compensation in order to receive an employer
contribution. During 1996, the Company and its subsidiary banks matched 30% of
the amount of such employee contributions. During 1997, the match level was
increased
<PAGE>
to 35%, and in 1998 to 371_2 %. In addition, each employee could contribute
amounts in excess of the 6% limit, up to the lesser of 15% of compensation or
federal tax limits, with no Company or subsidiary bank participation. The
matching contribution formula is determined annually and requires approval of
the Company's Board of Directors. Expense for this plan was $221,000 for 1998,
$174,000 for 1997 and $141,000 for 1996.
Common stock of the Company owned by the KSOP at year end was as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Total number of shares 179,364 151,707
Fair value $ 6,099,000 $ 4,588,000
</TABLE>
Note L - 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:
<TABLE>
<CAPTION>
December 31 1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 3,336 $ 2,902
Postretirement benefit obligation 636 616
Deferred compensation and director fees 496 482
Net unrealized losses 28
Other 815 625
5,283 4,653
Deferred tax liabilities:
Accumulated depreciation 1,283 1,178
Mortgage servicing rights 377 161
Net unrealized gains 102
Other 200 137
1,962 1,476
Net deferred tax assets $ 3,321 $ 3,177
</TABLE>
Income tax expense is composed of the following amounts:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
<S> <C> <C> <C>
Currently payable $ 5,237 $ 5,026 $ 4,278
Deferred tax (credit) 116 (324) (172)
Income tax expense $ 5,353 $ 4,702 $ 4,106
</TABLE>
Applicable income taxes (benefits) on investment securities transactions
amounted to $(4,000), $28,000, and $(30,000), in 1998, 1997 and 1996,
respectively, and are included in income tax expense. The components of income
tax expense for 1997 and 1996 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:
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
<S> <C> <C> <C>
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Income before income tax expense $ 16,530 $ 15,151 $ 13,739
Federal income tax computed at 35% $ 5,786 $ 5,303 $ 4,809
Deduct effect of:
Tax-exempt bond and loan interest income (484) (593) (662)
Other items-net 51 (8) (41)
$ 5,353 $ 4,702 $ 4,106
</TABLE>
Note M - Stock Options
The Company has a stock option plan which is used to reward key employees and
provide them with an additional equity interest. Options to buy stock are issued
for 10 year periods, with vesting occurring after the first three years. At year
end 1998, 102,843 shares were authorized for future grants. Information about
option grants follows.
<TABLE>
<CAPTION>
Number Weighted-average Weighted-average
of options exercise price fair value of grants
<S> <C> <C> <C> <C>
Outstanding, beginning of 1996 103,638 $ 21.31 $14.55
Granted 51,819 21.08 9.98
Outstanding, end of 1996 155,457 21.23 13.03
Granted none
Outstanding, end of 1997 155,457 21.23 13.03
Granted 50,400 27.14 11.88
Exercised (2,300) 17.23
Outstanding, end of 1998 203,557 22.74 12.70
</TABLE>
Options exercisable at each year end were as follows:
<TABLE>
<CAPTION>
Number Weighted-average
of options exercise price
<S> <C> <C>
1996 none
1997 51,819 $ 17.23
1998 101,338 21.40
</TABLE>
At year end 1998 options outstanding were as follows:
<TABLE>
<S> <C>
Number of options 203,557
Range of exercise price $17.23 - $27.14
Weighted-average exercise price $22.74
Weighted-average remaining option life 7.7 years
</TABLE>
FASB Statement 123, "Accounting for Stock-Based Compensation," 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
1998, 1997, and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net income as reported $ 11,177 $ 10,449 $ 9,633
Pro forma net income 10,830 10,205 9,499
Basic earnings per share as reported $ 1.81 $ 1.69 $ 1.56
Pro forma basic earnings per share 1.75 1.65 1.54
Diluted earnings per share as reported 1.80 1.69 1.56
Pro forma diluted earnings per share 1.74 1.65 1.54
</TABLE>
In future years, the pro forma effect of not applying this standard is
expected to increase as additional options are granted.
The pro forma effects are computed using option pricing models, using the
following weighted-average assumption as of grant date.
<TABLE>
<CAPTION>
1998 1996
<S> <C> <C>
Risk-free interest rate 5.42% 6.26%
Expected option life 6 years 7 years
Expected stock price volatility 56% 56%
Dividend yield 3.4% 3.1%
</TABLE>
On January 22, 1999, an additional 48,000 options were granted at a price of
$33.00.
NOTE N - 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.
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
<S> <C> <C> <C>
Basic earnings per share
Net income $ 11,177 $ 10,449 $ 9,633
Weighted-average common shares outstanding 6,172 6,171 6,171
Basic earnings per share $ 1.81 $ 1.69 $ 1.56
Diluted earnings per share
Net income $ 11,177 $ 10,449 $ 9,633
Weighted-average common shares outstanding 6,172 6,171 6,171
Add dilutive effects of assumed exercises
under stock options 47 14 8
Weighted-average common and dilutive
potential common shares outstanding 6,219 6,185 6,179
Diluted earnings per share $ 1.80 $ 1.69 $ 1.56
</TABLE>
Note O - 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.
<PAGE>
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, 1998 follows:
<TABLE>
<CAPTION>
Loan Standby Letters
Expiration Date Commitments of Credit
<S> <C> <C>
1999 $ 107,500 $ 4,188
2000 13,868 928
2001 704 657
2002 692 171
2003 1,234 92
Thereafter 1,639 2,968
$ 125,637 $ 9,004
</TABLE>
Note P - Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Fair Carrying- Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 87,977 $ 87,977 $ 49,299 $ 49,299
Mortgage loans held for sale 17,186 17,217 5,171 5,180
Securities -
Available for sale 96,048 96,048 76,981 76,981
Held to maturity 10,952 11,054
Loans, less allowance 599,233 602,528 620,788 622,235
Financial liabilities:
Deposits $ 728,660 $ 739,522 $ 694,803 $ 702,573
Federal Home Loan Bank advances 3,000 2,989 5,000 4,804
</TABLE>
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.
Securities (including mortgage-backed securities): Fair values for
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 and mortgage loans held for sale: 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
<PAGE>
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, 1998 and 1997.
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
deposit 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.
Note Q - Segment Information
Effective December 31, 1998, the Company adopted FASB Statement 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company is principally engaged in one business segment: banking. The accounting
policies used are the same as those described in the summary of significant
accounting policies.
Information about reportable segments follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net interest income
Banking $ 40,168 $ 40,377 $ 39,030
Other 145 163 168
Total $ 40,313 $ 40,540 $ 39,198
Other revenue
Banking $ 10,542 $ 9,471 $ 8,224
Other 957 759 792
Total $ 11,499 $ 10,230 $ 9,016
Depreciation
Banking $ 2,208 $ 2,068 $ 1,819
Other 0 0 0
Total $ 2,208 $ 2,068 $ 1,819
Loan loss provision
Banking $ 905 $ 1,781 $ 1,929
Other 0 0 0
Total $ 905 $ 1,781 $ 1,929
Net gain on loan sales
Banking $ 2,610 $ 975 $ 695
Other 0 0 0
Total $ 2,610 $ 975 $ 695
Income tax expense
Banking $ 5,206 $ 4,658 $ 4,014
Other 147 44 92
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Total $ 5,353 $ 4,702 $ 4,106
Segment net income
Banking $ 11,039 $ 10,535 $ 9,605
Other 298 91 192
Total $ 11,337 $ 10,626 $ 9,797
Segment assets
Banking $ 840,007 $ 801,566
Other 3,517 2,829
Total $ 843,524 $ 804,395
</TABLE>
Significant segment totals are reconciled to the financial statements as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net interest income and noninterest income
Net interest income $ 40,315 $ 40,541 $ 39,199
Noninterest income 13,948 11,027 9,547
Total $ 54,263 $ 51,568 $ 48,746
Banking segment $ 53,320 $ 50,823 $ 47,949
Other 1,102 922 960
Eliminations (159) (177) (163)
Total $ 54,263 $ 51,568 $ 48,746
Net income
Segment net income $ 11,337 $ 10,626 $ 9,797
Eliminations (160) (177) (164)
Total $ 11,177 $ 10,449 $ 9,633
Assets
Segment assets $ 843,524 $ 804,395
Eliminations (31) 1
Total $ 843,493 $ 804,396
</TABLE>
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, 1998, $10,508,000 of retained
earnings was available for dividend declaration without prior regulatory
approval.
Following are condensed parent company financial statements.
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31 1998 1997
<S> <C> <C>
Assets
Cash $ 6,772 $ 6,946
Money market investments 1,958
Securities available for sale 470
Investment in bank subsidiaries 87,958 84,333
Investment in insurance subsidiary 2,217 1,920
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Premises and equipment 1,448 1,576
Other assets 977 946
Total Assets $ 101,800 $ 95,721
Liabilities
Accrued expenses and other liabilities $ 3,195 $ 3,030
Stockholders' Equity 98,605 92,691
Total Liabilities and Stockholders' Equity $ 101,800 $ 95,721
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks $ 8,500 $ 7,700 $ 6,900
Fees from subsidiary banks 6,104 5,702 4,909
Interest from subsidiary banks 199 130 44
Securities gains 30 109 13
Interest and dividends from securities and
money market investments 19 20 37
Other 7 46 13
Total Income 14,859 13,707 11,916
Expenses:
Salaries and employee benefits 3,814 3,414 3,211
Data processing 1,670 1,488 1,285
Other 2,435 2,314 1,966
Total Expenses 7,919 7,216 6,462
Income before income tax and equity in
undistributed net income of subsidiaries 6,940 6,491 5,454
Income tax credit (550) (414) (514)
Income before equity in undis-tributed
net income of subsidiaries 7,490 6,905 5,968
Equity in undistributed net income of:
Bank subsidiaries 3,389 3,453 3,473
Insurance subsidiary 298 91 192
Net Income $ 11,177 $ 10,449 $ 9,633
</TABLE>
Condensed Statements of Comprehensive Income
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
<S> <C> <C> <C>
Net income $ 11,177 $ 10,449 $ 9,633
Comprehensive income $ 11,419 $ 10,682 $ 9,493
Condensed Statements of Cash Flows
Year ended December 31 1998 1997 1996
Operating Activities
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net income $ 11,177 $ 10,449 $ 9,633
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiaries (3,687) (3,544) (3,665)
Decrease in other real estate 250
Depreciation and amortization 261 248 189
Realized investment securities gains (30) (109) (13)
Accretion of investment securities discount (9) (20) (2)
Deferred income tax (credit) (33) (7) 4
Other 74 477 (161)
Net Cash Provided by Operating Activities 7,753 7,744 5,985
Investing Activities
Proceeds from sale of available for sale securities 785 1,356 996
Purchases of money market investments (1,958)
Purchases of available for sale securities (1,206) (1,227) (981)
Purchases of premises and equipment (43) (15) (130)
Proceeds from sale of premises and equipment 2
Net Cash Provided (Used)
by Investing Activities (2,422) 114 (113)
Financing Activities
Proceeds from common stock issued 57
Cash dividends (5,562) (4,604) (3,865)
Net Cash Used By Financing Activities (5,505) (4,604) (3,865)
Net Change in Cash (174) 3,254 2,007
Cash at beginning of year 6,946 3,692 1,685
Cash At End of Year $ 6,772 $ 6,946 $ 3,692
</TABLE>
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, 1998 and 1997 and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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.
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
<PAGE>
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company llp
Grand Rapids, Michigan
January 15, 1999, except for Note M, as to which the date is January 22, 1999
Quarterly Results of Operations (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 16,778 $ 16,925 $ 17,147 $ 17,079 $ 15,939 $ 16,555 $ 16,931 $17,118
Net interest income 9,965 10,015 10,165 10,170 9,738 10,069 10,330 10,404
Loan loss provision 382 218 100 205 204 454 601 522
Investment securities gains (losses) (40) 30 59 21
Noninterest income 3,293 3,476 3,361 3,828 2,479 2,671 2,836 2,961
Noninterest expense 9,036 9,069 9,216 9,507 8,539 8,595 8,745 8,757
Income tax expense 1,192 1,376 1,370 1,415 1,051 1,155 1,202 1,294
Net income 2,608 2,858 2,840 2,871 2,423 2,536 2,677 2,813
Basic earnings per share 0.42 0.46 0.46 0.47 0.39 0.41 0.43 0.46
Diluted earnings per share 0.42 0.46 0.46 0.46 0.39 0.41 0.43 0.45
</TABLE>
Per share amounts have been adjusted to reflect stock dividends paid in both
years.
MFC Bank Directors
Marquette
Howard L. Cohodas
Chairman of the Board and President
Michigan Financial Corporation and
MFC First National Bank, Marquette
<PAGE>
K. Michael Skytta Executive Vice President and Chief Operating Officer
MFC First National Bank, Marquette
Kenneth F. Beck, Senior Vice President, Treasurer and Secretary
Michigan Financial Corporation
Robert O. Berube II, Dentist
Charles H. Carlson, President
Industrial Piping Co. of Marquette
Willard L. Cohodas Executive Vice President
Cohodas Bros. Company of Michigan
James P. Grundstrom, President
Frei Chevrolet, Inc.
David Holli, President
Holli Forest Products, Inc.
Nicholas F. Joseph, President
Joseph's, Inc.
Ronald C. Katers, Secretary - Treasurer
M.K. Stores, Inc.
Thomas D. LeGalley, President
Cardiology Associates of the Upper Peninsula
Paulette J. Lindberg, Owner - Manager
Adventure Travel & Tour
David J. Lundquist, President
Swanson - Lundquist Funeral Home, Inc.
Michael P. Mlinar, General Manager
Tilden Mining Company L.C.
Kirk A. Nelson, President - Secretary
Nelson Chevrolet - Oldsmobile, Inc.
Dewayne D. Nygard
Vice President, Treasurer and Controller
Lake Superior & Ishpeming Railroad Co.
George F. Russo, Retired
Escanaba
James L. Smith, President
MFC First National Bank, Escanaba
Lois M. Anderson, Owner
Holiday Travel Agency
John T. Anthony, President
Andex Industries, Inc.
Kenneth F. Beck, Senior Vice President, Treasurer and Secretary
Michigan Financial Corporation
John C. Bissell, Senior Vice President and Trust Officer
MFC First National Bank, Escanaba
Gary W. Bradley, Dentist
Thomas R. Broullire, President
Messier-Broullire Funeral Home, Inc.
Gary L. Butryn
Vice President - Operations
Mead Paper Division
Mead Corporation
<PAGE>
Willard M. Carne, Owner
Carne's Amoco Service
Howard L. Cohodas Chairman of the Board and President
Michigan Financial Corporation
Willard L. Cohodas Executive Vice President
Cohodas Bros. Company of Michigan
Wayne J. Dagenais, Manager
Elmer's County Market
Michael J. DeLany
Executive Vice President
MFC First National Bank, Escanaba
Roger H. Jensen, President
Guindon Moving & Storage Co.
James D. Okraszewski Woodlands Manager
Mead Paper Division
Mead Corporation
Thomas L. Wilson, Owner
McDonald's Restaurants
Menominee
Kim Van Osdol, President
MFC First National Bank, Menominee
Stephen J. Albers
Senior Vice President and Trust Officer
MFC First National Bank, Menominee
Kenneth F. Beck, Senior Vice President, Treasurer and Secretary
Michigan Financial Corporation
Alton R. Berquist Chief Executive Officer
Marmen Computing and Silvan Industries
David V. Bournonville, President
Menominee Industrial Supply
William H. Caley, President
Twin City Service Agency
Howard L. Cohodas Chairman of the Board and President
Michigan Financial Corporation
Willard L. Cohodas Executive Vice President
Cohodas Bros. Company of Michigan
Orlin R. Herrild, DVM, President
Town & Country Veterinarian Clinic
Hugh C. Higley, Jr., Senior Vice President
Interstate Welding Sales Corporation
Thomas J. Kuber, President
K&K Warehousing, Inc.
Harry L. Meintz, Owner
Pleasant View Dairy Farm
North A. Shetter, Dentist
James J. Stang, President
Stang Wisconsin Corp.
<PAGE>
Ironwood
Robert W. Martin, President
MFC First National Bank, Ironwood
Howard L. Cohodas Chairman of the Board and President
Michigan Financial Corporation
Willard L. Cohodas Executive Vice President
Cohodas Bros. Company of Michigan
Daniel J. Corullo
Vice President and Secretary
Action Floor Systems, Inc.
President, Ottawa Forest Products, Inc.
Edrye Doman, Owner
Doman Appraisals
Robert J. Jacquart, President
Jacquart Fabric Products, Inc.
Wayne Nasi, President
Wayne Nasi Construction Co., Inc.
Lucien R. Perron, President
Midwest Timber of MN, Inc.
Richard D. Steiger, President
Steiger's Home Center
John F. Wisler, President
MFC First National Bank, Iron Mountain
Iron Mountain
John F. Wisler, President
MFC First National Bank, Iron Mountain
Richard J. Celello
Partner, Mouw & Celello, P.C.
Howard L. Cohodas Chairman of the Board and President
Michigan Financial Corporation
Willard L. Cohodas Executive Vice President
Cohodas Bros. Company of Michigan
Dale L. Edwards, President
Edwards Chevrolet
Alan J. Filizetti
Executive Vice President and Cashier
MFC First National Bank, Iron Mountain
Suzanne M. Fleury
Attorney-At-Law
James S. Gibula, President
MFC First National Bank, Iron River
Daniel H. Lori, Owner
DN Lori Associates, Inc.
Mark F. Pontti,
Manager of Public Affairs- Michigan
Champion International Corporation
Iron River
James S. Gibula, President
MFC First National Bank, Iron River
<PAGE>
Alfred J. Angeli, Chairman
Angeli Foods Company
Howard L. Cohodas Chairman of the Board and President
Michigan Financial Corporation
Willard L. Cohodas Executive Vice President
Cohodas Bros. Company of Michigan
John Detterbeck, President
Iron River Manufacturing (LDE)
Chester Fabbri, Owner
Fob's Fine Foods
Chester C. Kudwa, Owner
Idlewild Farm
John Lofgren, Owner
Allied Industries Inclusive, Inc.
Fred M. Saigh, Chairman
First National Underwriters, Inc.
John F. Wisler, President
MFC First National Bank, Iron Mountain
Houghton
Susanne V. Boxer, President
MFC First National Bank, Houghton
Kenneth F. Beck, Senior Vice President, Treasurer and Secretary
Michigan Financial Corporation
Barbara B. Briggs, Retired
Howard L. Cohodas Chairman of the Board and President
Michigan Financial Corporation
Martin J. Feira, Retired
Clarence R. Fisher President and Chief Executive Officer
Upper Peninsula Power Company
Robert A. Sturos Vice President and Controller
Gundlach Champion, Inc.
Robert A. Vollwerth II Secretary - Treasurer
Vollwerth & Co.
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.,
<PAGE>
Stock Transfer Department
161 North Concord Exchange
South St. Paul, Minnesota 55075
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 27, 1999 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:
Herzog, Heine, Geduld, Inc.
Knight Securities LP
Roney Capital Markets
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.,
Shareowner Services
161 North Concord Exchange, P.O. Box 64856
St. Paul, Minnesota 55164-0856
800/468-9716 or 651/450-4064
Market Price and Dividend Information
Dividends
per share High Low Close
1997
First quarter $ 0.18 $23.36 $21.77 $ 22.56
Second quarter 0.18 23.10 20.64 22.26
Third quarter 0.19 28.57 21.90 28.57
Fourth quarter 0.19 31.31 26.67 30.24
1998
<PAGE>
First quarter $ 0.22 $31.43 $26.90 $ 30.60
Second quarter 0.22 44.00 30.48 42.69
Third quarter 0.23 43.38 30.00 35.38
Fourth quarter 0.23 38.00 28.00 34.00
Amounts have been adjusted to reflect stock dividends paid in both years.
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, 1998 is shown above, along with the closing prices.
At December 31, 1998, there were 6,173,268 shares outstanding and
approximately 1,796 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.
Officers and Directors
Board of Directors
Alfred J. Angeli
Chairman, Angeli Foods Company
Kenneth F. Beck, CPA
Senior Vice President,
Treasurer and Secretary
Gary L. Butryn
Vice President - Operations,
Mead Paper Division
Mead Corporation
Willard M. Carne
Owner, Carne's Amoco Service
Howard L. Cohodas
Chairman and President
Willard L. Cohodas
Executive Vice President,
Cohodas Brothers -Company of Michigan
Clarence R. Fisher
President and Chief Executive Officer,
Upper Peninsula Power Company
Hugh C. Higley, Jr.
Senior Vice President, Interstate Welding Sales Corporation
David Holli
President, Holli Forest Products, Inc.
Daniel H. Lori
Owner, DN Lori Associates, Inc.
Wayne Nasi
President, Wayne Nasi Construction Co., Inc.
<PAGE>
Fred M. Saigh
Chairman, First National Underwriters, Inc.
James L. Smith
President,
MFC First National Bank, Escanaba
William C. Verrette
Chairman and President,
Champion, Inc.
Officers
Howard L. Cohodas
Chairman and President
Kenneth F. Beck, CPA
Senior Vice President,
Treasurer and Secretary
Ward L. Rantala, CEBS
Vice President - Human Resources
John W. Lenten, CPA, CTA
Vice President - Audit
Stephen C. Mattson
Vice President-
Retail and Electronic Banking
Steven W. White, CBA, CRCM
Vice President - Compliance
Gloria Lambert
Operations Officer
Scott M. Beaudry
Controller
Toni Eppensteiner
Purchasing and Facilities Officer
Toni R. Jandron
Marketing Officer
Steven J. Swanson
Marketing Officer
Patricia Varda
Training Officer
Douglas W. Hill
Item Processing Manager
Susan E. Johnson
Deposit Operations Manager
Carolyn K. Krieg
<PAGE>
Loan Operations Manager
Janet A. Van Dyke
Banking Office Support Manager
Tim E. Wakkuri
Technology Systems Manager
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 15, 1999,
except for Note M, as to which the date is January 22, 1999, on the 1998
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, 1998.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 22, 1999
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, l998.
Dated January 18, 1999 /s/ GARY L. BUTRYN
-----------------------------------
Gary L. Butryn
Dated January 18, 1999 /s/ WILLARD M. CARNE
-----------------------------------
Willard M. Carne
Dated January 18, 1999 /s/ WILLARD L. COHODAS
-----------------------------------
Willard L. Cohodas
Dated January 18, 1999 /s/ CLARENCE R. FISHER
-----------------------------------
Clarence R. Fisher
Dated January 18, 1999 /s/ HUGH C. HIGLEY, JR
-----------------------------------
Hugh C. Higley, Jr.
Dated January 18, 1999 /s/ DAVID HOLLI
-----------------------------------
David Holli
24
<PAGE>
Dated January 18, 1999 /s/ DANIEL H. LORI
-----------------------------------
Daniel H. Lori
Dated January 18, 1999 /s/ WAYNE L. NASI
-----------------------------------
Wayne L. Nasi
Dated January 18, 1999 /s/ FRED M. SAIGH
-----------------------------------
Fred M. Saigh
Dated January 18, 1999 /s/ JAMES L. SMITH
-----------------------------------
James L. Smith
Dated January 18, 1999 /s/ WILLIAM C. VERRETTE
-----------------------------------
William C. Verrette
25
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 36,863
<INT-BEARING-DEPOSITS> 4,664
<FED-FUNDS-SOLD> 46,450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 96,048
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 625,880
<ALLOWANCE> 9,461
<TOTAL-ASSETS> 843,493
<DEPOSITS> 728,650
<SHORT-TERM> 0
<LIABILITIES-OTHER> 13,228
<LONG-TERM> 3,000
0
0
<COMMON> 35,741
<OTHER-SE> 62,864
<TOTAL-LIABILITIES-AND-EQUITY> 843,493
<INTEREST-LOAN> 59,828
<INTEREST-INVEST> 5,302
<INTEREST-OTHER> 2,799
<INTEREST-TOTAL> 67,929
<INTEREST-DEPOSIT> 27,407
<INTEREST-EXPENSE> 27,614
<INTEREST-INCOME-NET> 40,315
<LOAN-LOSSES> 905
<SECURITIES-GAINS> (10)
<EXPENSE-OTHER> 36,828
<INCOME-PRETAX> 16,530
<INCOME-PRE-EXTRAORDINARY> 11,177
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,177
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.80
<YIELD-ACTUAL> 5.38
<LOANS-NON> 3,701
<LOANS-PAST> 1,152
<LOANS-TROUBLED> 540
<LOANS-PROBLEM> 19,076
<ALLOWANCE-OPEN> 9,533
<CHARGE-OFFS> 1,428
<RECOVERIES> 451
<ALLOWANCE-CLOSE> 9,461
<ALLOWANCE-DOMESTIC> 4,288
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,173
</TABLE>
