<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1994
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to __________
Commission file number 0-7186
MICHIGAN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-0111135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
27777 Inkster Road, Farmington Hills, MI 48334
(Address of principal executive offices)
(810) 473-3000
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Common stock outstanding at July 31, 1994 - 15,300,498 SHARES
<PAGE> 2
Michigan National Corporation
and Subsidiaries
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
<TABLE>
<S> <C>
Consolidated Statement of Income:
Three Months Ended June 30, 1994 and 1993 1
Six Months Ended June 30, 1994 and 1993 3
Consolidated Statement of Condition:
June 30, 1994 and December 31, 1993 5
Consolidated Statement of Changes in Shareholders' Equity:
Six Months Ended June 30, 1994 and 1993 7
Consolidated Statement of Cash Flows:
Six Months Ended June 30, 1994 and 1993 8
Notes to Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Part I Exhibit 56
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 57
Item 4. Results of Votes of Security Holders 57
Item 6.(a) Exhibits 57
Signatures 58
</TABLE>
<PAGE> 3
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
- - -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED INCREASE
JUNE 30 (DECREASE)
(IN THOUSANDS, EXCEPT PER SHARE) 1994 1993
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Federal funds sold and resale agreements $2,473 $2,707 ($234)
Interest-bearing deposits with banks 4,318 1,220 3,098
Money market investments 110 50 60
Investment securities available for sale 4,336 526 3,810
Investment securities held to maturity 18,169 23,555 (5,386)
Trading securities 964 1,514 (550)
Loans and lease financing, including related fees 129,812 142,225 (12,413)
Note receivable-FDIC 3,818 5,794 (1,976)
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 164,000 177,591 (13,591)
INTEREST EXPENSE
Money market accounts 14,662 14,806 (144)
Savings deposits 5,864 7,517 (1,653)
Time deposits < $100,000 33,604 41,131 (7,527)
Time deposits > $100,000 6,485 8,096 (1,611)
Short-term borrowings 4,225 3,907 318
Long- term debt 1,567 1,629 (62)
FDIC assistance (3,339) (3,404) 65
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 63,068 73,682 (10,614)
NET INTEREST INCOME 100,932 103,909 (2,977)
PROVISION FOR POSSIBLE CREDIT LOSSES 6,000 12,494 (6,494)
- - -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 94,932 91,415 3,517
- - -------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges 31,468 34,026 (2,558)
Trust and investment services income 4,472 4,837 (365)
Mortgage banking gains, net 4,406 4,681 (275)
Gains (losses) from sale of mortgage servicing rights 53 (53)
Investments available-for-sale gains, net 160 (160)
Other income 11,547 11,917 (370)
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 51,893 55,674 (3,781)
NON-INTEREST EXPENSE
Salaries and wages 46,625 44,586 2,039
Other employee benefits 13,971 13,257 714
Net occupancy expense 7,645 7,529 116
Equipment expense 10,517 10,600 (83)
Outside services 8,306 8,052 254
Defaulted loan (income) expense, net (2,462) 2,819 (5,281)
Amortization of purchased mortgage servicing rights 3,027 21,654 (18,627)
Other expenses 25,883 29,690 (3,807)
- - --------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 113,512 138,187 (24,675)
- - --------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 33,313 8,902 24,411
Income tax provision (benefit) (Note I) (29,981) (29,981)
- - -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $63,294 $8,902 $54,392
===============================================================================================================================
</TABLE>
The Consolidated Statement of Income is continued on the next page.
1
<PAGE> 4
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
continued (UNAUDITED)
- - -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED INCREASE
JUNE 30 (DECREASE)
(IN THOUSANDS, EXCEPT PER SHARE) 1994 1993
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME PER COMMON SHARE $4.06 $0.58 $3.48
- - -------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING 15,584 15,225 359
- - -------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $0.50 $0.50
===============================================================================================================================
</TABLE>
2
<PAGE> 5
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
- - -------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED INCREASE
JUNE 30 (DECREASE)
(IN THOUSANDS, EXCEPT PER SHARE) 1994 1993
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Federal funds sold and resale agreements $7,225 $6,796 $429
Interest-bearing deposits with banks 6,593 2,194 4,399
Money market investments 183 94 89
Investment securities available for sale 7,868 2,548 5,320
Investment securities held to maturity 34,526 46,056 (11,530)
Trading securities 1,973 3,279 (1,306)
Loans and lease financing, including related fees 256,342 275,800 (19,458)
Note receivable-FDIC 7,707 11,934 (4,227)
Guaranteed yield on covered assets 32 (32)
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 322,417 348,733 (26,316)
INTEREST EXPENSE
Money market accounts 28,815 30,519 (1,704)
Savings deposits 12,640 14,732 (2,092)
Time deposits < $100,000 68,608 84,948 (16,340)
Time deposits > $100,000 12,677 17,542 (4,865)
Short-term borrowings 6,987 8,288 (1,301)
Long- term debt 3,103 3,265 (162)
FDIC assistance (6,625) (6,934) 309
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 126,205 152,360 (26,155)
NET INTEREST INCOME 196,212 196,373 (161)
PROVISION FOR POSSIBLE CREDIT LOSSES 12,000 25,000 (13,000)
- - -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE CREDIT LOSSES 184,212 171,373 12,839
- - -------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges 64,298 63,043 1,255
Trust and investment services income 9,552 9,980 (428)
Mortgage banking gains, net 9,152 5,679 3,473
Gains (losses) from sale of mortgage servicing rights 53 (53)
Investments available-for-sale gains, net 6,128 (6,128)
Other income 22,409 22,218 191
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 105,411 107,101 (1,690)
NON-INTEREST EXPENSE
Salaries and wages 92,732 89,146 3,586
Other employee benefits 29,179 26,247 2,932
Net occupancy expense 15,297 14,866 431
Equipment expense 20,836 21,314 (478)
Outside services 16,061 15,787 274
Defaulted loan (income) expense, net (2,533) 6,299 (8,832)
Amortization of purchased mortgage servicing rights 8,413 80,994 (72,581)
Other expenses 51,617 59,717 (8,100)
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 231,602 314,370 (82,768)
- - -------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 58,021 (35,896) 93,917
Income tax provision (benefit) (Note I) (23,557) (23,557)
- - -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 81,578 (35,896) 117,474
===============================================================================================================================
</TABLE>
The Consolidated Statement of Income is continued on the next page.
3
<PAGE> 6
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
continued (UNAUDITED)
- - -------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED INCREASE
JUNE 30 (DECREASE)
(IN THOUSANDS, EXCEPT PER SHARE) 1994 1993
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME (LOSS) PER COMMON SHARE $5.27 $(2.39) $7.66
- - -------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING 15,474 15,018 456
- - -------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $1.00 $1.00
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 7
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CONDITION
(UNAUDITED)
- - -------------------------------------------------------------------------------------------------------------
June 30, December 31,
(IN THOUSANDS EXCEPT SHARE AMOUNTS) 1994 1993
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $476,498 $518,080
Federal funds sold and resale agreements 207,768 483,000
- - -------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 684,266 1,001,080
Interest-bearing deposits with banks 440,716 121,445
Money market investments 13,734 11,513
Investment securities available for sale (amortized cost of
$261,295 and $893 at 06/30/94 and 12/31/93, respectively) (Note C)
Mortgage-backed securities 121,231
U.S. Government and other securities 142,995 893
Investment securities held to maturity, (market value of $1,308,200
and $1,343,657 at 06/30/94 and 12/31/93, respectively) (Note C)
Mortgage-backed securities 740,817 983,765
U.S. Government and other securities 581,040 330,008
Trading securities 95,005 70,113
Residential mortgages held for sale (Note D) 331,300 583,056
Loans and lease financing (Note D) 6,100,665 6,106,829
- - -------------------------------------------------------------------------------------------------------------
Total Loans and Lease Financing 6,431,965 6,689,885
Unearned income (26,706) (18,619)
Allowance for possible credit losses (188,585) (190,992)
- - -------------------------------------------------------------------------------------------------------------
Net Loans and Lease Financing 6,216,674 6,480,274
Note receivable-FDIC 348,930 462,535
Premises and equipment, net 187,204 199,142
Due from customers on acceptances 3,124 612
Accrued income receivable 82,219 77,347
Purchased mortgage servicing rights, net 42,740 49,389
Capitalized excess service fees, net 6,404 6,869
Property from defaulted loans and other real estate owned, net 56,957 98,066
Other assets 272,310 279,757
- - -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,036,366 $10,172,808
=============================================================================================================
</TABLE>
The Consolidated Statement of Condition is continued on the next page.
5
<PAGE> 8
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CONDITION
continued (UNAUDITED)
- - -------------------------------------------------------------------------------------------------------------
June 30, December 31,
(IN THOUSANDS EXCEPT SHARE AMOUNTS) 1994 1993
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Non-interest bearing demand deposits $1,704,203 $1,995,940
Interest-bearing deposits:
Money market accounts 2,102,142 2,195,670
Savings deposits 1,175,555 1,183,280
Time deposits < $100,000 2,528,780 2,699,512
Time deposits > $100,000 644,847 650,677
- - -------------------------------------------------------------------------------------------------------------
Total Deposits 8,155,527 8,725,079
Short-term borrowings (Note E) 709,301 293,293
Customer acceptances outstanding 3,124 612
Accrued liabilities 200,179 261,112
Long-term debt 76,400 77,122
- - -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 9,144,531 9,357,218
Contingencies and Commitments (Notes F and G)
SHAREHOLDERS' EQUITY
Common stock, $10 par value, authorized 50,000,000 shares 152,933 151,764
Surplus 202,256 195,466
Retained earnings 549,953 483,572
Net unrealized gains on investment
securities available-for-sale (Note C) 1,905
Note receivable-ESOP (15,212) (15,212)
- - -------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 891,835 815,590
- - -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,036,366 $10,172,808
=============================================================================================================
Common stock outstanding 15,293,257 15,176,336
=============================================================================================================
</TABLE>
Certain prior period amounts have been reclassified in order to conform to
current period presentation.
6
<PAGE> 9
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
(UNAUDITED)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net
unrealized
gain on
investment
Convertible securities Note
Preferred Common Retained available Receivable
(in thousands) Stock Stock Surplus Earnings for sale ESOP Total
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $6,000 $149,079 $185,759 $482,949 ($18,012) $805,775
Net income (35,896) (35,896)
Unrealized loss on marketable
equity securities 12 12
Common stock issued, net 918 3,183 4,101
Conversion of preferred stock (6,000) 1,200 4,800
Cash dividends
Common stock (15,054) (15,054)
Convertible preferred stock (90) (90)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1993 $151,197 $193,742 $431,921 ($18,012) $758,848
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 $151,764 $195,466 $483,572 ($15,212) 815,590
Net income 81,578 81,578
Net unrealized gain/(loss) on securities
classified as available for sale (Note C) 2,931 2,931
Tax effect of unrealized gain/(loss) on
investment securities
classified as available for sale (1,026) (1,026)
Common stock issued, net 1,169 6,790 7,959
Cash dividends
Common stock (15,197) (15,197)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 $152,933 $202,256 $549,953 $1,905 ($15,212) $891,835
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
- - ------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30 (in thousands) 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $81,578 ($35,896)
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Provision for possible credit losses 12,000 25,000
Depreciation and amortization expense 28,658 111,983
Net amortization(accretion) associated with investment securities 2,053 (12)
Write-downs of property from defaulted loans 3,175 4,403
Net deferred income taxes (27,294) (28,694)
Gain from sale of investment securities available for sale (Note C) (6,127)
Gain from sale of fixed assets 233 597
Gain from sale of mortgage servicing rights (53)
Net gain from sale of property from defaulted loans (9,545) (1,887)
(Increase)decrease in operating assets:
Trading account securities (24,892) (101,891)
Accrued interest receivable (4,872) (3,725)
Residential mortgages held for sale 251,756 61,706
Pending investment and trading securities sales (29,881) (57,598)
Capitalized excess service fees (1,380) (3,469)
Other assets 62,592 (12,745)
Increase (decrease) in operating liabilities:
Accrued interest payable 11 (5,474)
Pending investment and trading securities purchases (17,029) 32,955
Accrued liabilities (43,915) 62,030
Other, net 1,156 1,123
- - ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $284,404 $42,226
- - ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for:
Purchase of investment securities available for sale ($127,804) ($1,193)
Purchase of investment securities held to maturity (496,425) (348,324)
Purchase of premises and equipment (7,219) (16,238)
Purchase of mortgage servicing rights (1,764) (7,879)
Capital expenditures on property from defaulted loans (1,397) (2,251)
Purchase of subsidiary, net of cash and cash equivalents acquired (727)
Proceeds from:
Sale of investment securities held to maturity 13,068
Sale of investment securities available for sale 164,602
Principal collection of investment securities available for sale 15,267 21,092
Principal collection of investment securities held to maturity 338,238 194,875
Sale of premises and equipment 1,447 75
Sale and principal collection of property
from defaulted loans 49,020 25,357
Net decrease (increase) in:
Interest-bearing deposits with banks (319,271) 102,520
Money market investments (2,221) (1,934)
Loans and lease financing (1,161) (216,618)
Covered assets and FDIC assistance 18,410
Note receivable-FDIC 113,605 162,293
- - ------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities ($439,685) $107,128
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Consolidated Statement of Cash Flows is continued on the next page.
8
<PAGE> 11
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) (continued)
- - ------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30 (in thousands) 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Payments for:
Long-term debt ($751) ($899)
Common stock dividends (15,197) (15,054)
Preferred stock dividends (90)
Repurchase of common stock (20) (20)
Proceeds from issuance of:
Common stock 7,979 4,121
Net (decrease)increase in:
Deposits (569,552) (463,931)
Short-term borrowings 416,008 126,257
- - ------------------------------------------------------------------------------------------------------------------------
Net cash (used) by financing activities ($161,533) ($349,616)
- - ------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents ($316,814) ($200,262)
Cash and cash equivalents at beginning of year 1,001,080 1,013,995
- - ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30 $684,266 $813,733
========================================================================================================================
Supplemental disclosures of cash flow information:
a.) Cash transactions:
Interest paid $126,195 $157,835
Federal income taxes paid (net of refunds) 13,194 900
State taxes paid (net of refunds) 187 368
FDIC tax sharing payment 5,604
b.) Non-cash transactions in loans and lease financing:
Transfer from loans to property from defaulted loans 9,071 8,902
Loans originated to finance sales of property from defaulted loans 7,982 4,900
Transfer to loans from assets held for sale 84
Transfer from covered assets to loans and lease financings 114
- - ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
April 1, 1993
Supplemental Schedule of Acquisition (In Thousands)
- - ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash paid for common stock and stock options 16,746
Fair Market value of assets acquired 117,920
Fair Market value of liabilities acquired 105,293
- - ----------------------------------------------------------------------------------------------
Fair market value of net assets 12,627
- - ----------------------------------------------------------------------------------------------
Cost in excess of fair value of net assets
acquired ("goodwill") 4,119
- - ----------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Certain prior period amounts have been reclassified in order to conform to
current year presentation.
9
<PAGE> 12
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The unaudited consolidated financial statements of Michigan National
Corporation and subsidiaries (Corporation) are prepared in accordance with
generally accepted accounting principles for interim financial information,
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and Item
303(b) of Regulation S-K.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the consolidated operating results of the Corporation for the
three and six months ended June 30, 1994 and 1993, its financial position at
June 30, 1994, and December 31, 1993, and cash flows for the six months ended
June 30, 1994, and 1993. Certain prior period amounts were reclassified to
conform with the current period presentation. The operating results for the
three and six months ended June 30, 1994, are not necessarily indicative of
operating results to be expected for the year ending December 31, 1994.
The Corporation uses the equity method to account for its 49% investment in
Bloomfield Hills Bancorp, Inc., which is not materially different than
consolidation. The amount of accumulated retained earnings from this
subsidiary included in consolidated retained earnings was approximately $277
thousand at June 30, 1994. At December 31, 1993, accumulated retained earnings
of approximately $184 thousand from this subsidiary were included in
consolidated retained earnings.
These financial statements and related notes should be read in conjunction with
the Michigan National Corporation 1993 Annual Report (1993 Annual Report).
Terms used in this report are defined on page 6 of the 1993 Annual Report.
10
<PAGE> 13
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
B. SALES.
On August 11, 1994, the Corporation's principal banking subsidiary, Michigan
National Bank and its mortgage banking subsidiary, Independence One Mortgage
Corporation, entered into an agreement with Norwest Mortgage, Inc. (Norwest) to
sell certain of its assets, including its $8.6 billion mortgage servicing
rights portfolio, its mortgage servicing operation and non-Michigan loan
origination business. Norwest would also assume certain liabilities including
the lease obligations of 20 branch production offices and a large portion of
IOMC's national servicing facility. The Corporation's best estimate is that
this sale will result in an after-tax gain, net of transaction costs, of
approximately $27 million. Subject to the receipt by Norwest of various
approvals, the transaction is expected to close in the third quarter of 1994.
On May 6, 1994, the Corporation entered into an agreement with International
Bank of Commerce to sell First State Bank and Trust Company (First State) for a
cash purchase price of approximately $28 million. First State's net equity at
June 30, 1994, was $21.9 million. The transaction is subject to regulatory
approvals and is expected to be concluded in the fourth quarter, 1994.
On April 5, 1994, the Corporation entered into an agreement with Comerica
Incorporated to sell Lockwood Banc Group, Inc. (Lockwood) and its wholly owned
subsidiary, Lockwood National Bank of Houston for a cash purchase price of $44
million. Lockwood's net equity at June 30, 1994, was $29.3 million. The
transaction was completed August 4, 1994, at a pre-tax gain of approximately
$15 million.
C. INVESTMENT SECURITIES
There were no sales of securities during the second quarter and six months
ended June 30, 1994.
The Corporation realized gross gains of sixty eight thousand dollars and no
losses from securities classified as available for sale during the three months
ended June 30, 1993. For the six months ended June 30, 1993, gross gains of
$6.6 million and gross losses of $0.6 million were realized from sales of
securities classified as available for sale. The remaining balance of the
security gains category for each period in 1993 consisted of non-sales related
activity, including write-offs of premiums and discounts associated with early
pay-offs of securities.
Effective January 1, 1994, the Corporation adopted Financial Accounting
Standards Board issued Statement of Financial Accounting Standard (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities. This
Statement requires investment in equity and debt securities be classified in
three categories and accounted for as follows: (i) debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and reported at amortized cost; (ii)
debt and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings;
(iii) debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of shareholders'
equity on an after-tax basis.
Upon initial application of this Statement, the Corporation transferred
securities with a book value of approximately $135.6 million and a market value
of approximately $144.7 million to the Available for Sale portfolio from the
Held to Maturity portfolio.
11
<PAGE> 14
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
C. INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
The following summarizes the book value, estimated market value, and gross unrealized gains and losses of investment
securities at June 30, 1994 and December 31, 1993.
- - ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 6/30/94 12/31/93
- - ------------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Market Market
Gross Gross Value Gross Gross Value
Amortized Unrealized Unrealized (Carrying Amortized Unrealized Unrealized (Carrying
Cost Gains Losses Value) Cost Gains Losses Value)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available-for-sale:
Mortgage-backed securities $116,293 $4,938 $121,231
U.S. Treasury, Government agencies
and corporations 104,753 1,951 102,802 $893 $893
Other securities 40,249 56 40,193
- - ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities
available-for-sale $261,295 $4,938 $2,007 $264,226 $893 $893
====================================================================================================================================
<CAPTION>
Amortized Amortized
Cost Gross Gross Estimated Cost Gross Gross Estimated
(Carrying Unrealized Unrealized Market (Carrying Unrealized Unrealized Market
Value) Gains Losses Value Value) Gains Losses Value
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
held-to-maturity:
Mortgage-backed securities $740,817 $4,196 $15,081 $729,932 $983,765 $25,900 $2,526 $1,007,139
U.S. Treasury, Government agencies
and corporations 452,750 950 5,163 448,537 275,484 4,351 12 279,823
State and municipal securities 35,389 1,460 17 36,832 38,918 2,181 12 41,087
Other securities 92,901 112 114 92,899 15,606 2 15,608
- - ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities
held-to-maturity $1,321,857 $6,718 $20,375 $1,308,200 $1,313,773 $32,434 $2,550 $1,343,657
====================================================================================================================================
</TABLE>
Investment securities with a book value of $638 million at June 30, 1994 were
pledged to collateralize deposits of public funds and for other purposes
required or permitted by law; at December 31, 1993, the corresponding amount
was $656 million. In addition, at December 31, 1993, mortgage-backed
investment securities with a book value of $14 million (market value of $15
million) were pledged to collateralize repurchase agreements. For the quarter
ended June 30, 1994 there were no mortgage-backed securities pledged to
collateralize repurchase agreements. In addition, treasury securities at June
30, 1994 with a book value of $317 million were pledged to collateralized
repurchase agreements; at December 31, 1993 no treasury securities were pledged
to collateralize repurchase agreements.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
The following summarizes interest and dividend income from investment securities for the three and six month periods ended
June 30, 1994 and 1993.
- - ------------------------------------------------------------------------------------------------------------------------------------
1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
3 Months 6 Months 3 Months 6 Months
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $2,670 $5,714 $92 $1,767
U.S. Treasury, Government agencies
and corporations 1,215 1,702 434 781
Other securities 451 452
- - ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities available for sale $4,336 $7,868 $526 $2,548
====================================================================================================================================
Mortgage-backed securities $10,863 $22,541 $19,193 $37,474
U.S. Treasury, Government agencies
and corporations 6,176 10,042 3,528 6,903
State and municipal securities 558 1,137 617 1,283
Other securities 572 806 217 396
- - ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities held to maturity $18,169 $34,526 $23,555 $46,056
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Income from Other Securities includes dividends of $452 thousand and $173
thousand for the three months ended June, 1994 and 1993, respectively, and $634
thousand and $309 thousand for the six months ended June 30, 1994 and 1993,
respectively.
12
<PAGE> 15
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
D. LOANS AND LEASE FINANCING (UNAUDITED)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
The following summarizes loans and lease financing at June 30, 1994 and December 31, 1993.
- - ---------------------------------------------------------------------------------------------------------------------------
(in thousands) 6/30/94 12/31/93
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial & agricultural secured by real estate $926,081 $971,917
Other commercial, financial & agricultural 2,392,341 2,373,707
Commercial real estate-mortgage 1,183,585 1,238,177
Residential real estate-mortgage
mortgages held for sale 331,300 583,056
mortgages held for investment 436,257 465,904
Short-term real estate-construction 149,843 159,594
Installment 870,703 780,532
Lease financing 141,855 116,998
- - ---------------------------------------------------------------------------------------------------------------------------
Total 6,431,965 6,689,885
Unearned income (26,706) (18,619)
- - ---------------------------------------------------------------------------------------------------------------------------
Total $6,405,259 $6,671,266
===========================================================================================================================
</TABLE>
13
<PAGE> 16
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
E. SHORT-TERM BORROWINGS
Effective May 31, 1994, the Corporation canceled a $25 million, three year line
of credit. The original commitment period would have expired April 30, 1995.
The commitment period of a second facility, a $20 million 364 day line of
credit, expired March 10, 1994. These two facilities were established in the
second quarter of 1992 to support the Corporation's commercial paper program
and for a variety of general corporate purposes. The facilities are no longer
necessary because the Corporation has not issued commercial paper for several
years and has sufficient sources of liquidity available to fund its operations.
14
<PAGE> 17
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
E. SHORT-TERM BORROWINGS (UNAUDITED)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------
The following summarizes short-term borrowings at June 30, 1994 and December 31, 1993.
(in thousands) 6/30/94 12/31/93
- - ----------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and repurchase agreements $558,885 $133,925
Other short-term borrowings 150,416 159,368
- - ----------------------------------------------------------------------------------------------
Total short-term borrowings $709,301 $293,293
==============================================================================================
</TABLE>
15
<PAGE> 18
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
F.FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers,
to reduce its own exposure to fluctuations in interest rates, and to realize
profits.
16
<PAGE> 19
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
The following summarizes financial instruments with off-balance sheet risk at June 30, 1994 and December 31, 1993.
(UNAUDITED)
(in thousands) CONTRACT OR NOTIONAL AMOUNT
- - ----------------------------------------------------------------------------------------------------------------------------
6/30/94 12/31/93
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $3,801,081 $3,431,721
Standby and other letters of credit 252,635 221,580
Other assets sold with recourse 93,406 115,681
Financial instruments whose contract or notional
amounts exceed the amount of credit risk:
Forward and futures contracts
Commitments to sell 335,825 701,478
Foreign exchange contracts 11,636 4,565
Interest rate swap contracts 2,772,408 2,514,207
Interest rate caps 40,750 10,000
============================================================================================================================
</TABLE>
17
<PAGE> 20
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
G. LEGAL PROCEEDINGS
A class action lawsuit was filed by Thomas Bradford against Independence One
Mortgage Corporation (IOMC) in the Supreme Court of New York for Monroe County
and subsequently removed to the U.S. District Court for the Western District of
New York and subsequently transferred to the U.S. District Court for Northern
District of Illinois (Civil Action File No. 93-CV-6423T). The Plaintiff
alleges that IOMC requires its mortgagors to deposit excessive funds into their
escrow accounts for the payment of property taxes, insurance and other
obligations. The Plaintiffs seek a refund to current mortgagors from their
escrow accounts and the payment of interest on the alleged "excess" funds held
by IOMC. Management and legal counsel believe that there are numerous valid
defenses to this claim. Based upon the substantial defenses available, it is
believed that the ultimate outcome of this claim will not have a material
adverse impact on the financial condition of the Corporation. The ultimate
outcome and liability with respect to this lawsuit, if any, is not presently
determinable.
Other than that which is stated above, there have been no material developments
in any previously reported legal proceedings brought against the Corporation,
nor any new material legal proceedings brought against the Corporation during
the period January 1, 1994 through July 31, 1994.
H. POSTEMPLOYMENT BENEFITS
In November 1992, the Financial Accounting Standards Board issued SFAS No. 112,
Employer's Accounting for Postemployment Benefits. This Statement requires
accrual of the estimated cost of benefits provided by an employer to former or
inactive employees after employment but before retirement (e.g., salary
continuation, severance and disability benefits, job training and counseling
and continuation of benefits such as health care and life insurance coverage).
Postemployment benefit expense recognized under these requirements will replace
the "pay-as-you-go" method of accounting previously utilized by the
Corporation for certain postemployment benefits. The Statement is effective
for financial statements with fiscal years beginning after December 15, 1993.
The Corporation adopted this Statement effective January 1, 1994, and
recognized $1.5 million of personnel benefit expense upon adoption.
I. INCOME TAXES
In the second quarter tax benefits of approximately $42.8 million were
recognized, $40.2 million of which were reflected in earnings, and $2.6
million of which were added directly to shareholders' equity - surplus. These
tax benefits are related to the 1988 acquisition of IOBOC. The ability of the
Corporation to realize these benefits was challenged by the U.S. Treasury
Department in a report issued in March 1991 to Congress. Congress addressed
this matter in the Revenue Reconciliation Bill of 1993, and denied recognition
of certain tax benefits occurring after March 3, 1991. As a result of this
Congressional action and recent discussions with the Federal government
concerning the Corporation's tax returns, the Corporation recognized pre-March
3, 1991 tax benefits in its financial statements.
The Corporation's projection of its 1994 effective income tax rate, excluding
the $40.2 million one-time benefit explained above, is 30.5%. The difference
18
<PAGE> 21
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
between this effective tax rate and the federal statutory rate of 35% is
largely due to tax exempt income from the FDIC note receivable and FDIC
assistance received by IOBOC pursuant to the agreement, as well as tax exempt
interest income from municipal obligations held principally by MNB.
The increase in the effective income tax rate from (9.2%) in 1993 to 30.5% for
1994, excluding the one-time benefit, is due to higher projected pre-tax
earnings in 1994 and a lower level of tax-exempt FDIC assistance. This has the
effect of increasing the percentage of projected taxable income relative to
total projected pre-tax financial income, resulting in a higher effective tax
rate.
19
<PAGE> 22
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS 1994 1994 1993 1993 1993 1993
- - -----------------------------------------------------------------------------------------------------------------------------------
TABLE 1 SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Second First Fourth Third Second First
(in thousands) Quarter Quarter Quarter Quarter Quarter Quarter
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Interest income $164,000 $158,417 $169,447 $176,053 $177,591 $171,142
Interest expense 63,068 63,137 67,616 72,646 73,682 78,678
- - -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 100,932 95,280 101,831 103,407 103,909 92,464
Provision for possible credit losses 6,000 6,000 7,000 8,000 12,494 12,506
Non-interest income 51,893 53,518 67,763 65,966 55,674 51,427
Non-interest expense 113,512 118,090 130,463 135,852 138,187 176,183
- - -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 33,313 24,708 32,131 25,521 8,902 (44,798)
Income tax provision (benefit) (29,981) 6,424 (501) (1,506)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $63,294 $18,284 $32,632 $27,027 $8,902 ($44,798)
===================================================================================================================================
PER COMMON SHARE
Net income (loss) $4.06 $1.19 $2.13 $1.77 $0.58 ($3.00)
Cash dividends declared 0.50 0.50 (1) (1) 0.50 0.50 0.50
Book value end-of-period 58.32 54.70 53.74 51.66 50.19 50.11
Market value end-of-period 72.00 61.50 57.50 58.88 56.50 60.00
Closing market value: high 79.00 65.25 62.75 59.88 61.63 64.25
Closing market value: low 59.63 55.00 57.50 54.50 52.00 50.00
===================================================================================================================================
SELECTED PERIOD-END BALANCES (IN MILLIONS)
Total assets $10,036 $10,129 $10,173 $10,395 $10,517 $10,442
Earning assets 9,097 9,151 9,135 8,932 9,388 9,291
Total loans and lease financing, net of unearned income 6,405 6,295 6,671 6,697 6,929 6,534
Non-performing assets 193 235 255 276 290 293
Deposits 8,156 8,504 8,725 8,657 8,710 8,678
Long-term debt 76 77 77 78 81 82
Shareholders' equity 892 832 816 781 759 757
===================================================================================================================================
SELECTED AVERAGE BALANCES (IN MILLIONS)
Total assets $9,950 $9,973 $10,249 $10,390 $10,372 $10,184
Earning assets 8,996 9,001 9,156 9,292 9,255 9,117
Total loans and lease financing, net of unearned income 6,280 6,399 6,681 6,880 6,742 6,477
Deposits 8,392 8,521 8,811 8,710 8,814 8,646
Long-term debt 76 77 77 79 82 82
Shareholders' equity 834 817 791 770 766 810
===================================================================================================================================
SELECTED FINANCIAL RATIOS
Return on average shareholders' equity 30.36% 8.95% 16.50% 14.04% 4.65% (22.13%)
Return on average total assets 2.54 0.73 1.27 1.04 0.34 (1.76)
Average equity to average total assets 8.38 8.19 7.72 7.41 7.38 7.95
Allowance to period-end loans 2.94 3.09 2.86 2.82 2.68 2.79
Non-performing assets to total loans (net of unearned
income) plus property from defaulted loans, net 2.98 3.69 3.77 4.05 4.11 4.38
Net interest spread 3.97 3.79 3.82 3.89 4.00 3.72
Net interest margin 4.71 4.50 4.64 4.65 4.74 4.38
Equity to asset ratio (period end) 8.89 8.21 8.02 7.51 7.22 7.25
Leverage ratio 8.20 7.84 7.56 7.09 6.90 7.12
Tier 1 risk based capital ratio 10.09 9.85 9.57 9.01 8.79 9.12
Total risk based capital ratio 12.26 12.03 11.73 11.16 10.99 11.34
Dividend payout ratio 12.32 42.02 (1) (1) 28.25 86.21 N/M
===================================================================================================================================
</TABLE>
N/M = Not meaningful
(1) A fourth quarter 1993 dividend of $0.50 per share was declared January 19,
1994, payable to shareholders of record as of February 1, 1994. This did
not represent a change in the Corporation's dividend policy, but rather a
change only in the timing of the dividend declaration.
Certain prior period amounts were reclassified to conform to current period
presentation.
20
<PAGE> 23
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL REVIEW
Net income for the second quarter of 1994 was $63.3 million, or $4.06 per
share, compared to $8.9 million, or $0.58 per share, for the same period in
1993. Earnings for the first six months were $81.6 million, or $5.27 per
share, compared to a loss of $35.9 million, or $2.39 loss per share, for the
first half of 1993.
Included in second quarter results were one-time tax benefits of $42.8 million,
$40.2 million of which were reflected in earnings and $2.6 million of which
were added directly to shareholders' equity - surplus. These one-time tax
benefits were related to the 1988 acquisition of IOBOC.
Second quarter earnings, excluding these tax benefits, were $23.1 million, or
$1.49 per share, an increase of 160% over prior year earnings. The improvement
was primarily attributable to a decrease of $18.6 million in amortization of
purchased mortgage servicing rights (PMSR) and $3.5 million in excess service
fee (ESF) assets due to a smaller servicing portfolio and a slow down in
prepayments; a $6.5 million decrease in the provision for possible credit
losses due to improved credit quality; and a decrease of $5.3 million in
defaulted loan expense due to gains from the sale of defaulted loan properties.
These improvements were partially offset by reductions in net interest income
of $3.0 million and mortgage servicing fees of $6.6 million.
Earnings for the six months ended June 30, 1994, excluding tax benefits, were
$41.4 million, an increase of $77.3 million over the same period last year.
Contributing to the improvement was decreases in PMSR and ESF amortization
expense of $83.2 million; provision for possible credit losses of $13.0
million; and defaulted loan expense of $8.8 million. Partially offsetting
these improvements was a decrease in mortgage servicing income of $12.4 million
and one-time security gains of $6.1 million realized in 1993.
As mentioned on page 10 of the 1993 Annual Report, the Corporation continues to
have discussions with representatives of the FDIC to determine if, or on what
terms, the Assistance Agreement might be terminated. A termination could
involve the early pay-off of the Note Receivable-FDIC, an early settlement of
the value of deposit subsidies, future tax sharing arrangements and settlement
of the value the FDIC has a right to receive as a return on its equity capital
investment. The accounting treatment of any gain resulting from an early
termination and settlement of the Assistance Agreement is under review at this
time and is contingent upon the actual results of the negotiations. The
Corporation is under no obligation to renegotiate the Assistance Agreement.
The Corporation has undertaken several initiatives to refocus on the Michigan
market. The previously announced sale of Lockwood Banc Group, Inc. of Houston,
Texas, to Comerica Bank closed August 4, 1994, at a pre-tax gain of
approximatley $15 million. In May, agreement was reached to sell First State
Bank and Trust of Port Lavaca, Texas, to International Bank of Commerce in
Laredo, Texas, and the sale is expected to close before the end of this year
thus completing the Corporation's withdrawal from the Texas banking market.
Furthermore, the Corporation's California based Savings Bank, Independence One
Bank of California, FSB, is exploring the possible sale of substantially all of
its banking assets including its subsidiary, First Collateral Services, Inc.,
a mortgage warehouse lender.
On August 11, 1994, the Corporation's principal banking subsidiary, Michigan
National Bank and its mortgage banking subsidiary, Independence One Mortgage
Corporation (IOMC), entered into an agreement with Norwest Mortgage, Inc.
(Norwest) to sell certain of its assets, including its $8.6 billion mortgage
servicing rights portfolio, its mortgage servicing operation and non-Michigan
loan origination business. Norwest would also assume certain liabilities
including the lease obligations of 20 branch production offices and a large
portion of IOMC's national servicing facility. The Corporation's best estimate
is that this sale will result in an after-tax gain, net of transaction costs,
of approximately $27 million. Subject to the receipt by Norwest of various
approvals, the transaction is expected to close in the third quarter of 1994.
As shown in the Table 16, Business Review, IOMC had a pre-tax loss of $10.3
million for the six months ended June 30, 1994.
The Corporation has recently initiated a major program to achieve significant
improvement in its earnings and reduce expenses. The program which has been
named "Project Streamline" is intended to strengthen the Corporation's
competitive position. The advisory firm of New York based Tandon Capital
Associates, Inc. has been retained to assist in the effort. The objective of
Project Streamline is to improve the efficiency ratio to under 60% by the third
quarter of 1995. Expressed in terms of pre-tax income, Project Streamline is
intended to increase pre-tax income by a minimum of $65 million.
It is anticipated that an unusual restructuring charge will be recorded in the
third or fourth quarter of 1994 in connection with Project Streamline. The
amount of the charge is not reasonably estimable at this time.
21
<PAGE> 24
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME
OVERVIEW
Net Interest Income for the second quarter 1994 decreased $3.0 million and Net
Interest Income on a Fully Taxable Equivalent Basis decreased $3.9 million
compared to the same period in 1993. For the six months ended June 30, 1994,
Net Interest Income decreased $0.2 million and Net Interest Income on a Fully
Taxable Equivalent Basis decreased $2.4 million compared to the same period
last year.
The Net Interest Rate Spread and Net Interest Margin in both the second quarter
and first six months of 1994 remained above five year historical ratios and
were relatively flat compared to last year. An increase in the spread between
the prime interest rate and money market (LIBOR) rates resulting from three
increases in the prime interest rate since March 24, 1994, and successful
deposit pricing contributed to this strong performance.
Please refer to Tables 2 through 7 for a presentation of various Net Interest
Margin related information.
INTEREST RATE RISK MANAGEMENT
The Corporation's Asset/Liability Committee, with the review of the Board of
Directors, sets policies regarding the management of the Net Interest Margin
and the interest rate risk of the Corporation. Policies implemented by the
Asset/Liability Committee utilize both on and off-balance sheet strategies to
manage such risk. At June 30, 1994, the Corporation was hedging the interest
rate risk associated with a portion of its prime-based, variable-rate
commercial loans with approximately $1.9 billion of interest rate swap
agreements.
The Corporation measures forecasted interest rate risk through the use of an
income forecasting simulation model. The model facilitates the forecasting of
Net Interest Income under a variety of interest rate scenarios. At June 30,
1994, the Corporation estimated that annual Net Interest Income would increase
approximately $1.8 million should a 100 Basis Point increase in the prime rate
occur. Conversely, an estimated $7.2 million of annual Net Interest Income is
at risk should a 100 Basis Point decrease in the prime rate occur.
BALANCE SHEET COMPOSITION
In the second quarter of 1994 the average balance of total earning assets
decreased $258.9 million, or 2.80%, from the same period in 1993, and the
average balance of interest-bearing liabilities decreased $391.9 million, or
5.24%. During the first six months of 1994 the average balance of total
earning assets decreased $187.1 million, or 2.04%, from the same period last
year and interest bearing liabilities decreased $444.5 million, or 5.88%. In
addition, the average balance of non-interest bearing demand deposits decreased
$80.4 million in the second quarter and increased $62.7 million in the first
six months of 1994 compared to the same periods in 1993.
EARNING ASSETS
Reductions in the average balances of the Note Receivable-FDIC and loans and
lease financing contributed to the decrease in earning assets in both the
second quarter and six months ended June 30, 1994. The average balance of the
Note Receivable-FDIC
22
<PAGE> 25
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
declined as a result of a $114 million principal payment in January, 1994.
Rising residential mortgage interest rates during 1994 and the resulting
slow-down in lending activity contributed to a $394.6 million decrease in the
average balance of residential mortgage loans in the second quarter and a
$157.9 million decrease in the mortgage warehouse lending portfolio. For the
six months ended June 30, 1994, residential mortgage loans and the mortgage
warehouse lending portfolio decreased $290.7 million and $62.8 million,
respectively. Also contributing to the decrease in residential mortgage loans
was the September 1993 sale of approximately $300 million of prime plus
mortgage loans.
Partially offsetting the decrease in residential loans was the purchase of
Federal Housing Administration (FHA) insured residential mortgage loans
beginning in the third quarter 1993 and an increase in the average balance of
installment loans. The average balance of FHA insured loans for the second
quarter and six months ended June 30, 1994 was approximately $130.5 million and
$129.9 million, respectively. For further discussion of the activity in the
residential mortgage loan portfolio during 1993, refer to the Loans and Lease
Financing Portfolio and Credit Risk Analysis section on page 21 of the 1993
Annual Report. The average balance of installment loans increased $116.8
million and $120.5 million in the second quarter and six months ended June 30,
1994, respectively, primarily due to the low interest rate environment,
resumption of indirect lending and aggressive marketing of Capital Reserve and
Equimoney loan products.
Liquidity provided by these decreases in earning assets was used to pay down
higher cost funding sources and purchase investment securities and money market
investments. Money market investments provide the Corporation a ready source
of liquidity with which to fund future origination of loans and maturing
deposit liabilities.
INTEREST-BEARING LIABILITIES
The Corporation's funding mix continued to shift during the first six months of
1994 as it did throughout 1993 as a result of the liquidity provided by the
decrease in total earning assets and the current low interest rate environment.
As mentioned above, the Corporation used some of the liquidity provided by the
decrease in earning assets to reduce higher cost discretionary funding sources,
primarily time deposits greater than $100,000 and short-term borrowings. The
average balances of lower cost savings and money market accounts grew as a
percentage of total interest-bearing liabilities while higher cost time
deposits greater than $100,000 and short-term borrowings decreased. Also
contributing to this change in deposit mix were successful pricing strategies
and customer preferences for shorter term and more liquid deposit products in
the current low interest rate environment. This rate environment has also
induced some customers to seek higher returns in non-bank financial products,
contributing to the decrease in time deposits less than $100,000.
EFFECT OF BALANCE SHEET COMPOSITION ON NET INTEREST MARGIN
The Net Interest Rate Spread and Net Interest Margin in the second quarter and
first six months of 1994 were relatively flat compared to those of the same
periods in 1993. The decline in the average rate paid on interest bearing
liabilities resulting from the favorable change in funding mix was offset by a
similar decline in the average yield received on interest earning assets due to
decreases in certain higher yielding assets and the resulting change in asset
mix.
Net Interest Margin for the first six months of 1994 was favorably affected by
a $65.8 million increase in the average balance of non-interest bearing demand
deposits. The increase in non-interest bearing demand deposits resulted from
higher
23
<PAGE> 26
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
balances in commercial and retail banking customer accounts. The contribution
of demand deposits related to the Corporation's off-balance sheet mortgage
servicing portfolios has decreased significantly. The decrease is due to a
significant decline in the volume of payoffs from the Corporation's off-balance
sheet mortgage servicing portfolios which are temporarily held and invested
before being remitted to investors. Increases in residential mortgage interest
rates during 1994 have slowed the pace of mortgage refinancing pay-off
activity. In addition, a smaller servicing portfolio resulting from sales of
servicing has reduced mortgage escrow balances.
The Corporation previously announced its intention to sell its two Texas banks,
Lockwood and First State Bank and Trust, during 1994 so that it can focus more
directly on its core franchises. Combined, these two banks contributed
interest earning assets with an average balance of $533.2 million, yielding
6.78%, and interest bearing liabilities with an average balance of $414.7
million and a weighted average cost of 3.19%, during the first six months of
1994.
INTEREST RATE ENVIRONMENT
Interest rates declined steadily throughout 1993 before increasing during the
first six months of 1994. In addition, the spread between the prime rate and
money market borrowing rates began to narrow during the first quarter of 1994
as money market rates increased and widened again in the second quarter as a
result of increases in the prime interest rate. Due to the Corporation's
reduced reliance on money market funding sources discussed above, its funding
cost was not significantly affected by the increase in money market borrowing
rates.
As discussed above and on page 9 of the 1993 Annual Report, the Corporation
utilizes interest rate swap agreements to hedge the interest rate risk
associated with a portion of its prime-based, variable rate commercial loans.
The rate the Corporation pays on the notional value of substantially all its
interest rate swap agreements varies with LIBOR. The narrowing of the spread
between the prime interest rate and LIBOR that occurred during the first
quarter had the effect of reducing the level of net interest income that the
Corporation received on its hedged positions.
Prime lending rate increases on March 24, April 19 and May 17, 1994, of 25, 50
and 50 Basis Points, respectively, pushed the prime rate to 7.25% and helped to
offset the negative effects that the increase in the LIBOR had on the
Corporation's hedged positions. Increases in the prime lending rate have a
positive effect on net interest income because of the Corporation's overall
asset sensitive position.
Further contraction of the spreads between prime and money market rates could
have the effect of reducing Net Interest Income.
24
<PAGE> 27
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
TABLE 2 SUMMARY OF CONSOLIDATED NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT) (UNAUDITED)
THREE MONTHS ENDED June 30, 1994 March 31, 1994 December 31, 1993
- - -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements $258,420 $2,473 3.84% $600,261 $4,752 3.21% $498,375 $3,842 3.06%
Interest-bearing deposits with banks 462,420 4,318 3.75% 245,968 2,276 3.75% 110,324 955 3.43%
Money market funds 14,268 110 3.09% 10,695 73 2.77% 10,031 67 2.65%
- - -----------------------------------------------------------------------------------------------------------------------------------
Total money market investments 735,108 6,901 3.77% 856,924 7,101 3.36% 618,730 4,864 3.12%
Investment securities available for sale
Investment securities-taxable 261,404 4,336 6.65% 174,704 3,532 8.20% 891 7 3.12%
Investment securities held to maturity
Investment securities-taxable 1,243,998 17,611 5.68% 1,085,285 15,778 5.90% 1,247,769 20,355 6.47%
Investment securities-tax-exempt 36,544 788 8.65% 38,673 815 8.55% 39,099 797 8.09%
Trading securities 86,516 1,048 4.86% 92,551 1,123 4.92% 105,976 1,260 4.72%
- - ------------------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities 1,628,462 23,783 5.86% 1,391,213 21,248 6.19% 1,393,735 22,419 6.38%
Mark-to-market securities adjustment 3,767 862
- - ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,632,229 23,783 1,392,075 21,248 1,393,735 22,419
Loans and lease financing 6,280,037 130,276 8.32% 6,398,873 126,947 8.05% 6,680,501 137,499 8.17%
Note receivable-FDIC 348,930 5,873 6.75% 352,717 5,984 6.88% 462,535 8,259 7.08%
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 8,996,304 166,833 7.44% 9,000,589 161,280 7.27% 9,155,501 173,041 7.50%
Allowance for possible credit losses (195,642) (192,948) (191,301)
Cash and due from banks 535,494 511,378 568,373
Other assets 613,515 654,256 716,491
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $9,949,671 $9,973,275 $10,249,064
====================================================================================================================================
LIABILITIES
Money market accounts $2,164,867 $14,662 2.72% $2,187,184 $14,153 2.62% $2,127,503 $14,986 2.79%
Savings deposits 1,191,567 5,865 1.97% 1,194,861 6,776 2.30% 1,161,392 7,637 2.61%
Time deposits < $100,000 2,566,196 28,477 4.45% 2,657,334 29,957 4.57% 2,727,057 32,516 4.73%
Time deposits > $100,000 650,358 6,477 3.99% 698,963 6,184 3.59% 716,042 6,867 3.80%
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,572,988 55,481 3.39% 6,738,342 57,070 3.43% 6,731,994 62,006 3.65%
Fed funds purchased & repo agreements 333,217 3,278 3.95% 194,893 1,475 3.07% 220,977 1,696 3.04%
Dollar repurchase agreements
Other short-term borrowings 100,398 947 3.78% 142,320 1,287 3.67% 89,828 734 3.24%
Subordinated notes 57,240 1,199 8.40% 57,482 1,201 8.47% 57,709 1,205 8.28%
Long-term debt 15,352 265 6.92% 15,352 228 6.02% 15,354 233 6.02%
Capital lease obligations 3,879 103 10.65% 4,005 107 10.84% 4,148 110 10.52%
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,083,074 61,273 3.47% 7,152,394 61,368 3.48% 7,120,010 65,984 3.68%
Demand deposits 1,819,038 1,782,393 2,079,388
Other liabilities 213,517 221,335 258,502
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 9,115,629 9,156,122 9,457,900
Shareholders' equity 834,042 817,153 791,164
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $9,949,671 $9,973,275 $10,249,064
====================================================================================================================================
Net interest income (fully taxable
equivalent basis) $105,560 $99,912 $107,057
Tax equivalent adjustment 4,628 4,632 5,226
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $100,932 $95,280 $101,831
====================================================================================================================================
Net interest rate spread 3.97% 3.79% 3.82%
====================================================================================================================================
Net interest margin 4.71% 4.50% 4.64%
====================================================================================================================================
</TABLE>
Certain prior period amounts were reclassified to conform to current period
presentation.
25
<PAGE> 28
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
TABLE 2 SUMMARY OF CONSOLIDATED NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT) (UNAUDITED)
THREE MONTHS ENDED September 30, 1993 June 30, 1993
- - -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements $365,674 $ 2,823 3.06% $367,004 $ 2,707 2.96%
Interest-bearing deposits with banks 31,809 282 3.52% 152,005 1,220 3.22%
Money market funds 9,201 62 2.67% 7,817 50 2.57%
- - -----------------------------------------------------------------------------------------------------------------------------------
Total money market investments 406,684 3,167 3.09% 526,826 3,977 3.03%
Investment securities available for sale
Investment securities-taxable 7,503 59 3.12% 61,981 526 3.40%
Investment securities held to maturity
Investment securities-taxable 1,327,220 21,953 6.56% 1,284,436 22,939 7.16%
Investment securities-tax-exempt 39,575 848 8.50% 40,702 868 8.55%
Trading securities 168,314 1,881 4.43% 136,627 1,628 4.78%
- - -----------------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities 1,542,612 24,741 6.36% 1,523,746 25,961 6.83%
Mark-to-market securities adjustment
- - -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,542,612 24,741 1,523,746 25,961
Loans and lease financing 6,879,707 143,368 8.27% 6,742,123 142,702 8.49%
Note receivable-FDIC 462,535 8,519 7.31% 462,535 8,778 7.61%
- - -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 9,291,538 179,795 7.68% 9,255,230 181,418 7.86%
Allowance for possible credit losses (188,908) (184,655)
Cash and due from banks 543,804 543,738
Other assets 743,659 758,048
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,390,093 $10,372,361
===================================================================================================================================
LIABILITIES
Money market accounts $2,117,822 $ 15,462 2.90% $ 2,110,664 $14,807 2.81%
Savings deposits 1,134,487 7,675 2.68% 1,099,960 7,517 2.74%
Time deposits < $100,000 2,798,119 34,090 4.83% 2,923,551 35,982 4.94%
Time deposits > $100,000 754,192 7,721 4.06% 780,401 8,088 4.16%
- - -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,804,620 64,948 3.79% 6,914,576 66,394 3.85%
Fed funds purchased & repo agreements 410,691 3,282 3.17% 333,313 2,592 3.12%
Dollar repurchase agreements 29,117 310 4.27%
Other short-term borrowings 145,466 1,178 3.21% 116,182 1,006 3.47%
Subordinated notes 58,446 1,220 8.28% 58,682 1,222 8.35%
Long-term debt 15,808 240 6.02% 18,187 273 6.02%
Capital lease obligations 4,356 114 10.38% 4,931 134 10.90%
- - -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,439,387 70,982 3.79% 7,474,988 71,931 3.86%
Demand deposits 1,905,196 1,899,393
Other liabilities 275,539 232,414
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 9,620,122 9,606,795
Shareholders' equity 769,971 765,566
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $10,390,093 $10,372,361
===================================================================================================================================
Net interest income (fully taxable equivalent basis) $108,813 $109,487
Tax equivalent adjustment 5,406 5,578
- - -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $103,407 $103,909
===================================================================================================================================
Net interest rate spread 3.89% 4.00%
===================================================================================================================================
Net interest margin 4.65% 4.74%
===================================================================================================================================
</TABLE>
Certain prior period amounts were reclassified to conform to current period
presentation.
26
<PAGE> 29
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
TABLE 3 CHANGE IN NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT)(UNAUDITED)
- - --------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date Change in Change in Change in
Average Balance Interest Average Rate
(in thousands) 6/30/94 vs 3/31/94 6/30/94 vs 3/31/94 6/30/94 vs 3/31/94
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($341,841) ($2,279) 0.63%
Interest-bearing deposits with banks 216,452 2,042
Money market funds 3,573 37 0.32%
- - --------------------------------------------------------------------------------------------------------------------------
Total money market investments (121,816) (200) 0.41%
Investment securities available for sale
Investment securities-taxable 86,700 804 -1.55%
Investment securities held to maturity
Investment securities-taxable 158,713 1,833 -0.22%
Investment securities-tax-exempt (2,129) (27) 0.10%
Trading securities (6,035) (75) -0.06%
- - --------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities 237,249 2,535 -0.33%
Mark-to-market adjustment 2,905
- - --------------------------------------------------------------------------------------------------------------------------
Total investment securities 240,154 2,535
Loans and lease financing (118,836) 3,329 0.27%
Note receivable-FDIC (3,787) (111) -0.13%
- - --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (4,285) 5,553 0.17%
Allowance for possible credit losses (2,694)
Cash and due from banks 24,116
Other assets (40,741)
- - --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($23,604)
==========================================================================================================================
LIABILITIES
Money market accounts ($22,317) $509 0.10%
Savings deposits (3,294) (911) -0.33%
Time deposits < $100,000 (91,138) (1,480) -0.12%
Time deposits > $100,000 (48,605) 293 0.40%
- - --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (165,354) (1,589) -0.04%
Fed funds purchased & repo agreements 138,324 1,803 0.88%
Other short-term borrowings (41,922) (340) 0.11%
Subordinated notes (242) (2) -0.07%
Long-term debt 37 0.90%
Capital lease obligations (126) (4) -0.19%
- - --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (69,320) (95) -0.01%
Demand deposits 36,645
Other liabilities (7,818)
- - --------------------------------------------------------------------------------------------------------------------------
Total Liabilities (40,493)
Shareholders' equity 16,889
- - --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ($23,604)
==========================================================================================================================
Net interest income (fully taxable
equivalent basis) $5,648
Tax equivalent adjustment (4)
- - --------------------------------------------------------------------------------------------------------------------------
Net interest income $5,652
==========================================================================================================================
Net interest rate spread 0.18%
==========================================================================================================================
Net interest margin 0.21%
==========================================================================================================================
</TABLE>
27
<PAGE> 30
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------
TABLE 3 CHANGE IN NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT)(UNAUDITED)
- - ------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date Change in Change in Change in
Average Balance Interest Average Rate
(in thousands) 6/30/94 vs 6/30/93 6/30/94 vs 6/30/93 6/30/94 vs 6/30/93
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($108,584) ($234) 0.88%
Interest-bearing deposits with banks 310,415 3,098 0.53%
Money market funds 6,451 60 0.52%
- - ------------------------------------------------------------------------------------------------------------------
Total money market investments 208,282 2,924 0.74%
Investment securities available for sale
Investment securities-taxable 199,423 3,810 3.25%
Investment securities held to maturity
Investment securities-taxable (40,438) (5,328) -1.48%
Investment securities-tax-exempt (4,158) (80) 0.10%
Trading securities (50,111) (580) 0.08%
- - ------------------------------------------------------------------------------------------------------------------
Sub-total investment securities 104,716 (2,178) -0.97%
Mark-to-market adjustment 3,767
- - ------------------------------------------------------------------------------------------------------------------
Total investment securities 108,483 (2,178)
Loans and lease financing (462,086) (12,426) -0.17%
Note receivable-FDIC (113,605) (2,905) -0.86%
- - ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (258,926) (14,585) -0.42%
Allowance for possible credit losses (10,987)
Cash and due from banks (8,244)
Other assets (144,533)
- - ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($422,690)
==================================================================================================================
LIABILITIES
Money market accounts $54,203 ($145) -0.09%
Savings deposits 91,607 (1,652) -0.77%
Time deposits < $100,000 (357,355) (7,505) -0.49%
Time deposits > $100,000 (130,043) (1,611) -0.17%
- - ------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (341,588) (10,913) -0.46%
Fed funds purchased & repo agreements (96) 686 0.83%
Dollar repurchase agreements (29,117) (310) -4.27%
Other short-term borrowings (15,784) (59) 0.31%
Subordinated notes (1,442) (23) 0.05%
Long-term debt (2,835) (8) 0.90%
Capital lease obligations (1,052) (31) -0.25%
- - ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (391,914) (10,658) -0.39%
Demand deposits (80,355)
Other liabilities (18,897)
- - ------------------------------------------------------------------------------------------------------------------
Total Liabilities (491,166)
Shareholders' equity 68,476
- - ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ($422,690)
==================================================================================================================
Net interest income (fully taxable
equivalent basis) ($3,927)
Tax equivalent adjustment (950)
- - ------------------------------------------------------------------------------------------------------------------
Net interest income ($2,977)
==================================================================================================================
Net interest rate spread -0.03%
==================================================================================================================
Net interest margin -0.03%
==================================================================================================================
</TABLE>
28
<PAGE> 31
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
TABLE 4 VOLUME/RATE ANALYSIS (FULLY TAXABLE EQUIVALENT) (UNAUDITED)
- - ------------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date 6/30/94 vs 3/31/94
Change in Interest Due to:
(in thousands) Average Balance Average Rate Net Change
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($7,318) $5,039 ($2,279)
Interest-bearing deposits with banks 2,042 2,042
Money market funds 28 9 37
- - ------------------------------------------------------------------------------------------------------------------------------
Total money market investments (5,248) 5,048 (200)
Investment securities available for sale
Investment securities-taxable 4,505 (3,701) 804
Investment securities held to maturity
Investment securities-taxable 5,265 (3,432) 1,833
Investment securities-tax-exempt (86) 59 (27)
Trading securities (63) (12) (75)
- - ------------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities 9,621 (7,086) 2,535
Mark-to-market adjustment
- - ------------------------------------------------------------------------------------------------------------------------------
Total investment securities 9,621 (7,086) 2,535
Loans and lease financing (11,126) 14,455 3,329
Note receivable-FDIC (41) (70) (111)
- - ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (6,794) 12,347 5,553
Allowance for possible credit losses
Cash and due from banks
Other assets
- - ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($6,794) $12,347 $5,553
==============================================================================================================================
LIABILITIES
Money market accounts ($816) $1,325 $509
Savings deposits (17) (894) (911)
Time deposits < $100,000 (840) (640) (1,480)
Time deposits > $100,000 (2,036) 2,329 293
- - ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (3,709) 2,120 (1,589)
Fed funds purchased & repo agreements 1,286 517 1,803
Other short-term borrowings (593) 253 (340)
Subordinated notes (0) (2) (2)
Long-term debt 37 37
Capital lease obligations (2) (2) (4)
- - ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (3,019) 2,924 (95)
Demand deposits
Other liabilities
- - ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities (3,019) 2,924 (95)
Shareholders' equity
- - ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ($3,019) $2,924 ($95)
==============================================================================================================================
Net interest income (fully taxable equivalent basis) $5,648
Tax equivalent adjustment (4)
- - ------------------------------------------------------------------------------------------------------------------------------
Net interest income $5,652
==============================================================================================================================
Net interest rate spread 0.18%
==============================================================================================================================
Net interest margin 0.21%
==============================================================================================================================
</TABLE>
29
<PAGE> 32
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
TABLE 4 VOLUME/RATE ANALYSIS (FULLY TAXABLE EQUIVALENT) (UNAUDITED)
- - --------------------------------------------------------------------------------------------------------------------
Quarter-to-Date 6/30/94 vs 6/30/93
Change in Interest Due to:
(in thousands) Average Balance Average Rate Net Change
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($3,339) $3,105 ($234)
Interest-bearing deposits with banks 2,870 228 3,098
Money market funds 48 12 60
- - --------------------------------------------------------------------------------------------------------------------
Total money market investments (421) 3,345 2,924
Investment securities available for sale
Investment securities-taxable 2,937 873 3,810
Investment securities held to maturity
Investment securities-taxable (707) (4,621) (5,328)
Investment securities-tax-exempt (145) 65 (80)
Trading securities (764) 184 (580)
- - --------------------------------------------------------------------------------------------------------------------
Sub-total investment securities 1,321 (3,499) (2,178)
Mark-to-market adjustment
- - --------------------------------------------------------------------------------------------------------------------
Total investment securities 1,321 (3,499) (2,178)
Loans and lease financing (9,612) (2,814) (12,426)
Note receivable-FDIC (1,988) (917) (2,905)
- - --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (10,699) (3,886) (14,585)
Allowance for possible credit losses
Cash and due from banks
Other assets
- - --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($10,699) ($3,886) ($14,585)
====================================================================================================================
LIABILITIES
Money market accounts $1,626 ($1,771) ($145)
Savings deposits 3,497 (5,149) (1,652)
Time deposits < $100,000 (4,144) (3,361) (7,505)
Time deposits > $100,000 (1,294) (317) (1,611)
- - --------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (316) (10,597) (10,913)
Fed funds purchased & repo agreements (5) 691 686
Dollar repurchase agreements (155) (155) (310)
Other short-term borrowings (470) 411 (59)
Subordinated notes (65) 42 (23)
Long-term debt (172) 164 (8)
Capital lease obligations (28) (3) (31)
- - --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (1,211) (9,447) (10,658)
Demand deposits
Other liabilities
- - --------------------------------------------------------------------------------------------------------------------
Total Liabilities (1,211) (9,447) (10,658)
Shareholders' equity
- - --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ($1,211) ($9,447) (10,658)
====================================================================================================================
Net interest income (fully taxable equivalent basis) ($3,927)
Tax equivalent adjustment (950)
- - --------------------------------------------------------------------------------------------------------------------
Net interest income (2,977)
====================================================================================================================
Net interest rate spread -0.03%
====================================================================================================================
Net interest margin -0.03%
====================================================================================================================
</TABLE>
30
<PAGE> 33
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------------
TABLE 5 SUMMARY OF CONSOLIDATED NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT) (UNAUDITED)
SIX MONTHS ENDED June 30, 1994 June 30, 1993
- - --------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements $428,396 $7,225 3.40% $453,558 $6,796 3.02%
Interest-bearing deposits with banks 354,792 6,593 3.75% 134,296 2,194 3.29%
Money market funds 12,491 183 2.95% 7,608 94 2.49%
- - --------------------------------------------------------------------------------------------------------------------------------
Total money market investments 795,679 14,001 3.55% 595,462 9,084 3.08%
Investment securities available for sale
Investment securities-taxable $224,208 $7,868 7.08% $46,156 $2,548 11.13%
Investment securities held to maturity
Investment securities-taxable 1,159,166 33,389 5.81% 1,285,284 44,773 7.02%
Investment securities-tax-exempt 37,603 1,603 8.60% 41,136 1,787 8.76%
Trading securities 89,517 2,171 4.89% 142,025 3,569 5.07%
- - --------------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities 1,510,494 45,031 6.01% 1,514,601 52,677 7.01%
Mark-to-market securities adjustment 2,322
- - --------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,512,816 45,031 1,514,601 52,677
Loans and lease financing 6,339,128 257,223 8.18% 6,608,038 276,837 8.45%
Covered assets and FDIC assistance 1,262
Note receivable-FDIC 350,812 11,857 6.82% 466,122 18,081 7.82%
- - --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 8,998,435 328,112 7.35% 9,185,485 356,679 7.83%
Allowance for possible credit losses ($194,302) ($182,135)
Cash and due from banks 523,503 518,546
Other assets 633,772 756,717
- - --------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $9,961,408 $10,278,613
================================================================================================================================
LIABILITIES
Money market accounts $2,175,963 $28,815 2.67% $2,110,150 $30,519 2.92%
Savings deposits 1,193,205 12,641 2.14% 1,062,613 14,732 2.80%
Time deposits < $100,000 2,612,290 58,434 4.51% 2,977,619 74,460 5.04%
Time deposits > $100,000 674,526 12,661 3.79% 841,547 17,525 4.20%
- - --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,655,984 112,551 3.41% $6,991,929 $137,236 3.96%
Federal funds purchased & repurchase agreements 264,438 4,753 3.62% $288,159 $4,446 3.11%
Dollar repurchase agreements 78,313 1,761 4.53%
Other short-term borrowings 121,243 2,234 3.72% 122,368 2,082 3.43%
Subordinated notes 57,360 2,399 8.43% 58,874 2,451 8.40%
Long-term debt 15,352 493 6.48% 18,187 543 6.02%
Capital lease obligations 3,942 210 10.74% 5,018 271 10.89%
- - --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,118,319 122,640 3.47% $7,562,848 $148,790 3.97%
Demand deposits 1,800,818 $1,738,167
Other liabilities 216,627 189,943
- - --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 9,135,764 $9,490,958
Shareholders' equity 825,644 $787,655
- - --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $9,961,408 $10,278,613
================================================================================================================================
Net interest income (fully taxable
equivalent basis) $205,472 $207,889
Tax equivalent adjustment 9,260 11,516
- - --------------------------------------------------------------------------------------------------------------------------------
Net interest income $196,212 $196,373
================================================================================================================================
Net interest rate spread 3.88% 3.86%
================================================================================================================================
Net interest margin 4.60% 4.56%
================================================================================================================================
</TABLE>
Certain prior period amounts have been reclassified to conform to current
period presentation.
31
<PAGE> 34
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------------
TABLE 6 CHANGE IN NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT)(UNAUDITED)
Change in Change in Change in
Year-to-Date Average Balance Interest Average Rate
6/30/94 vs 6/30/94 vs 6/30/94 vs
(in thousands) 6/30/93 6/31/93 6/30/93
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($25,162) $429 0.38%
Interest-bearing deposits with banks 220,496 4,399 0.46%
Money market funds 4,883 89 0.46%
- - -------------------------------------------------------------------------------------------------------------------------------
Total money market investments 200,217 4,917 0.47%
Investment securities available for sale
Investment securities-taxable 178,052 5,320 -4.07%
Investment securities held to maturity
Investment securities-taxable (126,118) (11,384) -1.22%
Investment securities-tax-exempt (3,533) (184) -0.16%
Trading securities (52,508) (1,398) -0.18%
- - -------------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities (4,107) (7,646) -1.00%
Mark-to-market securities adjustment 2,322
- - -------------------------------------------------------------------------------------------------------------------------------
Total investment securities (1,785) (7,646)
Loans and lease financing (268,910) (19,614) -0.27%
Covered assets and FDIC assistance (1,262)
Note receivable-FDIC (115,310) (6,224) -1.00%
- - -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (187,050) (28,567) -0.48%
Allowance for possible credit losses ($12,167)
Cash and due from banks 4,957
Other assets (122,945)
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($317,205)
================================================================================================================================
LIABILITIES
Money market accounts $65,813 ($1,704) -0.25%
Savings deposits 130,592 (2,091) -0.66%
Time deposits < $100,000 (365,329) (16,026) -0.53%
Time deposits > $100,000 (167,021) (4,864) -0.41%
- - -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits ($335,945) ($24,685) -0.55%
Federal funds purchased & repurchase agreements ($23,721) $307 0.51%
Dollar repurchase agreements (78,313) (1,761) -4.53%
Other short-term borrowings (1,125) 152 0.29%
Subordinated notes (1,514) (52) 0.03%
Long-term debt (2,835) (50) 0.46%
Capital lease obligations (1,076) (61) -0.15%
- - -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ($444,529) ($26,150) -0.50%
Demand deposits $62,651
Other liabilities 26,684
- - -------------------------------------------------------------------------------------------------------------------------------
Total Liabilities ($355,194)
Shareholders' equity $37,989
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ($317,205)
================================================================================================================================
Net interest income (fully taxable equivalent basis) ($2,417)
Tax equivalent adjustment (2,256)
- - -------------------------------------------------------------------------------------------------------------------------------
Net interest income ($161)
================================================================================================================================
Net interest rate spread 0.02%
================================================================================================================================
Net interest margin 0.04%
================================================================================================================================
</TABLE>
32
<PAGE> 35
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
TABLE 7 VOLUME/RATE ANALYSIS (FULLY TAXABLE EQUIVALENT(UNAUDITED)
6/30/94 vs 6/30/93
Year-to-Date Change in Interest Due to:
Average Average Net
(in thousands) Balance Rate Change
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Federal funds sold and resale agreements ($924) $1,353 $429
Interest-bearing deposits with banks 4,052 347 4,399
Money market funds 69 20 89
- - ----------------------------------------------------------------------------------------------------------------
Total money market investments 3,197 1,720 4,917
Investment securities available for sale
Investment securities-taxable 8,297 (2,977) 5,320
Investment securities held to maturity
Investment securities-taxable (4,106) (7,278) (11,384)
Investment securities-tax-exempt (151) (33) (184)
Trading securities (1,276) (122) (1,398)
- - ----------------------------------------------------------------------------------------------------------------
Sub-total investment securities 2,764 (10,410) (7,646)
Mark-to-market securities adjustment
- - ----------------------------------------------------------------------------------------------------------------
Total investment securities 2,764 (10,410) (7,646)
Loans and lease financing (10,990) (8,624) (19,614)
Covered assets and FDIC assistance
Note receivable-FDIC (4,105) (2,119) (6,224)
- - ----------------------------------------------------------------------------------------------------------------
Total interest-earning assets ($9,134) ($19,433) ($28,567)
Allowance for possible credit losses
Cash and due from banks
Other assets
- - ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ($9,134) ($19,433) ($28,567)
================================================================================================================
LIABILITIES
Money market accounts $2,362 ($4,066) ($1,704)
Savings deposits 4,091 (6,182) (2,091)
Time deposits < $100,000 (8,639) (7,387) (16,026)
Time deposits > $100,000 (3,262) (1,602) (4,864)
- - ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits ($5,448) ($19,237) ($24,685)
Federal funds purchased & repurchase agreements ($880) $1,187 $307
Dollar repurchase agreements (881) (880) (1,761)
Other short-term borrowings (55) 207 152
Subordinated notes (77) 25 (52)
Long-term debt (146) 96 (50)
Capital lease obligations (57) (4) (61)
- - ----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ($7,544) ($18,606) ($26,150)
Demand deposits
Other liabilities
- - ----------------------------------------------------------------------------------------------------------------
Total Liabilities ($7,544) ($18,606) ($26,150)
Shareholders' equity
- - ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ($7,544) ($18,606) ($26,150)
================================================================================================================
Net interest income (fully taxable equivalent basis) ($2,417)
================================================================================================================
</TABLE>
33
<PAGE> 36
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
LOANS AND LEASE FINANCING PORTFOLIO AND CREDIT RISK ANALYSIS
The Corporation's total loans and lease financing, net of unearned income, at
June 30, 1994, decreased $266.0 million, or 3.99%, from December 31, 1993.
Please refer to Table 8 for a presentation of the Corporation's loans and lease
financing portfolio for the five most recent quarters, and Tables 8a and 8b,
respectively, for a presentation of the Corporation's commercial real estate
loans outstanding and commercial, financial and agricultural loans outstanding
at June 30, 1994, by geographic area. Watch Credits for the five most recent
quarters are presented in Table 8.
The decrease in total loans outstanding was primarily due to decreases in the
residential real estate-mortgage loan portfolios. The balance of these
portfolios decreased due to a slow down in mortgage lending volume in the first
six months of 1994 resulting from higher mortgage interest rates. Lower
residential loan demand also contributed to a $197.9 million decrease in the
balance of the warehouse loan portfolio, which is included in commercial loans.
This decrease in the warehouse loan portfolio was offset by other commercial
loan growth.
The Corporation sold $14.3 million of non-performing commercial loans secured
by real estate during the second quarter. This transaction resulted in a
charge-off of $4.6 million against the allowance for loan losses. An
additional charge-off of $2.4 million was taken on another $7.3 million of
Non-performing commercial loans secured by real estate which are expected to be
sold during the third quarter.
The level of Non-performing Assets and Watch Credits at June 30, 1994,
decreased from their level at December 31, 1993. Please refer to Table 9 for a
presentation of Non-performing Assets for the five most recent quarters and to
Table 9a for a presentation of the changes in commercial and commercial real
estate Non-performing Assets during the six months ended June 30, 1994.
34
<PAGE> 37
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
TABLE 8 LOANS AND LEASE FINANCING PORTFOLIO (UNAUDITED)
- - ----------------------------------------------------------------------------------------------------------------------------------
Balance at:
(in thousands) 06/30/94 03/31/94 12/31/93 9/30/93 6/30/93
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial & agricultural
secured by real estate (Table 8a) $926,081 $927,047 $971,917 $913,554 $937,774
Other commercial, financial & agricultural (Table 8a) 2,392,341 2,295,503 2,373,707 2,537,150 2,533,941
Commerical real estate-mortgage (Table 8b) 1,183,585 1,201,482 1,238,177 1,229,197 1,211,915
Residential real estate-mortgage
Mortgages held for sale 331,300 342,061 583,056 635,363 609,094
Mortgages held for investment 436,257 459,674 465,904 386,680 667,659
Short-term real estate-construction (Table 8b) 149,843 159,106 159,594 156,639 167,789
Installment 870,703 803,193 780,532 751,069 722,141
Lease financing 141,855 133,216 116,998 105,122 96,006
- - ----------------------------------------------------------------------------------------------------------------------------------
Total 6,431,965 6,321,282 6,689,885 6,714,774 6,946,319
Unearned income (26,706) (25,868) (18,619) (18,192) (17,450)
- - ----------------------------------------------------------------------------------------------------------------------------------
Total $6,405,259 $6,295,414 $6,671,266 $6,696,582 $6,928,869
==================================================================================================================================
==================================================================================================================================
Watch Credits (in millions) (1) $351 $356 $387 $450 $478
==================================================================================================================================
</TABLE>
(1) Loans classified as Watch Credits are included in the above loan balances.
35
<PAGE> 38
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
TABLE 8 a. COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS OUTSTANDING
June 30, 1994 (in thousands) (UNAUDITED)
- - --------------------------------------------------------------------------------------------------------------------------
Other Other
Industry (1) Michigan Midwest Northeast South States Total
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, Financial and Agricultural Loans
Secured by Real Estate Outstanding:
Finance, insurance and real estate $289,687 $14,133 $3,428 $8,046 $2,118 $317,412
Service 214,137 19,620 15,359 123 1,853 251,092
Retail Trade 79,318 1,220 61,435 1,645 143,618
Manufacturing 52,035 852 1,909 868 55,664
Automotive 51,051 1,462 52,513
Wholesale Trade 25,814 54 25,868
Transportation/utilities 12,537 12,537
Other 20,757 63 46,557 67,377
- - --------------------------------------------------------------------------------------------------------------------------
Total 745,336 37,404 80,222 11,723 51,396 926,081
- - --------------------------------------------------------------------------------------------------------------------------
Other Commercial, Financial and
Agricultural Loans Outstanding:
Service 422,409 19,662 1,950 7,330 7,756 459,107
Finance, insurance and real estate 270,135 768 329 18,445 122,831 412,508
Manufacturing 249,846 25,721 16,479 8,127 6,135 306,307
Retail Trade 254,618 8,705 3,284 10,624 6,976 284,207
Wholesale Trade 260,417 8,865 5,909 275,191
Transportation/utilities 228,657 5,591 1,361 2,543 238,152
Automotive 218,674 4,750 786 224,210
Other 100,649 625 3,126 88,258 192,658
- - --------------------------------------------------------------------------------------------------------------------------
Total 2,005,405 74,685 23,403 48,438 240,408 2,392,341
- - --------------------------------------------------------------------------------------------------------------------------
Total Commercial, Financial and
Agricultural Loans Outsatnding $2,750,741 $112,089 $103,625 $60,161 $291,804 $3,318,422
==========================================================================================================================
Percentage of geographic location to
total Commercial, Financial and
Agricultural Loans outstanding 82.89% 3.38% 3.12% 1.81% 8.79% 100.00%
==========================================================================================================================
</TABLE>
(1) During 1993 the Corporation redefined its industrial categories from
Standard Industrial Classification codes to internally developed
definitions based on the primary market in which the borrower operates.
36
<PAGE> 39
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
TABLE 8 b. SHORT-TERM COMMERCIAL REAL ESTATE - CONSTRUCTION AND COMMERCIAL REAL ESTATE - MORTGAGE LOANS OUTSTANDING
June 30, 1994 (in thousands) (UNAUDITED)
- - --------------------------------------------------------------------------------------------------------------------
Other Other
Collateral Type Michigan Midwest Northeast South States Total
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Short-term Commercial
Real Estate-Construction:
Land development/acquisition $18,645 $118 $54,669 $73,432
Residential > 4 family 3,680 6,818 10,498
Office 8,012 8,012
Retail 6,133 6,133
Other 44,171 2,620 $4,977 51,768
- - --------------------------------------------------------------------------------------------------------------------
Total 80,641 118 64,107 4,977 149,843
- - --------------------------------------------------------------------------------------------------------------------
Commercial Real Estate-Mortgage:
Retail 262,246 1,506 24,249 736 288,737
Office 213,607 3,488 5,352 1,164 223,611
Residential > 4 family 159,843 1,317 3,000 30,106 194,266
Industrial 112,549 4,771 1,658 4,625 123,603
Hotels 60,764 881 $17,776 10,342 32,466 122,229
Mobile home parks 81,606 12,493 533 14,775 6,736 116,143
Warehouse 23,286 4,490 611 28,387
Other 25,866 598 249 3,827 56,069 86,609
- - --------------------------------------------------------------------------------------------------------------------
Total 939,767 29,544 18,558 63,203 132,513 1,183,585
- - --------------------------------------------------------------------------------------------------------------------
Total Commercial
Real Estate Loans Outstanding $1,020,408 $29,662 $18,558 $127,310 $137,490 $1,333,428
====================================================================================================================
Percentage of geographic location to
Total Commercial Real Estate Loans
outstanding 76.52% 2.22% 1.39% 9.55% 10.31% 100.00%
====================================================================================================================
</TABLE>
(1) During 1993 the Corporation redefined its industrial categories from
Standard Industrial Classification codes to internally developed
definitions based on the primary market in which the borrower operates.
37
<PAGE> 40
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
TABLE 9 NON-PERFORMING ASSETS (UNAUDITED)
(in thousands) 06/30/94 03/31/94 12/31/93 9/30/93 6/30/93
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans
Commercial, financial & agricultural secured by real estate $18,875 $37,045 $36,872 $37,538 $38,658
Other commercial, financial & agricultural 28,168 29,939 32,243 28,346 33,118
Commerical real estate-mortgage 11,796 12,443 8,886 14,046 14,655
Residential real estate-mortgage held for investment 21,950 19,437 22,271 17,627 15,700
Short-term real estate-construction 52,913 53,588 55,189 53,760 55,464
Installment 1,771 1,421 1,002 1,876 2,195
Lease financing 22 65
- - -----------------------------------------------------------------------------------------------------------------------------
Total 135,473 153,895 156,463 153,193 159,855
Renegotiated Loans
Commercial, financial & agricultural secured by real estate 41 44 47 23 23
Other commercial, financial & agricultural 85 95
Commerical real estate-mortgage 331 338
Short-term real estate-construction 290 300 313 325 350
- - -----------------------------------------------------------------------------------------------------------------------------
Total 331 675 698 433 468
- - -----------------------------------------------------------------------------------------------------------------------------
Total Non-performing Loans 135,804 154,570 157,161 153,626 160,323
- - -----------------------------------------------------------------------------------------------------------------------------
Property from defaulted loans
Commercial, financial & agricultural secured by real estate 10,368 17,344 18,998 19,832 19,654
Other commercial, financial & agricultural 6,560 6,963 7,299 4,407 5,418
Commerical real estate-mortgage 10,214 11,971 13,193 15,558 19,158
Residential real estate-mortgage - held for investment 5,589 6,635 6,242 5,099 6,821
Short-term real estate-construction 23,401 37,091 51,084 76,535 77,791
Installment 818 917 937 706 836
Other real estate owned, net 7 7 313 314 315
- - -----------------------------------------------------------------------------------------------------------------------------
Property from defaulted loans and other real estate owned 56,957 80,928 98,066 122,451 129,993
- - -----------------------------------------------------------------------------------------------------------------------------
Total Non-performing Assets $192,761 $235,498 $255,227 $276,077 $290,316
=============================================================================================================================
Non-performing Assets to total loans (net of unearned
income) plus property from defaulted loans and other
real estate owned, net 2.98% 3.69% 3.77% 4.05% 4.11%
=============================================================================================================================
Non-performing loans to total loans, net of unearned income 2.12% 2.46% 2.36% 2.29% 2.31%
==============================================================================================================================
Allowance for possible credit losses to
Non-performing Loans 139% 126% 122% 123% 116%
==============================================================================================================================
</TABLE>
Amounts for June 30, 1993 have been restated for a change in reporting
classification to exclude loans that are 90 days or more past due and still
accruing and include real estate of discontinued operations. Loans 90 days or
more past due and still accruing at June 30, 1994, March 31, 1994, December 31,
1993, September 30, 1993 and June 30, 1993 amounted to $99,956, $115,967,
$118,363, $88,139 and $2,483. At June 30, 1994, 96.3% of loans 90 day or more
past due and still accruing were insured by the FHA.
38
<PAGE> 41
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
TABLE 9 a. CHANGES IN COMMERCIAL AND COMMERCIAL REAL ESTATE NON-PERFORMING ASSETS (UNAUDITED)
- - --------------------------------------------------------------------------------------------------------------------------
Commercial Short-Term Commercial Other
Real Estate- Commercial Loans Secured Commercial
Mortgage Real Estate- By Real Estate Total
(in thousands) Construction
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing Assets at
December 31, 1993 $22,417 $106,586 $55,917 $39,542 $224,462
Activity during 1994:
Additions 3,618 2,440 2,615 13,168 21,841
Pay-downs (1,524) (1,321) (11,782) (10,210) (24,837)
Disposition of assets (3,208) (27,491) (6,523) (1,172) (38,394)
Charge-offs (487) (7,568) (5,054) (13,109)
Write-downs (1,770) (248) (2,018)
Return to accrual (1) (237) (618) (876) (1,551) (3,282)
Other(2) 1,431 (2,992) (729) 253 (2,037)
- - --------------------------------------------------------------------------------------------------------------------------
Net activity during 1994 (407) (29,982) (26,633) (4,814) (61,836)
- - --------------------------------------------------------------------------------------------------------------------------
Non-performing Assets at
June 30, 1994 $22,010 $76,604 $29,284 $34,728 $162,626
==========================================================================================================================
Percentage of Non-Performing Asset
category to Total 13.53% 47.10% 18.01% 21.36% 100.00%
==========================================================================================================================
</TABLE>
(1)Loans are returned to performing status after a reasonable period of
sustained performance and the borrower's financial condition has improved to
a point where doubt as to repayment of principal and interest no longer
exists.
(2)Represents net activity for assets with a carrying value generally less than
$250 thousand.
39
<PAGE> 42
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
ALLOWANCE AND PROVISION FOR POSSIBLE CREDIT LOSSES
Provisions are made to the allowance for possible loan losses in amounts
necessary to maintain the allowance at a level considered by management to be
sufficient to provide for risk of loss inherent in the loan portfolio.
Determining the adequacy of the allowance for possible loan losses involves a
disciplined quarterly analysis. The analysis ensures that all relevant factors
affecting loan collectability are consistently applied. The analysis of the
allowance relies mainly on historical loss ratios, current general economic and
industry trends, and current and projected financial condition of certain
individual borrowers. Specific allocations of the allowance are assigned to
individual loans where serious doubt of full principal repayment exists.
General allocations of the allowance are assigned to the remaining portfolio on
the basis of historical loss factors. The historical loss factors are
determined on the basis of past charge-off experience identified by portfolio
type and, within each portfolio type, identified by risk rating. A migration
analysis is utilized to support the calculation of the allowance and evaluate
the overall reasonableness. Management believes the allowance for possible
loan loss at June 30, 1994, is adequate based on the risks identified in the
various loan categories.
The Corporation places more emphasis on estimates of a property's net
realizable values and the borrowers' equity position in the collateral, and
less emphasis on secondary collateral values and personal guarantees when
assessing the need for charge-off. The Corporation's Appraisal Review
Department is responsible for establishing and maintaining property appraisal
policies in accordance with regulatory guidelines. The frequency of
reappraisal is based upon several factors including the loan's risk rating.
For the six month period ended June 30, 1994, the provision was $12.0 million,
a decrease of $13.0 million from the same period in 1993. The decrease is
attributable to continued improvement in the area of credit quality. The
improvement in credit quality is evidenced by reductions in Watch Credits,
Non-performing Assets and net charge-offs during 1993 and the first six months
of 1994.
While the provision for possible credit losses decreased year-over-year, the
allowance for possible credit losses as a percentage of Non-performing Loans
improved to 139% at June 30, 1994, from 116% at June 30 of last year. The
allowance for possible credit losses as a percentage of total period-end loans
improved to 2.94% at June 30, 1994, from 2.68% at June 30 last year.
40
<PAGE> 43
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------
TABLE 10 ANALYSIS OF THE ALLOWANCE FOR POSSIBLE CREDIT LOSSES (UNAUDITED)
- - ---------------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended 06/30/94 03/31/94 12/31/93 9/30/93 6/30/93
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $194,521 $190,992 $189,055 $185,399 $182,101
Charge-offs
Commercial, financial & agricultural secured by real-estate 7,308 260 1,190 716 851
Other commercial, financial & agricultural 3,927 1,178 2,718 233 6,499
Commerical real estate-mortgage 40 447 276 463 2,691
Residential real estate-mortgage 493 440 284 258 748
Short-term real estate-construction 3,000
Installment 1,879 1,903 2,054 2,187 1,976
Lease financing 20 15 51
- - ---------------------------------------------------------------------------------------------------------------------------
Total 13,667 4,228 6,537 6,908 12,765
Recoveries
Commercial, financial & agricultural secured by real-estate 173 76 100 704 90
Other commercial, financial & agricultural 744 1,030 683 577 1,529
Commerical real-estate--mortgage 250 173 268 396 631
Residential real-estate--mortgage 39 4
Short-term real-estate--construction 0 1 1 361 1
Installment 526 473 417 526 439
Lease financing 0 0 5 1
- - ---------------------------------------------------------------------------------------------------------------------------
Total 1,731 1,757 1,474 2,564 2,691
Net charge-offs 11,936 2,471 5,063 4,344 10,074
Additions:
Provisions charged to operating expense 6,000 6,000 7,000 8,000 12,494
Allowance of subsidiary purchased 878
- - ---------------------------------------------------------------------------------------------------------------------------
Ending balance $188,585 $194,521 $190,992 $189,055 $185,399
============================================================================================================================
Allowance for possible credit losses to period-end loans 2.94% 3.09% 2.86% 2.82% 2.68%
============================================================================================================================
CHARGE-OFF RATIOS
- - ---------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date 06/30/94 03/31/94 12/31/93 9/30/93 6/30/93
- - ---------------------------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average
loans, net of unearned income 0.76% 0.15% 0.30% 0.25% 0.60%
============================================================================================================================
Year-to-Date 6/30/94 6/30/93
- - ---------------------------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average loans, net of unearned income 0.45% 0.48%
============================================================================================================================
</TABLE>
41
<PAGE> 44
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest income for the second quarter and first six months of 1994
decreased $3.8 million and $1.7 million, respectively, over the same periods in
1993. Non-interest expenses for the second quarter and first six months of
1994 decreased $24.7 million and $82.8 million over the same periods in 1993.
Substantial write-downs of mortgage servicing intangible assets during 1993 and
the first six months of 1994 resulted in a 72% decrease in the net book value
of those assets. This lower book value resulted in reductions in ESF and PMSR
amortization expense. During the second quarter and six months ended June 30,
1994, ESF amortization decreased $3.5 million and $10.6 million, respectively,
and PMSR amortization decreased $18.6 million and $72.6 million, respectively,
compared to the same periods last year.
Excluding ESF amortization expense, non-interest income for the second quarter
1994 was $7.3 million lower than in the same period last year due principally
to a reduction in mortgage servicing income of $6.6 million. The decline in
mortgage servicing income resulted from a fourth quarter 1993 sale of servicing
rights for approximately $2.5 billion of loans and from accelerated prepayments
in the servicing portfolio throughout 1993.
For the six months ended June 30, 1994, non-interest income, excluding ESF
amortization expense and security gains, decreased $6.2 million compared to the
same period last year. Contributing to this decline were reductions in
mortgage servicing income of $12.4 million and trading profits of $1.9 million.
Partially offsetting these reductions were increases in mortgage banking
secondary marketing gains, $3.4 million; other income, $2.1 million; merchant
fee income, $1.6 million; and deposit account processing fees, $1.1 million.
During the second quarter 1994, non-interest expense (excluding PMSR
amortization expense and a one-time write-down (discussed below) in the second
quarter 1993) was $1.4 million lower than the same quarter last year
principally due to a decrease in defaulted loan expense.
Gains from the sale of real estate owned resulted in net defaulted loan income
of $2.5 million in the second quarter 1994 compared to net expense of $2.8
million in the same period last year. A $1.4 million decline in lost interest
on pool payoffs was attributable to a slow down in refinancing of the loans in
the Corporation's off-balance sheet servicing portfolios due to higher mortgage
interest rates and a smaller servicing portfolio.
In the category of salaries and wages, base salaries decreased $1.9 million due
to cost cutting initiatives implemented during 1994. Offsetting this
improvement were costs associated with staff reductions and the resumption of
accruals for performance bonuses which resulted in an overall increase in
salaries and wages of $2.0 million.
The Corporation recognized a one-time write-down, referred to above, of $4.6
million in the second quarter 1993, of the assets of the its Dallas, Texas
software subsidiary, BancA. The Corporation sold substantially all the assets
and liabilities of BancA in the fourth quarter 1993.
Excluding PMSR amortization and the BancA write-down, non-interest expense for
the six months ended June 30, 1994, decreased $5.6 million principally due to
gains on the sale of property from defaulted loans and recent cost cutting
initiatives. Partially offsetting these reductions were
42
<PAGE> 45
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
increases in salaries and wages, discussed above, and other employee benefits.
The Corporation recognized $1.5 million of expense in connection with the
adoption of SFAS No. 112, Employer's Accounting for Postemployment Benefits,
during the first quarter 1994. Also contributing to the increase in employee
benefit costs was a change in the discount rate used in determining the
actuarial present value of projected pension and postretirement benefit
obligations. This change in discount rate from 8.5% at December 31, 1992, to
7.0% at December 31, 1993, contributed to a $2.2 million increase in both
postretirement and pension expense in the first six months of 1994. Cost
savings from a change in the retiree health insurance plan adopted April 1,
1994, will mitigate the increases resulting from this change in discount rate.
The major components of the Corporation's non-interest income and non-interest
expense are presented in Table 11 and Table 12, respectively, for the five most
recent quarters, and in Table 13 and Table 14, respectively, for the comparable
six month periods. Also, refer to Table 15 Business Review for summary
financial information regarding the Corporations principal subsidiaries.
43
<PAGE> 46
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------------
TABLE 11 NON-INTEREST INCOME (UNAUDITED)
- - ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
(in thousands) 6/30/94 3/31/94 12/31/93 9/30/93 6/30/93
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts 15,196 15,113 15,117 15,176 15,362
Merchant card processing fees 4,866 4,515 4,943 4,578 4,319
Mortgage servicing fees 10,062 10,741 14,297 15,482 16,656
Amortization of capitalized excess service fees (789) (1,056) (1,750) (4,711) (4,266)
Loan service charges 2,133 3,517 3,058 2,918 1,955
- - ---------------------------------------------------------------------------------------------------------------------------------
Service charges 31,468 32,830 35,665 33,443 34,026
Trust and investment services income 4,472 5,080 4,923 4,619 4,837
Mortgage banking gains, net 4,406 4,746 6,919 16,984 4,681
Gains(losses) from sale of mortgage servicing rights 9,273 53
Investments available for sale gains, net 12 160
Other Income:
Trading profits (losses) 210 (379) 405 195 818
Other 11,337 11,241 10,578 10,713 11,099
- - ---------------------------------------------------------------------------------------------------------------------------------
Other income 11,547 10,862 10,983 10,908 11,917
- - ---------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $51,893 $53,518 $67,763 $65,966 $55,674
=================================================================================================================================
</TABLE>
44
<PAGE> 47
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------------
TABLE 12 NON-INTEREST EXPENSE (UNAUDITED)
- - ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
(in thousands) 6/30/94 3/31/94 12/31/93 9/30/93 6/30/93
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and wages $46,625 $46,107 $45,663 $47,489 $44,586
Other employee benefits 13,971 15,208 12,760 12,198 13,257
Net occupancy 7,645 7,652 7,615 7,460 7,529
Equipment 10,517 10,319 10,570 9,748 10,600
Outside services 8,306 7,755 9,652 8,795 8,052
Defaulted loan expense, net
Writedowns and losses from sale 2,544 1,900 4,451 4,379 3,542
Gains from sale (7,628) (3,234) (1,451) (1,077) (2,149)
Other operating expenses, net 2,622 1,263 3,177 2,724 1,426
Amortization of purchased mortgage servicing rights 3,027 5,386 9,850 14,154 21,654
Other Expenses:
FDIC Insurance 5,384 5,386 5,392 5,406 5,526
Assets held for sale, net (income)loss (60) 64 (378) 8 (92)
Communications 2,287 2,321 2,180 2,434 2,322
Stationery and supplies 2,055 2,249 2,831 2,264 2,382
Advertising 1,608 1,619 2,218 1,971 2,060
Michigan single business tax 1,988 2,181 583 1,827 2,062
Postage 1,243 1,567 1,546 1,470 1,589
Amortization of goodwill 305 311 314 300 300
Uncollected interest on early payoffs of loans serviced 1,428 1,799 3,588 3,648 2,827
Provision for foreclosure costs on loans serviced 1,125 975 580 873 837
Other 8,520 7,262 9,322 9,781 9,877
- - ---------------------------------------------------------------------------------------------------------------------------------
Other expenses 25,883 25,734 28,176 29,982 29,690
- - ---------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense $113,512 $118,090 $130,463 $135,852 $138,187
=================================================================================================================================
Net overhead ratio (1) 2.74% 2.87% 2.74% 3.01% 3.57%
Efficiency ratio (2) 72.09% 76.96% 74.63% 77.73% 83.67%
==================================================================================================================================
</TABLE>
(1) Non-interest expense less non-interest income divided by average earning
assets.
(2) Non-interest expense divided by the sum of net interest income on a fully
taxable basis and non-interest income.
45
<PAGE> 48
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
TABLE 13 NON-INTEREST INCOME (UNAUDITED)
- - --------------------------------------------------------------------------------------------------------------------
Six Months Ended
(in thousands) 06/30/94 06/30/93
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service charges on deposit accounts $30,309 $29,250
Merchant card processing fees 9,381 7,784
Mortgage servicing fees 20,803 33,168
Amortization of capitalized excess service fees (1,845) (12,466)
Loan service charges 5,650 5,307
- - --------------------------------------------------------------------------------------------------------------------
Service charges 64,298 63,043
Trust and investment services income 9,552 9,980
Mortgage banking gains, net 9,152 5,679
Gains(losses) from sale of mortgage servicing rights 53
Investments available for sale gains, net 6,128
Other income:
Trading profits(losses) (169) 1,768
Other 22,578 20,450
- - --------------------------------------------------------------------------------------------------------------------
Other income 22,409 22,218
- - --------------------------------------------------------------------------------------------------------------------
Total non-interest income $105,411 $107,101
=====================================================================================================================
</TABLE>
46
<PAGE> 49
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
TABLE 14 NON-INTEREST EXPENSE (UNAUDITED)
- - --------------------------------------------------------------------------------------------------------------------
Six Months Ended
(in thousands) 06/30/94 06/30/93
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Salaries and wages $92,732 $89,146
Other employee benefits 29,179 26,247
Net occupancy 15,297 14,866
Equipment 20,836 21,314
Outside services 16,061 15,787
Defaulted loan expense, net
Writedowns and losses from sale 4,444 5,445
Gains from sale (10,862) (2,977)
Other operating expenses, net 3,885 3,831
Amortization of purchased mortgage servicing rights 8,413 80,994
Other Expenses:
FDIC Insurance 10,770 11,000
Assets held for sale, net (income)expense 4 (221)
Communications 4,608 4,763
Stationery and supplies 4,304 4,848
Advertising 3,227 3,966
Michigan single business tax 4,169 4,271
Postage 2,810 3,220
Amortization of goodwill 616 523
Uncollected interest on early payoffs of loans serviced 3,227 4,728
Provision for foreclosure costs on loans serviced 2,100 2,822
Other 15,782 19,797
- - --------------------------------------------------------------------------------------------------------------------
Other expenses 51,617 59,717
- - --------------------------------------------------------------------------------------------------------------------
Total non-interest expense $231,602 $314,370
====================================================================================================================
Net overhead ratio (1) 2.80% 4.51%
Efficiency ratio (2) 74.50% 99.80%
=====================================================================================================================
</TABLE>
(1) Non-interest expense less non-interest income, annualized, divided by
average earning assets.
(2) Non-interest expense divided by the sum of net interest income on a fully
taxable basis and non-interest income.
47
<PAGE> 50
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
TABLE 15 BUSINESS REVIEW (UNAUDITED)
- - ------------------------------------------------------------------------------------------------------------------------------
MNB
Three Months Ended June 30 (excluding IOMC) IOMC IOBOC
(in thousands) 1994 1993 1994 1993 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for possible credit losses $80,591 $73,263 $3,847 $5,886 $5,071 $6,362
Non-interest income 33,324 32,016 15,301 22,053 333 711
Gains from sale of mortgage servicing rights 53
Amortization of capitalized excess service fees (789) (4,266)
Amortization of purchased mortgage servicing right (3,027) (21,654)
Other non-interest expense (78,000) (79,599) (19,091) (19,378) (4,441) (4,744)
-------- -------- -------- -------- -------- --------
Income before taxes $35,915 $25,680 ($3,759) ($17,306) $963 $2,329
======== ======== ======== ======== ======== ========
At June 30
Total assets $8,739,681 $9,052,399 $681,789 $1,276,089 $645,704 $981,129
Total Liabilities $8,063,938 $8,431,807 $658,406 $1,251,539 $541,024 $854,705
Total Equity $675,743 $620,592 $23,383 $24,550 $104,680 $126,424
Mortgage Servicing Portfolio :
Originated Servicing $3,839 $3,908
Purchased Servicing $4,764 $7,317
-------- --------
Total $8,603 $11,225
======== =======
</TABLE>
Certain prior period amounts have been reclassified to conform to current
period presentation.
48
<PAGE> 51
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------------
TABLE 15 BUSINESS REVIEW (UNAUDITED) (Continued)
- - ---------------------------------------------------------------------------------------------------------------------------------
Texas Bank Holding Company and Consolidated
Three Months Ended June 30 Subsidiaries other operations (1) MNC
(in thousands) 1994 1993 1994 1993 1994 1993
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for possible credit losses $5,494 $6,064 ($71) ($160) $94,932 $91,415
Non-interest income 1,451 1,560 2,273 3,547 52,682 59,887
Gains from sale of mortgage servicing rights 53
Amortization of capitalized excess service fees (789) (4,266)
Amortization of purchased mortgage servicing rights (3,027) (21,654)
Other non-interest expense (5,165) (4,899) (3,788) (7,913) (110,485) (116,533)
-------- -------- -------- -------- -------- --------
Income before taxes $1,780 $2,725 ($1,586) ($4,526) $33,313 $8,902
======== ======== ======== ======== ======== ========
At June 30
Total assets $573,871 $599,423 ($604,679) ($1,391,879) $10,036,366 $10,517,161
Total Liabilities $522,741 $553,612 ($641,578) ($1,333,350) $9,144,531 $9,758,313
Total Equity $51,130 $45,811 $36,899 ($58,529) $891,835 $758,848
</TABLE>
(1) Amounts include intercompany eliminations.
Certain prior period amounts have been reclassified to conform to current
period presentation.
49
<PAGE> 52
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
TABLE 16 BUSINESS REVIEW (UNAUDITED)
- - ------------------------------------------------------------------------------------------------------------------------------
MNB
Six Months Ended June 30 (excluding IOMC) IOMC IOBOC
(in thousands) 1994 1993 1994 1993 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for possible credit losses $155,915 $139,535 $7,057 $9,475 $10,425 $12,148
Non-interest income 67,985 68,250 31,916 40,125 1,046 1,268
Gains from sale of mortgage servicing rights 53
Amortization of capitalized excess service fees (1,845) (12,466)
Amortization of purchased mortgage servicing right (8,413) (80,994)
Other non-interest expense (158,595) (159,257) (38,992) (40,769) (9,533) (9,238)
-------- -------- -------- -------- -------- --------
Income before taxes $65,305 $48,528 ($10,277) ($84,576) $1,938 $4,178
======== ======== ======== ======== ======== ========
</TABLE>
50
<PAGE> 53
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------------------
TABLE 16 BUSINESS REVIEW (UNAUDITED) (Continued)
- - ---------------------------------------------------------------------------------------------------------------------------------
Texas Bank Holding Company and Consolidated
Six Months Ended June 30 Subsidiaries other operations (1) MNC
(in thousands) 1994 1993 1994 1993 1994 1993
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for possible credit losses $11,092 $10,485 ($277) ($270) $184,212 $171,373
Non-interest income 2,990 3,529 3,319 6,342 107,256 119,514
Gains from sale of mortgage servicing rights 53
Amortization of capitalized excess service fees (1,845) (12,466)
Amortization of purchased mortgage servicing rights (8,413) (80,994)
Other non-interest expense (10,408) (8,643) (5,661) (15,469) (223,189) (233,376)
-------- -------- -------- -------- -------- --------
Income before taxes $3,674 $5,371 ($2,619) ($9,397) $58,021 ($35,896)
======== ======== ======== ======== ======= ========
</TABLE>
(1) Amounts include intercompany eliminations.
51
<PAGE> 54
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAX PROVISION
In the second quarter tax benefits of approximately $42.8 million were
recognized, $40.2 million of which were reflected in earnings, and $2.6 million
of which were added directly to shareholders' equity - surplus. These tax
benefits are related to the 1988 acquisition of IOBOC. The ability of the
Corporation to realize these benefits was challenged by the U.S. Treasury
Department in a report issued in March 1991 to Congress. Congress addressed
this matter in the Revenue Reconciliation Bill of 1993, and denied recognition
of certain tax benefits occurring after March 3, 1991. As a result of this
Congressional action and recent discussions with the Federal government
concerning the Corporation's tax returns, the Corporation recognized pre-March
3, 1991 tax benefits in its financial statements.
The Corporation's projection of its 1994 effective income tax rate, excluding
the $40.2 million one-time benefit explained above, is 30.5% . The difference
between this effective tax rate and the federal statutory rate of 35% is
largely due to tax exempt income from the FDIC note receivable and FDIC
assistance received by IOBOC pursuant to the agreement, as well as tax exempt
interest income from municipal obligations held principally by MNB.
The increase in the effective income tax rate from (9.2%) in 1993 to 30.5% for
1994, excluding the one-time benefit, is due to higher projected pre-tax
earnings in 1994 and a lower level of tax-exempt FDIC assistance. This has the
effect of increasing the percentage of projected taxable income relative to
total projected pre-tax financial income, resulting in a higher effective tax
rate.
CAPITAL RESOURCES
The capital position of the Corporation continues to be an important factor in
developing corporate strategies and achieving established goals. Management
reviews the various capital measures weekly and takes appropriate action to
ensure that they are within established internal and external guidelines.
Management believes the Corporation's capital position, which exceeds
guidelines established by industry regulators, is adequate to support its
various businesses.
The Office of the Comptroller of the Currency announced proposed rulemaking to
amend the agency's capital adequacy rules to explicitly include in the Tier 1
capital ratio net unrealized gains and losses on securities classified as
available-for-sale resulting from the adoption of SFAS No. 115. Under SFAS No.
115, which the Corporation adopted effective January 1, 1994, these net
unrealized holding gains and losses are reported as a separate component of
stockholders' equity. Current capital adequacy rules exclude these net
unrealized gains and losses from stockholders' equity. The proposed rulemaking
would amend the definition of stockholders' equity to include adjustments for
both unrealized gains and losses on available-for-sale securities under SFAS
No. 115.
52
<PAGE> 55
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
TABLE 17 CAPITAL RATIOS (UNAUDITED)
Quarter Ended
(in thousands) 6/30/94 3/31/94 12/31/93 9/30/93 6/30/93
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1:
Common shareholders' equity $889,930 $827,323 $815,590 $753,822 $733,564
Intangible assets (13,430) (13,901) (14,279) (14,239) (14,702)
PMSR Capital Limitation (1,697) (403)
SFAS 109 Capital Limitation (59,584) (33,886) (21,876)
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital $816,916 $777,839 $779,032 $739,583 $718,862
- - -----------------------------------------------------------------------------------------------------------------------------------
Tier 2:
Allowance for possible credit losses (1) $103,042 $100,508 $103,149 $103,718 $103,208
Equity commitment note 15,212 15,212 15,212 15,212 18,012
Equity contract note 57,246 57,475 57,715 57,944 58,184
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital $175,500 $173,195 $176,076 $176,874 $179,404
- - -----------------------------------------------------------------------------------------------------------------------------------
Total qualifying capital $992,416 $951,034 $955,108 $916,457 $898,266
- - -----------------------------------------------------------------------------------------------------------------------------------
Risk-weighted assets $7,088,791 $6,980,006 $7,233,972 $7,389,159 $7,540,523
Risk-weighted off-balance sheet exposure 1,167,978 1,074,546 1,032,619 922,510 730,814
- - -----------------------------------------------------------------------------------------------------------------------------------
Less: disallowance for loan loss & intangibles 160,123 146,200 124,880 101,496 97,333
==================================================================================================================================
Total risk-weighted assets and off-balance sheet exposure $8,096,646 $7,908,352 $8,141,711 $8,210,173 $8,174,004
==================================================================================================================================
==================================================================================================================================
Tier 1 risk-based capital ratio 10.09% 9.85% 9.57% 9.01% 8.79%
- - -----------------------------------------------------------------------------------------------------------------------------------
Total risk-based capital ratio 12.26% 12.03% 11.73% 11.16% 10.99%
==================================================================================================================================
Leverage ratio 8.20% 7.84% 7.56% 7.09% 6.90%
==================================================================================================================================
</TABLE>
(1) The allowance for possible credit losses is limited to 1.25% of the total
risk-weighted assets and off-balance sheet exposure.
53
<PAGE> 56
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY
The purpose of liquidity management is to ensure sufficient cash flow to meet
all financial commitments and enable the Corporation to capitalize on
opportunities for business expansion. The parent company manages its liquidity
position to provide the cash necessary to service debt, pay dividends, invest
in subsidiaries and satisfy other operating requirements. The subsidiary banks
and subsidiary savings and loan manage liquidity to meet the needs of borrowers
and to satisfy the need for deposit withdrawals. The Corporation is managing
the asset/liability process toward a prudent level of liquidity thereby
enhancing balance sheet strength. Management believes the Corporation's
liquidity position is strong and is adequate to support its various businesses.
- - --------------------------------------------------------------------------------
TABLE 18 SOURCES OF FUNDS (UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Michigan National Corporation
Three Months Ended
(in thousands) 6/30/94 3/31/94 12/31/93
- - ------------------------------------------------------------------------------------------------------------------------------------
% of % of % of
Total Total Total
Asset Asset Asset
Balance Funding Balance Funding Balance Funding
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Core deposits $ 7,338,660 73% $ 7,644,987 76% $ 7,872,824 77%
Discretionary deposits (1) 816,867 8% 858,732 8% 852,255 8%
Short-term borrowings 709,301 7% 418,733 4% 293,293 3%
Long-term debt 76,400 1% 76,752 1% 77,122 1%
Equity 891,835 9% 831,553 8% 815,590 8%
Other liabilities 203,303 2% 297,918 3% 261,724 3%
- - ------------------------------------------------------------------------------------------------------------------------------------
Total $10,036,366 100% $10,128,675 100% $10,172,808 100%
====================================================================================================================================
Parent Company:
(in millions)
Subsidiaries' retained
earnings available for
dividends (2) $65 $45 $33
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Michigan National Corporation
Three Months Ended
(in thousands) 9/30/93 6/31/93
- - ------------------------------------------------------------------------------------------------------------------------------------
% of % of
Total Total
Asset Asset
Balance Funding Balance Funding
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Core deposits $ 7,662,174 74% $ 7,781,356 74%
Discretionary deposits (1) 994,072 9% 928,755 9%
Short-term borrowings 556,432 5% 654,351 6%
Long-term debt 77,998 1% 81,312 1%
Equity 781,397 8% 758,848 7%
Other liabilities 323,337 3% 312,539 3%
- - ------------------------------------------------------------------------------------------------------------------------------------
Total $10,395,410 100% $10,517,161 100%
====================================================================================================================================
Parent Company:
(in millions)
Subsidiaries' retained
earnings available for
dividends (2) $52 $31
====================================================================================================================================
</TABLE>
(1) Discretionary deposits consist of time deposits > $100,000 plus all brokered
deposits.
(2) Retained earnings available for dividends is calculated based on current
year-to-date net income plus two years' prior income less certain
adjustments.
Certain prior period amounts have been reclassified to conform to current period
presentation.
54
<PAGE> 57
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
EARNINGS PER SHARE
Earnings per share presented in the Consolidated Statement of Income for the
three and six months ended June 30, 1994, reflect the use of the "treasury
stock" method to calculate the common stock equivalents attributable to the
Corporation's 8% Redeemable Subordinated Debentures (Debentures). Refer to
Note N - Long-term Debt and Note O - Capital on pages 56 and 57 of the 1993
Annual Report for further information on these Debentures. Increasing interest
rates during 1994 have resulted in a significant narrowing of the premium value
of the fixed income feature of the Debentures and it appears likely that the
fixed income feature could be valued at a discount in the near future. If and
when that occurs, under the requirements of Accounting Principles Board Opinion
No. 15 - Earnings per Share, the "if converted" method will be used to
calculate the common stock equivalents of the Debentures.
The "if converted method" would result in an approximate 800,000 share increase
in common stock equivalents. In addition, interest expense on the Debentures
would be added back to income for purposes of calculating earnings per share
under the "if converted" method.
55
<PAGE> 58
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
PART I EXHIBIT
EXHIBIT (11) COMPUTATION OF EARNINGS PER COMMON SHARE (UNAUDITED)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
- - ------------------------------------------------------------------------------------------------------------------------------------
1994 1993 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share)
<S> <C> <C> <C> <C>
PRIMARY
Net Income $63,294 $8,902 81,578 ($35,896)
------------------------------------------------------------------------
Average common shares outstanding 15,233 15,093 15,211 15,018
Common stock equivalents 351 132 263
------------------------------------------------------------------------
AVERAGE PRIMARY SHARES OUTSTANDING 15,584 15,225 15,474 15,018
========================================================================
PRIMARY EARNINGS PER SHARE $4.06 $0.58 $5.27 ($2.39)
========================================================================
FULLY DILUTED
Net Income $63,294 $8,902 $81,578 ($35,896)
------------------------------------------------------------------------
Average common shares outstanding 15,233 15,093 15,211 15,018
Common stock equivalents 383 137 383
------------------------------------------------------------------------
AVERAGE FULLY DILUTED SHARES OUTSTANDING 15,616 15,230 15,594 15,018
========================================================================
FULLY DILUTED EARNINGS PER SHARE $4.05 $0.58 $5.23 ($2.39)
========================================================================
</TABLE>
(1) The Corporation has changed from the "if converted" method to the
"treasury stock" method to calculate the dilutive effect of its
Cancelable Mandatory Stock Purchase Contracts (Equity Contracts).
56
<PAGE> 59
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
PART II. OTHER INFORMATION
Item 1. - Legal Proceedings
See note G. of the Notes to Consolidated Financial
Statements and Note U. of the 1993 Annual Report
Item 4. - Results of Votes of Security Holders
At the April 19, 1994, Michigan National Corporation Annual Meeting of
Stockholders, it was resolved that the following persons were elected as
Directors of Michigan National Corporation until the next Annual Meeting of
Stockholders and thereafter until their successors are duly elected and
qualified. The following is the result of the voting with respect to each
nominee for office:
<TABLE>
<CAPTION>
_________ NUMBER OF VOTES ___________
WITHHOLD
FOR AUTHORITY TOTAL
--- --------- -----
<S> <C> <C> <C>
Daniel T. Carroll 8,601,550 4,137,758 12,739,308
John S. Carton 8,619,804 4,119,504 12,739,308
Douglas E. Ebert 8,568,630 4,170,678 12,739,308
Sidney E. Forbes 8,582,854 4,156,454 12,739,308
Sue L. Gin 8,543,081 4,196,227 12,739,308
Morton E. Harris 8,565,783 4,173,525 12,739,308
Gerald B. Mitchell 8,607,965 4,131,343 12,739,308
Robert J. Mylod 8,378,585 4,360,723 12,739,308
William F. Pickard 8,575,055 4,164,253 12,739,308
Stanton Kinnie Smith, Jr. 8,578,416 4,160,892 12,739,308
Walter H. Teninga 8,569,712 4,169,596 12,739,308
Stephen A. Van Andel 8,551,624 4,187,684 12,739,308
Richard T. Walsh 8,583,084 4,156,224 12,739,308
James A. Williams 8,581,449 4,157,859 12,739,308
</TABLE>
Item 6.(a) - Exhibits
Exhibit (11) - Statement regarding computation of per share
earnings. See Part I Exhibit.
57
<PAGE> 60
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICHIGAN NATIONAL CORPORATION
(Registrant)
August 12, 1994 Joseph J. Whiteside
___________________________________
Joseph J. Whiteside
Executive Vice President
(Chief Financial Officer)
August 12, 1994 Robert V. Panizzi
___________________________________
Robert V. Panizzi
First Vice President and Controller
(Chief Accounting Officer)
58
