<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1993
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
27777 Inkster Road, Farmington Hills, MI 48334
- ---------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (810) 473-3000
------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $10 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (X) Yes ( ) No
At February 28, 1994, the registrant's common stock, $10 par value held by
nonaffiliates, had an aggregate market value of $991,739,970 based on the
closing price of $65.25 and 15,199,080 common shares outstanding.
At February 28, 1994, the registrant had outstanding 15,199,080 shares of its
common stock, $10 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III: Items 10-13--Portions of registrant's March 1994 Proxy Statement.
Part IV: Item 14(c)3--Registrant's Form 10-K for the year ended December 31,
1988, and Item 14(c)10--Registrant's Form 10-Ks for the years ended December
31, 1992, 1990, 1989 and 1987.
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INDEX TO ANNUAL REPORT ON FORM 10-K
MICHIGAN NATIONAL CORPORATION
PART I
Item 1 BUSINESS ................................................. 8
Statistical Disclosure By Bank Holding Companies
Summary of Consolidated Net Interest Income............ 17
Volume/Rate Analysis .................................. 18
Investment Securities Portfolio ....................... 49
Loans and Lease Financing Portfolio ................... 27
Loan Maturities and Interest Rate Sensitivity ......... 20
Non-Performing Loans .................................. 30
Cross-Border Outstandings ............................. 33
Analysis of the Allowance for Possible Credit
Losses ............................................... 33
Allocation of the Allowance for Possible Credit
Losses ............................................... 34
Average Deposits ...................................... 17
Time Deposits of $100,000 or More, Maturity
Distribution ......................................... 20
Financial Ratios ...................................... 13
Short-Term Borrowings ................................. 60
Item 2 PROPERTIES ............................................... 10
Item 3 LEGAL PROCEEDINGS ........................................ 66
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to, or voted on, by security
holders during the fourth quarter of 1993.
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PART II
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Item 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS ...................................... 73
Item 6 SELECTED FINANCIAL DATA .................................. 13
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................... 11
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Michigan National Corporation and Subsidiaries
Consolidated Statement of Condition
December 31, 1993 and 1992 ............................ 40
Consolidated Statement of Income
Years Ended December 31, 1993, 1992 and 1991 .......... 41
Consolidated Statement of Changes in Shareholders' Equity
Years Ended December 31, 1993, 1992 and 1991 .......... 43
Consolidated Statement of Cash Flows
Years Ended December 31, 1993, 1992 and 1991 .......... 42
Notes to Consolidated Financial Statements ............. 44
Independent Auditors' Report ........................... 72
Selected Quarterly Financial Data .......................74
Item 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE--None
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PART III
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Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (1)
Item 11 EXECUTIVE COMPENSATION (1)
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (1)
2
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INDEX TO ANNUAL REPORT ON FORM 10-K CONTINUED
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PART III (CONTINUED)
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Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (1)
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PART IV
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Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Certain documents filed as a part of the Form 10-K
Financial Statements and Schedules - the financial
statements and schedules filed as part of this report
are listed under Item 8.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three month
period ended December 31, 1993.
(c) Exhibits required by Item 601 of Regulation S-K
3. Articles of Incorporation and By-Laws
a. Articles of Incorporation, as amended, are
incorporated herein by reference to Exhibit
3(a) on Form 10-K for the year ended
December 31, 1988.
b. By-Laws, as amended, are incorporated
herein by reference to Exhibit A on
Form 8-K filed December 19, 1990.
4. Instruments defining the Rights of Security
Holders,including indentures
a. Note Purchase Agreement between Marine
Midland Bank, N.A., dated July 10, 1985,
incorporated herein by reference to Exhibit
E on Form 10-C filed July 22, 1985.
b. Stock and Warrant Purchase Agreement
between Marine Midland Banks, Inc. and
Michigan National Corporation dated July
10, 1985, incorporated herein by reference
to Exhibit F on Form 10-C filed July 22,
1985.
c. Stock Purchase Agreement dated July 10,
1985 between Michigan National Corporation
Employee Stock Ownership Plan and Michigan
National Corporation, incorporated herein
by reference to Exhibit D on Form 10-C
filed July 22, 1985.
d. Exchange Agreement and Certificate of
Determination of Relative Rights and
Preferences of 6% Cumulative Convertible
Preferred Stock ($10 par value),
incorporated herein by reference to Item
6.(a)-Exhibit (4) on Form 10-Q dated March
31, 1988.
e. Rights Agreement dated April 25, 1988
between Michigan National Corporation
and Mellon Bank, N.A., incorporated
herein by reference to Exhibit 1 on Form
8-A filed April 26, 1988.
f. Registration No. 33-4515, 500,000 shares of
Common Stock of Michigan National
Corporation (Michigan National Corporation
1985 Stock Option Plan), incorporated
herein by reference to Exhibit 4.1 of Form
S-8 dated April 2, 1986.
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INDEX TO ANNUAL REPORT ON FORM 10-K CONTINUED
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PART IV (CONTINUED)
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g. Registration No. 33-17222, 500,000 shares
of Common Stock of Michigan National
Corporation (Michigan National Corporation
Stock Option and Performance Incentive
Plan), incorporated herein by reference to
Exhibit 4.1 of Form S-8 dated September 9,
1987.
h. Registration No. 33-18943, 1,303,045 shares
of Common Stock of Michigan National
Corporation (Employee Stock Ownership
Plan), incorporated herein by reference to
Exhibit 4.1 of Form S-8 dated December 8,
1987.
i. Registration No. 33-22430, 656,787 shares
of Common Stock of Michigan National
Corporation, incorporated herein by
reference to Form S-3 dated June 9, 1988.
j. Registration No. 33-22542, 250,000 shares
of Common Stock of Michigan National
Corporation (Michigan National Corporation
Employees' Stock Bonus Plan, 401- (k)
account), incorporated herein by reference
to Exhibit 4.1 of Form S-8 dated June 27,
1988.
k. Registration No. 33-24751, Indenture, dated
as of November 10, 1988, between Michigan
National Corporation and Bankers Trust
Company, incorporated herein by reference
to Exhibit 4.1, of Form S-3 dated October
6, 1988.
l. Registration No. 33-45188, 200,000 shares
of Common Stock of Michigan National
Corporation (Michigan National Corporation
Nonqualified Stock Option Plan),
incorporated herein by reference to Form
S-8 dated January 21, 1992.
m. Registration No. 33-58644, Senior Indenture
between Michigan National Corporation and
First National Bank of Chicago and
Subordinated Indenture between Michigan
National Corporation and First Trust
National Association, incorporated herein
by reference to Exhibit (4) (a) and Exhibit
(4) (b) respectively, on Form S-3 dated
January 23, 1993.
n. Registration No. 33-58644, proposed sale of
up to $150,000,000 of debt securities
filed as a shelf registration, is
incorporated herein by reference to Form
S-3, dated February 23, 1993.
10. Material Contracts
a. Employment Agreement dated January 16, 1985
between Michigan National Corporation and
Robert J. Mylod, as amended............. (2)
b. Pension Agreement dated January 16, 1985
between Michigan National Corporation and
Robert J. Mylod, as amended March 17,
1993.....................................(5)
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INDEX TO ANNUAL REPORT ON FORM 10-K CONTINUED
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PART IV (CONTINUED)
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c. Loan Agreement between Michigan National
Corporation and the Michigan National
Corporation Employee Stock Ownership Plan
dated July 10, 1985, incorporated herein by
reference to exhibit C on Form 10-C filed
July 22, 1985.
d. Pension Agreement dated October 22, 1987
between Michigan National Corporation and
Eric D. Booth, as amended February 26,
1993.................................... (5)
e. Assistance, Capital Maintenance and Stock
Purchase Agreements among the Registrant,
the Federal Savings and Loan Insurance
Corporation and Beverly Hills Federal
Savings Bank, incorporated herein by
reference to Exhibits 2.0, 28.1, and 28.2,
respectively, on Form 8-K filed January 4,
1989.
f. Master Purchase Agreement for Credit Card
Portfolio and Related Assets between
Independence One Bank, N.A. and Michigan
National Bank (Sellers); and The Chase
Manhattan Bank (USA), N.A. (Purchaser) as
amended, incorporated herein by reference
to Form 8-K's filed May 25, 1989 and July
18, 1989.
g. Form Michigan National Corporation
Executive Change in Control Severance
Agreement dated September 14, 1989, between
Michigan National Corporation and nine
current Executive Officers including,
Robert J. Mylod, Eric D. Booth, Charles W.
Kight, Richard C. Webb and W. David
Tull.................................... (3)
h. Separation Agreement dated February 6, 1990
between Michigan National Corporation and
K. Larry Hastie......................... (3)
i. Separation Agreement dated March 27, 1990
between Michigan National Corporation and
Richard A. Bondie....................... (4)
j. Form Michigan National Corporation Director
Indemnification Agreement dated September
19, 1990 between Michigan National
Corporation and the 15 members of the Board
of Directors............................ (4)
k. Separation Agreement dated October 23, 1990
between Michigan National Corporation and
Peter K. Thomsen........................ (4)
l. Pension Agreement dated November 7, 1990
between Michigan National Corporation and
W. David Tull, as amended March 9,
1993.................................... (5)
m. Pension Agreement dated November 7, 1990
between Michigan National Corporation and
Charles W. Kight, as amended March 12,
1993.................................... (5)
n. Pension Agreement dated January 1, 1991
between Michigan National Corporation and
Lawrence L.Gladchun, as amended March 4,
1993.................................... (5)
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INDEX TO ANNUAL REPORT ON FORM 10-K CONTINUED
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PART IV (CONTINUED)
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o. Pension Agreement dated January 1, 1991
between Michigan National Corporation and
Richard C. Webb, as amended March 5,
1993.................................... (5)
p. Employment Agreement dated November 17,
1993 between Michigan National Corporation
and Douglas E. Ebert......................76
q. Pension Agreement dated January 10, 1994
between Michigan National Corporation and
Douglas E. Ebert......................... 91
r. Michigan National Corporation Executive
Change in Control Severance Agreements
dated January 14, 1994, and March 2, 1994,
between Michigan National Corporation and
Douglas E. Ebert and Michigan National
Corporation and Joseph J. Whiteside,
respectively. These documents are the
same, except for the names and dates, as
the Form Michigan National Corporation
Executive Change in Control Severance
Agreement dated September 14, 1989...... (3)
s. Employment Agreement dated March 2, 1994
between Michigan National Corporation and
Joseph J. Whiteside.......................83
t. Pension Agreement dated March 11, 1994
between Michigan National Corporation and
Joseph J. Whiteside...................... 91
11. Statement regarding computation of per share
earnings - Sufficient data is available in the
financial statements to compute per share
earnings, therefore this statement is not
included.
13. Annual report to shareholders - the registrant's
1993 annual report to shareholders is not
incorporated by reference in whole or in part
to this Form 10-K and therefore, is not filed as
an exhibit.
21. Subsidiaries of the registrant................ 92
23. Consent of Independent Auditors............... 93
99. Principal commitments of the Memorandum of
Understanding between Michigan National Bank and
the Central District Office of the Comptroller
of Currency dated August 4, 1993, which is
incorporated herein by reference to Item 5 of
the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993.
d. Financial Statement Schedules required by Regulation S-X -
not applicable
SIGNATURES................................................................... 94
(1) Incorporated by reference to the registrant's March 1994 Proxy Statement.
(2) This exhibit is incorporated herein by reference to Exhibit 10 on Form
10-K for the year ended December 31, 1987.
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INDEX TO ANNUAL REPORT ON FORM 10-K CONTINUED
(3) This exhibit is incorporated herein by reference to Exhibit 10 on Form
10-K for the year ended December 31, 1989.
(4) This exhibit is incorporated herein by reference to Exhibit 10 on Form
10-K for the year ended December 31, 1990.
(5) This exhibit is incorporated herein by reference to Exhibit 10 on Form
10-K for the year ended December 31, 1992.
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FORM 10-K
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. BUSINESS
GENERAL
Michigan National Corporation (MNC), a registered bank and savings and loan
association holding company, is incorporated under the laws of the State of
Michigan.
MNC owns 100% of the common stock of four of its bank and savings and loan
subsidiaries, and its five non-bank subsidiaries. MNC owns 49% of the common
stock of the holding company of an additional bank subsidiary.
Effective October 1, 1993, MNC sold substantially all the assets and certain
liabilities of BancA Corporation, a Dallas, Texas computer software company.
The assets were previously written down during the second quarter of 1993 with
a $4.6 million charge to income and no additional loss resulted from the sale
transaction. MNC had acquired all the assets and assumed certain liabilities
of BancA Corporation on July 29, 1992, for a cash purchase price of $3.5
million.
On April 1, 1993, Peoples National Bank, Pasadena, Texas; Peoples Bank,
Houston, Texas; and Community National Bank, Friendswood, Texas were acquired
and merged into Lockwood Banc Group, Inc. (Lockwood). The cash purchase price
for the acquisition was $16.7 million, which was equal to the estimated net
fair value of those institutions. The transaction was accounted for under the
purchase method and goodwill of $4.1 million was recognized in the acquisition,
which is being amortized over 15 years on a straight-line basis.
MNC has approximately 5,900 full-time equivalent employees. At the end of
1993, MNC was the fourth largest bank holding company in Michigan based upon
total assets. Michigan National Bank (MNB), MNC's principal banking
subsidiary, has 190 branch offices, operates one of the largest automated
teller machine networks in Michigan and provides all services associated with a
full-service commercial banking institution.
INDUSTRY SEGMENTS
MNC operates in two industry segments - the mortgage banking industry and the
financial institutions industry. Please refer to Note W. to consolidated
financial statements for industry segment information.
Independence One Mortgage Corporation (IOMC) operates the mortgage banking
business and has 23 offices in ten states. IOMC's principal business
activities are discussed in the Mortgage Banking Activities section of Note A.
to consolidated financial statements.
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FORM 10-K ITEM 1. BUSINESS (CONTINUED)
The financial institutions primary businesses are retail banking, commercial
banking and investment banking. These businesses are operated by MNB.
Independence One Bank of California (IOBOC), Lockwood and First State Bank &
Trust also operate retail and commercial banking businesses.
COMPETITION
Michigan is a highly competitive financial services market. Michigan laws that
allow reciprocal interstate banking with contiguous states and nationwide
interstate banking have enlarged the banking market and heightened competitive
forces. MNB competes primarily with other Michigan banks for loans, deposits
and trust accounts. Further competition comes from a variety of financial
intermediaries including savings and loan associations, consumer finance
companies, mortgage companies and credit unions. IOBOC does business in the
highly competitive southern California market and MNC's Texas banks have a
small presence in southeast area of the state. Financial institutions compete
for deposit accounts, loans and other business on the basis of interest rates,
fees, convenience and quality of service. The mortgage banking industry in
which IOMC does business is highly competitive in most of the markets it
serves. MNC's non-bank subsidiaries (included in the financial institutions
industry segment), which are involved in leasing, insurance and investment
management, face direct competition from leasing companies, brokerage houses,
large retailers and commercial finance and insurance companies.
SUPERVISION AND REGULATION
MNC is subject to supervision and regulation by the Federal Reserve Board under
the Bank Holding Company Act of 1956, as amended. Since it is a bank holding
company, the services provided by the subsidiary banks and the operations of
MNC are required to be closely related to the business of banking or related
financial services.
MNC currently operates two national banks and one state bank, all of which are
members of the Federal Reserve System, thereby supervised, regulated and
subject to examination by the appropriate federal regulatory agencies. MNC
also operates a federally-chartered stock savings bank which is regulated by
the Office of Thrift Supervision.
In addition, all MNC bank subsidiaries and its savings bank subsidiary are
members of the Federal Deposit Insurance Corporation. The electronic funds
transfer services of these subsidiaries are governed by both state and federal
laws.
As previously reported in August 1993, MNB entered into a Memorandum of
Understanding (MOU) with the Central Office of the Comptroller of the Currency.
Under the terms of the MOU, MNB agreed to review its management structure; risk
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FORM 10-K ITEM 1. BUSINESS (CONTINUED)
management policies; and its mortgage banking business for the purpose
of determining its appropriate role in MNB's strategic plan.
ITEM 2. PROPERTIES
MNC's corporate headquarters is located at 27777 Inkster Road, Farmington
Hills, Michigan in a building owned by MNB. MNB occupies 199 offices
throughout the State of Michigan, of which 103 are owned and 96 are leased.
The initial lease terms of these properties range from one year through 20
years, while the majority have terms ranging from 5 through 10 years. The
expiration of most of the leases will occur in the period 1994 through 2010.
10
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GLOSSARY
Definitions of terms used in the following Management's Discussion and
Analysis and Consolidated Financial Statements and Notes to Consolidated
Financial Statements include:
ASSISTANCE AGREEMENT
An agreement entered into on December 31,1988, between Michigan National
Corporation, the Federal Savings and Loan Insurance Corporation (FSLIC) and
Independence One Bank of California, FSB (IOBOC), formerly Beverly Hills
Federal Savings Bank (BHFSB), executed in connection with the acquisition of
IOBOC, whereby FSLIC agreed to provide certain assistance to IOBOC.
Under the provisions of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA), the FDIC assumed the FSLIC's responsibilities
in connection with the Assistance Agreement.
BASIS POINT
A unit of measure used in quantifying interest rates. One basis point is equal
to 0.01%.
CORPORATION
Michigan National Corporation and subsidiaries.
COVERED ASSETS
All assets of IOBOC at the acquisition date except cash, marketable
securities, premises and equipment and the Note Receivable-FDIC.
CAPITAL LOSS COVERAGE
Guarantee to IOBOC, provided for under the terms of the Assistance Agreement,
against losses incurred on the disposition or write-down of Covered Assets.
ESF
Excess Service Fees, an asset that represents the present value of the
difference between estimated net servicing fee income retained when mortgage
loans are sold and normal servicing fee income.
FCSI
First Collateral Services, Inc., a mortgage warehouse lending business
acquired by IOBOC on April 13, 1992.
FDIC
Federal Deposit Insurance Corporation
FHLBB COF
A cost of funds index determined and published by the Eleventh District of the
Federal Home Loan Bank Board (Federal Home Loan Bank of San Francisco). The
index is a composite of the weighted average cost of funds of all savings
institutions in the district.
FULLY TAXABLE EQUIVALENT
(FTE) ADJUSTMENT
The basis on which tax-exempt interest income and expense is
converted to its equivalent pre-tax interest income and expense, stated in
fully-taxable amounts.
GUARANTEED YIELD
Guaranteed interest income on Covered Assets provided for under the terms of
the Assistance Agreement. The Assistance Agreement guaranteed that the
Covered Asset portfolio will earn interest income at the FHLBB COF plus 250
Basis Points in 1989 and at the FHLBB COF plus 150 Basis Points from 1990
through 1992.
IOBOC
Independence One Bank of California, FSB, formerly Beverly Hills Federal
Savings Bank.
IMMEDIATELY REALIZABLE VALUE
An estimate of the pre-tax value realizable if an asset were to be sold
immediately for cash on an "as is" basis for purposes of determining the 1992
Capital Loss Coverage settlement.
LOCKWOOD
Lockwood Banc Group, Inc., the holding company for Lockwood National Bank of
Houston, Texas (Lockwood Bank).
NET INTEREST INCOME
Net Interest Income is the difference between total interest income and total
interest expense. Increases or decreases in Net Interest Income are the
result of changes in the volume and mix of assets and liabilities (including
off-balance sheet instruments such as interest rate swaps) and their relative
sensitivity to movements in determinant interest rates.
NET INTEREST MARGIN
Net Interest Income on a Fully Taxable Equivalent Basis expressed as a
percentage of average earning assets.
NET INTEREST RATE SPREAD
The difference between the average rate earned on total earning assets and the
average rate paid on total interest-bearing liabilities on a Fully Taxable
Equivalent Basis.
NON-PERFORMING LOANS
Non-accrual loans plus renegotiated loans.
NON-PERFORMING ASSETS
Non-performing Loans plus property from defaulted loans plus other real estate
owned.
NOTE RECEIVABLE-FDIC
A ten year note issued by the FSLIC to IOBOC in connection with the acquisition
of IOBOC that bears interest at a floating rate of FHLBB COF plus a stated
premium. The interest rates applicable to the note during its term are as
follows:
<TABLE>
<CAPTION>
INTEREST
PERIOD INTEREST RATE
--------- ----------------------------
<S> <C>
1989-1990 FHLBB COF + 200 Basis Points
1991-1993 FHLBB COF + 100 Basis Points
1994-1996 FHLBB COF + 75 Basis Points
1997-1998 FHLBB COF + 50 Basis Points
</TABLE>
PEOPLES/COMMUNITY BANKS
Peoples National Bank, Pasadena, Texas; Peoples Bank, Houston, Texas; and
Community National Bank, Friendswood, Texas acquired April 1, 1993, and merged
into Lockwood Bank.
PMSR
Purchased Mortgage Servicing Rights, an intangible asset that represents
the capitalized cost of purchasing the right to service loans originated by
others.
WATCH CREDITS
Performing loans where the borrower's operating results are showing signs of
current or possible future financial difficulties. These performing loans
are subjected to closer and more frequent risk assessment reviews and closer
management of the credit relationship.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL REVIEW
Net Income for the year ended 1993 was $23.8 million, or $1.56 per share. Net
income for the year 1992, which included a one-time cumulative adjustment of
$6.3 million related to the adoption of Statement of Financial Accounting
Standards (SFAS) No. 109, was $66.1 million, or $4.38 per share.
During 1993, earnings were significantly pressured by unprecedented mortgage
refinancing activity experienced by the mortgage banking industry and the
resulting accelerated prepayments in mortgage servicing portfolios. Starting in
the third quarter 1992, the Corporation aggressively addressed the effect of
these prepayment trends through accelerated amortization of its mortgage
servicing assets. Total 1993 amortization expense for PMSR and ESF of $123.9
million was twice the $62.5 million recorded in 1992. The total net book value
of these assets at December 31, 1993, was $56.3 million, a 68% decrease from
$177.3 million at the end of 1992.
The Corporation continued to make improvements in the area of credit quality
during 1993. The level of Watch Credits, Non-performing Assets and net
charge-offs all declined during the year. After reaching a high of $694 million
at June 30, 1992, Watch Credits decreased to $387 million at December 31, 1993;
total Non-performing Assets declined from $304.2 million at year-end 1992, to
$255.2 million at December 31, 1993; net charge-offs for the year ended 1993
were $25.4 million, 52% below 1992's net charge-offs of $52.8 million. These
improvements prompted a $30.7 million (43%) decrease in the provision for
possible loan losses to $40.0 million in 1993 from $70.7 million in 1992. At
the same time, the allowance for possible loan losses strengthened to 2.86% of
total loans at December 31, 1993, up from 2.61% at December 31, 1992, and the
allowance to Non-performing Loans ratio improved to 121.5% from 115.4% at
year-end 1992.
Net Interest Income was $401.6 million and $401.1 million in 1993 and 1992,
respectively. The Net Interest Margin was 4.60% in 1993 and 4.55% in 1992. Wide
interest rate spreads and effective asset/liability management, which included
the use of off-balance sheet hedging strategies, contributed to the strong
margin in both periods. The Net Interest Margin in both periods was further
enhanced by significant increases in non-interest-bearing demand deposits.
Non-interest income increased $16.0 million, or 7.1%, in 1993 compared to
1992. Growth in commercial and retail banking fee income of approximately $7.7
million plus an increase in mortgage banking gains of approximately $8.0
million were primary contributors to the increase. Approximately $2.6 million
of the increase was attributable to the Corporation's recent acquisitions (FCSI
in 1992 and Peoples/Community banks in 1993). Non-interest income included
total one-time gains of $25.6 million in 1993, compared to one-time gains of
$15.0 million in 1992. These one-time gains were offset by an increase in 1993
ESF amortization expense to $18.9 million, which was twice 1992 amortization
expense of $9.5 million.
Non-interest expense increased in 1993 to $580.7 million from $488.8 million
in 1992. A major contributor to this increase was PMSR amortization expense,
which increased $52.0 million to $105.0 million in 1993 from $53.0 million in
1992. The Corporation's recent acquisitions contributed another $11.9 million
to the increase. Non-interest expense in 1993 includes retiree medical expense
of $6.9 million accrued in accordance with the requirements of SFAS No. 106,
which the Corporation adopted effective January 1, 1993. This is approximately
$5.6 million greater than cash claims cost expensed in 1992 under cash basis
accounting. Salaries and other employee benefits (excluding the aforementioned
retiree medical benefit expense and expenses of recent acquisitions) increased
$13.1 million, or 6.3%, from 1992. Also during 1993, the Corporation recorded a
$4.6 million write-down of the assets of its Texas software subsidiary, BancA
Corporation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
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Table 1 Selected Financial Data
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1993 1992 1991 1990 1989 1988
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<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS (in thousands)
Net Interest Income $401,611 $401,111 $368,999 $355,750 $378,513 $394,964
Provision for possible credit losses 40,000 70,670 86,500 73,082 128,481 62,555
Non-interest income(1) 240,830 224,793 190,039 175,742 381,503 166,859
Non-interest expense 580,685 488,776 410,836 400,917 424,339 368,843
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Income before income tax (benefit) provision 21,756 66,458 61,702 57,493 207,196 130,425
Income tax (benefit) provision (2,007) 6,652 11,612 9,479 28,257 37,271
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Income before cumulative effect of accounting change 23,763 59,806 50,090 48,014 178,939 93,154
Cumulative effect of accounting change 6,265 8,325
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Net income $ 23,763 $ 66,071 $ 50,090 $ 48,014 $187,264 $ 93,154
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PER COMMON SHARE
Income before cumulative effect of accounting change $1.56 $3.96 $3.36 $3.21 $11.59 $6.07
Cumulative effect of accounting change 0.42 0.54
- -------------------------------------------------------------------------------------------------------------------------------
Net income-primary and fully diluted 1.56 4.38 3.36 3.21 12.13 6.07
- -------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared 1,50(2) 2.00 2.00 2.00 2.00 1.95
Book value end-of-period 53.74 53.65 51.50 49.93 48.28 37.70
Market value end-of-period 57.50 51.25 41.50 16.75 49.50 44.88
Closing market value: high 64.25 52.25 42.00 50.25 57.75 52.25
Closing market value: low 50.00 42.00 14.75 13.25 41.25 38.75
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
AT YEAR END (in millions)
Total assets $10,173 $10,663 $10,650 $10,956 $11,480 $11,266
Earning assets 9,135 9,540 9,548 9,941 10,335 10,278
Total loans and lease financing, net of unearned income 6,671 6,731 6,588 6,784 6,796 7,397
Non-performing Assets 255 304 328 304 125 69
Deposits 8,623 8,975 8,655 9,018 9,295 9,175
Long-term debt 77 83 92 99 120 139
Shareholders' equity 816 806 760 736 735 573
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES (in millions)
Total assets $10,292 $10,639 $10,580 $11,377 $11,053 $ 8,898
Earning assets 9,205 9,562 9,626 10,416 10,119 8,131
Total loans and lease financing, net of unearned income 6,695 6,699 6,593 6,969 7,131 6,334
Deposits 8,640 8,771 8,657 9,079 9,122 7,067
Long-term debt 80 89 94 105 131 52
Shareholders' equity 784 791 744 740 649 542
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on average shareholders' equity 3.03% 8.35% 6.74% 6.49% 28.87% 17.18%
Return on average total assets 0.23 0.62 0.47 0.42 1.69 1.05
Average equity to average total assets 7.62 7.43 7.03 6.51 5.87 6.09
Allowance to year-end loans 2.86 2.61 2.35 2.02 1.84 1.31
Non-performing Assets to year-end loans (net of
unearned income) plus property from defaulted loans 3.77 4.42 4.87 4.40 1.83 0.94
Net Interest Spread 3.81 3.79 3.50 3.08 3.34 3.90
Net Interest Margin 4.60 4.55 4.37 4.05 4.41 5.02
Efficiency ratio(1) 87.38 74.02 67.24 67.04 51.23 64.16
Equity to assets ratio (period-end) 8.02 7.56 7.14 6.72 6.40 5.09
Tier 1 risk-based capital ratio(3) 9.57 9.69 9.39 8.75 8.55 N/A
Total risk-based capital ratio(3) 11.73 11.91 11.60 10.96 10.79 N/A
Dividend payout ratio(4) 96.15(2) 45.66 59.52 62.31 16.49 32.13
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
OTHER STATISTICS
Number of common shareholders end-of-period 8,065 8,807 9,463 10,200 8,900 8,800
Number of full-time equivalent employees
end-of-period 5,856 5,900 5,700 5,700 6,200 6,500
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1989 includes a $225 million pre-tax gain from the sale of the Corporation's
credit card portfolio.
(2) 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 does
not represent a change in the Corporation's dividend policy, but rather a
change only in the timing of the dividend declaration.
(3) Federal Reserve Board risk-based capital guidelines were first effective
March 15, 1989.
(4) Based on primary earnings per common share.
N/A: Not applicable.
Certain prior period amounts were reclassified to conform to current period
presentation.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME
OVERVIEW
An analysis of the Corporation's average balance sheet and associated
interest income, expense and average rates for each of the three years ended
December 31, 1993, 1992 and 1991, is presented in Tables 2 and 3.
Net Interest Income was relatively flat in 1993 compared to 1992 and
increased $32.1 million, or 8.7%, in 1992 compared to 1991. Net Interest Margin
was also relatively flat in 1993 compared to 1992 and increased 18 Basis Points
in 1992 compared to 1991. The average balance of earning assets decreased
during both periods as discussed below under Balance Sheet Composition. The
principal reasons for the strong margin in both years were effective
asset/liability management, which includes the use of off-balance sheet
financial instruments, and the wide spread between the prime interest rate and
money market rates. The Net Interest Margin in both periods was also enhanced
by significant increases in non-interest-bearing demand deposits.
Partially offsetting these favorable conditions in 1993 and 1992 were
decreases in tax-exempt interest income. Tax-exempt interest income decreased
in both periods due to lower average balances in Covered Assets and the Note
Receivable-FDIC and lower FHLBB COF rates throughout both periods. Interest
income from the Note Receivable-FDIC is tax-exempt and a portion of the
Guaranteed Yield on Covered Assets was tax-exempt.
Following is a discussion regarding the Corporation's asset/liability
management and balance sheet composition.
ASSET/LIABILITY MANAGEMENT
Asset/Liability management involves managing the positions of interest rate
sensitive assets, liabilities and off-balance sheet financial instruments used
in the Corporation's investing, financing and interest rate management
activities with the objective of maximizing Net Interest Income within the
constraints of manageable levels of interest rate risk, while maintaining
prudent levels of capital and liquidity.
Changes in customer demand for various forms of loans and deposits are
frequent and unpredictable and the maturities or repricing of these loans and
deposits rarely match, subjecting the Corporation to interest rate risk. The
Corporation's Asset/Liability Management Committee (ALCO), with the review of
the Board of Directors, sets policies regarding the management of the interest
rate risk of the Corporation.
Policies implemented by ALCO utilize both off and on-balance sheet
strategies to manage interest rate risk. Off-balance sheet hedges are used to
manage a significant portion of interest rate risk that is inherent in the
Corporation's banking operations. The use of interest rate swap agreements
enables the Corporation to offer customers the products they desire without
having to restructure the balance sheet to protect earnings when movements in
interest rates occur.
A significant percentage of the Corporation's commercial loan portfolios are
prime-based, variable-rate loans that reprice faster than longer term deposit
liabilities and which, therefore, in the falling rate environment of the past
few years, created an asset sensitive balance sheet. Rather than implement
strategies to restructure the balance sheet, the Corporation entered into
interest rate swap agreements to mitigate this asset sensitivity. At December
31, 1993, the Corporation was hedging a portion of its prime-based,
variable-rate commercial loans with approximately $2.0 billion of interest rate
swap agreements. The table below summarizes these interest rate swap
agreements. For further discussion of off-balance sheet financial instruments,
see Note I.
<TABLE>
<CAPTION>
INTEREST RATE SWAPS OUTSTANDING
December 31, 1993 (dollars in millions)
- ---------------------------------------------------------------
WEIGHTED AVERAGE AT DECEMBER 31, 1993
-------------------------------------
NOTIONAL RATE RATE MONTHS
VALUE RECEIVED PAID REMAINING
------------------------------------------------
<S> <C> <C> <C> <C>
Receive
Fixed-
Rate $1,873 6.32% 3.49%(1) 25
Receive
Variable-
Rate $ 100 3.19%(2) 4.16%(3) 5
- ---------------------------------------------------------------
</TABLE>
(1) Rate paid on the notional value varies primarily with the three and six
month LIBOR rate.
(2) Rate received on the notional value varies with the three month LIBOR rate.
(3) Rate paid on the notional value varies with the prime rate.
An interest rate sensitivity/gap analysis is presented in Table 4 for
informational purposes only. The analysis summarizes the Corporation's gap
between repricing or maturing assets and liabilities at a point in time.
However, assets and liabilities with similar contractual repricing
characteristics may not reprice at the same time nor to the same degree. As a
result, the gap analysis does not necessarily predict the effect on Net
Interest Income of changes in general levels of interest rates. The
Corporation, in practice, 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 December 31, 1993, the Corporation estimated that annual Net Interest Income
would increase approximately $2.7 million should a 100 Basis Point increase in
the prime interest rate occur. Conversely, an estimated $5.4 million of annual
Net Interest Income is at risk should a 100 Basis Point decrease in the prime
rate occur.
INTEREST RATE ENVIRONMENT
On balance, interest rates declined throughout 1992 and 1993, and the spread
between the prime rate and money market rates was wider than historical
spreads. This favorable spread combined with the aforementioned interest rate
swap hedge positions had the effect of lowering the
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
Corporation's overall funding cost without a proportionate decrease in
the earnings rate on its prime-based assets, thereby contributing to the strong
Net Interest Rate Spread and Net Interest Margin for these periods. Contraction
of the spread between prime and money market borrowing rates could have the
effect of reducing Net Interest Margin from current levels.
BALANCE SHEET COMPOSITION
Earning Assets
Average earning assets decreased $356.9 million, or 3.7%, from 1992 to 1993.
Reductions in the average balances of Covered Assets, the Note Receivable-FDIC,
investment securities and the short-term commercial real estate-construction
loan portfolio were the principal contributors to the decrease.
The average balance of Covered Assets declined primarily as a result of
sales and a formal valuation process conducted in connection with the 1992
Capital Loss Coverage settlement provision of the Assistance Agreement.
Reference Note E for further information on the Assistance Agreement. According
to the terms of the Assistance Agreement, any remaining Covered Assets were
required to be written down to their Immediately Realizable Value by December
31, 1992, and IOBOC reimbursed for the write-down amount. After payment of the
Capital Loss Coverage settlement, the assets were no longer "covered" for
purposes of Guaranteed Yield and Capital Loss Coverage. This process was
completed during the first quarter of 1993. Those assets which the Corporation
intended to sell were transferred to the Assets Held for Sale account (included
in Other Assets on the Statement of Condition). IOBOC contracted with an
independent party to market these assets. During 1993 and 1992, net gains of
$0.5 million and $0.3 million, respectively, were realized in connection with
sales of these assets. At December 31, 1993, the balance remaining in the
Assets Held for Sale account was $0.7 million.
Approximately $77 million of previously Covered Assets, which the
Corporation intends to hold, were transferred to the performing residential and
commercial real estate-mortgage loan accounts late in 1992. Due to the
discounted value of these loans, their average yield is substantially higher
than the yield on Covered Assets.
The decline in the average balance of the Note Receivable-FDIC was due to
two FDIC principal payments made since the beginning of 1992. The FDIC made
principal payments of approximately $105 million and $162 million in January,
1992, and January, 1993, respectively. The FDIC also made principal payments of
approximately $81 million in May, 1991 and $114 million in January, 1994. The
Corporation accepted these payments, reserving its rights under the terms of
the note to challenge them as being made prematurely. According to the
Corporation's interpretation of the terms of the note the prepayments could not
have been made until December 31 of the respective years.
Furthermore, the Corporation has recently resumed 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
and early settlement of the FDIC's right to receive a return on its equity
capital investment. The accounting treatment of any gain or loss 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.
Reimbursement of write-downs and proceeds from sales of Covered Assets, and
Note Receivable-FDIC principal payments were used to pay down higher cost
discretionary liabilities and to fund the April 13, 1992, acquisition of a
mortgage warehouse lending business.
The average balance of total investment securities was also lower in 1993
principally as a result of security sales in December 1992 of approximately
$125 million, and in 1993 of approximately $221 million. In addition,
accelerated payments on amortizing mortgage-backed securities contributed to
the lower average balance of total investment securities. Cash proceeds from
the December 1992 security sales were used to pay down higher cost funding
sources. Cash proceeds from the 1993 security sales along with payments on
amortizing mortgage-backed securities were used to purchase new securities with
original average maturities ranging from 2.5 to 6.5 years. Refer to the
Investment Securities section for additional information regarding
these sales.
The short-term commercial real estate-construction loan portfolio declined
significantly since the beginning of 1991. This decrease is a result of a
managed effort to reduce the Corporation's commercial real estate exposure.
Partially offsetting these decreases in earning assets was an increase in
the average balance of residential mortgages, the addition of earning assets
from the Corporation's recent acquisitions and an increase in the average
balance of consumer loans.
Growth in IOMC's portfolio of prime plus mortgage loans since the latter
half of 1992 contributed to the increase in residential mortgage loans.
However, during September 1993, approximately $300 million of prime plus
mortgage loans were sold. The loans were sold principally to prevent possible
future economic loss associated with the prepayment risk inherent in the
portfolio. The remaining balance in this portfolio was approximately $67
million at December 31, 1993, and the Corporation now intends to manage this
portfolio as held for sale. Cash proceeds from the sale of these loans were
invested temporarily in money market investments and are being used to pay down
higher cost discretionary liabilities as they mature.
Also contributing to the growth in the residential mortgage loan portfolio
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
were purchases of Federal Housing Administration (FHA) insured loans during the
third and fourth quarters of 1993 (average balance for 1993 of approximately
$43 million and period end balance at December 31, 1993, of approximately $122
million). Interest income on these loans was accrued at a weighted average rate
of 9.11% during 1993. (Refer to the Loans and Lease Financing Portfolio and
Credit Risk Analysis section).
Earning assets from the Corporation's recent acquisitions of
Peoples/Community Banks and a mortgage warehouse lending business (refer to
Note B) also partially offset the above decreases. Peoples/Community Banks,
acquired April 1, 1993, contributed loans with an average balance of
approximately $58 million. The Corporation's April 13, 1992, acquisition of a
mortgage warehouse lending business (operating as FCSI) contributed earning
assets with an average balance of approximately $259 million, including $257
million of commercial loans for 1993. During 1992, the business contributed
approximately $129 million of earning assets, including approximately $122
million of commercial loans.
The average balance of the Corporation's installment loan portfolio
increased $56.1 million (excluding the installment loan portfolio of
Peoples/Community Banks), or 9%, from $636.2 million for the year ended
December 31, 1992, to $692.4 million for 1993. This increase was principally
attributable to growth in consumer loans due to the low interest rate
environment and successful marketing of the Capital Reserve line of credit
product.
Interest-Bearing Liabilities
The Corporation's funding mix continued to shift throughout 1992 and 1993 as
a result of the liquidity provided by the decreases in earning assets discussed
above and the current low interest rate environment. 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. 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 decreased. Also contributing to this change
in funding mix were deposit 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 traditional non-bank financial products, contributing to the
decrease in time deposits less than $100,000.
There was a significant decrease in the average balance of short-term
borrowings during 1993 and 1992. Liquidity provided by increases in
non-interest-bearing demand deposits along with reductions in certain earning
assets discussed above reduced the Corporation's need for these discretionary
borrowings.
The Peoples/Community Banks acquisition contributed interest-bearing
deposits with an average balance of approximately $53 million for 1993.
Under the terms of the Assistance Agreement, the FDIC subsidizes interest
expense on certain time deposits through the earlier of the date of their
maturity or December 31, 1998. At December 31, 1993, the balance of subsidized
time deposits was approximately $143 million. The subsidy limits the interest
expense on those deposits to the FHLBB COF. In addition, an interest subsidy of
approximately 6% was paid on a long-term debt obligation of IOBOC. This
obligation was paid off during 1992. The amount of FDIC interest expense
subsidy received during 1993 and 1992 was $13.3 million and $14.1 million,
respectively.
1992 VS. 1991
The level of average earning assets was relatively constant from 1991 to
1992. Reductions in the average balances of Covered Assets, the Note
Receivable-FDIC and the commercial real estate loan portfolios that were
experienced throughout 1991 and 1992 were offset by growth in the portfolio of
residential loans and by assets added through acquisitions.
Lockwood, acquired October 31, 1991, contributed earning assets with an
average balance of approximately $212 million during 1992, and $35 million
during 1991. The addition of earning assets from FCSI during 1992 is discussed
above.
The decrease in the average balance of interest-bearing liabilities from
1991 to 1992 was due to the 1992 reductions discussed above. Lockwood
contributed interest-bearing liabilities with an average balance of
approximately $156 million in 1992 and $26 million in 1991.
EFFECT OF BALANCE SHEET COMPOSITION ON NET INTEREST MARGIN
The Net Interest Rate Spread and Net Interest Margin in 1993 were relatively
flat compared to those of 1992. 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 rate received on earning assets
due to decreases in certain higher yielding earning assets discussed above.
The favorable change in the Corporation's funding mix was also the primary
on-balance sheet contributor to the improvement in Net Interest Rate Spread and
Net Interest Margin in 1992 compared to those of 1991. The average rate paid on
the Corporation's interest-bearing funds declined more than the average rate
received on earning assets, contributing to the improvement in the above
ratios.
Both 1993 and 1992 ratios were enhanced by significant increases in the
average balance of non-interest-bearing demand deposits. The average balance of
non-interest-bearing demand deposits increased approximately $263 million in
1993, and $292 million in 1992, over the balance in the respective preceding
year. The increases in non-interest-bearing demand deposits resulted from
higher balances in commercial and retail banking customer accounts and the
collection of payoffs on loans in the Corporation's off-balance sheet mortgage
servicing portfolios. The payoffs collected are temporarily held and invested
before being remitted to investors.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Table 2 Summary of Consolidated Net Interest Income (Fully Taxable Equivalent)
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities-taxable $ 1,288,588 $ 87,786 6.81% $1,530,698 $123,486 8.07%
Investment securities-tax-exempt 40,154 3,432 8.55 45,547 4,055 8.90
Investment securities available-for-sale 22,891 1,908 8.34 8,366 690 8.25
Trading securities 139,565 6,710 4.81 144,631 7,500 5.19
- -----------------------------------------------------------------------------------------------------------------------------
Total securities 1,491,198 99,836 6.70 1,729,242 135,731 7.85
Federal funds sold and resale
agreements 442,703 13,460 3.04 395,070 13,912 3.52
Interest-bearing deposits with banks 102,421 3,432 3.35 106,499 4,913 4.61
Money market funds 8,621 223 2.59 6,392 222 3.47
Loans and lease financing(1) 6,694,778 557,706 8.33 6,464,527 574,903 8.89
Covered Assets and FDIC assistance 626 234,744 19,702 8.39
Note Receivable-FDIC 464,314 34,859 7.51 625,117 56,836 9.09
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets 9,204,661 709,516 7.71 9,561,591 806,219 8.43
Allowance for possible credit losses (186,153) (170,530)
Cash and due from banks 529,836 479,000
Other assets 743,230 769,425
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $10,291,574 $10,639,486
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Money market accounts $ 2,116,458 $ 60,968 2.88% $ 2,060,358 $ 72,299 3.51%
Savings deposits 1,105,627 30,044 2.72 975,719 31,542 3.23
Time deposits < $100,000 2,770,911 141,066 5.09 3,087,298 180,159 5.84
Time deposits > $100,000 787,894 32,113 4.08 1,051,284 51,675 4.92
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,780,890 264,191 3.90 7,174,659 335,675 4.68
Federal funds purchased and
repurchase agreements 302,110 9,425 3.12 288,316 10,202 3.54
Dollar repurchase agreements 38,835 1,760 4.53 311,909 12,714 4.08
Other short-term borrowings 119,988 3,994 3.33 131,427 5,229 3.98
Subordinated notes 58,472 4,875 8.34 59,584 4,958 8.32
Long-term debt 16,873 1,017 6.03 23,997 1,329 5.54
Capital lease obligations 4,632 495 10.69 5,508 593 10.77
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,321,800 285,757 3.90 7,995,400 370,700 4.64
Demand deposits 1,858,639 1,595,921
Other liabilities 327,053 257,177
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 9,507,492 9,848,498
Shareholders' equity 784,082 790,988
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $10,291,574 $10,639,486
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income
(fully taxable equivalent basis) $423,759 $435,519
Tax equivalent adjustment(2) 22,148 34,408
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income $401,611 $401,111
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Rate Spread 3.81% 3.79%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.60% 4.55%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1991
- ---------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE
(in thousands) BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investment securities-taxable $ 1,535,348 $134,092 8.73%
Investment securities-tax-exempt 51,416 4,712 9.16
Investment securities available-for-sale
Trading securities 150,747 10,139 6.73
- ---------------------------------------------------------------------------------------------------------------
Total securities 1,737,511 148,943 8.57
Federal funds sold and resale
agreements 424,703 24,510 5.77
Interest-bearing deposits with banks 107,003 7,452 6.96
Money market funds 2,809 163 5.80
Loans and lease financing(1) 6,134,653 633,699 10.33
Covered Assets and FDIC assistance 457,949 47,186 10.30
Note Receivable-FDIC 761,221 90,931 11.95
- ---------------------------------------------------------------------------------------------------------------
Total earning assets 9,625,849 952,884 9.90
Allowance for possible credit losses (157,792)
Cash and due from banks 421,345
Other assets 690,161
- ---------------------------------------------------------------------------------------------------------------
Total assets $10,579,563
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES
Money market accounts $ 1,722,867 $ 87,922 5.10%
Savings deposits 828,682 39,906 4.82
Time deposits < $100,000 3,052,807 222,426 7.29
Time deposits > $100,000 1,748,748 122,129 6.98
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 7,353,104 472,383 6.42
Federal funds purchased and
repurchase agreements 219,605 12,535 5.71
Dollar repurchase agreements 495,348 30,238 6.10
Other short-term borrowings 146,226 8,911 6.09
Subordinated notes 56,611 4,758 8.40
Long-term debt 31,318 2,396 7.65
Capital lease obligations 6,124 664 10.84
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 8,308,336 531,885 6.40
Demand deposits 1,304,047
Other liabilities 223,678
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 9,836,061
Shareholders' equity 743,502
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $10,579,563
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income
(fully taxable equivalent basis) $420,999
Tax equivalent adjustment(2) 52,000
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income $368,999
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Net Interest Rate Spread 3.50%
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Net Interest Margin 4.37%
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The average balance of loans and lease financing is net of unearned income
and includes Non-performing Loans.
(2) The tax equivalent adjustment is computed using a federal income tax rate
of 34% in 1993, 1992 and 1991, as adjusted for the loss of interest expense
deductions associated with tax-exempt obligations acquired after August 7,
1986, in accordance with the Tax Reform Act of 1986.
Certain prior period amounts have been reclassified to conform to current
period presentation.
17
<PAGE> 18
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Table 3 Consolidated Net Interest Income Volume/Rate Analysis (Fully Taxable Equivalent)
- ------------------------------------------------------------------------------------------------------------------
1993/1992 1992/1991
CHANGE IN INTEREST DUE TO: CHANGE IN INTEREST DUE TO:
- ------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE NET AVERAGE AVERAGE NET
(IN THOUSANDS) BALANCE RATE CHANGE BALANCE RATE CHANGE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities-taxable $(17,966) $(17,734) $(35,700) $ (403) $ (10,203) $ (10,606)
Investment securities-tax-exempt (468) (155) (623) (526) (131) (657)
Investment securities available-for-sale 1,210 8 1,218 690 690
Trading securities (256) (534) (790) (398) (2,241) (2,639)
- ------------------------------------------------------------------------------------------------------------------
Total securities (17,480) (18,415) (35,895) (637) (12,575) (13,212)
Federal funds sold and resale agreements 1,568 (2,020) (452) (1,608) (8,990) (10,598)
Interest-bearing deposits with banks (182) (1,299) (1,481) (35) (2,504) (2,539)
Money market funds 65 (64) 1 144 (85) 59
Loans and lease financing 19,940 (37,137) (17,197) 32,816 (91,612) (58,796)
Covered assets and FDIC assistance (9,845) (9,857) (19,702) (19,911) (7,573) (27,484)
Note receivable-FDIC (13,114) (8,863) (21,977) (14,610) (19,485) (34,095)
- ------------------------------------------------------------------------------------------------------------------
Total earning assets $(19,048) $(77,655) $(96,703) $ (3,841) $(142,824) $(146,665)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Liabilities
Money market accounts $ 1,927 $(13,258) $(11,331) $ 15,112 $ (30,735) $ (15,623)
Savings deposits 3,868 (5,366) (1,498) 6,259 (14,623) (8,364)
Time deposits < $100,000 (17,350) (21,743) (39,093) 2,486 (44,753) (42,267)
Time deposits > $100,000 (11,633) (7,929) (19,562) (40,401) (30,053) (70,454)
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (23,188) (48,296) (71,484) (16,544) (120,164) (136,708)
Federal funds purchased and
repurchase agreements 473 (1,250) (777) 3,249 (5,582) (2,333)
Dollar repurchase agreements (12,247) 1,293 (10,954) (9,229) (8,295) (17,524)
Other short-term borrowings (429) (806) (1,235) (829) (2,853) (3,682)
Subordinated notes (95) 12 (83) 246 (46) 200
Long-term debt (422) 110 (312) (489) (578) (1,067)
Capital lease obligations (94) (4) (98) (66) (5) (71)
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $(36,002) $(48,941) $(84,943) $(23,662) $(137,523) $(161,185)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Net interest income (fully taxable
equivalent basis) $(11,760) $ 14,520
Tax equivalent adjustment (12,260) (17,592)
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 500 $ 32,112
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Net Interest Rate Spread 0.02% 0.29
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Net Interest Margin 0.05% 0.18
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The rate/volume variance is allocated to the rate variance and the volume
variance on the basis of the percentage relationship of each to the sum of the
two.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table 4 Interest Rate Sensitivity/Gap Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1993 (in thousands) Interest Rate Sensitivity Period
- ------------------------------------------------------------------------------------------------------------------------------------
1-90 91-365 1-5 Over
Days Days Years 5 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Loans $ 4,771,203 $ 178,295 $ 799,227 $ 922,541 $ 6,671,266
Note Receivable-FDIC 462,535 462,535
Mortgage-backed investments 79,417 207,443 617,347 79,558 983,765
Other investment securities 46,964 126,173 131,145 26,619 330,901
Trading securities 70,113 70,113
Federal funds sold and resale agreements 483,000 483,000
Money market investments 11,513 11,513
Other earning assets 101,411 20,034 121,445
Non-earning assets 1,038,270 1,038,270
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 6,026,156 $ 531,945 $1,547,719 $ 2,066,988 $ 10,172,808
- ------------------------------------------------------------------------------------------------------------------------------------
FUNDING SOURCES
Time deposits < $100,000 $ 605,767 $ 850,772 $1,086,296 $ 54,834 $ 2,597,669
Time deposits > $100,000 508,211 113,195 26,654 2,617 650,677
Other interest-bearing deposits 2,145,645 50,024 1,183,281 3,378,950
Federal funds purchased and repurchase agreements 133,925 133,925
Other short-term borrowings 159,368 159,368
Long-term borrowings 18,393 9,540 49,189 77,122
Non-interest-bearing sources 3,175,097 3,175,097
- ------------------------------------------------------------------------------------------------------------------------------------
Total Funding Sources $ 3,571,309 $ 973,507 $1,212,163 $ 4,415,829 $10,172,808
- ------------------------------------------------------------------------------------------------------------------------------------
REPRICING/MATURITY GAP BEFORE INTEREST RATE SWAPS
Period $ 2,454,847 $ (441,562) $ 335,556 $ (2,348,841)
Cumulative $ 2,454,847 $ 2,013,285 $2,348,841
Period Gap/Total Assets 24.1% -4.3% 3.3% -23.1%
- ------------------------------------------------------------------------------------------------------------------------------------
SENSITIVITY IMPACT OF INTEREST RATE SWAPS
Period $ (1,671,523) $ 348,093 $1,313,972 $ 9,458
Cumulative $ (1,671,523) $ (1,323,430) $ (9,458)
Interest Rate Swaps/Total Assets -16.4% 3.4% 12.9% 0.1%
- ------------------------------------------------------------------------------------------------------------------------------------
REPRICING/MATURITY GAP ADJUSTED FOR
INTEREST RATE SWAPS
Period $ 783,324 $ (93,469) $1,649,528 $ (2,339,383)
Cumulative $ 783,324 $ 689,855 $2,339,383
Period Gap/Total Assets 7.7% -0.9% 16.2% -23.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Table 5 Loan Maturities and Interest Rate Sensitivity (1)
DUE ONE
WITHIN THROUGH AFTER
DECEMBER 31, 1993 (in thousands) ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $1,486,068 $1,369,851 $ 489,705 $3,345,624
Short-term real estate-construction 80,298 73,910 5,386 159,594
- -------------------------------------------------------------------------------------------------------------------
Total $1,566,366 $1,443,761 $ 495,091 $3,505,218
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PREDETERMINED FLOATING
INTEREST RATES INTEREST RATES TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans due after one year $ 673,282 $1,265,570 $1,938,852
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excluding commercial and residential real estate-mortgage, installment and
lease financing loans. Demand loans and overdrafts are classified as due within
one year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Table 6 Time Deposits of $100,000 or More, Remaining Term to Maturity
Distribution
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993 (in thousands)
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Three months or less $508,211
Over three through six months 88,899
Over six through twelve months 24,296
Over twelve months 29,271
- -------------------------------------------------------------------------------------------------------------------
Total $650,677
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
NON-INTEREST INCOME
Non-interest income, largely fee-based, remains an important supplement to
Net Interest Income in the increasingly competitive financial services
industry. Non-interest income increased $16.0 million, or 7.1%, in 1993
compared to 1992, and $34.8 million, or 18.3%, in 1992 compared to 1991. Refer
to Table 7 for a comparative analysis of the components of non-interest income.
Also, refer to the Business Review section and Table 15 for summary financial
information regarding the Corporation's principal subsidiaries.
Following is a discussion of the major transactions included in the
comparative analysis in Table 7.
1993 VS. 1992
Activity at the Corporation's mortgage banking subsidiary, IOMC, was a
significant contributor to the increase in non-interest income. During 1993,
IOMC realized a $10.1 million gain from the sale of approximately $300 million
of prime plus residential mortgage loans, reflected in the mortgage banking
gains category. The remaining balance in this portfolio was approximately $67
million at December 31, 1993, and the Corporation now intends to manage this
portfolio as held for sale. This sale is discussed in the Net Interest Income
section.
Excluding the gain from the sale of prime plus loans, 1993 mortgage banking
gains from the sale of loan production were $19.5 million compared to mortgage
banking gains
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Table 7 Non-Interest Income
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (in thousands) 1993
CONSOLIDATED
MNC(2)
EXCLUDING
NEW IOMC AND CONSOLIDATED
IOMC BUSINESSES(1) NEW BUSINESSES MNC
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $3,143 $ 56,400 $ 59,543
Merchant card processing fees 25 17,280 17,305
Mortgage servicing fees $62,947 62,947
Amortization of ESF (18,926) (18,926)
Loan service charges 168 2,271 8,842 11,281
- -------------------------------------------------------------------------------------------------------------------------
Service charges 44,189 5,439 82,522 132,150
- -------------------------------------------------------------------------------------------------------------------------
Trust and investment services income 19,522 19,522
Mortgage banking gains, net 29,582 29,582
Gains from sale of mortgage servicing rights 9,324 9,324
Investment securities gains (losses), net
Investment securities available for sale gains, net 6,139 6,139
Other Income:
Trading profits 2,368 2,368
Other 2,584 2,392 36,769 41,745
- -------------------------------------------------------------------------------------------------------------------------
Total other income 2,584 2,392 39,137 44,113
- -------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $85,679 $7,831 $147,320 $240,830
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) New businesses include: Lockwood, acquired 10/31/91; Independence One Asset
Management Corporation, start-up 11/12/91; First Collateral Services, Inc.,
acquired 4/13/92; BancA Corp., acquired 7/29/92 and Peoples/Community Banks,
acquired 4/1/93.
(2) Includes inter-company eliminations.
Certain prior period amounts have been reclassified to conform to current
period presentation.
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
in 1992 of $11.5 million. This increase is principally due to an
increase in the volume of loans sold with servicing released.
In addition, net gains of $9.3 million were recognized from the sales of the
mortgage servicing rights for approximately $2.5 billion of loans. The gains of
$9.3 million were net of approximately $15.2 million of PMSR and ESF assets
written off in the sale. Net gains in 1992 were $5.8 million from sales of the
mortgage servicing rights for approximately $579 million of loans.
Unprecedented refinancing activity resulted in accelerated prepayments
(runoff) in IOMC's off-balance sheet servicing portfolios which required the
acceleration of the amortization of ESF. The 1993 amortization expense of 18.9
million was twice that of $9.5 million for 1992, reducing mortgage servicing
income. In addition, the net runoff in the servicing portfolios was the
principal reason for the $3.4 million decrease in mortgage servicing fees.
Refer to the Business Review section for further discussion of IOMC's
business activities.
Approximately $2.6 million of the increase in non-interest income was
attributable to the Corporation's recent acquisitions (FCSI in 1992 and
Peoples/Community Bank in 1993).
1992 VS. 1991
As in 1993, IOMC was a significant contributor to the increase in
non-interest income in 1992 from 1991. Mortgage servicing fees, before
amortization of ESF, increased $9.4 million, or 16.5%, due to the significant
net growth in the mortgage servicing portfolios in 1992.
The extraordinary increase in refinancing loan production during 1992
resulted in a $6.3 million, or 120%, increase in mortgage banking gains.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Table 7 Non-Interest Income (continued)
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (in thousands) 1992
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED
MNC(2)
EXCLUDING
NEW IOMC AND CONSOLIDATED
IOMC BUSINESSES(1) NEW BUSINESSES MNC
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $1,937 $ 50,665 $ 52,602
Merchant card processing fees 16 15,171 15,187
Mortgage servicing fees $66,336 66,336
Amortization of ESF (9,485) (9,485)
Loan service charges 226 832 7,202 8,260
- ---------------------------------------------------------------------------------------------------------
Service charges 57,077 2,785 73,038 132,900
- ---------------------------------------------------------------------------------------------------------
Trust and investment services income 17,877 17,877
Mortgage banking gains, net 11,476 11,476
Gains from sale of mortgage
servicing rights 5,799 5,799
Investment securities gains (losses), net 1,303 1,303
Investment securities available for
sale gains, net 7,946 7,946
Other Income:
Trading profits
Other 2,977 3,478 33,330 39,785
- ---------------------------------------------------------------------------------------------------------
Total other income 2,977 3,478 41,037 47,492
- ---------------------------------------------------------------------------------------------------------
Total Non-Interest Income $77,329 $6,263 $141,201 $224,793
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) New businesses include: Lockwood, acquired 10/31/91; Independence One Asset
Management Corporation, start-up 11/12/91; First Collateral Services, Inc.,
acquired 4/13/92; BancA Corp., acquired 7/29/92 and Peoples/Community Banks,
acquired 4/1/93.
(2) Includes inter-company eliminations.
Certain prior period amounts have been reclassified to conform to current
period presentation.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Table 7 Non-Interest Income (continued)
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (in thousands) 1991
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED
MNC(2)
EXCLUDING
NEW IOMC AND CONSOLIDATED
IOMC BUSINESSES(1) NEW BUSINESSES MNC
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 296 $ 46,715 $ 47,011
Merchant card processing fees 2 12,587 12,589
Mortgage servicing fees $56,938 56,938
Amortization of ESF (3,129) (3,129)
Loan service charges 213 5,134 5,347
- ---------------------------------------------------------------------------------------------------------
Service charges 54,022 298 64,436 118,756
- ---------------------------------------------------------------------------------------------------------
Trust and investment services income 15,481 15,481
Mortgage banking gains, net 5,206 5,206
Gains from sale of mortgage
servicing rights 7,102 7,102
Investment securities gains (losses), net (13) 1,768 1,755
Investment securities available for
sale gains, net
Other Income:
Trading profits
Other 3,941 68 30,705 34,714
- ---------------------------------------------------------------------------------------------------------
Total other income 3,941 68 37,730 41,739
- ---------------------------------------------------------------------------------------------------------
Total Non-Interest Income $70,271 $ 353 $119,415 $190,039
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) New businesses include: Lockwood, acquired 10/31/91; Independence One Asset
Management Corporation, start-up 11/12/91; First Collateral Services, Inc.,
acquired 4/13/92; BancA Corp., acquired 7/29/92 and Peoples/Community Banks,
acquired 4/1/93.
(2) Includes inter-company eliminations.
Certain prior period amounts have been reclassified to conform to current
period presentation.
22
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
NON-INTEREST EXPENSE
Non-interest expense increased $91.9 million, or 18.8%, in 1993 compared to
1992, and $77.9 million, or 19.0%, in 1992 compared to 1991.
Refer to Table 8 for a comparative analysis of the components of
non-interest expense for the years ended December 31, 1993, 1992, and 1991.
Following is a discussion of the major transactions included in the comparative
analysis in Table 8.
1993 VS. 1992-The major contributor to higher expenses in 1993 was an
approximate 100% increase in PMSR amortization expense to $105.0 million for
the year ended 1993 from $53.0 million during 1992. This increase is directly
attributable to the accelerated prepayments in the purchased servicing
portfolios resulting from the extraordinary volume of refinancing activity that
continued through most of 1993.
The Corporation's recent acquisitions contributed another $11.9 million to
the increase in non-interest expense.
Effective January 1, 1993, the Corporation's FDIC deposit insurance
assessment increased from twenty-three Basis Points to twenty-six Basis Points
resulting in a $2.0 million increase in FDIC insurance expense.
During the second quarter 1993, the Corporation recognized a $4.6 million
one-time write-down of the assets of the Corporation's Dallas, Texas software
subsidiary, BancA Corporation, due to a longer than expected sales cycle for
bank software products. Virtually all the assets of BancA Corporation were sold
effective October 1, 1993. The sale transaction did not result in any further
loss to the Corporation.
Other employee benefits for the year ended December 31, 1993, include
retiree medical benefit expense of $6.9 million accrued in accordance with SFAS
No. 106, which was adopted January 1, 1993. This compares to retiree medical
claims expense of $1.3 million recognized in 1992 under cash basis accounting.
Effective December 31, 1993, the Corporation reduced the discount rate used to
measure the present value of pension and post retirement health care benefit
obligations from 8.5% to 7.0%. The change in discount rate will have the effect
of increasing future annual expense accruals for these
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Table 8 Non-Interest Expense
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (in thousands) 1993
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
MNC(2)
EXCLUDING
NEW IOMC AND CONSOLIDATED
IOMC BUSINESSES(1) NEW BUSINESSES MNC
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and wages $ 25,399 $10,725 $146,174 $182,298
Other employee benefits 8,806 2,057 40,341 51,204
Net occupancy 3,341 1,520 25,080 29,941
Equipment 3,848 1,479 36,304 41,631
Outside services 3,855 2,692 27,671 34,218
Defaulted loan expense, net:
Writedowns 1,071 30 17,910 19,011
Operating (income)/expense, net 1,617 109 (2,234) (508)
Amortization of PMSR 104,998 104,998
Other Expenses:
FDIC insurance 579 21,219 21,798
Communications 2,233 343 6,801 9,377
Stationery and supplies 1,629 426 7,889 9,944
Advertising 362 170 7,622 8,154
Michigan single business tax 6,681 6,681
Postage 1,834 239 4,163 6,236
Amortization of goodwill 640 497 1,137
Uncollected interest on early payoffs of loans serviced 11,965 11,965
Provision for foreclosure costs on loans serviced 4,275 4,275
Other 12,958 7,723 17,644 38,325
- ----------------------------------------------------------------------------------------------------------------------
Total other expenses 35,256 10,120 72,516 117,892
- ----------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $188,191 $28,732 $363,762 $580,685
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Net Overhead Ratio(3) 10.61% 4.05% 2.80% 3.69%
- ----------------------------------------------------------------------------------------------------------------------
Efficiency Ratio(4) 167.60% 73.53% 70.88% 87.38%
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) New businesses include: Lockwood, acquired 10/31/91; Independence One
Asset Mangement Corporation, start-up 11/12/91; First Collateral Services,
Inc., acquired 4/13/92; BancA Corporation, acquired 7/29/92 and
Peoples/Community Banks, acquired 4/1/93. 1993 activity includes the $4.6
million on-time write-down of BancA Corporation assets.
(2) Includes inter-company eliminations.
(3) Non-interest expense less non-interest income divided by average earning
assets.
(4) Non-interest expense divided by the sum of Net Interest Income (Fully
Taxable Equivalent) and non-interest income.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
benefits. The Corporation's current projection of these increases is an
estimated $2.5 million for pension benefit expense and an estimated $1.5
million for postretirement health care benefit expense. See Note P and Note Q
for further information regarding these benefit obligations.
1992 VS. 1991-Excluding increases attributable to the Corporation's recent
acquisitions and a one-time charge in 1991, non-interest expense for 1992
increased $72.7 million over 1991. The one-time charge represented a write-off
of intangible assets totaling $8.1 million and is included in other expense
($6.4 million) and amortization of goodwill ($1.7 million).
As in 1993, the principal contributor to the year-over-year increases in
total non-interest expense was an increase in PMSR amortization expense at
IOMC. Significant operating expense increases, principally salaries and wages,
were also incurred to process the unusually high volume of refinancing
activity.
The negative effect the depressed commercial real estate industry had on
certain borrowers resulted in significant increases in the Corporation's
holdings of foreclosed (legal and in-substance) commercial real estate and
associated defaulted loan expense during 1992 and 1991.
The increase in FDIC insurance was attributable to an increase in the
assessment from nineteen and one-half Basis Points to twenty-three Basis Points
effective July 1, 1991.
NEW ACCOUNTING STANDARDS
Two new accounting standards were recently issued which affect the
measurement of employee benefit costs. The Financial Accounting Standards Board
has issued SFAS No. 112, Employer's Accounting for Postemployment Benefits. The
Corporation will adopt this Statement in the first quarter of 1994.
The American Institute of Certified Public Accountants has issued Statement
of Position No. 93-6, Employer's Accounting for Employee Stock Ownership Plans.
This Statement is effective for fiscal years beginning after December 31, 1993,
and applies to shares acquired by employee stock ownership plans after December
31, 1992.
Refer to Note A for further information on these new accounting standards.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Table 8 Non-Interest Expense (continued)
- ---------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (in thousands)
- ---------------------------------------------------------------------------------------
1992
- ---------------------------------------------------------------------------------------
CONSOLIDATED
MNC(2)
EXCLUDING
NEW IOMC AND CONSOLIDATED
IOMC BUSINESSES(1) NEW BUSINESSES MNC
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and wages $ 19,973 $ 6,812 $138,762 $165,547
Other employee benefits 7,267 1,320 36,283 44,870
Net Occupancy 3,177 1,023 24,923 29,123
Equipment 3,439 972 33,885 38,296
Outside services 3,596 2,325 22,786 28,707
Defaulted loan expense, net:
Writedowns 276 20,128 20,404
Operating (income)/expense, net 1,109 716 1,825
Amortization of PMSR 53,000 53,000
Other Expenses:
FDIC insurance 450 19,282 19,732
Communications 2,358 251 6,991 9,600
Stationery and supplies 1,702 279 7,109 9,090
Advertising 293 53 3,775 4,121
Michigan single business tax 812 4,484 5,296
Postage 1,779 155 3,965 5,899
Amortization of goodwill 313 560 873
Uncollected interest on early
payoffs of loans serviced 7,543 7,543
Provision for foreclosure
costs on loans serviced 12,653 12,653
Other 13,833 967 17,397 32,197
- ----------------------------------------------------------------------------------
Total other expenses 40,973 2,468 63,563 107,004
- ----------------------------------------------------------------------------------
Total Non-Interest Expense $132,810 $14,920 $341,046 $488,776
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Net Overhead Ratio(3) 6.11% 4.19% 2.37% 2.76%
- ----------------------------------------------------------------------------------
Effiiency Ratio(4) 127.86% 60.48% 64.13% 74.02%
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
(1) New businesses include: Lockwood, acquired 10/31/91; Independence One
Asset Mangement Corporation, start-up 11/12/91; First Collateral Services,
Inc., acquired 4/13/92; BancA Corporation, acquired 7/29/92 and
Peoples/Community Banks, acquired 4/1/93. 1993 activity includes the $4.6
million on-time write-down of BancA Corporation assets.
(2) Includes inter-company eliminations.
(3) Non-interest expense less non-interest income divided by average earning
assets.
(4) Non-interest expense divided by the sum of Net Interest Income (Fully
Taxable Equivalent) and non-interest income.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Table 8 Non-Interest Expense (continued)
- --------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (in thousands)
- --------------------------------------------------------------------------------------
1991
- --------------------------------------------------------------------------------------
CONSOLIDATED
MNC(2)
EXCLUDING
NEW IOMC AND CONSOLIDATED
IOMC BUSINESSES(1) NEW BUSINESSES MNC
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and wages $14,240 $ 592 $131,877 $146,709
Other employee benefits 4,674 101 38,418 43,193
Net Occupancy 2,817 137 26,399 29,353
Equipment 2,497 142 34,433 37,072
Outside services 2,006 268 22,237 24,511
Defaulted loan expense, net:
Writedowns 263 22,347 22,610
Operating (income)/expense, net 345 (6,565) (6,220)
Amortization of PMSR 19,656 19,656
Other Expenses:
FDIC insurance 79 18,131 18,210
Communications 1,545 24 6,612 8,181
Stationery and supplies 1,192 41 7,157 8,390
Advertising 131 6 4,418 4,555
Michigan single business tax 225 4,530 4,755
Postage 1,305 25 4,081 5,411
Amortization of goodwill 52 2,325 2,377
Uncollected interest on early
payoffs of loans serviced 1,612 1,612
Provision for foreclosure
costs on loans serviced 4,569 4,569
Other 8,875 148 26,869 35,892
- ---------------------------------------------------------------------------------------
Total other expenses 19,454 375 74,123 93,952
- ---------------------------------------------------------------------------------------
Total Non-Interest Expense $65,952 $1,615 $343,269 $410,836
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Net Overhead Ratio(3) -1.07% 3.65% 2.44% 2.29%
- ---------------------------------------------------------------------------------------
Effiiency Ratio(4) 84.02% 84.69% 64.69% 67.24%
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
(1) New businesses include: Lockwood, acquired 10/31/91; Independence One
Asset Mangement Corporation, start-up 11/12/91; First Collateral Services,
Inc., acquired 4/13/92; BancA Corporation, acquired 7/29/92 and
Peoples/Community Banks, acquired 4/1/93. 1993 activity includes the $4.6
million on-time write-down of BancA Corporation assets.
(2) Includes inter-company eliminations.
(3) Non-interest expense less non-interest income divided by average earning
assets.
(4) Non-interest expense divided by the sum of Net Interest Income (Fully
Taxable Equivalent) and non-interest income.
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAXES
For the years 1993 and 1992, the Corporation determined income tax expense
in accordance with SFAS No. 109, which was adopted effective January 1, 1992. A
$6.3 million cumulative effect on prior years of adopting the new standard was
recognized in 1992. Prior to January 1, 1992, the Corporation determined income
tax expense under the provisions of SFAS No. 96. SFAS No. 109 supersedes SFAS
No. 96.
The difference between the effective income tax rate and the statutory rate
(35% in 1993, 34% in 1992 and 1991) in each of the three years ended December
31, 1993, 1992, and 1991, is principally due to the recognition of tax benefits
derived from tax-exempt assistance received by IOBOC from the FDIC, as well as
tax-exempt interest income from municipal obligations. Further information
regarding the assistance received from the FDIC can be found in Note E. A
detailed reconciliation to the statutory income tax rate is presented in
Note V.
The effective tax rate was (9.2)% in 1993 compared to an effective rate of
10.0% in 1992 and 18.8% in 1991. The change in the effective tax rate from 1992
to 1993 was principally due to an increase in the percentage of tax-exempt
income relative to total pre-tax income. In addition, the Omnibus Budget
Reconciliation Act of 1993 increased the normal corporate statutory tax rate by
1 % to 35% for calendar year 1993. This rate change increased the value of the
Corporation's net deferred tax assets, which contributed to the reduction of
the effective tax rate. The decrease in the effective tax rate to 10.0% for
1992 from 18.8% for 1991 was primarily due to the recognition of deferred tax
benefits under the provisions of SFAS No. 109 that the Corporation could not
otherwise recognize under SFAS No. 96. For further detail regarding the
Corporation's income tax provisions for each of the three years ended December
31, 1993, 1992 and 1991, refer to Note V.
The U.S. Department of Treasury and the Internal Revenue Service have
indicated that they will contest tax deductions for losses and expenses
reimbursed by assistance from the FDIC. Refer to Note V for additional
information regarding the contingencies associated with this issue.
INVESTMENT SECURITIES
The management of the investment portfolios is an important component of the
overall management of the Corporation's balance sheet. Investment portfolio
management requires diversification of risk and the ability to satisfy bank
pledging requirements. The investment portfolios are structured so that
sufficient marketable securities mature periodically or can be easily
liquidated.
Effective December 1992, the Corporation accounts for its investment
securities in one of two portfolios-Investments held-to-maturity and
Investments available-for-sale. The accounting policies applicable to these two
portfolios are presented in Note A. Security holdings that management intends
to retain until maturity are classified as Investments held-to-maturity.
Investments which may be utilized for active management of interest rate risk
or liquidity are classified in the available-for-sale portfolio.
In December 1992 and the first quarter 1993, the Corporation transferred a
total of approximately $312 million of mortgage-backed securities, and
approximately $54 million of short-term U.S. Government Treasury bills to this
portfolio. Prior to the transfers the Corporation had both the positive intent
and ability to hold those securities for the foreseeable future. However,
management considered it prudent to make the transfers because the market
characteristics of those securities could make them more susceptible to more
active management sometime prior to maturity. Once these securities were
transferred to the available-for-sale portfolio, they were subject to "lower of
cost or market" accounting with the potential for future unrealized market
losses below cost creating a new risk to capital. In December, 1992, the
Corporation sold approximately $125 million of these securities for a net gain
of approximately $8.0 million, and during 1993, the Corporation sold
approximately $221 million for net gains of approximately $6.3 million.
The Financial Accounting Standards Board has issued 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. The Statement is
effective for financial statements with fiscal years beginning after December
15, 1993. The Corporation will adopt this Statement in the first quarter of
1994 and does not expect that adoption will have a material adverse effect on
its financial condition.
25
<PAGE> 26
The Corporation's investments held-to-maturity portfolio consists of four
types of securities: (a) U.S. Treasury, Government agencies and corporations
(b) state and municipal, (c) mortgage-backed securities and (d) other
securities. Refer to Note D for further detailed disclosures regarding the
investment portfolio.
Declining interest rates have resulted in accelerated principal prepayment
of mortgage-backed securities. The mortgage-backed securities portfolio balance
at December 31, 1993, was $1.0 billion with an expected weighted average
maturity of 2.36 years and an average yield of 6.62%. This compares to a
balance of $1.0 billion at December 31, 1992, with an expected weighted average
maturity of 3.2 years and an average yield of 7.76%. In an effort to mitigate
some of the prepayment risk associated with the mortgage-backed portfolio, the
Corporation sold approximately $70.2 million of pass-through certificates in a
coupon roll down transaction during the first quarter 1992. That is, higher
coupon rate certificates were sold and the proceeds immediately reinvested in
lower coupon securities. This sale resulted in gains of $1.9 million.
LOANS AND LEASE FINANCING PORTFOLIO AND CREDIT RISK ANALYSIS
OVERVIEW
Credit quality continued to improve during 1993 as evidenced by reductions
in the level of Watch Credits, Non-performing Assets and net charge-offs. After
reaching a high of $694 million at June 30, 1992, Watch Credits decreased to
$387 million at December 31, 1993; total Non-performing Assets declined from
$304.2 million at year-end 1992, to $255.2 million at December 31, 1993; net
charge-offs for the year ended 1993 were $25.4 million, 52% below 1992's net
charge-offs of $52.8 million. Further improvement in credit quality will
continue to be a major focus of the Corporation in 1994.
The Corporation's total loans and lease financing were relatively flat
compared to year-end 1992 total outstandings. Net increases in consumer loans;
commercial real estate mortgages and lease financing were offset by net
decreases in residential real estate-mortgages; short-term real
estate-construction; and commercial loans.
A discussion of the loan portfolio composition, management of credit risk
and loan quality follows.
LOAN PORTFOLIO COMPOSITION
Table 9 provides a five year presentation of the Corporation's loan
portfolio. A breakdown of the Corporation's outstanding commercial loans
secured by real estate and other commercial loans by industry and geographic
concentrations at December 31, 1993 are presented in Table 9a. Table 9b
presents the Corporation's outstanding short-term commercial real estate
construction loans and commercial real estate-mortgage loans by collateral type
and geographic concentration at December 31, 1993.
The installment loan portfolio increased $132.4 million, or 20%, to $780.5
million at December 31, 1993, from $648.1 million at year-end 1992. This
increase was principally attributable to growth in secured and unsecured direct
consumer loans due to the low interest rate environment and successful
marketing of the unsecured Capital Reserve line of credit product.
Mortgage loan refinancing activity subsided in late 1993 and contributed to
the reduction of the residential mortgage loan portfolio.
Another major contributor to the decrease in residential mortgage loans was
a sale of a $300 million prime-rate-based residential loan portfolio. This sale
is further discussed in the Net Interest Income section. The remaining balance
in this portfolio was approximately $67 million at December 31, 1993, and the
Corporation now intends to manage this portfolio as held for sale.
Partially offsetting these decreases was the purchase of approximately
$122 million of FHA insured residential mortgages that are over 90 days
delinquent in Government National Mortgage Association (GNMA) mortgage pools
serviced by IOMC. The FHA insures 100% of the principal balance of these loans
and interest is insured at an FHA debenture rate less two months interest for
those loans that become foreclosure loans. These past due but still accruing
loans are excluded from the Corporation's Non-performing Asset totals.
The Corporation is accruing interest income on these loans at FHA
debenture rates. The weighted average debenture rate for this portfolio was
9.11% at December 31, 1993. The loans' contractual interest rates in all cases
exceed the FHA debenture rate and, for those loans that are brought current by
the borrower, interest income received in excess of the debenture rate is
recognized on a cash basis only.
The purchase reduces IOMC's risk of loss associated with those loans
that might become foreclosure loans. That is, IOMC will not have the expense of
reimbursing GNMA for the difference between the contractual interest and the
FHA debenture rate. Other costs associated with foreclosure are the obligation
of IOMC regardless of whether the loans have been purchased or remain in GNMA
pools.
The commercial loan portfolio declined slightly during 1993 due, in
part, to alternative funding opportunities which are available to customers in
the private placement and syndication markets.
The Corporation expects modest increases in loan volume during 1994,
continuing to concentrate on middle market business.
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT OF CREDIT RISK
The Corporation's senior credit officer reports directly to the Chairman
and Chief Executive Officer and is responsible for credit policies designed to
reduce the credit risk of the Corporation. This structure provides for greater
focus on general credit policies and their consistent application on a
corporate wide basis.
The Corporation utilizes a committee structure as the primary mechanism for
credit approval. A comprehensive risk rating system is employed for commercial
and commercial real estate loans in excess of $10 thousand. The risk rating of
a loan is based upon the borrower's financial condition, industry analyses and
other factors.
If a loan is performing but the borrower's operating results are showing
signs of current or possible future financial difficulties, the loan is
classified as a Watch Credit. These performing loans are subjected to closer
and more frequent risk assessment reviews and closer management of the credit
relationship. The Corporation's Watch Credits totaled $387 million at December
31, 1993, a significant decline from $539 million at December 31, 1992.
Improvement in the financial condition of certain borrowers was a significant
contributing factor to this decline.
If and when the current and/or projected financial condition of a borrower
reaches a point where, in management's judgment, serious doubt of repayment of
principal or interest exists, the loan is placed in a non-accrual or
in-substance foreclosure status. Non-performing and in-substance foreclosure
loans and property from defaulted loans are generally reassigned to departments
that specialize in the management of such assets as well as the management and
marketing of properties from defaulted loans with the objective of maximizing
the Corporation's return, or minimizing any loss.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Table 9 Loans and Lease Financing Portfolio
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (in thousands) 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural secured
by real estate $ 971,917 $ 977,616 $1,036,815 N/A N/A
Other commercial, financial and agricultural 2,373,707 2,378,753 2,118,710 N/A N/A
- -------------------------------------------------------------------------------------------------------------------
Subtotal(1) 3,345,624 3,356,369 3,155,525 $3,197,514 $3,169,941
Commercial real estate-mortgage 1,238,177 1,168,669 1,260,416 1,333,155 1,287,113
Residential real estate-mortgage:
Mortgages held for sale 583,056 670,800 494,866 231,648 317,741
Mortgages held for investment 465,904 578,909 283,874 298,397 173,569
- -------------------------------------------------------------------------------------------------------------------
Subtotal(1) 2,287,137 2,418,378 2,039,156 1,863,200 1,778,423
Short-term commercial
real estate-construction 159,594 222,819 335,730 521,544 674,415
Installment 780,532 648,099 649,102 617,387 498,260
Lease financing 116,998 82,728 22,391 31,848 32,046
- -------------------------------------------------------------------------------------------------------------------
Total 6,689,885 6,728,393 6,201,904 6,231,493 6,153,085
Unearned income (18,619) (15,869) (3,834) (5,872) (5,615)
- -------------------------------------------------------------------------------------------------------------------
Total 6,671,266 6,712,524 6,198,070 6,225,621 6,147,470
Covered Assets and FDIC assistance 18,524 389,698 558,335 648,612
- -------------------------------------------------------------------------------------------------------------------
Total $6,671,266 $6,731,048 $6,587,768 $6,783,956 $6,796,082
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Watch Credits (in millions) (2) $387 $539 $616 $412 $228
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) During 1990, the Corporation undertook a project whereby its loans were
reclassified in accordance with definitions which better reflect the
relative risk characteristics of those loans. Prior year data was not
restated because the 1990 reclassifications did not materially change the
respective categories.
(2) Loans classified as Watch Credits are included in the above loan balances.
N/A: Not Available.
27
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
Table 9a. Commercial, Financial and Agricultural Loans Outstanding at DECEMBER
31, 1993 (in thousands)
<TABLE>
<CAPTION>
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:
Finance, insurance and real estate $ 318,966 $ 13,483 $ 3,488 $ 9,691 $ 2,149 $ 347,777
Service 199,030 18,858 20,681 128 1,887 240,584
Retail trade 79,871 1,431 82,724 2,440 166,466
Manufacturing 51,962 27 1,970 928 54,887
Automotive 52,742 1,972 54,714
Wholesale trade 24,558 57 378 24,993
Transportation/utilities 12,037 301 12,338
Other 20,916 87 49,155 70,158
- ----------------------------------------------------------------------------------------------------------------------
Total 760,082 35,915 107,194 14,607 54,119 971,917
- ----------------------------------------------------------------------------------------------------------------------
Other Commercial, Financial and
Agricultural Loans:
Finance, insurance and real estate 270,898 1,187 338 15,123 304,270 591,816
Service 330,761 21,431 2,451 1,394 8,441 364,478
Manufacturing 251,457 22,606 12,853 6,670 6,764 300,350
Retail trade 245,777 9,528 4,743 5,999 2,083 268,130
Wholesale trade 219,453 2,801 5,512 227,766
Automotive 217,748 6,779 504 225,031
Transportation/utilities 199,814 7,020 1,632 3,500 211,966
Other 72,195 161 30 2,394 109,390 184,170
- ----------------------------------------------------------------------------------------------------------------------
Total 1,808,103 71,513 22,047 32,084 439,960 2,373,707
- ----------------------------------------------------------------------------------------------------------------------
Total Commercial, Financial and
Agricultural Loans Outstanding $2,568,185 $107,428 $129,241 $46,691 $494,079 $3,345,624
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Percentage of geographic location to Total 76.76% 3.21% 3.86% 1.40% 14.77% 100%
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)During 1993 the Corporation redefined its industry categories from Standard
Industrial Classification codes to internally developed definitions which are
based on the primary market in which the borrower operates.
Table 9b. Short-Term Commercial Real Estate-Construction and Commercial Real
Estate-Mortgage Loans Outstanding at DECEMBER 31, 1993 (in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
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 $ 16,639 $ 129 $ 54,640 $ 71,408
Retail 15,402 15,402
Office 12,058 12,058
Residential > 4 family 4,273 98 3,429 7,800
Other 46,969 3,390 $ 2,567 52,926
- ---------------------------------------------------------------------------------------------------------------------
Total 95,341 227 61,459 2,567 159,594
- ---------------------------------------------------------------------------------------------------------------------
Commercial Real Estate-Mortgage:
Retail 289,673 5,374 17,014 752 312,813
Office 224,164 8,554 7,504 1,216 241,438
Residential > 4 family 157,115 1,396 3,000 33,773 195,284
Mobile home parks 94,580 8,606 $ 541 30,225 6,774 140,726
Industrial 114,643 290 792 2,764 118,489
Hotels 61,373 898 18,301 5,887 28,606 115,065
Warehouse 22,181 5,502 680 28,363
Other 43,769 394 259 4,253 37,324 85,999
- ---------------------------------------------------------------------------------------------------------------------
Total 1,007,498 31,014 19,101 68,675 111,889 1,238,177
- ---------------------------------------------------------------------------------------------------------------------
Total Commercial
Real Estate Loans Outstanding $1,102,839 $31,241 $19,101 $130,134 $114,456 $1,397,771
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Percentage of geographic location to Total 78.89% 2.24% 1.37% 9.31% 8.19% 100%
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
NON-PERFORMING ASSETS
Non-performing Assets continued to decrease in 1993 to $255.2 million, the
lowest level since September 30, 1990, from a high of $348 million at March 30,
1991. The high level of Non-performing Assets in recent years was due to the
weak economy's effect on individual borrowers and the deterioration in real
estate values which were caused by an excess supply of commercial real estate
properties in several market areas.
Loans are generally placed in non-accrual status when 90 days or more past
due, or sooner when there is serious doubt as to the collectability of future
interest or principal. While in non-accrual, cash payments received (both
principal and interest) are generally applied as a reduction of the principal
balance.
Property from defaulted loans includes both foreclosed and in-substance
foreclosed properties, which are recorded at the lower of the investment in the
related loan or the fair market value of the foreclosed property less estimated
costs to sell the asset. Cash payments received on in-substance foreclosed
properties are recorded based on the source of the payment. Payments sourced
from the operation of the property are recorded as defaulted loan income;
payments from other sources (i.e. sale of property) are recorded as reductions
of the principal balance.
Table 10 provides a five year presentation of the Corporation's
Non-performing Assets and Table 10a presents the 1993 activity in commercial
and commercial real estate Non-performing Assets. Table 10b presents a break
down of commercial loans secured by real estate and other commercial
Non-performing Assets by industry and geographic concentrations at December 31,
1993. A break down of the short-term commercial real estate-construction and
commercial real estate-mortgage Non-performing Assets by collateral type and by
geographic concentration at December 31, 1993, is presented in Table 10c.
As the economy improves, a continuing decline in the level of Non-performing
Assets is expected. In 1994, the Corporation will continue to focus its efforts
on reducing Non-performing Assets through successful marketing of property from
defaulted loans.
At December 31, 1993, the Corporation had only $7 million of unfunded
commitments associated with its Non-performing Assets which it may fund under
certain circumstances.
The following table presents the estimated interest income on Non-performing
Assets held at December 31 that would have been recognized in each year during
the period that such assets were in a non-performing status.
PROFORMA INTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 1993 1992 1991
- ---------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Non-performing
Loans $ 9.7 $14.6 $16.8
Real estate
owned 4.5 7.2 4.7
In-substance
foreclosures 3.4 3.4 7.4
- ---------------------------------------------------------
Total proforma
interest $17.6 $25.2 $28.9
- ---------------------------------------------------------
</TABLE>
Actual cash interest received during 1993, 1992 and 1991 on Non-performing
Assets held at December 31 of each year, while such assets were in an accruing
status, was $14.7 million, $19.9 million and $10.5 million, respectively.
29
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Table 10 Non-performing Assets
- --------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (in thousands) 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans
Commercial, financial and agricultural secured by real estate $ 36,872 $ 41,782 $ 37,305 N/A N/A
Other commercial, financial and agricultural 32,243 24,843 54,601 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal 69,115 66,625 91,906 62,000 49,256
Commercial real estate-mortgage 8,886 14,606 45,484 47,817 12,219
Residential real estate-mortgages held for investment 22,271 11,713 9,393 4,805 3,232
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal 31,157 26,319 54,877 52,622 15,451
Short-term commercial real estate-construction 55,189 56,337 34,540 51,259 7,514
Installment 1,002 2,520 2,632 2,138 1,440
Lease financing 84 3 190
- --------------------------------------------------------------------------------------------------------------------------------
Total Non-accrual Loans 156,463 151,885 183,958 168,209 73,661
Renegotiated loans
Commercial, financial and agricultural secured by real estate 47 328 N/A N/A
Other commercial, financial and agricultural 145 N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal 47 145 328 1,403 412
Commercial real estate-mortgage 338 488
Short-term commercial real estate-construction 313
- --------------------------------------------------------------------------------------------------------------------------------
Total Renegotiated Loans 698 145 816 1,403 412
- --------------------------------------------------------------------------------------------------------------------------------
Total Non-performing Loans 157,161 152,030 184,774 169,612 74,073
- --------------------------------------------------------------------------------------------------------------------------------
Property from defaulted loans and discontinued operations 98,066 152,207 143,079 134,552 51,170
- --------------------------------------------------------------------------------------------------------------------------------
Total Non-performing Assets $255,227 $304,237 $327,853 $304,164 $125,243
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Non-performing Loans to loans 2.36% 2.26% 2.80% 2.50% 1.09
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for possible credit losses to Non-performing Loans 121.53% 115.42% 83.69% 80.89% 168.41
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Non-performing Assets to total loans (net of unearned income)
plus property from defaulted loans and discontinued
operations 3.77% 4.42% 4.87% 4.40% 1.83%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain prior period amounts have been restated for a change in reporting
classification to exclude loans that are 90 days or more past due and still
accruing and to include real estate of discontinued operations. Loans 90 days
or more past due and still accruing at December 31, 1993, 1992, 1991, 1990 and
1989, were $118,363, $2,087, $2,049, $4,445 and $1,564, respectively. At
December 31, 1993, 97.5% of loans 90 days or more past due and still accruing
were insured by the FHA.
N/A: Not Available
30
<PAGE> 31
Management's Discussion and Analysis
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Table 10a. Changes in Commercial and Commercial Real Estate Non-performing
Assets (in thousands)
- --------------------------------------------------------------------------------------------------------------
Short-Term Commercial
Commercial Real Commercial Real Loans Secured Other
Estate-Mortgage Estate-Construction By Real Estate Commercial Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing Assets at
December 31, 1992 $40,813 $138,518 $62,846 $39,535 $281,712
Activity during 1993:
Additions 10,031 25,894 9,098 39,632 84,655
Pay-downs (8,729) (12,251) (1,513) (13,361) (35,854)
Disposition of assets (13,717) (29,939) (2,424) (3,332) (49,412)
Charge-offs (4,318) (4,000) (4,832) (11,414) (24,564)
Write-downs (2,160) (4,202) (2,015) (360) (8,737)
Return to accrual(1) (2,448) (5,823) (2,814) (7,451) (18,536)
Other(2) 2,945 (1,611) (2,429) (3,707) (4,802)
- --------------------------------------------------------------------------------------------------------------
Net activity during 1993 (18,396) (31,932) (6,929) 7 (57,250)
- --------------------------------------------------------------------------------------------------------------
Non-performing Assets at
December 31, 1993
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
$22,417 $106,586 $55,917 $39,542 $224,462
Percentage of Non-performing Asset
category to Total 9.99% 47.49% 24.91% 17.61% 100%
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</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.
Prior period amounts have been restated for a change in reporting
classification to exclude loans that are 90 days or more past due and
still accruing.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Table 10b. Commercial, Financial and Agricultural Non-performing Assets as of
DECEMBER 31, 1993 (in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Other Other
Industry(1) Michigan Midwest Northeast South States Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, Financial and Agricultural
Secured by Real Estate:
Retail trade $ 1,266 $35,333 $36,599
Services 2,651 $ 439 8,834 11,924
Finance, investment, real estate 2,489 12 2,501
Manufacturing 1,527 1,527
Transportation and public utilities 602 602
Automotive 334 334
Agriculture, forestry, fishing 113 113
Construction contractors 65 65
Wholesale trade 43 43
Other 2,209 2,209
- -----------------------------------------------------------------------------------------------------------------------------
Total 11,299 451 44,167 55,917
- -----------------------------------------------------------------------------------------------------------------------------
Other Commercial, Financial and Agricultural:
Services 9,662 68 $ 413 10,143
Automotive 8,796 8,796
Finance, investment, real estate 4,207 205 2,101 6,513
Retail trade 3,336 99 452 83 $171 4,141
Transportation and public utilities 880 706 1,632 3,218
Construction contractors 1,424 1,424
Manufacturing 904 904
Wholesale trade 276 276
Other 2,361 948 818 4,127
- -----------------------------------------------------------------------------------------------------------------------------
Total 31,846 1,010 2,152 3,545 989 39,542
- -----------------------------------------------------------------------------------------------------------------------------
Total Commercial, Financial and Agricultural
Non-performing Assets $43,145 $1,461 $46,319 $3,545 $989 $95,459
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Percentage of geographic location to Total 45.20% 1.53% 48.52% 3.71% 1.04% 100%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)During 1993 the Corporation redefined its industry categories from Standard
Industrial Classification codes to internally developed definitions which are
based on the primary market in which the borrower operates.
31
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Table 10c. Short-Term Commercial Real Estate-Construction and Commercial Real Estate-Mortgage Non-performing Assets at
December 31, 1993 (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
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 $ 1,865 $ 6,396 $1,800 $53,000 $ 63,061
Hotels 4,753 14,295 19,048
Retail 11,834 4,629 16,463
Office 2,814 2,814
Residential > 4 family 98 98
Other 2,775 2,327 5,102
- ----------------------------------------------------------------------------------------------------------------------------
Total 12,207 18,328 1,800 74,251 106,586
- ----------------------------------------------------------------------------------------------------------------------------
Commercial Real Estate-Mortgage:
Hotels 5,806 5,806
Retail 4,254 4,254
Office 2,333 1,160 3,493
Residential > 4 family 1,419 1,396 2,815
Industrial 2,623 2,623
Other 1,016 69 $2,341 3,426
- ----------------------------------------------------------------------------------------------------------------------------
Total 11,645 1,465 5,806 1,160 2,341 22,417
- ----------------------------------------------------------------------------------------------------------------------------
Total Commercial Real Estate
Non-performing Assets $23,852 $19,793 $7,606 $75,411 $2,341 $129,003
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Percentage of geographic location to Total 18.49% 15.34% 5.90% 58.46% 1.81% 100%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ALLOWANCE FOR POSSIBLE LOAN LOSS
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 the 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
primarily 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 December 31, 1993, 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 value and a borrower's 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 re-appraisal is
determined based upon several factors, including the loan's risk rating.
Table 11 presents a five year summary of charge-off, recovery and provision
activity within the allowance. The decline in the provision and the
corresponding improvement in the ratio of allowance for possible credit losses
to year-end loans and in the ratio of allowance for possible credit losses to
Non-performing Loans is primarily attributable to declines in the levels of
Non-performing Assets over the past two years.
Table 12 presents a five year summary of the allocation of the allowance
among the various loan categories.
NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued SFAS No. 114, Accounting
by Creditors for Impairment of a Loan. The Corporation plans to adopt this
Statement in 1995. Refer to Note A for further information on this
new accounting standard.
32
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Table 11 Analysis of the Allowance for Possible Credit Losses
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (in thousands) 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $175,471 $154,638 $137,200 $124,744 $ 97,075
Charge-offs
Commercial, financial and agricultural secured by real estate 4,832 5,767 7,962 N/A N/A
Other commercial, financial and agricultural 11,498 22,192 10,645 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
Subtotal 16,330 27,959 18,607 34,486 28,272
Commercial real estate-mortgage 4,318 11,734 14,253 N/A N/A
Residential real estate-mortgages held for investment 1,281 61 59 N/A N/A
Subtotal 5,599 11,795 14,312 2,102 8,090
Short-term commercial real estate-construction 4,000 12,360 33,603 24,812
Installment 8,012 8,558 9,538 5,047 4,575
Credit card 26,405
Lease financing 66 537 4,064 398 3,509
- ----------------------------------------------------------------------------------------------------------------------------
Total charge-offs 34,007 61,209 80,124 66,845 70,851
Recoveries
Commercial, financial and agricultural secured by real estate 917 770 59 N/A N/A
Other commercial, financial and agricultural 3,986 4,811 6,514 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
Subtotal 4,903 5,581 6,573 3,787 5,289
Commercial real estate-mortgage 1,495 829 164 24 24
Short-term commercial real estate-construction 398 29 1,533
Installment 1,848 1,933 1,692 1,626 1,419
Credit card 3,769
Lease financing 6 1 67 154
- ----------------------------------------------------------------------------------------------------------------------------
Total recoveries 8,650 8,372 9,963 5,504 10,655
Net charge-offs 25,357 52,837 70,161 61,341 60,196
Additions
Provisions charged to operating expense 40,000 70,670 86,500 73,082 128,481
Allowance of subsidiaries purchased 878 1,099 715 742
Allocation of cash discount received
from Covered Asset settlement 3,000
Less
Allowance of credit card portfolio sold 41,358
- ----------------------------------------------------------------------------------------------------------------------------
Ending balance $190,992 $175,471 $154,638 $137,200 $124,744
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for possible credit losses to year-end loans 2.86% 2.61% 2.35% 2.02% 1.84%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans 0.38% 0.79% 1.06% 0.88% 0.84%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans (excluding Covered Assets) 0.38% 0.82% 1.14% 0.96% 0.94%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans (excluding
Covered Assets and credit card) 0.38% 0.82% 1.14% 0.96% 0.65%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/A: Not Available
- ------------------------------------------------------------------------------
CROSS BORDER OUTSTANDINGS
At December 31, 1993, there was $76 million of deposits and interest bearing
investments outstanding with banks in the United Kingdom. At December 31, 1992
and 1991 there were $118 million and $303 million, respectively, of deposits
and interest bearing investments outstanding with banks in Japan.
33
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Table 12 Allocation of the Allowance for Possible Credit Losses (1)
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (in thousands) 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of
Related Related Related Related
Loans to loans to Loans to loans to
Dollar Total Dollar Total Dollar Total Dollar Total
Amount Loans Amount loans Amount Loans Amount loans
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 35,344 50 $ 44,966 50 $ 30,432 51 $ 26,480 51
Commercial real estate-mortgage 17,654 18 20,551 17 22,180 20 9,600 21
Residential real estate-mortgage:
Mortgages held for sale 9 10 8 4
Mortgages held for investment 11,556 7 4,679 9 1,729 5 5
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal 29,210 34 25,230 36 23,909 33 9,600 30
Short-term commercial real
estate-construction 17,823 2 20,056 3 27,477 5 15,389 8
Installment 10,494 12 9,258 10 16,331 10 3,872 10
Lease financing 72 2 900 1 97 1 4,783 1
Unallocated 98,049 75,061 56,392 77,076
- ---------------------------------------------------------------------------------------------------------------------------------
Total $190,992 100 $175,471 100 $154,638 100 $137,200 100
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
December 31 (in thousands) 1989
- ---------------------------------------------------------------------------------------------------------------------------------
% of
Related
Loans To
Dollar Total
Amount Loans
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $11,318 51
Commercial real estate-mortgage 9,220 21
Residential real estate-mortgage:
Mortgages held for sale 5
Mortgages held for investment 3
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal 9,220 29
Short-term commercial real
estate-construction 5,135 11
Installment 2,109 8
Lease financing 1,071 1
Unallocated 95,891
- ---------------------------------------------------------------------------------------------------------------------------------
Total $124,744 100
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)This table represents an estimated allocation of the allowance and is
provided only as an indication of the relative risk assessment of the
components of the loan portfolio. The allowance for loan losses is a general
allowance available to cover losses in any category of the loan portfolio.
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's liquidity and capital positions remain strong and
management believes that the strength of its liquidity and capital levels will
support its various business activities.
During 1993, the Corporation continued to manage the asset/liability process
toward a prudent level of increased liquidity, thereby enhancing balance sheet
strength. This has been achieved, in part, by maintaining high levels of
short-term, liquid investments and low levels of discretionary and
credit-sensitive, short-term borrowings.
The capital position of the Corporation is 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 regulatory guidelines. The
Corporation's capital position substantially exceeds guidelines established by
the industry regulators.
LIQUIDITY MANAGEMENT
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, and satisfy other operating
requirements. Its primary sources of funds are dividends and fees from
subsidiaries, borrowings and, from time to time, proceeds from equity
issuances. The parent company has sufficient cash resources to cover fixed
charges and cash dividend payments. The common stock cash dividend coverage
ratio at December 31, 1993, was 63.7% and the fixed charge coverage ratio was
272.5%. These ratios have declined over 1992 and 1993, principally due to the
depressed earnings at IOMC (a subsidiary of the Corporation's principal bank
subsidiary), which have had the effect of reducing the availability of
subsidiary dividends as a source of cash. Consideration of regulatory capital
requirements governing the subsidiary banks and the subsidiary savings and loan
are employed in determining the payment of dividends by the respective
subsidiaries to the parent company. Current banking laws and regulations place
limitations on the ability of national banks to pay cash dividends in order to
prevent capital impairment. The subsidiary banks and the subsidiary savings and
loan are in compliance with the regulatory dividend limitation guidelines as of
December 31, 1993. Dividends paid to the parent company in 1993 totaled $40.5
million. At December 31, 1993, the subsidiaries had retained earnings of
approximately $33.0 million available to pay dividends to the parent company
without regulatory approval.
The subsidiary banks and subsidiary savings and loan manage liquidity to
meet the needs of borrowers and to honor deposit withdrawals. Subsidiary
liquidity is derived from deposit growth, short-term borrowings, short-term
investments, and the sale and maturity of investment securities.
Reference Table 13 for a presentation of the Corporation's funding structure.
LIQUIDITY POSITION
The following discussion of the Corporation's liquidity position should be
read in conjunction with the Consolidated Statement of Cash Flows.
The Corporation's cash and cash equivalents were $1.0 billion at December
31, 1993, and December 31, 1992, compared to $811.2 million at December 31,
1991.
34
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ----------------------------------------------------------------------------
Cash provided by investing activities totaled $428.9 million, $130.5 million
and $621.0 million for the year ended December 31, 1993, 1992 and 1991,
respectively. The sale of securities and prime plus loans as well as the
repayment and maturities of securities, loans and the Note Receivable-FDlC
enhanced the liquidity position of the Corporation in 1993. Cash proceeds from
these transactions were used to pay down higher cost discretionary liabilities
and to purchase securities and money market instruments (refer to the Net
Interest Income section for further discussion of these transactions and for
discussion of the possible early settlement of the Note Receivable-FDIC).
Net cash used by financing activities for the year ended December 31, 1993,
was $709.5 million, compared to $23.4 million and $611.0 million for 1992 and
1991, respectively. The major contributor to this use of funds in 1993 was the
pay-down of higher cost discretionary and credit-sensitive liabilities
(principally time deposits greater than $100,000 and short-term borrowings),
which was funded by an increase in non-interest-bearing demand deposits and the
aforementioned reduction in earning assets. Discretionary liabilities provided
11.26%,17.15% and 22.77% of total asset funding at December 31, 1993, 1992 and
1991, respectively.
Decreased reliance on credit-sensitive liabilities minimized the negative
impact of a credit rating downgrade on the Corporation's liquidity position. In
September 1993, the Corporation's Standard and Poor's (S&P) credit rating was
downgraded. Other major rating agencies, however, did not change their credit
ratings from those in effect at December 31, 1992. The following chart presents
the Moody's and S&P credit ratings at December 31, 1993, of the parent company
and its principal bank subsidiary.
<TABLE>
<CAPTION>
MICHIGAN NATIONAL MICHIGAN NATIONAL
CORPORATION BANK
--------------------- ---------------------
MOODY'S S&P MOODY'S S&P
--------------------- ---------------------
<S> <C> <C> <C> <C>
Short-term P-2 A-3 P-2 A-2
Long-term
Senior N/R N/R A-3 BBB
Long-term
Subordinated Baa-3 BB + N/A N/A
</TABLE>
N/R = NOT RATED
N/A = NOT APPLICABLE
Reference Note M for information on the Corporation's outstanding and
available short-term borrowings and Note N for outstanding and available
long-term debt. Tables 4, 5, 6 and Note D provide information regarding the
Corporation's short-term and long-term liquidity status as it relates to asset
and liability repricing and maturities.
CAPITAL POSITION
Bank holding companies and national banks are required to comply with
capital guidelines mandated by the Federal Reserve Board (FRB) and the Office
of the Comptroller of the Currency (OCC). The purpose of these guidelines is to
ensure capital adequacy which is critical to the safety and soundness of an
institution. Capital adequacy is measured in terms of two ratios which are the
risk-based capital ratio and the leverage ratio. Risk-based capital
requirements assess the credit risk of a financial institution's balance sheet
assets and off-balance sheet commitments relative to its capital structure.
Under the guidelines, one of four risk weights is applied to the different
balance sheet assets and off-balance sheet items, such as loan commitments,
primarily based on the relative credit risk of the counter party. Capital
instruments are divided into two tiers which are: core capital (Tier 1) and
supplemental (Tier 2) capital. The risk-based capital ratio is obtained by
dividing the capital base (Tier 1 and Tier 2) by the total risk-weighted
assets. The capital guidelines establish a minimum total (Tier 1 plus Tier 2)
ratio of 8%, 4% of which must be comprised of Tier 1 capital. Refer to Table 14
for the composition of Tier 1 and Tier 2 capital.
The leverage ratio, which is used in tandem with the risk-based capital
ratio, consists of Tier 1 capital divided by average total assets (excluding
intangible assets that were deducted to arrive at Tier 1 capital). The
guidelines establish a minimum leverage ratio of 3%.
The capital level of a financial institution is further classified under one
of five capital categories as mandated by the FDIC Improvement Act of 1992.
The highest capital category is "Well Capitalized".
The Corporation's December 31, 1993, capital category designation is Well
Capitalized. Its excess capital under this capital category as of December 31,
1993, amounted to $290.7 million, $140.9 million and $263.9 million for Tier 1,
Total Risk-Based and Leverage capital levels respectively. The Corporation's
bank and thrift subsidiaries are individually in compliance with all required
capital adequacy ratios and are classified as Well Capitalized at December 31,
1993. The Corporation's capital position at December 31, 1993, 1992, and 1991,
is further illustrated in Table 14.
The Federal Reserve Board and other federal agencies are currently
addressing issues that will potentially impact future regulatory capital
positions of the Corporation and its subsidiary banks and savings and loan. The
issuance of SFAS No. 115, Accounting for Certain Investments in Debt & Equity
Securities (reference Investment Securities section for a discussion of SFAS
No. 115) has raised the question of whether unrealized gains and losses
on available-for-sale securities should be included in Tier 1 capital for
risk-based and leverage capital purposes. Also under consideration by federal
agencies, is the measurement of the effect of interest rate exposure on
risk-adjusted total assets and capital positions of institutions. Management
has examined these proposals and estimates that they, as presently defined,
would not have a material effect on the Corporation's current capital position.
35
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table 13 Funding Position
- ------------------------------------------------------------------------------------------------------------------------------------
Michigan National Corporation and Consolidated Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (in thousands) 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
% OF TOTAL % OF TOTAL % OF TOTAL
BALANCE ASSET FUNDING BALANCE ASSET FUNDING BALANCE ASSET FUNDING
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deposits $8,623,236 84% $8,975,293 83% $8,655,477 81%
Short-term borrowings 293,293 3% 528,094 5% 841,910 8%
Long-term debt 77,122 1% 82,651 1% 91,749 1%
Equity 815,590 8% 805,775 8% 759,898 7%
Other liabilities 363,567 4% 271,511 3% 301,197 3%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Subsidiary Banks & Savings and Loan
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (in thousands) 1993 1992 1991
% OF TOTAL % OF TOTAL % OF TOTAL
BALANCE ASSET FUNDING BALANCE ASSET FUNDING BALANCE ASSET FUNDING
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deposits $8,659,743 86% $9,004,950 86% $8,703,886 82%
Short-term borrowings 293,293 3% 528,094 5% 841,910 8%
Equity 821,689 8% 827,532 8% 801,680 8%
Other liabilities 281,353 3% 148,849 1% 212,040 2%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table 14 Risk-Based Capital
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (in thousands) 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1
Common shareholders' equity(1) $ 815,590 $ 799,048 $ 750,145
Convertible preferred stock 6,000 6,000
Intangible assets (14,279) (10,936) (10,688)
PMSR Capital Limitation(2) (403)
SFAS 109 Capital Limitation(3) (21,876) (19,955)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital $ 779,032 $ 774,157 $ 745,457
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 2
Allowance for possible credit losses(4) $ 103,149 $ 100,798 $ 100,031
Equity commitment note 15,212 18,012 20,812
Equity contract note 57,715 58,735 54,555
Qualified subordinated debt 100
- ------------------------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital $ 176,076 $ 177,545 $ 175,498
- ------------------------------------------------------------------------------------------------------------------------------------
Total qualifying capital $ 955,108 $ 951,702 $ 920,955
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Risk-weighted assets $7,233,972 $7,379,667 $7,234,058
Risk-weighted off-balance sheet exposure 1,032,619 695,090 768,459
- ------------------------------------------------------------------------------------------------------------------------------------
Less: disallowance for loan loss,
intangibles and PMSR 124,880 86,027 65,530
- ------------------------------------------------------------------------------------------------------------------------------------
Total risk-weighted assets and
off-balance sheet exposure $8,141,711 $7,988,730 $7,936,987
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
MINIMUM RATIOS FOR
WELL-CAPITALIZED INSTITUTION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital ratio 6.00% 9.57% 9.69% 9.39%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total capital ratio 10.00% 11.73% 11.91% 11.60%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Leverage ratio 5.00% 7.56% 7.24% 7.01%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1992 and 1991 common equity was adjusted to conform to regulatory
accounting principals (RAP) which require a maximum 15 year amortization
period for purchased mortgage servicing rights, the effect of which was a
$.7 million and a $3.7 million decrease to earnings in 1992 and 1991,
respectively.
(2) Regulatory capital guidelines limit inclusion of PMSR in regulatory capital
to the lesser of: (a) 90% of fair value or (b) 100% of unamortized book
value.
(3) Regulatory capital guidelines relating to the adoption of SFAS 109 limit the
amount of deferred tax assets dependent on future taxable income or tax
planning strategies to the lesser of: (a) the amount that can be realized
within one year of the report date or (b) 10% of Tier 1 capital.
(4) The allowance for possible credit losses is limited to 1.25% of the total
risk-weighted assets and off-balance sheet exposure.
36
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS REVIEW
The Corporation's four core businesses are retail banking, commercial
banking, mortgage banking, and investment banking. These businesses are
operated by the Corporation's principal subsidiary, Michigan National Bank
(MNB). Independence One Mortgage Corporation (IOMC), a wholly-owned subsidiary
of MNB, operates the mortgage banking business. In addition, the Corporation's
savings and loan subsidiary, Independence One Bank of California (IOBOC), and
the Corporation's two subsidiary banks in Texas, First State Bank & Trust
(FSB&T) and Lockwood National Bank, (Lockwood Bank), operate retail and
commercial banking businesses. IOBOC also operates a mortgage warehouse lending
subsidiary, doing business as First Collateral Services, Inc. (FCSI).
A summary of financial information for the Corporation's principal
subsidiaries is presented in Table 15, and a brief discussion of 1993 operating
performance follows.
MNB (EXCLUDING IOMC)
MNB's commercial banking business performance in 1993 was favorably affected
by improvements in credit quality and increases in its business deposit
accounts.
Over the past few years, this business has focused its efforts on managing a
reduction in its commercial real estate portfolios. These efforts, along with
improvements in the financial condition of certain borrowers, have resulted in
a reduction in both Non-performing Assets and Watch Credits, as well as a
reduction in net charge-offs. The success in the area of credit quality
contributed to earnings improvement in 1993.
Increased sales of commercial cash management products and services
contributed to an increase in commercial deposits from $565.1 million at
December 31, 1992, to $628.9 million at December 31, 1993. This increase along
with the low interest rate environment in 1993 were the primary reasons for
commercial fee income growth and a continued strong net interest margin.
Commercial deposit account processing fee income for the year ended December
31, 1993 was $18.0 million compared to $15.4 million in 1992.
Commercial loan growth was sluggish in 1993 due, in part, to alternative
funding opportunities offered by the private placement and syndication markets.
Modest loan growth is expected for 1994 with a continued concentration on
middle market business.
During 1993, MNB's retail banking business concentrated on growth in its
consumer deposit base and its consumer loan portfolio. In terms of market
share, core households (households with one or more personal checking or
savings accounts) increased from 300,761 at December 31, 1992, to 307,686 at
December 31, 1993. In addition, its anchor account (checking and savings)
balances increased $0.2 billion to $2.2 billion at December 31, 1993. However,
retail investment deposit account (time deposit and money market) balances
decreased $0.3 billion to $3.3 billion principally due to the competitive
pressures from more attractive yields offered by traditional non-bank financial
products. MNB's total retail customer service fee income grew $5.4 million, or
10%, to $59.9 million for the year ended 1993.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Table 15 Business Review
- -------------------------------------------------------------------------------------------------------------------------------
MNB
(EXCLUDING IOMC) IOMC
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (in thousands) 1993 1992 1991 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after provision for possible
credit losses $288,114 $264,404 $245,138 $ 25,315 $ 25,278 $ 6,947
Non-interest income 134,536 129,161 109,593 95,280 81,015 66,298
Gains from sale of mortgage servicing rights 9,324 5,799 7,102
Amortization of ESF (18,926) (9,485) (3,129)
Amortization of PMSR (104,998) (53,000) (19,656)
Other non-interest expense (330,707) (318,670) (318,397) (83,193) (79,810) (46,336)
- -------------------------------------------------------------------------------------------------------------------------------
Income before taxes $ 91,943 $ 74,895 $ 36,334 $ (77,198) $(30,203) $ 11,226
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31 (in millions)
Total assets $ 8,720 $ 9,208 $ 8,962 $ 1,001 $ 1,327 $ 869
Total liabilities $ 8,080 $ 8,580 $ 8,346 $ 971 $ 1,287 $ 829
Total equity $ 640 $ 628 $ 616 $ 30 $ 40 $ 40
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Mortgage Servicing Portfolio:
Originated servicing $ 3,961 $ 3,960 $ 2,041
Purchased servicing $ 5,608 10,228 12,043
- -------------------------------------------------------------------------------------------------------------------------------
Total(2) $ 9,569 $ 14,188 $ 14,084
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts include inter-company eliminations.
(2) Amounts include loans serviced for MNC affiliates of $1.0 billion, $1.3
billion and $1.4 billion at December 31, 1993, 1992 and l991, respectively.
Certain prior period amounts were restated to conform to current period
presentation.
37
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS
MNB's consumer lending business experienced excellent growth in 1993 in its
secured and unsecured direct loans. The low interest rate environment along
with successful marketing of the Capital Reserve line of credit product were
the primary reasons for the growth. MNB's total consumer loan outstandings
increased $78.6 million, or 15%, to $596.6 million at December 31, 1993, from
$518.0 million at December 31, 1992.
In 1994, MNB's retail banking business will continue to focus on profitable
growth in consumer deposit and consumer lending market share. A new business
unit has been formed which is dedicated to the special needs of small
businesses through MNB's new Business Class Banking line of products.
In addition, in 1994 retail banking will continue to place emphasis on
improving its financial performance by rationalizing its branch network in
Michigan, re-engineering branch processes, and otherwise reducing operating
costs.
MNB's investment services business provides asset management, trust
services, and investment products to individuals, corporations, employee
benefit plans, institutions, and municipal entities. The investment services
industry is highly competitive with banks, brokers, insurance companies, and
investment counseling firms all competing for customers. During 1993, MNB's
investment services business continued to introduce new products such as an
enhanced 401k plan (Envision) and an asset allocation product
(CAPITALAdvantage), which have helped to position the business for continued
growth.
In 1993, the investment services business contributed $6 million to the
Corporation's pre-tax operating profits, a 52% increase over 1992. Total fee
income of $24.8 million and fee generating assets of $6.3 billion increased
8.4% and 12.4%, respectively, from 1992 levels.
IOMC
IOMC originates and purchases residential mortgage loans and then sells
those loans into the secondary market. Historically, substantially all the
loans were sold with servicing rights retained to generate servicing fee income
over the life of the underlying loans. Table 16 presents the activity in IOMC's
off-balance sheet servicing portfolio for each of the three years ended
December 31, 1993, 1992 and 1991.
IOMC's earnings performance continued to be adversely effected by
unprecedented volume of mortgage loan refinancings, which resulted in a
prepayment (runoff) rate of approximately 48% in the purchased servicing
portfolio and a corresponding amortization rate of PMSR assets during 1993.
The runoff in the servicing portfolios also caused a decline in servicing
fee income during 1993. Servicing fee income was further reduced by the sale of
the servicing rights for approximately $2.5 billion of loans, for a net gain of
$9.3 million, after the write-off of approximately $15.2 million of related
PMSR and ESF assets. The servicing rights were sold as part of IOMC's strategy
to reposition its business and reduce the earnings volatility resulting from
purchased servicing.
Accelerated amortization along with the aforementioned sale have resulted in
significant declines in the mortgage servicing assets. The total net book value
of PMSR and ESF assets at December 31, 1993, was $56.3 million,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Table 15 Business Review (continued)
- ---------------------------------------------------------------------------------------------------------------------------
IOBOC TEXAS SUBSIDIARIES
1993 1992 1991 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after provision for possible
credit losses $ 26,542 $ 23,334 $ 21,816 $ 22,400 $ 17,435 $ 7,545
Non-interest income 3,123 1,359 426 6,504 3,804 1,675
Gains from sale of mortgage servicing rights
Amortization of ESF
Amortization of PMSR
Other non-interest expense (19,326) (15,323) (12,394) (18,766) (13,849) (7,035)
- ---------------------------------------------------------------------------------------------------------------------------
Income before taxes 10,339 $ 9,370 $ 9,848 $ 10,138 $ 7,390 $ 2,185
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31 (in millions)
Total assets $ 916 $ 1,010 $ 1,208 $ 593 $ 493 $ 462
Total liabilities $ 813 $ 888 $ 1,094 $ 544 $ 456 $ 430
Total equity $ 103 $ 122 $ 114 $ 49 $ 37 $ 32
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage Servicing Portfolio:
Originated servicing
Purchased servicing
- ---------------------------------------------------------------------------------------------------------------------------
Total(2)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Table 15 Business Review (continued)
- ------------------------------------------------------------------------------------------------------------------------------
Holding Company Consolidated
and other operations(1) MNC
- ------------------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after provision for possible
credit losses $ (760) $ (10) $ 1,053 $ 361,611 $ 330,441 $ 282,499
Non-interest income 10,989 13,140 8,074 250,432 228,479 186,066
Gains from sale of mortgage servicing rights 9,324 5,799 7,102
Amortization of ESF (18,926) (9,485) (3,129)
Amortization of PMSR (104,998) (53,000) (19,656)
Other non-interest expense (23,695) (8,124) (7,018) (475,687) (435,776) (391,180)
- ------------------------------------------------------------------------------------------------------------------------------
Income before taxes $(13,466) $ 5,006 $ 2,109 $ 21,756 $ 66,458 $ 61,702
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31 (in millions) $ (1,057) $ (1,375) $ (851) $ 10,173 $ 10,663 $ 10,650
Total assets $ (1,051) $ (1,354) $ (809) $ 9,357 $ 9,857 $ 9,890
Total liabilities $ (6) $ (21) $ (42) $ 816 $ 806 $ 760
Total equity
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage Servicing Portfolio: $ 3,961 $ 3,960 $ 2,041
Originated servicing 5,608 10,228 12,043
Purchased servicing
- ------------------------------------------------------------------------------------------------------------------------------
Total(2) $ 9,569 $ 14,188 $ 14,084
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts include inter-company eliminations.
(2) Amounts include loans serviced for MNC affiliates of $1.0 billion, $1.3
billion and $1.4 billion at December 31, 1993, 1992 and l991, respectively.
Certain prior period amounts were restated to conform to current period
presentation.
38
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS
a 68% decrease from $177.4 million at the end of 1992.
IOMC is positioned to sell servicing rights related to 1994 loan
originations, taking advantage of attractive market prices. This action along
with the reduction in the servicing assets and expected reductions in servicing
operating expenses will provide a solid foundation for financial improvement at
IOMC.
IOBOC
During 1993, IOBOC concentrated on expansion of commercial lines of business
through its corporate banking department and its subsidiary, FCSI. FCSI's
interest income benefitted from the record home mortgage refinancing activity
through its mortgage warehouse lending operations. At December 31, 1993,
IOBOC's total commercial loans outstanding were $404 million with unfunded
commitments of approximately $312 million, a substantial increase from loans
outstanding of $300 million and unfunded commitments of $212 million at the end
of 1992.
In addition, IOBOC increased non-interest-bearing demand deposits from $59
million at December 31, 1992, to $135 million at December 31, 1993. This
increase is primarily related to the growth in IOBOC corporate deposit
customers doing business with FCSI.
IOBOC's successes in 1993 are noteworthy considering the continued weakness
in the California economy. From a competitive standpoint, IOBOC's strong
capital base provides an advantage in relation to competitors in IOBOC's
market.
During 1994, IOBOC management will concentrate on continuing to expand its
commercial banking activities and on increasing its retail market share through
aggressive but focused marketing and sales efforts.
TEXAS SUBSIDIARIES
FSB&T and Lockwood Bank continue to generate strong earnings since their
acquisition in mid-1989 and late 1991, respectively.
On a combined basis, the return on equity and return on assets for these two
subsidiaries for the year 1993 was 14.87% and 1.15%, respectively. The
Corporation recently announced its intent to sell these two subsidiaries.
Current aggressive acquisition pricing has made further expansion in Texas
costly and more difficult for the Corporation to build its Texas affiliates to
a critical mass that would justify a long-term investment. Accordingly, the
Corporation has decided to redeploy the capital invested in Texas to its core
businesses. The Corporation does not expect to recognize any losses associated
with the intended sale(s).
- ------------------------------------------------------------------------------
Table 16 Residential Mortgage Servicing Portfolio Activity
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31 (In Millions) 1993 1992 1991
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $14,188 $14,084 $11,159
Net additions 3,576 5,183 5,107
Payments (472) (344) (246)
Prepayments (5,159) (4,156) (1,362)
Sales of servicing rights (2,564) (579) (574)
- ------------------------------------------------------------------------------
Balance, end of year $ 9,569 $14,188 $14,084
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31 (In thousands, except per share and share amounts) 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note C) $ 518,080 $ 547,697
Federal funds sold and resale agreements 483,000 466,298
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 1,001,080 1,013,995
Interest-bearing deposits with banks 121,445 136,565
Money market investments 11,513 6,469
Trading securities 70,113 79,668
Investment securities available for sale (Note D) 893 189,880
Investment securities held to maturity, (market
value of $1,343,659 and $1,348,098 at 12/31/93 and
12/31/92, respectively) (Note D)
Mortgage-backed securities 983,765 1,049,303
Government and other securities 330,008 256,371
Loans and lease financing (Note F) 6,106,829 6,057,593
Residential mortgages held for sale (Note F) 583,056 670,800
Covered assets and FDIC assistance (Note E) 18,524
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS AND LEASE FINANCING 6,689,885 6,746,917
Unearned income (18,619) (15,869)
Allowance for possible credit losses (Note G) (190,992) (175,471)
- --------------------------------------------------------------------------------------------------------------------------
NET LOANS AND LEASE FINANCING 6,480,274 6,555,577
Note receivable-FDlC(Note E) 462,535 624,828
Premises and equipment, net (Note J) 199,142 202,056
Due from customers on acceptances 612 183
Accrued income receivable 77,347 69,111
Purchased mortgage servicing rights, net (Note L) 49,389 155,083
Capitalized excess service fees, net (Note L) 6,869 22,277
Property from defaulted loans and discontinued
operations, net (Note K) 98,066 152,207
Other assets 279,757 149,751
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,172,808 $10,663,324
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Non-interest bearing demand deposits $ 1,995,940 $ 1,787,771
Interest-bearing deposits:
Money market accounts 2,195,670 2,168,453
Savings deposits 1,183,280 1,026,132
Time deposits < $100,000 2,597,669 2,996,756
Time deposits > $100,000 650,677 996,181
- --------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 8,623,236 8,975,293
Short-term borrowings (Note M) 293,293 528,094
Customer acceptances outstanding 612 183
Accrued liabilities 362,955 271,328
Long-term debt (Note N) 77,122 82,651
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 9,357,218 9,857,549
CONTINGENCIES AND COMMITMENTS (Notes 1, U and V)
SHAREHOLDERS' EQUITY (Note O)
Preferred stock, authorized 6,000,000 shares:
6% cumulative, convertible, $36 stated value, no shares authorized at
December 31, 1993; 166,667 shares authorized at December 31, 1992;
Series B junior participating, $10 par value, authorized 500,000 shares,
none outstanding 6,000
Common stock, $10 par value, authorized 50,000,000 shares 151,764 149,079
Surplus 195,466 185,759
Retained earnings 483,572 482,949
Note receivable-ESOP (Note N and P) (15,212) (18,012)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 815,590 805,775
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,172,808 $10,663,324
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Preferred stock outstanding (Note O) 166,667
Common stock outstanding 15,176,336 14,907,895
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certain prior period amounts have been reclassified to conform to current year
presentation.
See notes to consolidated financial statements.
40
<PAGE> 41
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (in thousands, except per share amounts) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C>
Interest-bearing deposits with banks $ 3,432 $ 4,913 $ 7,452
Federal funds sold and resale agreements 13,460 13,912 24,510
Money market investments 223 222 163
Investment securities(Note D) 92,154 127,111 137,305
Trading securities 6,117 6,832 9,351
Loans and lease financing, including related fees 555,841 572,505 630,241
Income from Covered Assets 8,999 18,611
FDIC assistance 7,063 18,861
- -------------------------------------------------------------------------------------------------------
Total Guaranteed Yield on Covered Assets (Note E) 16,062 37,472
Note Receivable-FDIC (Note E) 23,009 37,516 60,020
- -------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 694,236 779,073 906,514
INTEREST EXPENSE
Money market accounts 60,968 72,299 87,922
Savings deposits 30,044 31,542 39,906
Time deposits < $100,000 161,239 201,315 238,086
Time deposits > $100,000 32,145 51,731 122,253
Short-term borrowings 15,179 28,145 51,684
Long-term debt 6,387 7,020 8,597
FDIC assistance(Note E) (13,337) (14,090) (10,933)
- -------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 292,625 377,962 537,515
NET INTEREST INCOME 401,611 401,111 368,999
Provision For Possible Credit Losses 40,000 70,670 86,500
- -------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE
CREDIT LOSSES 361,611 330,441 282,499
NON-INTEREST INCOME
Service charges 132,150 132,900 118,756
Trust and investment services income 19,522 17,877 15,481
Mortgage banking gains, net 29,582 11,476 5,206
Gains from sale of mortgage servicing rights 9,324 5,799 7,102
Investment securities gains, net (Note D) 1,303 1,755
Investments available-for-sale gains, net (Note D) 6,139 7,946
Other income 44,113 47,492 41,739
- -------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 240,830 224,793 190,039
NON-INTEREST EXPENSE
Salaries and wages 182,298 165,547 146,709
Other employee benefits 51,204 44,870 43,193
Net occupancy expense 29,941 29,123 29,353
Equipment expense 41,631 38,296 37,072
Outside services 34,218 28,707 24,511
Defaulted loan expense, net 18,503 22,229 16,390
Amortization of purchased mortgage servicing
rights (Note L) 104,998 53,000 19,656
Other expenses (Note T) 117,892 107,004 93,952
- -------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 580,685 488,776 410,836
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 21,756 66,458 61,702
INCOME TAX (BENEFIT) PROVISION (Note V) (2,007) 6,652 11,612
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 23,763 59,806 50,090
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (Note A and V) 6,265
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 23,763 $ 66,071 $ 50,090
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Income before cumulative effect of accounting change $1.56 $3.96 $3.36
Cumulative effect of accounting change 0.42
- -------------------------------------------------------------------------------------------------------
Net income $1.56 $4.38 $3.36
- -------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING 15,230 15,079 14,858
- -------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $1.50(1) $2.00 $2.00
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
(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 does
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 have been reclassified to conform to current
period presentation.
See notes to consolidated financial statements.
41
<PAGE> 42
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (in thousands) 1993 1992 1991
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $ 23,763 $ 66,071 $ 50,090
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Provision for possible credit losses 40,000 70,670 86,500
Depreciation and amortization expense 160,223 95,257 63,250
Net amortization (accretion) associated
with investment securities 924 2,123 (598)
Write-downs of property from defaulted loans 12,505 19,383 12,203
Net deferred income taxes (24,261) (15,959) (9,998)
Gain from sale of securities (Note D) (4,257) (2,694)
Gain from sale of investment securities available
for sale (Note D) (6,000) (8,004)
Gain from sale of mortgage servicing rights (9,324) (5,799) (7,102)
Loss from sale of fixed assets 1,902 100 1,371
Gain from sale of property from defaulted loans (4,053) (8,721) (1,551)
(Increase) decrease in operating assets:
Trading account securities 9,555 51,060 (48,441)
Accrued interest receivable (8,236) 11,688 17,063
Residential mortgages held for sale 87,744 (175,934) (263,219)
Pending securities sales 49,633 55,792 (64,182)
Capitalized excess service fees (4,952) (18,738) (10,285)
Other assets (152,144) 16,444 6,612
Increase (decrease) in operating liabilities:
Accrued interest payable (4,866) 9,794 (12,871)
Pending securities purchases 21,292 (42,369) 64,404
Accrued liabilities 67,256 (24,432) 575
Other, net 6,643 1,543 1,773
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 267,604 $ 95,712 $(117,100)
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for:
Purchase of investment securities $ (510,111) $ (664,392) $(433,559)
Purchase of premises and equipment (28,304) (36,636) (36,315)
Purchase of mortgage servicing rights (13,084) (20,788) (52,782)
Capital expenditures on property from
defaulted loans (7,076) (4,068) (6,863)
Purchase of subsidiary, business assets, and
assumption of business liabilities, net of
cash and cash equivalents acquired (Note B) (727) (198,993) 18,964
Proceeds from:
Sale of investment securities (Note D) 161,420 166,029
Sale of investment securities available
for sale (Note D) 226,601 131,488
Principal collection of investment securities 488,220 531,448 282,785
Sale of premises and equipment 307 659 608
Sale of mortgage servicing rights 26,313 9,086 9,786
Sales and principal collection of property
from defaulted loans 48,795 55,449 76,382
Net decrease (increase) in:
Interest-bearing deposits with banks 15,120 (35,805) 119,965
Money market investments (5,044) (2,086) (644)
Loans and lease financing 7,232 (191,771) 228,210
Covered assets and FDIC assistance 18,410 290,012 167,285
Note receivable--FDIC 162,293 105,491 81,147
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES $ 428,945 $ 130,514 $620,998
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments for:
Long-term debt $ (5,019) $ (9,198) $ (10,973)
Common stock dividends (22,618) (29,573) (29,266)
Preferred stock dividends (90) (360) (360)
Proceeds from issuance of
Common stock 6,392 6,939 614
Payments on Note Receivable -ESOP 2,800 2,800 2,800
Net (decrease) increase in:
Deposits (456,128) 319,816 (567,809)
Short-term borrowings (234,801) (313,816) (5,981)
- --------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES $ (709,464) $ (23,392) $(610,975)
- --------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (12,915) $ 202,834 $(107,077)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,013,995 811,161 918,238
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $1,001,080 $1,013,995 $ 811,161
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 43
CONSOLIDATED STATEMENT OF CASH FLOWS CONTINUED
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (in thousands) 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
a) Cash transactions:
Interest paid $297,491 $368,168 $556,056
Federal Income taxes paid (net of refunds) 14,017 2,000 9,657
State taxes paid (net of refunds) 661 540 855
FDIC tax sharing payment 6,464 3,272 8,652
b) Non-cash transactions in property from
defaulted loan accounts:
Transfer from loans to property from defaulted loans 29,360 76,400 100,134
Loans originated to finance sales of property from
defaulted loans 27,049 3,370 11,527
c) Non-cash transactions in covered assets:
Transfer from covered assets to assets held for sale 3,905
Transfer from covered assets to loans and lease
financing 114 77,257
Transfer from covered assets to other assets 1,352
d) Fair market value of assets acquired less
liabilities assumed (Note B) 16,746 203,786 17,300
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Certain prior period amounts have been reclassified to conform to current
period presentation.
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE NOTE
PREFERRED COMMON RETAINED RECEIVABLE
(in thousands) STOCK STOCK SURPLUS EARNINGS ESOP TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1991 $6,000 $146,206 $181,079 $426,347 $(23,612) $736,020
Net income 50,090 50,090
Common stock issued 166 448 614
ESOP payment 2,800 2,800
Cash dividends
Common stock ($2.00 per share) (29,266) (29,266)
Convertible preferred
stock ($2.16 per share) (360) (360)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1991 $6,000 $146,372 $181,527 $446,811 $(20,812) $759,898
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1992 $6,000 $146,372 $181,527 $446,811 $(20,812) $759,898
Net income 66,071 66,071
Common stock issued 2,707 4,232 6,939
ESOP payment 2,800 2,800
Cash dividends
Common stock ($2.00 per share) (29,573) (29,573)
Convertible preferred
stock ($2.16 per share) (360) (360)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 $6,000 $149,079 $185,759 $482,949 $(18,012) $805,775
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1993 $6,000 $149,079 $185,759 $482,949 $(18,012) $805,775
Net income 23,763 23,763
Excess of additional
pension liability over
unrecognized prior
service cost (Note P) (432) (432)
Common stock issued 1,485 4,907 6,392
Conversion of
preferred stock (Note O) (6,000) 1,200 4,800
ESOP payment 2,800 2,800
Cash dividends
Common stock ($1.50 per share)(1) (22,618) (22,618)
Convertible
preferred stock ($0.54 per share) (90) (90)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 $151,764 $195,466 $483,572 $(15,212) $815,590
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 does
not represent a change in the Corporation's dividend policy, but rather a
change only in the timing of the dividend declaration.
See notes to consolidated financial statements.
43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
GENERAL
The Corporation's accounting and reporting policies conform with generally
accepted accounting principles, Securities and Exchange Commission regulations
and predominant practices within the banking and savings and loan industries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Corporation include the
accounts of the parent company and its subsidiaries. All significant
inter-company accounts and transactions are eliminated in the consolidated
financial statements.
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 retained earnings from this subsidiary included in
consolidated retained earnings was approximately $184 thousand and $30 thousand
at December 31, 1993 and 1992, respectively.
INVESTMENT AND TRADING SECURITIES
Management determines the appropriate classification of securities at the
time of purchase. Investment securities that management has the ability and
intent, at the time of purchase, to hold to maturity are classified as
investments held-to-maturity and accounted for at amortized cost, adjusted for
amortization of premiums and discounts using the interest method.
Beginning in 1992, investment securities purchased to be held for an
indefinite period of time are classified as investments available-for-sale and
carried at the lower of aggregate cost or market value. These securities are
intended to be used by management to respond to unforeseen circumstances or
future conditions which may necessitate the sale of these securities to
mitigate the effects of such events. Gains and losses from the sale of
securities are computed using the specific identification method.
Mortgage backed securities are subject to prepayment risk. The premium and
discount accounts and, therefore, the effective annual yield of those
securities, are adjusted at least annually for actual prepayment experience.
Investment securities which are purchased for the purpose of selling in the
short-term to generate a profit for the Corporation are classified as trading
securities. Trading securities are stated at market value. Gains and losses are
included in non-interest income. Net interest earned on trading securities is
included in interest income.
The Financial Accounting Standards Board has issued 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. The Statement is
effective for financial statements with fiscal years beginning after December
15, 1993. The Corporation will adopt this Statement in the first quarter of
1994 and does not expect that adoption will have a material adverse effect on
its financial condition.
FINANCIAL FUTURES, OPTIONS, INTEREST RATE CAPS, FOREIGN EXCHANGE AND FORWARD
CONTRACTS
The Corporation is party to a variety of financial futures, options,
interest rate caps, foreign exchange and forward contracts in its trading
activities and in the management of its interest rate exposure.
Financial futures, options, caps, forward contracts, and foreign exchange
contracts used in trading activities are carried at market value. Realized and
unrealized gains and losses are included in non-interest income.
Realized and unrealized gains and losses on financial futures and forward
contracts designated and effective as hedges of interest rate exposure are
deferred and recognized as interest income or interest expense over the lives
of the hedged assets or liabilities.
INTEREST RATE SWAP AGREEMENTS
The Corporation enters into interest rate swap agreements as a means of
managing its interest rate exposure. The differential paid or received on
interest rate swap agreements is recorded as an adjustment to interest income
or interest expense on the related asset or liability being hedged. Realized
gains and losses from the early termination of swap agreements are deferred and
amortized through the remaining term of the original hedge period.
LOANS AND LEASE FINANCING
Loans are stated at the principal amount outstanding, net of any unearned
discount (including deferred fees and costs), if any, except for mortgages held
for sale, which are carried at the lower of cost or market value.
Interest income on loans is accrued based on the principal amount
outstanding. Generally, loan origination and commitment fees, certain direct
loan origination costs, and purchase premiums and discounts are deferred and
amortized as an adjustment to yield over the life of the loan. Fees that adjust
the yield on the underlying loan are included in interest on loans and lease
financing. Fees for loan related services are included in non-interest income.
44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans are placed in a non-accrual category generally when over 90 days past
due, or sooner when there is serious doubt as to the collectability of future
interest or principal. When loans are placed in non-accrual, the related
interest receivable is reversed against interest income of the current period.
Cash interest payments received on non-accrual loans are generally applied as a
reduction of the principal balance. Loans are removed from non-accrual and
returned to a performing loan status at their then current carrying value when
they become current as to both principal and interest and when doubt no longer
exists as to the collectability of principal or interest.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The allowance for possible credit losses is available for future loan
charge-offs. The allowance is increased by a provision in the income statement
and by recoveries on items previously charged off.
The allowance is decreased as loans are charged off. A charge-off, in whole
or in part, occurs once a probability of loss has been determined, with
consideration given to such factors as the customer's financial condition and
underlying collateral.
The provision for possible credit losses is based upon management's estimate
of the amount necessary to maintain the allowance at a level adequate to
provide for probable and estimable losses inherent in the loan and lease
portfolio. Management's estimate is based upon evaluations of individual loans
and concentrations of credit risk, historical charge-offs, levels of
non-accrual loans, current economic conditions industry analyses, and other
pertinent factors. In addition, reviews are performed by the responsible
lending officers, the internal loan review staff and credit administration
management who consider, among other things, the effects of current
developments with respect to the borrower's financial condition, changes in
economic conditions and results of examinations by bank regulatory authorities.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is recognized over the estimated useful lives of the
assets. Leasehold improvements are amortized over the term of the lease or the
estimated useful life of the improvements, whichever is shorter. Depreciation
and amortization are calculated using the straight-line method.
The Corporation and its subsidiaries lease certain premises and equipment.
Capital leases are accounted for and amortized as owned property, with lease
payments accounted for as interest and debt reduction.
PROPERTY FROM DEFAULTED LOANS
Property from defaulted loans is comprised of foreclosed properties where
the bank has actually received title, or which are in-substance foreclosures.
Loans are classified as in-substance foreclosures when the debtor has little or
no remaining equity in the collateral considering its fair value; where
repayment can only be expected to come for the operation or sale of the
collateral; and where the borrower formally or informally abandoned control of
the collateral to the Corporation, or retained control of the collateral but it
is doubtful that the debtor will be able to rebuild equity in the collateral.
In April of 1992, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 92-3, Accounting for Foreclosed
Assets. The Statement requires that foreclosed assets held for sale be carried
at the lower of (a) cost or (b) fair value less estimated costs to sell. The
Corporation adopted SOP 92-3 in 1992, and the effect of this change resulted in
an increase in defaulted loan expense of $1.6 million and $1.2 million in 1993
and 1992, respectively.
Foreclosed properties and in-substance foreclosures are recorded at the
lower of the recorded investment in the related loan or the fair market value
of the foreclosed property less estimated costs to sell the asset. Fair market
value of such assets is determined based on current independent market
appraisals and other relevant factors. At the time of foreclosure and
classification as property from defaulted loans, any excess of the recorded
investment in the related loan over the fair market value of the foreclosed
collateral is recorded as a charge-off to the allowance for possible credit
losses. Subsequent to classification as property from defaulted loans,
valuation write-downs, net operating expenses (including rental or lease
income, legal fees and real estate taxes), and gains or losses from sales of
property from defaulted loans are charged or credited to defaulted loan
expense, while costs related to improving such real estate are capitalized up
to the estimated fair value of the property less estimated selling costs.
Capital improvement costs in excess of the estimated fair market value less
estimated selling costs are charged to defaulted loan expense.
MORTGAGE BANKING ACTIVITIES
The Corporation's consolidated subsidiary, Independence One Mortgage
Corporation (IOMC), originates, purchases, sells and services residential
mortgage loans. Residential mortgage loans held for sale are carried at the
lower of cost or market, determined on a net aggregate basis.
IOMC is party to forward contracts in the management of its interest rate
exposure. Hedge gains and losses are deferred and recognized upon sale and
delivery of the underlying mortgage loans and are included in gains from the
sale of mortgage loans.
45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gains or losses on sales of mortgage loans are recognized at the time of
sale and are determined by the difference between net sales proceeds, adjusted
for excess servicing fees (ESF), and the carrying value of loans sold, adjusted
for deferred hedge gains or losses.
IOMC generally sells loans with servicing rights retained.
Mortgage servicing fee income is generally recorded when received.
Purchased mortgage servicing rights (PMSR) represent the cost of purchasing
the right to service mortgage loans originated by others. ESF represent the
present value of the difference between estimated future net servicing fee
income retained when mortgage loans are sold and normal servicing fee income.
PMSR and ESF are recorded as assets and amortized in proportion to, and over
the period of, estimated net servicing income. The expected life of the
estimated net servicing income is based, in part, on the expected prepayment
rate of the underlying mortgages.
Periodically during the year, the Corporation reviews the carrying value of
PMSR and ESF assets for impairment due to changes in prepayment and other
valuation assumptions, and makes necessary adjustments to the carrying value.
The impairment analyses are performed for individual mortgage pools with
similar economic characteristics using a discounted cash flow method.
IOMC establishes and maintains escrow and custodial funds. These funds are
segregated in special bank accounts which are held on deposit with Michigan
National Bank (a wholly owned subsidiary of the Corporation) and are therefore
reflected in the consolidated statement of condition.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued SFAS No.
109, Accounting for Income Taxes which superseded SFAS No. 96, Accounting for
Income Taxes. Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. To the extent
that current available evidence about the future raises doubt about the
realization of a deferred tax asset, a valuation allowance must be established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Effective January 1, 1992, the Corporation adopted SFAS No. 109 and has
reported the cumulative effect of that change in method of accounting for
income taxes in the 1992 consolidated statement of income.
The Corporation previously used the asset and liability method under SFAS
No. 96. Under the asset and liability method of SFAS No. 96, deferred tax
assets and liabilities were recognized for all events that had been recognized
in the financial statements. Under SFAS No. 96, the future tax consequences of
recovering assets or settling liabilities at their financial statement carrying
amounts were considered in calculating deferred taxes. Generally, SFAS No. 96
prohibited consideration of any other future events in calculating deferred
taxes.
EARNINGS PER SHARE
Primary and fully diluted earnings per common share are based on the
weighted average number of common shares outstanding in each year, plus shares
representing the dilutive effect of outstanding stock options and Cancelable
Mandatory Stock Purchase Contracts (Equity Contracts). The dilutive effect of
outstanding stock options and Equity Contracts is calculated using the Treasury
Stock Method in accordance with Accounting Principles Board Opinion No. 15,
Earnings Per Share.
For periods prior to April, 1993, the weighted average number of common
shares outstanding were further adjusted for the assumed conversion of
convertible preferred shares outstanding in accordance with the preferred share
conversion formula. On April 2, 1993, all of the convertible preferred shares
were converted and 120,000 shares of common stock were issued in the
conversion.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of estimated fair values of financial instruments, whether
or not recognized in the statements of condition, for which it is practicable
to estimate such values. In cases where quoted market prices are not available,
fair value estimates are based on the present value of expected future cash
flows or other valuation techniques, all of which may be significantly affected
by the assumptions used. Therefore, these values may not be substantiated by
comparison to independent markets and are not intended to reflect proceeds that
may be realized from a current exchange. Furthermore, the Corporation does not
intend to dispose of a significant portion of financial instruments, and thus,
any aggregate unrealized gains or losses should not be interpreted as a
forecast of future earnings and cash flows.
46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 107 excludes certain financial instruments from its disclosure
requirements, such as obligations for pension and other postretirement
benefits, deferred compensation arrangements and leases. In addition,
disclosure of fair value estimates are not required for non-financial assets
and liabilities, such as fixed assets and intangibles. Fair value estimates,
methods and assumptions are set forth, as applicable, throughout the following
notes to financial statements.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has 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 currently utilized by the Corporation for
short-term disability and health insurance continuation. The Statement is
effective for financial statements with fiscal years beginning after December
15, 1993. The Corporation will adopt this Statement in the first quarter 1994
and the estimated effect of adoption of this new accounting standard in 1994 is
an increase in personnel benefit expense of approximately $1.5 million.
The Financial Accounting Standards Board has issued SFAS No. 114, Accounting
by Creditors for Impairment of a Loan. This Statement addresses the accounting
by creditors for impairment of certain loans. It is applicable to all impaired
loans, uncollateralized as well as collateralized, except large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of cost or
fair value, leases and debt securities. A loan is impaired when, based on the
current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. It requires that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. This
Statement applies to financial statements for fiscal years beginning after
December 15, 1994. The Corporation plans to adopt this Statement in 1995.
Management's initial estimates indicate that the effect of implementing the
foregoing, in today's interest rate environment, will not be material to the
Corporation's earnings or financial condition.
The American Institute of Certified Public Accountants has issued SOP No.
93-6, Employer's Accounting for Employee Stock Ownership Plans. This Statement
provides guidance on employer's accounting for employee stock ownership plans
(ESOP), both leveraged and non-leveraged. The Corporation has a leveraged ESOP
whereby employer debt was issued to the ESOP to purchase shares of stock of the
Corporation. Specifically the Statement requires that compensation expense
shall be recognized based on the fair value of the shares of stock committed to
be released by the ESOP to plan participants. Additionally, this Statement
changes the computation of earnings per share (EPS) for the number of shares
held by the ESOP. Only shares that have been committed to be released to
participants shall be considered outstanding in the calculation of EPS. This
Statement is effective for fiscal years beginning after December 15, 1993, and
applies to shares acquired by ESOP's after December 31, 1992, but not yet
committed to be released to participants. The ESOP has not purchased any shares
of stock of the Corporation subsequent to December 31, 1992. This statement
will have no effect on the Corporation's net income or earnings per share until
such future time as additional shares of stock are purchased by the ESOP.
A discussion regarding the new SFAS No. 115 is included under the heading
"Investment and Trading Securities" in Note A.
47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. Acquisitions and Sale
Effective October 1, 1993, the Corporation sold substantially all the assets
and certain liabilities of BancA Corporation, a Dallas, Texas computer software
company. The assets were previously written down during the second quarter of
1993 with a $4.6 million charge to income and no additional loss resulted from
the sale transaction. The Corporation had acquired all the assets and assumed
certain liabilities of BancA Corporation on July 29, 1992, for a cash purchase
price of $3.5 million.
On April 1, 1993, the Corporation completed the acquisition of all of the
outstanding stock of Peoples National Bank, Pasadena, Texas; Peoples Bank,
Houston, Texas; and Community National Bank, Friendswood, Texas and the banks
were merged into Lockwood. The cash purchase price for the acquisition was
$16.7 million. The transaction was accounted for under the purchase method and
goodwill of $4.1 million was recognized in the acquisition, which is being
amortized over 15 years on a straight-line basis.
On June 30, 1992, Michigan National Bank (MNB), the principal subsidiary of
the Corporation, acquired 3,047 merchant credit card processing contracts from
Central Fidelity Bank of Richmond, Virginia for a cash purchase price of $1.4
million. Under the terms of the acquisition agreement, MNB will assume all the
merchant transaction processing responsibilities of Central Fidelity Bank and
both Central Fidelity Bank and MNB will conduct joint marketing efforts.
On April 13, 1992, a subsidiary of IOBOC purchased a mortgage warehouse
lending business and other net assets having a total book value of
approximately $200 million from First Collateral Services, Inc., a subsidiary
of Honfed Bank, FSB. The assets were purchased for cash equal to their book
value plus a $400,000 premium. Subsequent to the acquisition, IOBOC's
subsidiary is doing business as First Collateral Services, Inc. (FCSI).
On October 31, 1991, MNC acquired Lockwood Banc Group, Inc. for a cash
purchase price of $17.3 million. The fair market value of the assets acquired
and liabilities assumed totaled $225.9 million and $213.3 million,
respectively. The transaction was accounted for under the purchase method.
Goodwill of $4.7 million was recognized in the acquisition and is being
amortized over 15 years on a straight-line basis.
The Corporation recently announced its intent to sell its two Texas
subsidiary banks, FSB&T and Lockwood (the holding company of Lockwood Bank),
and does not expect to recognize any losses on the intended sale(s).
C. Cash and Due From Banks
Included in cash and due from banks are amounts required to be maintained by
subsidiary banks to comply with deposit reserve requirements of bank regulatory
authorities. These amounts were $216 million and $186 million at December 31,
1993 and 1992, respectively.
48
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. Investment Securities
The following summarizes the book value, estimated market value, and gross
unrealized gains and losses of investment securities at December 31 of each
year. The carrying amounts for short-term investments approximate market value
because they mature in 90 days or less. The estimated market value of
longer-term investments is based on quoted market prices or bid quotations
received from securities dealers.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(in thousands) 1993
- --------------------------------------------------------------------------------------------
ESTIMATED GROSS GROSS
BOOK MARKET UNREALIZED UNREALIZED
VALUE VALUE GAINS LOSSES
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities held-to-maturity:
U.S. Treasury, Government
agencies and corporations $ 275,484 $ 279,823 $ 4,351 $ 12
State and municipal 38,918 41,087 2,181 12
Mortgage-backed securities 983,765 1,007,139 25,900 2,526
Other securities 15,606 15,608 2
- --------------------------------------------------------------------------------------------
Total 1,313,773 1,343,657 32,434 2,550
Investment securities
available-for-sale:
Treasury Bills 893 893
Mortgage-backed securities
- --------------------------------------------------------------------------------------------
Total 893 893
- --------------------------------------------------------------------------------------------
Trading account securities 70,113 70,113
- --------------------------------------------------------------------------------------------
Total Securities $1,384,779 $1,414,663 $32,434 $2,550
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------
(in thousands) 1992
- ------------------------------------------------------------------------------------------------
ESTIMATED GROSS GROSS
BOOK MARKET UNREALIZED UNREALIZED
VALUE VALUE GAINS LOSSES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities held-to-maturity:
U.S. Treasury, Government
agencies and corporations $ 198,348 $ 220,284 $21,936
State and municipal 42,928 45,031 2,103
Mortgage-backed securities 1,049,303 1,067,684 19,007 $626
Other securities 15,095 15,099 4
- ------------------------------------------------------------------------------------------------
Total 1,305,674 1,348,098 43,050 626
Investment securities
available-for-sale:
Treasury Bills 24,972 24,972
Mortgage-backed securities 164,908 167,979 3,071
- ------------------------------------------------------------------------------------------------
Total 189,880 192,951 3,071
- ------------------------------------------------------------------------------------------------
Trading account securities 79,668 79,668
- ------------------------------------------------------------------------------------------------
Total Securities $1,575,222 $1,620,717 $46,121 $626
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
Investment securities with a book value of $656 million at December 31, 1993,
were pledged to collateralize deposits of public funds and for other purposes
required or permitted by law; at December 31, 1992, the corresponding amount
was $603 million. In addition, at December 31, 1993 and 1992, mortgage-backed
investment securities with a book value of $14 million (market value of $15
million), and $153 million (market value of $160 million), respectively, were
pledged under repurchase agreements. Mortgage-backed investment securities with
a book value of $133 million (market value of $141 million) were collateralized
under dollar repurchase agreements at December 31, 1992.
Interest and dividend income from investment securities at December 31 of each
year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(in thousands) 1993 1992 1991
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury, Government agencies
and corporations $14,784 $ 9,569 $ 10,154
State and municipal 2,461 4,056 3,214
Mortgage-backed securities 74,083 112,705 122,922
Other securities 826 781 1,015
- ------------------------------------------------------------------------------------------------
Total $92,154 $127,111 $137,305
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Income from other securities included dividends of $0.6 million for the years
ended December 31, 1993, and December 31, 1992, and $0.8 million for the year
ended December 31, 1991.
</TABLE>
For the years ended December 31, 1993, 1992 and 1991, the Corporation
received proceeds of $227.5 million, $292.9 million and $166.0 million,
respectively, from sales of investment securities. The Corporation realized
gross gains of $6.6 million, $12.3 million and $2.8 million as of December 31,
1993, 1992 and 1991, respectively, from sales of investment securities. Gross
realized losses from sales of investment were $600 thousand, $25 thousand and
$140 thousand for the years then ended.
The remaining balance of security gains (losses) for each of the three years
ended December 31, 1993, consisted of non-sales related activity, including
write-offs of premiums and discounts associated with early pay-offs of
securities.
49
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
D. Investment Securities (continued)
- -------------------------------------------------------------------------------
The following summarizes the remaining maturity and average yield of the
investment securities portfolio at December 31 of each year.(1)(2)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
ESTIMATED ESTIMATED ESTIMATED
BOOK MARKET AVERAGE BOOK MARKET AVERAGE BOOK MARKET AVERAGE
VALUE VALUE YIELD VALUE VALUE YIELD VALUE VALUE YIELD
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury, Government
agencies and corporations
One year or less $158,772 $ 159,997 5.24% $ 28,858 $ 45,399 6.02% $ 67,336 $ 68,232 7.80%
After one year through
five years 110,923 113,465 5.74 157,407 162,228 6.69 92,386 97,230 8.09
After five years through
ten years 5,789 6,361 7.40 12,083 12,657 7.17 19,184 20,451 8.14
After ten years
- -----------------------------------------------------------------------------------------------------------------------------------
Total 275,484 279,823 5.49 198,348 220,284 6.62 178,906 185,913 7.99
- -----------------------------------------------------------------------------------------------------------------------------------
State and municipal
One year or less 1,887 1,908 9.43 1,733 1,769 11.12 5,726 5,765 10.63
After one year through
five years 25,389 26,438 9.21 28,537 29,717 9.40 24,518 25,185 9.68
After five years through
ten years 8,009 8,619 9.20 8,025 8,498 9.90 13,300 13,855 9.53
After ten years 3,633 4,122 9.61 4,633 5,047 10.31 8,470 8,990 10.28
- -----------------------------------------------------------------------------------------------------------------------------------
Total 38,918 41,087 9.26 42,928 45,031 9.66 52,014 53,795 9.84
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed
securities(3)
One year or less 159,060 159,947 6.08 114,665 115,840 7.86
After one year through
five years 796,104 818,043 6.73 694,035 699,463 7.62 1,004,553 1,048,567 8.96
After five years through
ten years 28,601 29,149 6.67 240,603 252,381 8.11 384,323 410,039 8.34
After ten years
- -----------------------------------------------------------------------------------------------------------------------------------
Total 983,765 1,007,139 6.62 1,049,303 1,067,684 7.76 1,388,876 1,458,606 8.79
- -----------------------------------------------------------------------------------------------------------------------------------
Other securities
One year or less 500 502 4.80 7,171 7,175 3.64 5,339 5,339 1.44
After one year through
five years 3,000 3,000 6.67 2,540 2,540 7.84
After five years through
ten years 500 500 8.00
After ten years 12,106 12,106 5.40 7,924 7,924 6.00 7,924 7,924 6.00
- -----------------------------------------------------------------------------------------------------------------------------------
Total 15,606 15,608 5.62 15,095 15,099 4.88 16,303 16,303 4.86
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment
securities(3) $1,313,773 $1,343,657 6.45% $1,305,674 $1,348,098 7.61% $1,636,099 $1,714,617 8.70%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following summarizes the remaining maturity and average yield of securities
available-for-sale at December 31.(1)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
ESTIMATED ESTIMATED
BOOK MARKET AVERAGE BOOK MARKET AVERAGE
VALUE VALUE YIELD VALUE VALUE YIELD
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury,
Government agencies
and corporations
One year or less $893 $893 3.14% $ 24,916 $ 24,916 3.29%
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities
One year or less 15,308 15,459 9.24
After one year through
five years 73,775 72,771 5.82
After five years through
ten years 75,881 79,799 8.14
- -----------------------------------------------------------------------------------------------------------------------------------
Total 164,964 168,029 7.21
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities
available-for-sale $893 $893 3.14% $189,880 $192,945 6.70%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Weighted average yields are computed by dividing the annual income by the
security balance outstanding at December 31 of each year. Such computations
for states of the U.S. and political subdivisions are based on fully taxable
equivalent income using a federal tax rate of 34% in each year.
(2) The average maturity of the total investment securities portfolio was
approximately 2.3, 3.1 and 3.8 years at December 31, 1993, 1992 and 1991,
respectively.
(3) The weighted average expected life was used to determine the maturity of
mortgage-backed securities.
50
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
E. FDIC Assistance
- --------------------------------------------------------------------------------
Relevant terms of the Assistance Agreement are as follows:
- - The FDIC issued a 10 year $808 million negative net worth note,
(subsequently adjusted to $811 million based on a beginning balance sheet audit
completed in 1990), to bring IOBOC's equity deficit to zero. The note bears
interest at a rate tied to the FHLBB COF. The interest rate is on a downward
sliding scale starting at 200 Basis Points over the FHLBB COF in 1989 and
finishing at 50 Basis Points over in 1998. The note agreement specifies
consecutive quarterly interest payments during the term of the note. The entire
remaining principal balance is due with the final interest payment on December
31, 1998.
- - The terms of the note allow prepayment of the principal outstanding
at the end of each respective year according to the following schedule; 10% in
1991, 23% in 1992, 43% in 1993, 57% in 1994, 68% in 1995, 76% in 1996 and 100%
in both 1997 and 1998. In addition, under certain circumstances defined in the
Assistance Agreement, the FDIC may elect to prepay the entire outstanding
balance with 90 days prior written notice beginning on January 1, 1990. The
relevant circumstances did not exist at February 15, 1994, and the FDIC has
therefore, not made this election.
- - The FDIC agreed to provide certain assistance for a period of ten years,
except for Item 1 below which has expired. The nature and extent of assistance
is as follows:
1. Capital Loss Coverage and Guaranteed Yield on Covered Assets. In
addition, the Assistance Agreement requires that any remaining Covered Assets
be written-down to their Immediately Realizable Value by December 31, 1992,
and IOBOC reimbursed for the write-down amount. This process was completed
during the first quarter of 1993.
The following summarizes IOBOC's Covered Assets and FDIC assistance at December
31, 1992.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(in thousands) 1992
- ------------------------------------------------------------------------------------------------------
ESTIMATED FAIR FDIC CARRYING
MARKET VALUE ASSISTANCE VALUE
<S> <C> <C> <C>
Real estate-mortgage loans $ 3,826 $ 951 $ 4,777
Installment loans 2 11 13
Real estate-owned 7,598 6,136 13,734
- ------------------------------------------------------------------------------------------------------
Total $11,426 $7,098 $18,524
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
The Corporation recognized FDIC Capital Loss Coverage of $7.1, $57.9 and $111.1
million, for the years ended December 31, 1993, 1992 and 1991, respectively.
</TABLE>
2. Cost of funds subsidies on all fixed term deposit liabilities of IOBOC at
the acquisition date which mature after December 31, 1989. The subsidy will
limit interest expense on those deposits to the FHLBB COF. In addition, an
interest subsidy of approximately 6% is paid on a long-term debt obligation
of IOBOC. This obligation was paid-off during 1992.
3. Indemnification for unreserved claims and challenges to the transaction.
- - Under the Assistance Agreement, IOBOC agreed to share realized tax
benefits with the FDIC. The FDIC receives 25% of these benefits until the
Corporation has realized a return of its aggregate investment plus a 20%
compound return on investment, thereafter, the tax benefits are shared
equally. The FDIC shared tax benefits at a 25% rate each year since the
acquisition. Tax benefits expected relate primarily to the tax-exempt status of
all FDIC assistance and "built in tax losses" resulting from sales of Covered
Assets with tax bases in excess of assigned values. Reference Note V for a
discussion of contingencies related to the tax deductibility of certain of
these tax benefits.
- - The FDIC has the right to receive a payment at March 31, 1999, of up
to 20% of the sum of IOBOC earnings through December 31, 1998, plus the
Corporation's equity capital investment, as defined. At its option, IOBOC may
satisfy this obligation at any time by payment of $15 million plus interest
from December 31, 1988 to the date of exercise at a rate of 10% compounded
annually. Currently, the Corporation expects to pay an amount less than the
maximum of $15 million plus interest at March 31, 1999, and has accrued $9.7
million in connection with this right.
51
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
F. Loans and Lease Financing
- --------------------------------------------------------------------------------
The following summarizes loans and lease financing (excluding Covered Assets)
at December 31 of each year.
<TABLE>
- ----------------------------------------------------------------------------------------------
<CAPTION>
(in thousands) 1993 1992
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural secured by real estate $ 971,917 $ 977,616
Other commercial, financial and agricultural 2,373,707 2,378,753
Commercial real estate-mortgage 1,238,177 1,168,669
Residential real estate mortgages held for sale 583,056 670,800
Residential real estate mortgages held for investment 465,904 578,909
Short-term commercial real estate-construction 159,594 222,819
Installment 780,532 648,099
Lease financing 116,998 82,728
- ----------------------------------------------------------------------------------------------
Total 6,689,885 6,728,393
Unearned income (18,619) (15,869)
Allowance for possible credit losses (190,992) (175,471)
- ----------------------------------------------------------------------------------------------
NET LOANS AND LEASE FINANCING $ 6,480,274 $ 6,537,053
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
The estimated fair value of the Corporation's loan portfolio (excluding lease
financing) was $6.5 billion and $6.6 billion at December 31, 1993 and 1992,
respectively.
The fair value of performing variable rate loans was based on their carrying
values adjusted by an estimate of losses inherent in the loan portfolio.
The fair value of performing fixed-rate loans was segregated by loan type
(e.g., commercial, commercial real estate-mortgage, commercial real
estate-construction, installment, and residential mortgage held for investment)
and estimated through a discounted cash flow calculation that applies interest
rates currently being offered for new loans with similar terms and conditions.
The fair value of performing fixed-rate residential mortgage loans held for
sale was estimated on the basis of existing forward rate commitments to sell
such loans.
Fair value of non-accrual loans (fixed and variable) were generally
estimated based on recent appraisals of the underlying collateral or carrying
value adjusted for potential credit loss.
- --------------------------------------------------------------------------------
G. Allowance for Possible Credit Losses
- --------------------------------------------------------------------------------
The following summarizes the activity in the allowance for possible credit
losses.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(in thousands) 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $175,471 $154,638 $137,200
Additions
Provisions charge to expense 40,000 76,670 86,500
Recoveries 8,650 8,372 9,963
Subsidiaries purchased 878 1,099
Allocation of cash discount
received from Covered Asset settlement 3,000
- -----------------------------------------------------------------------------------------------------------
224,999 236,680 234,762
Less
Amounts charged-off 34,007 61,209 80,124
- -----------------------------------------------------------------------------------------------------------
Balance, end of year $190,992 $175,471 $154,638
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. Significant Concentrations of Credit Risk
The Corporation grants commercial, residential and installment loans primarily
to customers in Michigan. The Corporation has limited its credit risk by
establishing guidelines limiting aggregate outstanding commitments and loans to
particular borrowers, industries and geographic areas. Compliance with these
guidelines is monitored by the Credit Policy Committee.
Although the Corporation has a diversified loan portfolio, management has
identified the following as significant concentrations of credit risk as of
December 31, 1993 and 1992.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1993 1992
- -----------------------------------------------------------------------------------------
GEOGRAPHIC CONCENTRATIONS
<S> <C> <C>
Commercial real estate and commercial
loans outstanding to:
Michigan borrowers 77% 78%
INDUSTRY CONCENTRATIONS
Commercial loans by industry:
Finance, insurance and real estate 28% 23%
Service 18 19
Retail Trade 13 17
Manufacturing 11 12
Automotive 8 11
- -----------------------------------------------------------------------------------------
Certain prior period amounts were restated to conform to current period
presentation.
The Corporation had highly leveraged transactions outstanding of approximately
$92 million and $108 million as of December 31, 1993 and 1992, respectively.
</TABLE>
I. 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. These financial instruments include: commitments to extend credit,
loans sold with recourse, standby and other letters of credit, forward and
futures contracts, foreign currency futures, foreign exchange contracts,
options, interest rate swap contracts and interest rate caps. These financial
instruments involve, to varying degrees, elements of credit and market risk in
excess of the amount recognized in the statement of condition. The contract or
notional amount of those instruments expresses the extend of involvement the
Corporation has in particular classes of financial instruments.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
The following summarizes the financial instruments with off-balance sheet risk at December 31 of each year.
- ------------------------------------------------------------------------------------------------------------------
CONTRACT OR NOTIONAL AMOUNT
(in thousands) 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $3,431,721 $2,834,039
Standby and other letters of credit 221,580 194,077
Loans sold with recourse 115,681 202,212
Financial instruments whose contract or notional
amounts exceed the amount of credit risk:
Forward contracts
Commitments to sell 701,478 709,467
Foreign exchange contracts 4,565 11,686
Options
Commitments to sell
Interest rate swap contracts 2,514,207 1,809,673
Interest rate caps 10,000 30,585
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. Financial Instruments with Off-Balance Sheet Risk
The risks associated with these products include credit risk, market risk and
currency rate risk.
CREDIT RISK
Credit risk is the risk that a counterparty may fail to meet its
obligations under the contract. The Corporation manages credit risk by limiting
and monitoring the amount of contracts by customer and/or broker-dealer. These
limits are established through an evaluation of the customer's and/or
broker-dealer's credit worthiness on a case-by-case basis, and collateral is
required to support financial instruments when it is deemed necessary.
MARKET AND CURRENCY RATE RISK
Market and currency rate risk are caused by changes in the market value as a
result of movements in interest and currency exchange rates. The contract or
notional amount should not be considered a measure of the risk for futures,
forwards, foreign exchange contracts, options, interest rate swaps and interest
rate cap agreements because the present value of the replacement cost, at
current interest rates, of the contracts generally is much smaller than the
contract or notional amount.
The risk as of December 31, 1993, is further discussed below for each
instrument.
COMMITMENTS TO EXTEND CREDIT
The Corporation enters into contractual commitments to extend credit,
normally with fixed expiration dates or termination clauses, at specified rates
and for specific purposes.
Commercial customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Corporation's commitments to extend credit to commercial customers are
contingent upon the customers maintaining specific credit standards at the time
of loan funding. At December 31, 1993 and 1992, respectively, the Corporation
had entered into commitments to lend to commercial customers in the amounts of
approximately $2.9 billion and $2.2 billion. The Corporation does not expect
all of these outstanding commitments to be drawn upon and, therefore, the total
commitment amounts do not necessarily represent future cash requirements. The
estimated fair value of commitments to extend credit was $29 million and $22
million at December 31, 1993 and 1992, respectively. These amounts are based on
fees currently charged to enter into similar agreements.
The Corporation also has contractual commitments to close and fund
residential mortgage loan applications within a specified period of time at
specified interest rates. Those loans that are closed and funded are then
delivered to outside investors under previously contracted commitments to sell
loans which are discussed below under Futures and Forward Agreements.
The Corporation had contractual commitments to close and fund residential
mortgage loan applications of approximately $530 million and $652 million as of
December 31, 1993 and 1992, respectively. Of the total commitments at December
31, 1993 approximately $139 million are for variable-rate loans and therefore
present no market value risk to the Corporation. The Corporation does not
expect all of the remaining $391 million of fixed-rate commitments to close.
Approximately $271 million of the fixed-rate commitments are hedged under
forward commitments to sell that have an estimated fair value of $0.4 million
at December 31, 1993, determined on the basis of the commitment price stated in
the forward agreements adjusted for changes in interest rates or credit risk if
any.
At December 31, 1992, the Corporation was hedging approximately $181 million
of commitments to fund fixed-rate residential loans with forward commitments to
sell that had an estimated fair value of $0.3 million.
STANDBY AND OTHER LETTERS OF CREDIT
Standby and other letters of credit obligate the Corporation to guarantee
the performance of a customer to a third party. These instruments frequently
are issued in support of corporate debt issuances. The Corporation's policies
generally require that standby and other letter of credit arrangements contain
security and debt covenants similar to those contained in loan agreements. The
credit risk involved in issuing standby letters of credit is essentially the
same as that involved in extending loan facilities to customers. Standby
letters of credit are considered in determining the adequacy of the allowance
for possible credit losses. The estimated fair value of standby and other
letters of credit was $3.9 million and $3.4 million at December 31, 1993 and
1992, respectively. The estimated fair value of the Corporation's standby and
other letters of credit was estimated on the same basis as that discussed above
for commitments to extend credit.
LOANS SOLD WITH RECOURSE
Prior to 1990, IOMC sold loans with recourse, either directly or indirectly,
for credit or other loss exposure reasons. Approximately $116 million and $202
million of such loans were still outstanding as of December 31, 1993 and 1992,
respectively. These transactions were recorded as sales with appropriate
reserves established for such losses. Actual losses to date have not been
significant.
54
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN EXCHANGE CONTRACTS
Foreign exchange contracts are entered into primarily for trading
activities. The risk in these contracts arises from the ability of the
counterparties to deliver under the terms of the contract. Also, market risk
arises from inherent fluctuations in currency exchange rates. The Corporation
had contract amounts of approximately $5 million and $12 million for trading
purposes as of December 31, 1993 and 1992, respectively. The estimated fair
value of foreign exchange contracts is determined by quoted market prices or
quotes from broker dealers. The estimated fair value of foreign exchange
contracts at December 31, 1993 and 1992, was $23 thousand and $57 thousand,
respectively.
FUTURES AND FORWARD CONTRACTS
Futures and forward contracts represent future commitments to purchase or
sell securities at a specified price and date. The Corporation uses futures and
forward contracts in connection with its trading activities as well as to hedge
its assets and liabilities. The Corporation mitigates its credit risk by
entering into futures and forward contracts through organized exchanges which
control who can purchase and sell such contracts.
The Corporation had approximately $701 million and $709 million in forward
rate agreements outstanding as of December 31, 1993 and 1992, respectively.
These agreements were commitments to sell loans to another party at a specified
price and specified date in the future. The risk associated with the forward
rate agreements arises if the Corporation is unable to deliver according to the
terms of the agreement. No losses occurred as a result of the forward rate
agreements outstanding as of December 31, 1992. As of January 31, 1994, 51% of
the forward rate agreements outstanding at December 31, 1993, had been
delivered without a loss to the Corporation. The remaining contracts are
expected to be delivered as follows: 36% in February, 9% in March and the
remaining 4% before the end of 1994. The Corporation does not anticipate any
material losses as a result of the forward rate agreements. The estimated fair
value of these instruments is discussed under Commitments to Extend Credit
above and in Note F.
INTEREST RATE SWAPS
Interest rate swaps obligate two parties to exchange periodic cash flows
based on two different rates of interest applied to the same notional principal
amount. The parties exchange cash flows of a fixed or floating rate based on
specified interest rate indices. The Corporation has entered into interest rate
swap agreements with third parties to hedge specific assets or liabilities and
to reduce the impact of changes in interest rates on its earnings. The
Corporation has entered into customer accommodation swap transactions which are
also used for hedging purposes. Additionally, certain of the Corporation's
interest rate swaps have a declining notional feature whereby the notional
balance is amortized over the life of the swap. The credit risk associated with
interest rate swap agreements revolves around the ability of the counterparty
to perform its payment obligation under the agreement. Credit exposure exists
at a particular point in time when an interest rate swap has a positive market
value. The Corporation minimizes its credit risk by performing normal credit
reviews on its swap counterparties. Additionally, this exposure is further
minimized by the amount of collateral value received from the counterparty when
it is deemed necessary.
At December 31, 1993 and 1992, the Corporation had interest rate swap
agreements hedging commercial loans with a total notional principal amount of
$2.0 billion and $1.8 billion respectively. Of the 1993 amount, approximately
$153 million were customer accommodation swaps. Those agreements effectively
hedged the Corporation's interest rate exposure associated with its prime-based
variable-rate commercial loans. At December 31, 1993 and 1992, the Corporation
had credit exposure on these interest rate swaps of $23 million and $39 million
respectively. Customer accommodation swaps represented approximately $1.3
million of the total credit exposure in 1993.
In addition to the swap agreements hedging commercial loans, at December 31,
1993, the Corporation had swap agreements outstanding with a notional principal
amount of approximately $541 million hedging its current production of
originated and purchased residential mortgage servicing. The terms of these
swap agreements require the Corporation to make monthly premium payments to the
counterparty which are determined on the basis of the underlying outstanding
unamortized notional principal of the swap agreement. The counterparty is
obligated to make payment to the Corporation in the event that interest rates
fall resulting in prepayment speeds that differ from anticipated prepayment
speeds. The payment amount is determined on the basis of a scheduled formula
and predetermined prepayment rate. The Corporation had no credit risk exposure
on these swap agreements at December 31, 1993.
55
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
The Corporation had interest rate swap agreements hedging its fixed-rate
deposit notes having a total notional principal amount of $25 million as of
December 31, 1992. These agreements effectively changed the interest rate
exposure on those fixed-rate liabilities to a variable rate.
It is the Corporation's policy to execute net counterparty payments on all
new swap transactions. At December 31, 1993,100% of the swap portfolio was on a
net payment basis. The estimated fair value of interest rate swaps is
calculated on a present value basis using current interest rates, taking into
consideration the credit worthiness of the counterparties. The Corporation's
estimate of fair value on its total swap portfolio was $35 million and $45
million at December 31, 1993 and 1992, respectively.
INTEREST RATE SWAPS OUTSTANDING (dollars in millions)
- ----------------------------------------------------------------------------
The following is a presentation of the Corporation's interest
rate swap activity for the years ended December 31.
<TABLE>
<CAPTION>
1993 1992
- ----------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $1,809,672 $1,834,107
New Transactions 1,523,549 515,693
Maturities (700,000) (455,000)
Amortization (119,014) (85,128)
- ----------------------------------------------------------------------------
Balance, end of year $2,514,207 $1,809,672
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
INTEREST RATE CAPS
Interest rate caps are similar to interest rate swaps with regard to hedging
interest rate risk; however, these contracts obligate the seller of the
interest rate cap to make payments if an interest rate index exceeds a
specified "capped" level. The Corporation was party to interest rate cap
agreements at December 31, 1993 and 1992, with a notional principal of $10
million and $31 million, respectively. If the interest rate index exceeds the
"capped" level, the cap will be utilized by the Corporation to hedge the
commercial loan portfolio by effectively changing the Corporation's interest
rate exposure on a fixed rate loan to a floating rate. As of December 31, 1993
and 1992, the estimated fair value of interest rate caps was zero.
OPTIONS
Options are contracts allowing, but not requiring, its holder to buy or sell
a specific financial instrument at a specified price during a specified time
period. An issued option obligates the seller of the contract to purchase or
sell a specific financial instrument at the option of the buyer of the
contract. As of December 31, 1992, the Corporation had issued options with
contract amounts of $5 million in connection with its trading activities. As
the issuer of options, the Corporation received a premium at the outset, and
then bears the risk of an unfavorable change in the price of the financial
instrument underlying the option. Options used in such trading activity are
carried at market value based on market quotes.
56
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
J. Premises and Equipment
- --------------------------------------------------------------------------------
The following summarizes premises and equipment, including
capital leases, at December 31 of each year.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992
(in thousands)
<S> <C> <C>
Land $ 34,543 $ 32,008
Buildings and improvements 160,235 151,303
Equipment 194,319 180,392
- --------------------------------------------------------------------------------
Total 389,097 363,703
Less accumulated depreciation and amortization 189,955 161,647
- --------------------------------------------------------------------------------
Premises and Equipment, Net $199,142 $202,056
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The following summarizes capital leases included in premises
and equipment, at December 31 of each year.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992
(in thousands)
- --------------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $8,722 $9,741
Equipment 64
- --------------------------------------------------------------------------------
Total 8,722 9,805
Less accumulated amortization 6,351 6,796
- --------------------------------------------------------------------------------
Capital Leases, Net $2,371 $3,009
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The following summarizes rent expense for operating leases,
at December 31 of each year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1993 1992 1991
- -------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Operating rent expense $13,960 $14,292 $15,638
Operating rental income 3,498 3,515 4,435
- ------------------------------------------------------------------------------------------------------
Net Operating Lease Expense $10,462 $10,777 $11,203
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
The following summarizes future minimum lease payments
under non-cancellable leases at December 31, 1993.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
CAPITAL OPERATING
YEAR (in thousands) LEASES LEASES
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
1994 $ 924 $ 8,754
1995 897 7,185
1996 850 6,246
1997 729 5,206
1998 633 3,653
Later years 2,617 8,009
- ------------------------------------------------------------------------------------------------------
Total Minimum Lease Payments 6,650 39,053
Less imputed interest and other costs 2,595
- ------------------------------------------------------------------------------------------------------
Net Minimum Lease Payments $4,055 $39,053
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
K. Property From Defaulted Loans and Discontinued Operations
- ----------------------------------------------------------------------------
The following summarizes property from defaulted loans at
December 31 of each year.
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1993 1992
- ----------------------------------------------------------------------------
<S> <C> <C>
Foreclosed property $ 61,428 $ 99,239
In-substance foreclosures 36,638 52,968
- ----------------------------------------------------------------------------
Balance, end of year $ 98,066 $ 152,207
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
The following summarizes the activity in property from
defaulted loans for the years ended December 31.
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) 1993 1992
- ----------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $152,207 $143,079
Additions:
Foreclosures 22,077 35,657
In-substance foreclosures 7,283 40,743
Capital improvements/Payoff of senior liens 7,076 4,068
Purchase of Subsidiary 698
Reductions:
Disposition of assets 65,744 42,487
Pay-downs 6,045 7,610
Writedowns 12,505 19,383
Transfer of in-substance foreclosed loans
to Non-performing Loan status 5,416 376
Other, net (1,565) (1,484)
- ----------------------------------------------------------------------------
Net activity (54,141) 9,128
- ----------------------------------------------------------------------------
Balance, end of year $ 98,066 $152,207
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
Certain prior period amounts have been restated for a change
in reporting classification to include real estate of discontinued operations.
58
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
L. Purchased Mortgage Servicing Rights and Capitalized Excess Service Fees.
- --------------------------------------------------------------------------------
The following summarizes the activity in the purchased mortgage servicing and
capitalized excess service fees for years ended December 31. In measuring the
net book value of PMSR and ESF at December 31, 1993, concensus estimates of
future prepayment rates, when applied to the Corporation's portfolio were 26%
for PMSR and 22% for ESF. Weighted average discount rates of 13.46% and 10.69%
were used in the December 31, 1993 valuation analysis for PMSR and ESF,
respectively. PMSR and ESF are discussed in Note A. Also, reference
Note W for a presentation of the originated portion of the Corporation's
mortgage servicing portfolio for each of the years ended December 31, 1993,
1992 and 1991.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PURCHASED MORTGAGE SERVICING RIGHTS 1993 1992 1991
- ------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $155,083 $187,316 $154,683
Additions
Purchased servicing 13,084 20,788 52,782
Less
Reductions due to servicing sale activity 13,780 21 493
Amortization
Scheduled amortization(1) 34,340 26,563 18,356
Amortization due to changes in prepayment assumptions 70,658 26,437 1,300
- ------------------------------------------------------------------------------------------------------
Subtotal amortization 104,998 53,000 19,656
- -------------------------------------------------------------------------------------------------------
Balance, end of year $ 49,389 $155,083 $187,316
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
CAPITALIZED EXCESS SERVICE FEES
- ------------------------------------------------------------------------------------------------------
(in thousands) 1993 1992 1991
- ------------------------------------------------------------------------------------------------------
Balance, beginning of year $22,277 $ 16,290 $ 11,324
Additions
Capitalized servicing due to loan sale activity 4,952 18,738 10,286
Less
Reductions due to servicing sale activity 1,434 3,266 2,191
Amortization
Scheduled amortization(1) 10,150 3,660 3,129
Amortization due to changes in prepayment assumptions 8,776 5,825
- ------------------------------------------------------------------------------------------------------
Subtotal amortization 18,926 9,485 3,129
- ------------------------------------------------------------------------------------------------------
Balance, end of year(2) $ 6,869 $ 22,277 $ 16,290
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Scheduled amortization represents annual amortization determined on the
basis of prepayment assumptions in effect at the beginning of the year.
(2) The estimated fair value of unamortized excess service fees, determined
on a discounted cash flow basis adjusted for estimated prepayments,
was $7.2 million and $26.5 million at December 31, 1993 and 1992,
respectively.
59
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
M. Short-Term Borrowings
- -------------------------------------------------------------------------------
The Corporation had up to $100 million of commercial paper available to
issue at December 31, 1993. The actual amount of commercial paper that can be
issued is dependent upon the Corporation's credit ratings and the availability
of back-up lines of credit. These notes have a maturity of not more than 270
days from date of issuance. The yield is dictated by the market for similarly
rated commercial paper. The Corporation had no commercial paper borrowings
outstanding at December 31, 1993 and 1992.
To support the commercial paper program, two lines of credit were
established during the second quarter of 1992 totaling $45 million which may be
used for a variety of general corporate purposes. The first facility is a $25
million, three year line of credit with a commitment period that expires April
30, 1995 and the second facility, a $20 million 364 day line of credit, which
was extended to March 10, 1994. The latter facility may be renewed upon consent
of the involved parties. The annual interest rate charged on advances is based
on the average outstanding advances during the interest period and may be a
floating rate, fixed CD rate, or a Eurodollar rate at the selection of the
Corporation. Facility fees are paid on the commitment (whether used or unused)
based upon the rating assigned to the Corporation by a mutually acceptable
rating agency.
In December 1990, IOBOC received approval from the Federal Home Loan Bank of
San Francisco (FHLB) for line of credit advances under the FHLB's credit
program. Advances must be fully collateralized and, based upon residential
mortgage collateral pledged at December 31, 1993, IOBOC's borrowing capacity
was approximately $14.0 million. Advances are available, at IOBOC's option, at
a variable-rate subject to daily repricing or at a fixed rate with terms of one
to six months. IOBOC did not have any advances outstanding as of December 31,
1993 or 1992.
The carrying value of the Corporation's total short-term borrowings
approximates fair value because of the short-term maturity of these
instruments.
- -------------------------------------------------------------------------------
A summary of short-term borrowings for the past two years is presented below.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(in thousands) 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and repurchase agreements at December 31
Outstanding $133,925 $245,873
Average interest rate 3.09% 3.22%
Average during year
Outstanding $302,110 $288,316
Average interest rate 3.12% 3.54%
Maximum month-end balance during the year $481,983 $381,915
- -------------------------------------------------------------------------------------------
Dollar repurchase agreements at December 31
Outstanding $158,359
Average interest rate 4.63%
Average during year
outstanding $ 38,835 $311,909
Average interest rate 4.53% 4.08%
Maximum month-end balance during the year $158,594 $472,713
- -------------------------------------------------------------------------------------------
Other borrowings at December 31
outstanding $159,368 $123,862
Average interest rate 3.12% 3.10%
Average during year
Outstanding $119,988 $131,427
Average interest rate 3.33% 3.98%
Maximum month-end balance during the year $200,457 $224,646
- -------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
N. Long-Term Debt
- --------------------------------------------------------------------------------
On November 10, 1988, the Corporation issued $55 million of 8% Redeemable
Subordinated Debentures (Debentures) due November 10, 1998. The Debentures were
issued with detachable Cancelable Mandatory Stock Purchase Contracts. Interest
is payable quarterly on the fifteenth day of March, June, September and
December. The Debentures are redeemable at the Corporation's option upon at
least 60 days written notice. Redemption prices, which are expressed as a
percentage of par and adjusted on November 10 of each year, are as follows:
103.56% in 1993, 102.67% in 1994,101.78% in 1995, 100.89% in 1996 and 100.00%
in 1997. The Debentures are subordinate and junior in right of payment to
certain present and future indebtedness of the Corporation.
The following table is a summary of long-term debt at December 31, 1993 and
1992. The floating rate note due through 1997 relates to the Employee Stock
Ownership Plan and Trust discussed in Note P. The $3.2 million
variable rate subordinated debentures due 1997 were assumed in connection with
the acquisition of Lockwood. The debentures are redeemable at the option of
Lockwood in whole at any time, or in part from time to time, upon notice to
holders of the debentures.
Annual maturities of consolidated long-term debt (exclusive of capital lease
obligations) for the five years ending December 31, 1994, through 1998,
respectively, are $3.8, $3.8, $3.8, $7.1 and $54.9 million.
The estimated fair value of the Corporation's Debentures was approximately
$57 million and $56 million at December 31, 1993 and 1992, respectively. The
amounts are based on the quoted market prices for similar issues available to
the Corporation for debt of the same remaining maturities. The remainder of the
Corporation's long-term debt (excluding capital leases) is estimated to
approximate market value.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(in thousands) 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Parent Company
Floating rate note due through 1997(1) $15,212 $18,012
8% Redeemable subordinated debentures due 1998 54,555 54,603
- -------------------------------------------------------------------------------------------
Total 69,767 72,615
Subsidiaries
Variable rate subordinated debentures due through 1997(2) 3,160 4,132
9.4% Subordinated notes paid October 1993 500
85% Mortgage note due through 1997 140 175
- -------------------------------------------------------------------------------------------
Total 3,300 4,807
Capital lease obligations(note J) 4,055 5,229
- -------------------------------------------------------------------------------------------
Total long-term debt $77,122 $82,651
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Interest rate is Marine Midland Bank prime rate.
(2) Interest rate is First City National Bank of Houston prime rate with a
maximum of 11% and a minimum of 7%.
61
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
O. Capital
- --------------------------------------------------------------------------------
The Corporation's Tier 1 Risk-Based Capital Ratio at December 31, 1993 and
1992, was 9.57% and 9.69%, respectively. The Total Risk-Based Capital Ratio was
11.73% and 11.91% at December 31, 1993 and 1992, respectively. The leverage
ratio at December 31, 1993 and 1992 was 7.56% and 7.24%, respectively. The
minimum ratios for a Well Capitalized financial institution as designated by
the FDIC Improvement Act of 1992 are 6.00%,10.00% and 5.00% for the Tier 1
Risk-Basked Capital Ratio, Total Risk-Based Capital Ratio and leverage ratio,
respectively.
Current banking laws and regulations place limitations on the ability of
national banks to pay cash dividends in order to prevent capital impairment.
The Corporation's subsidiary banks and subsidiary savings and loan are in
compliance with the regulatory dividend limitation guidelines as of December
31, 1993. At December 31, 1993 and 1992, the subsidiaries had retained earnings
of approximately $33.0 million and $51.3 million, respectively, available to
pay dividends to the parent company without regulatory approval.
On November 10, 1988, as part of the Subordinated Debenture (Debentures)
issue discussed in Note N, the Corporation issued $55 million of Cancelable
Mandatory Stock Purchase Contracts (Equity Contracts). The Equity Contract
holders are required to purchase $55 million of the Corporation's common stock
on May 10, 1998 at a price of $56.375 per share, but have the option to
purchase all or a portion of the shares covered by the contract prior to May
10, 1998 at the same price per share. Payment for these shares may be made in
cash or by surrender of the Debentures. The Equity Contract owners are not
shareholders and do not have any of the rights or privileges of common stock
shareholders. The number of common stock shares purchased pursuant to the
Equity Contracts was 1,773, none and 443 during the years 1993, 1992 and 1991,
respectively. All were purchased by the surrender of debentures.
On April 19, 1988, the Corporation adopted a Rights Plan (Plan) to ensure
that shareholders receive a fair price for their investment in the event of an
acquisition of the Corporation. Under the Plan, shareholders were issued one
Right for each of their shares which entitles them to purchase 1/100 of a share
of a new series of the Corporation's Series B Junior Participating Preferred
Stock.
The Rights, which expire in 1998, have an exercise price of $170 (subject to
adjustment) and will be exercisable only if a person or group acquires 20% or
more of the Corporation's common stock, announces a tender offer for 30% or
more of the common stock, or the Corporation's board of directors determines
that any person or group that has acquired 15% or more of the Corporation's
common stock is an "Adverse Person." The board of directors may redeem the
Rights at $.05 per Right prior to the occurrence of any of the above events.
If, after the occurrence of one of the above events, any entity becomes the
beneficial owner of 25% or more of the Corporation's common stock, other than
pursuant to certain tender or exchange offers described in the Plan or if the
Board of Directors of the Corporation determines that any person or group that
is the beneficial owner of 15 % or more of the Corporation's common stock is an
Adverse Person, as specified in the Plan, each Right not owned by such person
or any related party will entitle its holder to purchase, at the Right's
then-current exercise price, shares of the Corporation's common stock having a
value of twice the Right's exercise price. Following the occurrence of any such
event, all Rights held by a 20% or more shareholder or an Adverse Person will
be null and void. In addition, if after any person has become a 20% or more
shareholder, the Corporation is involved in a merger or other business
combination transaction with another person, each Right will entitle its holder
to purchase, at the Right's then-current exercise price, shares of common stock
of such other person having a value of twice the Right's exercise price.
On March 22, 1988, the Corporation purchased from Marine Midland Banks, Inc.
(Marine) warrants to acquire 1.7 million shares of the Corporation's common
stock. Marine had originally acquired these warrants in 1985. In exchange for
the warrants, Marine received $10 million in cash and 166,667 shares of a newly
issued series of non-redeemable Cumulative Convertible Preferred Stock
(Preferred Stock). The Preferred Stock paid an annual dividend equal to 6% of
its stated value of $36 per share. Contractual provisions allowed Marine to
convert the Preferred Stock into the Corporation's common stock before October
10, 1993. The amount of common stock issued upon conversion of the Preferred
Stock was determined on the basis of a ratio of the then-current market to book
value of the Corporation's common stock. In accordance with that formula,
120,000 to 660,000 shares of common stock could be issued upon conversion of
the Preferred Stock. On March 31, 1993, Marine exercised their right to redeem
the 166,667 shares of Preferred Stock for 120,000 shares of newly issued common
stock.
The Corporation is authorized, from time to time and in one or more series,
to issue up to a total of six million shares of Preferred Stock, $10 par value,
with terms, conditions, rights and preference to be determined by the Board of
Directors prior to any such issuance.
62
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
P. Employee Benefit Plans
- --------------------------------------------------------------------------------
STOCK OPTIONS
In 1985, the Board of Directors granted an option to purchase 200,000 shares
of the Corporation's common stock to its Chief Executive Officer. During 1992,
this option was exercised in its entirety.
Also in 1985, a proposal was approved by the shareholders establishing a
stock option plan for certain of its employees (1985 Plan). The 1985 Plan was
subsequently amended and restated in 1987 and 1991 by the shareholders and is
now known as the Michigan National Corporation Stock Option and Performance
Incentive Plan (the Plan).
During 1991, the Plan was amended and restated to change the total number of
shares authorized for issuance from 1,000,000 shares to 8% of the total number
of the outstanding shares of the Corporation's common stock representing
approximately 1,214,107 shares as of December 31, 1993. Of these shares,
424,611 have been granted and exercised, 636,116 are granted and outstanding,
and 153,380 are available for future grant. The options granted under the Plan
are not exercisable before one year or after 10 years of date of grant.
Total shares immediately exercisable under stock options were 508,760;
498,153; and 680,446 at December 31, 1993, 1992 and 1991, respectively. The
following is a summary of the activity with respect to stock options offered by
the Corporation.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
NUMBER OF OPTION PRICE
SHARES PER SHARE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, December 31, 1990 860,760 $17.6875-$51.50
Granted 123,500 16 75-41 75
Exercised (7,033) 18.50-29.625
Terminated
(97,660) 18.50-51.50
Outstanding, December 31, 1991 879,567 16 75-51 50
Granted 5,600 42 00-44 75
Exercised(1) (266,073) 17.6875-40.50
Terminated (23,233) 18.50-51.50
Outstanding, December 31, 1992 595,861 16.75-51.50
Granted 192,450 58.25-60.00
Exercised (147,340) 18.25-51.50
Terminated (4,855) 18.50-59.50
- ------------------------------------------------------------------------------------------
OUTSTANDING, DECEMBER 31, 1993 636,116 $ 16.75-$60.00
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 200,000 shares exercised under the 1985 stock option granted to the
Chief Executive Officer.
PENSION
All eligible, salaried employees of the Corporation and its subsidiaries,
are covered by a non-contributory, defined-benefit pension plan. Benefits
under the plan are based on years of service and the highest average level of
compensation for any five consecutive years out of the last ten years of
service. The majority of plan assets are invested in fixed income U.S.
Government obligations and equities, with the balance in limited partnerships
and cash.
The following is a summary of the components of net periodic pension
costs for years ended December 31.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(in thousands) 1993 1992 1991
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 3,448 $ 2,794 $ 2,447
Interest cost 4,598 4,009 3,538
Actual return on plan assets (4,366) (3,832) (3,215)
Net amortization and deferral 829 819 820
- ----------------------------------------------------------------------------------------------------
Net periodic pension cost $ 4,509 $ 3,790 $ 3,590
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The "projected credit unit" method is used in the determination of accumulated
benefits and periodic pension cost. The weighted-average discount rate used in
determining the actuarial present value of the projected benefit obligation was
7.0% and 8.5% at December 31, 1993 and 1992, respectively. The assumed rate of
increase in future salaries was 5% at December 31, 1993 and 1992. The expected
long-term rate of return on assets was 8.25% at December 31, 1993 and 1992. The
net obligation at date of adoption is being recognized over 15 years on a
straight-line basis. The unrecognized prior service cost is the result of plan
amendments effective January 1, 1988, 1989, 1991, and 1993. This cost is being
recognized on a straight-line basis over approximately 13 years, the average
remaining service of employees. The Corporation's funding policy is to
contribute annually within the range of tax deductible amounts after
considering the minimum amount required by the Employee Retirement Income
Security Act. The following table sets forth the plan's funded status and the
prepaid pension cost recorded in the consolidated statement of condition.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
DECEMBER 31 (in thousands) 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefit obligation $(49,021) $(32,836)
Non-vested benefit obligation (3,677) (2,365)
- ------------------------------------------------------------------------------
Accumulated benefit obligation (52,698) (35,201)
Value of future pay increases (24,499) (15,442)
- ------------------------------------------------------------------------------
Projected benefit obligation (77,197) (50,643)
Fair value of plan assets 56,262 51,898
- ------------------------------------------------------------------------------
Projected benefit obligation less
than (in excess of) plan assets (20,935) 1,255
Unrecognized net obligation at date of adoption 4,852 5,459
Unrecognized prior service cost 1,742 1,848
Unrecognized net loss (gain) 20,054 (1,692)
- ------------------------------------------------------------------------------
Prepaid pension cost $ 5,713 $ 6,870
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
During the years ended December 31, 1993, 1992 and 1991 the Corporation
recognized additional pension expense of $0.6 million, $0.4 million, and $1.0
million, respectively, for supplemental pension benefits. The unfunded
recognized pension obligation for these benefits was $3.0 million and $1.7
million at December 31, 1993 and 1992, respectively. The December 31, 1993
liability balance of $3.0 million includes an "additional minimum liability" of
$0.7 million recognized in accordance with the provisions of SFAS No. 87. The
recognition of this liability was offset by the recognition of an "intangible
asset" of $0.3 million and a reduction in stockholders' equity of $0.4 million.
During 1992, the Corporation purchased individual deferred annuities to settle
the December 31, 1992 accumulated benefit obligation of certain of the
participants of the supplemental plans. The total cost of the annuities was
$1.5 million and the settlement resulted in an approximate $0.3 million
settlement gain determined in accordance with SFAS No. 88.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In 1985, the Corporation established an Employee Stock Ownership Plan and
Trust (ESOP). The ESOP purchased 1.3 million newly-issued shares of common
stock and the Corporation contributed an additional 6,035 shares of common
stock to the ESOP.
All employees are eligible to participate in the ESOP if employed by the
Corporation or a participating subsidiary, after completion of the age and
service requirements. An employee will be enrolled as a participant on the
first "Enrollment Date" after reaching age 18 and completing 1,000 hours of
service.
The Corporation, when the plan was established, loaned the ESOP
approximately $37.6 million to finance its purchase of the stock in exchange
for a promissory note. The note, which bears interest at the prime rate, is to
be repaid over 12 years using future Corporation contributions. The
Corporation's initial contribution to the ESOP of 6,035 shares was made on
behalf of all regular full-time employees age 18 or over as of July 10, 1985.
This was equal to one share of Michigan National Corporation common stock for
each eligible employee. Thereafter, the Corporation may make contributions to
the plan in an amount determined by its Board of Directors. The contribution
will be in amounts which, when added to the dividends received on the
Corporation's shares owned by the ESOP, are at least enough to allow the ESOP
to pay principal and interest on its loan. The Corporation contributed $3.0,
$3.1 and $3.5 million in 1993, 1992 and 1991, respectively, to the ESOP.
The note is shown as a reduction from shareholders' equity. The repayment
terms are identical to those of a related borrowing by the Corporation from
Marine Midland Bank, N.A. (See Note N). The Corporation made an annual
principal payment of $2.8 million and interest payments of $1.0, $1.3 and $2.1
in 1993, 1992 and 1991, respectively, to Marine Midland Bank, N.A..
64
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Q. Postretirement Benefits
The Corporation provides certain health care and life insurance benefits for
all of its retired employees who are eligible for a benefit under the pension
plan, are at least age 55 and have at least 15 years of service. Effective
January 1, 1993, the Corporation adopted SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pension. SFAS No. 106 requires the
Corporation to accrue the estimated cost of retiree benefit payments during the
years the employee provides services. The Corporation previously expensed the
cost of these benefits as claims were incurred. For each of the years ended
December 31, 1992 and 1991, the Corporation recognized expense of $1.3 million
for postretirement benefit claims paid. SFAS No. 106 allows immediate
recognition of the cumulative effect of the liability (transition obligation)
in the year of adoption or amortization of the transition obligation over a
period of up to twenty years. The Corporation has elected to recognize the
January 1, 1993, accumulated benefit obligation of approximately $40.2 million
over a period of twenty years. The Corporation's cash flows are not affected by
implementation of this Statement, but implementation resulted in additional
expense for the year ended December 31, 1993, of approximately $5.6 million.
- ------------------------------------------------------------------------------
The following is a summary of the components of net periodic postretirement
costs for the year ended December 31, 1993, determined under the provisions of
SFAS No. 106.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(in thousands)
- -----------------------------------------------------------------------
<S> <C>
Service cost $ 1,364
Interest cost 3,536
Amortization of transition obligation 2,012
- -----------------------------------------------------------------------
Net periodic postretirement cost $ 6,912
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The following table sets forth the amount recorded in the December 31, 1993,
consolidated statement of condition.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------
<S> <C>
Accumulated Postretirement Benefit Obligation:
Retirees $(27,617)
Fully eligible active plan participants (6,004)
Other active plan participants (20,939)
- ------------------------------------------------------------------------
Total (54,560)
Unrecognized net loss 10,770
Unrecognized transition obligation 38,216
- ------------------------------------------------------------------------
Accrued postretirement benefit liability $ (5,574)
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
For purposes of measuring the accumulated benefit obligation and periodic
cost, a 14% annual rate of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) was assumed for 1993; the rate was further
assumed to decline linearly over the next 15 years to 5.5%.
A one-percentage-point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
as of December 31, 1993 by an estimated $6.1 million and the annual net
periodic postretirement health care cost by an estimated $0.9 million. The
assumed discount rate used in determining the accumulated postretirement
benefit obligation was 7.0% at December 31, 1993, and 8.5% at January 1, 1993.
The Corporation has not funded its postretirement obligation.
- ------------------------------------------------------------------------
R. Fair Value of Deposit Liabilities
- ------------------------------------------------------------------------
The estimated fair value of deposit liabilities was $8.8 billion and $9.0
billion at December 31, 1993 and 1992, respectively. The estimated fair value
of deposits with no stated maturity, such as non-interest bearing demand
deposits, savings, NOW accounts, money market and checking accounts, is equal
to the amount payable on demand as of December 31, 1993. The fair value of
certificates of deposit is estimated by discounting their expected future cash
flows using rates offered for deposits of similar remaining maturities as of
the reporting date.
The fair value estimates above do not include the benefit
that results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market.
65
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
S. Transactions with Related Parties
The Corporation's major subsidiaries had, and expect to have in the future,
transactions with the Corporation's directors and their affiliates. Such
transactions were made in the ordinary course of business on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated parties and did not involve
more than the normal risk of collectability or present other unfavorable
features.
The aggregate amount of such loans to persons who were related parties at
December 31, 1993, approximated $97 million at the beginning and $113 million
at the end of 1993. During 1993, advances and new loans to related parties
approximated $82 million and payments approximated $39 million. In addition,
the beginning balance was reduced by approximately $27 million for individuals
who were directors or officers at December 31, 1992, but not at December 31,
1993. During 1992, advances and new loans to related parties approximated $134
million and payments approximated $116 million. The aggregate amount of such
loans at January 1, 1992, approximated $79 million.
T. Other Expenses
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
The following details other expenses for the years ended December 31.
- ------------------------------------------------------------------------------------------------------
(in thousands)
- ------------------------------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FDIC insurance $ 21,798 $ 19,732 $18,210
Communications 9,377 9,600 8,181
Stationery and supplies 9,944 9,090 8,390
Advertising 8,154 4,121 4,555
Michigan single business tax 6,681 5,296 4,755
Postage 6,236 5,899 5,411
Amortization of goodwill 1,137 873 2,377
Uncollected interest on early payoffs of
loans serviced 11,965 7,543 1,612
Provision for foreclosure costs on
loans serviced 4,275 12,653 4,569
Other 38,325 32,197 35,892
- ------------------------------------------------------------------------------------------------------
Total $117,892 $107,004 $93,952
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
U. Legal Proceedings and Regulatory Matters
LEGAL PROCEEDINGS
The Corporation and certain of its subsidiaries are parties to routine legal
proceedings arising in the normal course of their respective businesses.
Management, after having consulted with legal counsel, is of the opinion that
the ultimate liability, if any, resulting from these routine proceedings, will
not have a material adverse effect on the consolidated financial position or
results of operations of the Corporation.
Also reference Note V for a discussion of certain tax contingencies.
REGULATORY MATTERS
As previously reported in August 1993, Michigan National Bank (MNB), the
Corporation's principal banking subsidiary, entered into a Memorandum of
Understanding (MOU) with the Central Office of the Comptroller of the Currency.
Under the terms of the MOU, MNB agreed to review its management structure; risk
management policies; and its mortgage banking business for the purpose of
determining its appropriate role in MNB's strategic plan.
66
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
V. Income Taxes
- -------------------------------------------------------------------------------------------------------------------
The following is a summary of the components of income tax expense for the
year ended December 31:
- -------------------------------------------------------------------------------------------------------------------
(in thousands) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes estimated to be payable currently
Federal taxes $ 18,453 $ 18,051 $17,711
State taxes 972 808 919
Tax benefits associated with IOBOC which were
first applied to reduce goodwill on the IOBOC acquisition 34
FDlC's share of current tax benefits
associated with IOBOC 2,829 3,752 2,946
- -------------------------------------------------------------------------------------------------------------------
Subtotal 22,254 22,611 21,610
- -------------------------------------------------------------------------------------------------------------------
Deferred Federal taxes (benefit)
Deferred tax (benefit), exclusive of the
effects of the other components listed below (10,971) (19,343) (9,998)
Change in the valuation allowance for
deferred tax assets (13,290) 3,384
- -------------------------------------------------------------------------------------------------------------------
Subtotal (24,261) (15,959) (9,998)
- -------------------------------------------------------------------------------------------------------------------
Total Income Tax Expense $ (2,007) $ 6,652 $11,612
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
As discussed in Note A, the Corporation adopted SFAS No. 109 as of January
1, 1992. The cumulative effect of this change in accounting for income taxes of
$6.3 million was determined as of January 1, 1992 and was reported separately
in the consolidated statement of income for the year ended December 31, 1992.
Prior years' financial statements were not restated to apply the provisions of
SFAS No. 109.
As previously reported, the significant components of the net tax effects
of changes in temporary differences reflected in the deferred tax expense for
the years ended December 31, 1991 is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(in thousands) 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Provision for possible credit losses $(5,755)
Lease financing (703)
Amortization of purchased mortgage servicing 3,700
Deferred net (gains) losses (9,030)
All others 1,790
- -------------------------------------------------------------------------------------------------------------------
Total $(9,998)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Significant deferred tax assets and liabilities as of December 31, 1993 and
1992 arising from temporary differences and carryforwards are as follows:
<TABLE>
<CAPTION>
1993 1992
- -------------------------------------------------------------------------------------------------------------------
(in thousands) Asset Liability Asset Liability
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for possible credit losses $ 66,847 $10,503 $ 59,218 $ 7,722
Net operating loss (NOL) carryforward, net
of estimated FDIC sharing (see Note E) 29,598 35,856
IOBOC pre-acquisition net operating loss
(NOL) carryforwards, net of estimated FDIC
sharing (see Note E) 40,462 40,958
Alternative minimum tax credit carryforward, net of
estimated FDIC sharing (see Note E) 26,902 22,600
All others 28,440 14,802 24,137 19,074
- -------------------------------------------------------------------------------------------------------------------
Subtotal 192,249 25,305 182,769 26,796
Valuation allowance (70,059) (83,349)
- -------------------------------------------------------------------------------------------------------------------
Total deferred taxes $122,190 $25,305 $ 99,420 $26,796
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
A valuation allowance has been provided for net operating loss carryforwards
because of the uncertainty surrounding their realization.
The income tax expense was different than the amount computed using the
U.S. statutory income tax rate (35% for 1993, 34% for 1992 and 1991) as a
result of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
thousands) 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected income tax $ 7,615 $ 22,596 $ 20,979
Increases (reductions) in income tax expense resulting from:
Tax-exempt assistance received by IOBOC and related transactions-net of
FDlC sharing (8,471) (12,742) (19,317)
Alternative minimum tax-net of alternative minimum tax credit 12,117
Other tax-exempt income (2,447) (2,984) (3,945)
Change in statutory tax rate (1,429)
Provision for tax contingencies 2,263 480 192
State income tax provision 686 609 678
Goodwill amortization 398 297 808
Others (622) (1,604) 100
- -------------------------------------------------------------------------------------------------------------------
Total income tax expense $(2,007) $ 6,652 $ 11,612
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
At December 31, 1993, the Corporation has NOL carryforwards for federal
income tax purposes of approximately $169 million arising in the years 1989,
1990 and 1991. These carryforwards will expire in the years 2004, 2005 and
2006, respectively. As discussed below, in August 1993, the Internal Revenue
Code was amended retroactively to March 4, 1991, for certain losses and
deductions related to IOBOC. As a result of this retroactive change in law, the
Corporation's NOL carryforwards were reduced by approximately $42 million. In
addition NOL carryforwards of approximately $231 million were acquired and are
available at December 31, 1993, to offset only the future taxable income of
IOBOC. These carryforwards expire through 2003. The Corporation also has
alternative minimum tax credit carryforwards for tax purposes of approximately
$17.6 million which are available to reduce future federal regular income taxes
over an indefinite period. Benefits derived from the utilization of these
carryforwards are subject to sharing by the FDIC, see Note E for a
discussion of tax benefit sharing under the Assistance Agreement.
On March 4, 1991, the U.S. Department of Treasury (Treasury) issued a report
to the United States Congress announcing for the first time that the Treasury
has determined that an expense or loss of an assisted institution that is
incurred on the sale or write-down of certain assets should not be deductible
for federal income tax purposes to the extent the expense or loss is reimbursed
through assistance payments from the federal government (covered losses). The
report recognizes that certain inconsistencies exist between the position taken
in the report and prior Treasury positions and acknowledges potential contrary
interpretations of the law. The report urges "Congressional clarification" of
these issues and further indicates that the Internal Revenue Service (IRS) is
prepared to challenge and litigate, if necessary, the deductibility of these
expenses and covered losses.
The Internal Revenue Code (IRC) was amended as of August of 1993 to provide,
among other things, that FSLIC Assistance received for losses realized on the
disposition or write-down of covered assets shall be treated for tax purposes
as compensation for the loss, thus reducing or eliminating any tax loss with
respect to the asset. Furthermore, future assistance must be considered when
determining the extent a debt is currently worthless, hence reducing the amount
of any addition a taxpayer may claim to the tax bad debt reserve. This change
applies to FSLIC assistance credited on or after March 4, 1991, for assets
disposed of and charge-offs made in tax years ending on or after March 4, 1991.
Congressional history to this provision indicates that no inference is intended
as to prior law or as to the treatment of any item to which the IRC amendment
does not apply.
Despite these recent IRC amendments, Treasury has not expressed a change of
opinion with respect to the deductibility of expenses and covered losses
realized prior to the effective date of the amendments to the IRC. The
Corporation has claimed deductions of this nature. It is presently impossible
to determine how, if at all, such deductions will be affected. In the unlikely
event that all of these deductions are disallowed, future earnings would be
adversely impacted by approximately $23 million. In addition, approximately
$169 million of net operating loss carryforwards would be eliminated.
The Corporation continues to believe that its tax position with respect to
these deductions is correct and proper and it will vigorously defend them
against any challenge by the IRS.
68
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
W. Industry Segment Information
- -------------------------------------------------------------------------------
The Corporation operates in two industry segments (as defined by Statement
of Financial Accounting Standards (SFAS) No. 14, Financial Reporting for
Segments of a Business Enterprise). The two industry segments are the mortgage
banking industry and the financial institutions industry. Following is a
presentation of the revenues, operating profits and identifiable assets for the
years ended December 31, 1993, 1992 and 1991.
The intercompany income/(expense) presented below represents interest
expense incurred by the mortgage banking business on its line of credit with
the Corporation's bank subsidiary less interest income paid to the mortgage
banking business by the bank subsidiary for investment earnings from deposit
relationships brought to the bank by the mortgage banking servicing business.
In addition, intercompany income/(expense) includes operating expenses incurred
by the mortgage banking business for services provided by the bank subsidiary
(principally data processing services) and by the parent company (principally
general administrative services).
In addition, the mortgage banking business maintains escrow and custodial
funds which are on deposit with the Corporation's principal banking subsidiary,
MNB, and therefore are reflected in the total liabilities of the financial
institution business segment. Those deposit balances were approximately $469
million and $501 million at December 31, 1993 and 1992, respectively.
The off-balance sheet mortgage servicing portfolio is described in the
Mortgage Banking Activities section of Note A. As presented below, the
percentage of the off-balance sheet mortgage servicing portfolio that is
comprised of servicing from loans originated by the mortgage banking business
was significantly greater at December 31, 1993 than in prior years. Servicing
from originated loans does not have a purchased mortgage servicing intangible
asset associated with it.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
MORTGAGE BANKING FINANCIAL INSTITUTIONS
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(in thousands) 1993 1992 1991 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after provision
for possible credit losses $ 25,315 $ 25,278 $ 6,947 $ 336,296 $ 305,163 $ 275,552
Non-interest income 95,280 81,015 66,298 155,152 147,464 119,768
Gain from sale of mortgage servicing rights 9,324 5,799 7,102
Amortization of Capitalized Excess
Service Fees (18,926) (9,485) (3,129)
Amortization of Purchased Mortgage
Servicing Rights (104,998) (53,000) (19,656)
Other non-interest expense (83,193) (79,810) (46,336) (392,494) (355,966) (344,844)
- ----------------------------------------------------------------------------------------------------------------
Income before taxes $ (77,198) $(30,203) $ 11,226 $ 98,954 $ 96,661 $ 50,476
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Intercompany income/(expense) included
in income before taxes $ (42,862) $(50,058) $(34,995) $ 42,862 $ 50,058 $ 34,995
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
AT DECEMBER 31
(in millions)
- ----------------------------------------------------------------------------------------------------------------
Total identifiable assets $ 1,001 $ 1,327 $ 869 $ 10,122 $ 10,605 $ 10,581
Intercompany assets included in total
identifiable assets (15) (20) (17) (935) (1,249) (783)
- ----------------------------------------------------------------------------------------------------------------
Assets after intercompany eliminations $ 986 $ 1,307 $ 852 $ 9,187 $ 9,356 $ 9,798
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Mortgage Servicing Portfolio:
Total $ 9,569 $ 14,188 $ 14,084
Originated servicing as a percentage
of the total 41% 28% 14%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
CONSOLIDATED CORPORATION
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(in thousands) 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income after provision for
possible credit losses $ 361,611 $ 330,441 $ 282,499
Non-interest income 250,432 228,479 186,066
Gain from sale of mortgage servicing rights 9,324 5,799 7,102
Amortization of Capitalized Excess Service Fees (18,926) (9,485) (3,129)
Amortization of Purchased Mortgage
Servicing Rights (104,998) (53,000) (19,656)
Other non-interest expense (475,687) (435,776) (391,180)
- ----------------------------------------------------------------------------------------------------------------
Income before taxes $ 21,756 $ 66,458 $ 61,702
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Intercompany income/(expense) included in
income before taxes
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
AT DECEMBER 31
(in millions)
Total identifiable assets $ 11,123 $ 11,932 $ 11,450
Intercompany assets included in total
identifiable assets (950) (1,269) (800)
- ----------------------------------------------------------------------------------------------------------------
Assets after intercompany eliminations $ 10,173 $ 10,663 $ 10,650
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Mortgage Servicing Portfolio:
Total $ 9,569 $ 14,188 $ 14,084
Originated servicing as a percentage
of the total 41% 28% 14%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Certain prior period amounts were restated to conform to current period
presentation.
69
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
X. Parent Company Financial Information
- ---------------------------------------------------------------------------------------------------------------------------
Condensed Parent Company Only Statement of Condition
- ---------------------------------------------------------------------------------------------------------------------------
December 31 (in thousands) 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 187 $ 254
Short-term investments 71,584 90,459
Loans 40 60
Receivables from subsidiaries 2,348 8,032
Investment in bank and savings and loan subsidiaries 834,394 840,473
Investment in nonbank subsidiaries 22,042 9,969
Premises and equipment, net 11,002 13,308
Other assets 32,071 21,607
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $973,668 $984,162
- ---------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities 88,311 $105,772
Long-term debt and capital lease obligations 69,767 72,615
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities 158,078 178,387
Shareholders' equity 815,590 805,775
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $973,668 $984,162
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Condensed Parent Company Only Statement of Income
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (in thousands) 1993 1992 1991
<S> <C> <C> <C>
REVENUES
Dividends from bank and savings and loan subsidiaries $ 40,500 $20,000 $40,000
Service fees and interest from subsidiaries 34,337 45,056 44,967
Other 8,619 9,371 9,490
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 83,456 74,427 94,457
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Interest on debt 5,797 6,017 6,770
Salaries, wages and employee benefits 23,157 22,954 23,789
Service fees paid to subsidiaries 6,752 4,955 6,956
Other operating expenses 15,079 16,351 14,928
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 50,785 50,277 52,443
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed earnings of subsidiaries 32,671 24,150 42,014
Federal income tax provision (benefit) (5,485) (9,460) (6,474)
Equity in undistributed earnings of subsidiaries:
Banks and savings and loan 18,780 25,841 1,683
Nonbanks (33,173) 355 (81)
- ---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 23,763 59,806 50,090
Cumulative effect of a change in accounting principle 6,265
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 23,763 $66,071 $50,090
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Certain prior period amounts were reclassified to conform to current period presentation.
</TABLE>
70
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
- --------------------------------------------------------------------------------
Condensed Parent Company Only Statement of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31 (in thousands) 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 23,763 $ 66,071 $ 50,090
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Undistributed earnings of subsidiaries 14,391 (26,196) (1,602)
Depreciation and amortization 2,619 3,159 3,334
Gain on sale of premises and equipment (18) (208) (86)
(Increase) decrease in operating assets:
Trading account securities 1,269 (12,101) 26
Receivables from subsidiaries 5,683 (778) 203
Investment in subsidiaries (20,385) (1,308) (16,277)
Accrued interest receivable 36 106 168
Other assets (23,383) 928 587
Increase (decrease) in operating liabilities:
Accrued interest payable (36) (106) (168)
Other liabilities (4,706) 3,610 (7,500)
Other, net (12) (235) (677)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ (779) $ 32,942 $ 28,098
- -------------------------------------------------------------------------------------------------------------------
Investing Activities
Payments for:
Purchase of premises and equipment $ (591) $ (1,711) $ (2,963)
Purchase of investment securities (24,421)
Purchase of subsidiaries (3,214)
Proceeds from:
Sale of investment securities to subsidiary bank 24,421
Sale of premises and equipment 41 225 257
Net (increase) decrease in:
Interest-bearing deposits with banks (6,815) 19,025 1,935
Loans 20 20 2,009
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ 17,076 $(10,076) $ 1,238
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments for:
Long-term debt and capital lease obligations $ (2,848) $ (2,751) $ (2,817)
Common stock dividends (22,618) (29,573) (29,266)
Preferred stock dividends (90) (360) (360)
Proceeds from issuance of:
Common stock 6,392 6,939 614
Proceeds from ESOP trust 2,800 2,800 2,800
- ------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES $ (16,364) $(22,945) $(29,029)
- ------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH $ (67) $ (79) $ 307
CASH AT BEGINNING OF YEAR 254 333 26
- ------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 187 $ 254 $ 333
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE> 72
INDEPENDENT AUDITORS REPORT
[LOGO]
Shareholders and Board of Directors
Michigan National Corporation
We have audited the accompanying consolidated statements of financial
condition of Michigan National Corporation and subsidiaries as of December 31,
1993 and 1992, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the responsibility of
Michigan National Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Michigan National Corporation
and subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in the summary of significant accounting policies, Michigan
National Corporation changed its method of accounting for postretirement
benefits effective January 1, 1993 in order to conform with Statement of
Financial Accounting Standard No. 106. The Corporation changed its method of
accounting for income taxes effective January 1, 1992 in order to conform with
Statement of Financial Accounting Standard No. 109.
/s/ Deloitte & Touche
Detroit, Michigan
Feberuary 15, 1994
72
<PAGE> 73
SHAREHOLDER INFORMATION
The Corporation's common stock is traded on the NASDAQ over-the-counter
market, and as of December 31, 1993, there were approximately 8,800 holders of
record.
The following table shows the high and low closing market values by quarter
for the last two years. The quotations represent actual transactions and do not
reflect retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
CLOSING MARKET: CASH DIVIDEND
HIGH LOW PER SHARE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
1993
First Quarter $64 1/4 $50 $.50
Second Quarter 61 5/8 52 .50
Third Quarter 59 7/8 54 1/2 .50
Fourth Quarter 62 3/4 57 1/2 (a)
- ----------------------------------------------------------------------------------
1992
First Quarter $51 1/4 $42 $.50
Second Quarter 51 44 .50
Third Quarter 50 3/8 43 1/2 .50
Fourth Quarter 52 1/4 44 .50
- ----------------------------------------------------------------------------------
</TABLE>
(a) 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 does
not represent a change in the Corporation's dividend policy, but rather a
change only in the timing of the dividend declaration.
HEADQUARTERS
Michigan National Corporation
27777 Inkster Road
Farmington Hills, MI 48334
(810) 473-3000
ANNUAL MEETING
Tuesday, April 19, 1994
10:00 A.M. EST
Auditorium of Michigan
National Corporation Headquarters
MICHIGAN NATIONAL CORPORATION STOCK
Michigan National Corporation common stock is traded in the over-the-counter
market and quoted on the National Association of Securities Dealers Automated
Quotations (NASDAQ) National Market System under the symbol "MNCO."
GENERAL SHAREHOLDER CORRESPONDENCE
(Inquiries related to disbursement of dividends, replacement of lost
certificates, and address changes): First Chicago Trust Company of New York
P.O. Box 2500 Jersey City, New Jersey 07303-2500 1-(800)-628-8585
STOCK TRANSFERS
First Chicago Trust Company of New York P.O. Box 2506 Jersey City, New Jersey
07303-2506 1-(800)-628-8585
DIVIDEND REINVESTMENT PLAN
Automatic reinvestment of dividends and voluntary cash purchases of Michigan
National Corporation common stock are available without brokerage commissions
or service fees. Please direct requests for a Dividend Reinvestment Plan
brochure and any inquiries related to the Plan to: First Chicago Trust Company
of New York Dividend Reinvestment Plan P.O. Box 2598 Jersey City, New Jersey
07303-2598 1-(800)-628-8585
VOLUNTARY CASH PURCHASE PAYMENTS
First Chicago Trust Company of New York Dividend Reinvestment Plan P.O. Box
13531 Newark, New Jersey O7188-0001 1-(800)-628-8585
ADDITIONAL SHAREHOLDER INFORMATION
Please direct inquiries to:
Michigan National Corporation
Investor Relations Department
P.O. Box 9065
Farmington Hills, MI 48333-9065
(810) 473-3076
73
<PAGE> 74
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
(in thousands)
Interest income $169,447 $176,053 $177,591 $ 171,142 $187,187 $190,379 $199,971 $201,536
Interest expense 67,616 72,646 73,682 78,678 84,274 89,385 99,258 105,045
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 101,831 103,407 103,909 92,464 102,913 100,994 100,713 96,491
Provision for possible credit losses 7,000 8,000 12,494 12,506 15,317 18,571 18,418 18,364
Non-interest income 67,763 65,966 55,674 51,427 66,826 52,859 51,462 53,646
Non-interest expense 130,463 135,852 138,187 176,183 141,210 122,651 112,291 112,624
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense 32,131 25,521 8,902 (44,798) 13,212 12,631 21,466 19,149
Income tax provision (benefit) (501) (1,506) 1,322 1,078 2,247 2,005
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before cumulative
effect of accounting change 32,632 27,027 8,902 (44,798) 11,890 11,553 19,219 17,144
Cumulative effect of
accounting change 6,265
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 32,632 $ 27,027 $ 8,902 $(44,798) $ 11,890 $ 11,553 $ 19,219 $ 23,409
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2.13 $ 1.77 $ 0.58 $ (3.00) $ 0.78 $ 0.76 $ 1.28 $ 1.56
Cash dividends declared -(1) 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Book value end-of-period 53.74 51.66 50.19 50.11 53.65 53.51 53.15 52.53
Market value end-of-period 57.50 58.88 56.50 60.00 51.25 44.00 46.25 51.25
Closing market value: high 62.75 59.88 61.63 64.25 52.25 50.38 51.00 51.25
Closing market value: low 57.50 54.50 52.00 50.00 44.00 43.50 44.00 42.00
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED PERIOD-END BALANCES
(in millions)
Total Assets $ 10,173 $ 10,395 $ 10,517 $ 10,442 $ 10,663 $ 10,705 $ 10,656 $ 10,928
Earning Assets 9,135 8,932 9,388 9,291 9,540 9,507 9,633 9,813
Total loans and lease financing,
net of unearned income 6,671 6,697 6,929 6,534 6,731 6,788 6,620 6,744
Non-performing Assets 255 276 290 293 304 309 323 327
Deposits 8,623 8,555 8,613 8,582 8,975 8,699 8,639 8,936
Long-term debt 77 78 81 82 83 83 93 90
Shareholders' equity 816 781 759 757 806 798 790 777
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED AVERAGE BALANCES
(in millions)
Total assets $ 10,249 $ 10,390 $ 10,372 $ 10,184 $ 10,658 $ 10,471 $ 10,808 $ 10,606
Earning assets 9,156 9,292 9,255 9,117 9,529 9,405 9,768 9,547
Total loans and lease financing,
net of unearned income 6,681 6,880 6,742 6,477 6,737 6,560 6,786 6,716
Deposits 8,709 8,610 8,718 8,550 8,867 8,687 8,852 8,677
Long-term debt 77 79 82 82 83 88 94 90
Shareholders' equity 791 770 766 810 806 801 784 773
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
Return on average
shareholders' equity 16.50% 14.04% 4.65% (22.13%) 5.90% 5.77% 9.80% 12.11%
Return on average total assets 1.27 1.04 0.34 (1.70) 0.45 0.44 0.71 0.88
Average equity to average
total assets 7.72 7.41 7.38 7.95 7.56 7.65 7.25 7.29
Allowance to period-end loans 2.86 2.82 2.68 2.79 2.61 2.56 2.50 2.37
Non-performing assets to total loans
(net of unearned income) plus
property from defaulted loans
and discontinued operations, net 3.77 4.05 4.11 4.38 4.42 4.44 4.78 4.75
Net interest spread 3.77 3.84 3.95 3.67 3.92 3.87 3.73 3.69
Net interest margin 4.64 4.65 4.74 4.38 4.67 4.62 4.49 4.45
Equity to asset ratio (period end) 8.02 7.51 7.22 7.25 7.56 7.45 7.41 7.11
Leverage ratio 7.56 7.09 6.90 7.12 7.24 7.27 7.02 7.10
Tier 1 risk-based capital ratio 9.57 9.01 8.79 9.12 9.69 9.54 9.76 9.56
Total risk-based capital ratio 11.73 11.16 10.99 11.34 11.91 11.76 12.04 11.83
Dividend payout ratio -(1) 28.25 86.21 N/M 64.10 65.79 39.06 32.05
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 does
not represent a change in the corporation's dividend policy, but rather a
change only in the timing of the dividend declaration.
N/M = not meaningful.
Certain prior period amounts have been reclassified to conform to current
period presentation.
Previously reported amounts for the three months ended September 30, 1993
and June 30, 1993, have been restated to reflect the effects of postponing
the recognition of a second quarter sale of servicing rights for accounting
purposes.
74
<PAGE> 75
CONSOLIDATED SUMMARY OF INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
(in thousands) 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Short-term investments $ 17,115 $ 19,047 $ 32,125 $ 28,122 $ 43,052 $ 42,170
Investment and trading securities 98,271 133,943 146,656 204,020 147,747 94,773
Loans and lease financing 555,841 588,567 667,713 741,975 834,539 736,045
Note receivable-FSLIC 23,009 37,516 60,020 80,266 81,669
- -----------------------------------------------------------------------------------------------------------
Total Interest Income 694,236 779,073 906,514 1,054,383 1,107,007 872,988
Interest Expense
Interest-bearing deposits 271,059 342,889 477,748 592,431 642,280 399,449
Short-term borrowings 15,179 28,145 51,684 96,834 75,580 75,775
Long-term debt 6,387 6,928 8,083 9,368 10,634 2,800
- -----------------------------------------------------------------------------------------------------------
Total Interest Expense 292,625 377,962 537,515 698,633 728,494 478,024
Net Interest Income 401,611 401,111 368,999 355,750 378,513 394,964
Provision for possible credit losses 40,000 70,670 86,500 73,082 128,481 62,555
- -----------------------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Possible
Credit Losses 361,611 330,441 282,499 282,668 250,032 332,409
Other Operating Income
Service charges 132,150 132,900 118,756 106,946 116,202 114,019
Trust and investment
services income 19,522 17,877 15,481 15,790 14,569 14,265
Gains (losses) from sale of
mortgage servicing rights 9,324 5,799 7,102 5,958 (56)
Securities gains (losses) 6,139 9,249 1,755 979 (11,652) 2,561
Gain on sale of credit card portfolio 225,003
Other income 73,695 58,968 46,945 46,069 37,437 36,014
- -----------------------------------------------------------------------------------------------------------
Total Other Operating
Interest Income 240,830 224,793 190,039 175,742 381,503 116,859
Other operating expenses
Salaries and wages 182,298 165,547 146,709 155,354 154,437 146,001
Other employee benefits 51,204 44,870 43,193 38,320 35,102 35,572
Net occupancy expense 29,941 29,123 29,353 26,539 29,237 26,056
Equipment 41,631 38,296 37,072 36,838 41,794 37,457
Outside services 34,218 28,707 24,511 29,045 35,337 30,187
Defaulted loan expense, net 18,503 22,229 16,390 14,396 5,337 3,388
Amortization of purchased
mortgage servicing rights 104,998 53,000 19,656 14,573 17,990 9,535
Other expenses 117,892 107,004 93,952 85,852 105,105 80,647
- -----------------------------------------------------------------------------------------------------------
Total Other Operating Expenses 580,685 488,776 410,836 400,917 424,339 368,843
- -----------------------------------------------------------------------------------------------------------
Income (Loss) Before
Income Taxes 21,756 66,458 61,702 57,493 207,196 130,425
Income tax provision (credit) (2,007) 6,652 11,612 9,479 28,257 37,271
- -----------------------------------------------------------------------------------------------------------
Income before cumulative
effect of a change in
accounting principle 23,763 59,806 50,090 48,014 178,939 93,154
Cumulative effect of a change
in accounting principle 6,265 8,325
- -----------------------------------------------------------------------------------------------------------
Net income (Loss) $ 23,763 $ 66,071 $ 50,090 $ 48,014 $ 187,264 $ 93,154
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Certain prior period amounts have been reclassified to conform with the current
period presentation.
75
<PAGE> 76
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is entered into this 17th day of November, 1993,
between Michigan National Corporation, ("Employer") and Douglas E. Ebert,
("Employee").
WHEREAS, Employer wishes to avail itself of Employee's experience and
management skills in connection with the operation of Employer's business; and
WHEREAS, the Employee desires to be employed by Employer as an
executive officer.
NOW, THEREFORE, for the reasons set forth above, and in consideration
of the promises and conditions set forth herein, Employer and Employee agree as
follows:
ARTICLE ONE
EMPLOYMENT
1.1 Employer hereby employs and hires Employee as its Chief Operating
Officer. Employee accepts and agrees to such hiring and employment, subject to
the general supervision and pursuant to the orders, advice, and direction of
Employer. Employee shall perform all duties as are customarily performed by
one holding such position in other, or similar, businesses or enterprises as
that engaged in by Employer, and shall also additionally render such other and
unrelated services and duties as may be assigned to him from time-to-time by
Employer. Employee further agrees to perform such services and act in such
executive capacity as the Board of Directors of Employer shall from
time-to-time direct including, but not limited to, Chief Operating Officer of
Michigan National Bank, its principal banking subsidiary.
1.2 Employee agrees that he will at all times and to the best of his
ability, experience, and talents, perform all of the duties that may be
required of him pursuant to the express and implied terms hereof, to the
satisfaction of Employer. Such duties shall be rendered at the principal
offices of Employer.
1.3 Employee agrees that he will at all times observe and be bound
by all resolutions, policies or rules, in any form whatsoever, heretofore or
hereafter adopted by Employer that are generally applicable to Employer's
officers and employees including, but not limited to, those existing
resolutions, policies or rules concerning conflicts of interest and
transactions in the securities of Employer.
76
<PAGE> 77
ARTICLE TWO
TERM; TERMINATION
2.1 The initial term of this Agreement shall be three (3) years to
conclude on December 31, 1996 ("Term"), which may be extended for an additional
one-year period at the discretion of the Board of Directors of Employer
at the end of the first and second years of the Term of this Agreement. Upon
termination of this Agreement, Employee's employment may continue on an "at
will" basis.
2.2 This Agreement and Employee's employment hereunder may be
terminated by resolution of the Board of Directors of Employer or by mutual
written agreement between Employer and Employee at any time during the
Term of this Agreement whereupon Employee shall be entitled to continue to
receive his Base Salary, as defined in Section 4.1 hereof, for the remaining
Term of the Agreement, which shall be paid periodically as though his
employment is continued under this Agreement ("Salary Continuation"), but shall
not be entitled to the continuation of any other benefit whatsoever under this
Agreement. Provided, however, that Employee will continue to receive any
pension benefits to which he may be entitled pursuant to Section 5.3 hereof for
services rendered prior to the termination of this Agreement. Furthermore,
Employee agrees that any Salary Continuation will be reduced by any earnings
from Employment in any other capacity during the period of the Salary
Continuation.
2.3 This Agreement may also be terminated for any reason whatsoever by
Employee by giving ninety (90) days prior written notice to Employer. If
Employee elects to terminate this Agreement, all compensation and benefits of
any nature whatsoever shall terminate as of the effective date of the
termination of this Agreement. Provided, however, that Employee will continue
to receive any pension benefits to which he may be entitled pursuant to Section
5.3 hereof for services rendered prior to the termination of this Agreement.
ARTICLE THREE
EMPLOYMENT RESTRICTIONS
3.1 Employee shall devote substantially all of his attention,
knowledge, and skills solely to the business and interests of Employer. During
the Term of this Agreement, Employee shall not participate directly or
indirectly, as partner, officer, director, advisor, employee or in any other
capacity with any other organization or business without the express written
consent of the Board of Directors of Employer.
77
<PAGE> 78
ARTICLE FOUR
COMPENSATION
4.1 Employer agrees to compensate employee for services to be rendered
pursuant to this Agreement in the following manner:
(a) Employee shall receive an annual base salary of Four Hundred
Fifty Thousand ($450,000) Dollars ("Base Salary"), which
shall be adjusted annually in accordance with Employer's
policy on merit salary increases.
(b) Employee shall participate in any bonus program participated
in generally by the Employer's executive officers.
(c) At time of hire, Employee will receive a one-time lump sum
payment of Seventy-Five Thousand ($75,000) Dollars.
(d) Upon election to Employer's Board of Directors, Employee
will be granted options to purchase One Hundred Thousand
(100,000) shares of Employer's common stock which options
will include, but not be limited to, the following
provisions:
-- The option price will be the average of the closing
bid and asked prices for such stock as of the date
Employee is elected to the Board of Directors;
-- The options will be 100% vested as of the grant date;
-- The date of expiration will be ten (10) years and one
(1) day after the date of grant;
-- Employee will have 365 days after the date of
termination of actual employment by reason of
retirement, death, or disability to exercise the
options;
-- In the event of termination by Employer, Employee will
have six months from the date of termination to
exercise the options; and
-- The options are nontransferable other than by will or
by the laws of descent and distribution.
78
<PAGE> 79
(e) Employer will reimburse Employee for any loss incurred upon
the sale of Employee's current principal residence,
including brokerage fees, up to One Hundred Thousand
($100,000) Dollars. In the alternative, Employee may elect
to be covered under Employer's current Relocation Policy.
(f) The Board of Directors of Employer is currently reviewing
its existing Change in Control Severance Agreements with
certain of its executive officers. Employee will be
provided with the benefits afforded by any Change in
Control Severance Agreements with any executive officers of
Employer.
ARTICLE FIVE
EMPLOYEE BENEFITS
5.1 During the Term of this Agreement, Employer shall provide
certain fringe benefits to Employee, pursuant to such general policies and
procedures of Employer as adopted or amended from time-to-time in its sole
discretion by the Board of Directors of Employer. Employee shall also be
entitled to participate in such other plans or arrangements as the Board of
Directors of Employer may hereafter, in its sole discretion, adopt and approve
or change with respect to incentive compensation, deferred compensation and/or
retirement benefits for any salary grade of employees, which includes Employee.
5.2 Employee will be provided with pension benefits equal to 50% of
the average of the three highest years of total compensation, including base
wages and corporate bonus, with benefits beginning at age sixty (60). The
pension benefits will have a ten (10) year vesting cycle with 0% vesting for
the first two (2) years, 30% vesting after three (3) years, and 10% vesting
each year for years four (4) through ten (10). Any benefits received from
Social Security or from any qualified pension plan will reduce the pension
benefits payable under this Agreement.
ARTICLE SIX
CONFIDENTIAL INFORMATION
6.1 Employee agrees, during the Term of his employment, to treat
as confidential all memoranda, notes, computer software, records, data,
statistics, figures, customer information, manner of operations, plans, or
other documents or information not publicly available or generally known, made
or compiled or obtained by Employee, or made available or disclosed to
Employee, during his employment concerning the business of Employer
("Confidential Information"). The parties hereto stipulate the Confidential
Information is important, material, and confidential, and gravely
79
<PAGE> 80
affects the effective and successful conduct of the business of Employer, and
Employer's goodwill. Any breach of the terms of this Section of the Agreement
by Employee shall be deemed a material breach.
6.2 Employee agrees that, during the Term of his employment, he
will not use such Confidential Information for his own use, advantage or
benefit or for the use, advantage or benefit of any person, corporation,
partnership or association whatsoever ("Persons"). Employee further agrees
upon termination for any reason, that he will continue to treat as privileged
any such Confidential Information, and will not release any such Confidential
Information to any Persons, whether by statement, deposition or as witness,
except upon written authority of Employer or as may be required by law.
6.3 Employee agrees that during the Term of his employment,
Employee shall not at any time or in any manner, either directly or indirectly,
divulge, disclose, duplicate, communicate or otherwise make available to any
Persons in any manner whatsoever, any such Confidential Information. Employee
further agrees that he will not allow any Persons to copy, reproduce or
disclose, in whole or in part, in any manner, any such Confidential
Information.
6.4 Notwithstanding the foregoing, Employee shall only use,
disclose, communicate or duplicate any such Confidential Information in a
manner consistent with or as required to fulfill the terms of his employment.
ARTICLE SEVEN
SURRENDER OF RECORDS ON TERMINATION
7.1 Upon termination of employment for whatever reason, Employee
shall immediately return to Employer all of Employer's property, including any
such Confidential Information, as defined in Section 6, used by Employee in
fulfilling the terms of his employment, that is in Employee's possession or
under his control.
ARTICLE EIGHT
MISCELLANEOUS
8.1 Employee expressly acknowledges that the limitations contained
in this Agreement are reasonable and properly required for the adequate
protection of the business of Employer. It is the intention of the parties
hereto that the provisions of this Agreement be enforced to the fullest extent
permissible under all applicable laws and public policies, but that the
unenforceability or the modification to conform with such laws or public
policies of any provision contained herein shall not render unenforceable or
impair the remainder of this Agreement. Accordingly, if any
80
<PAGE> 81
provision of this Agreement shall be determined to be invalid, illegal or
unenforceable, in any respect, this Agreement shall be deemed amended to delete
or modify, as necessary, the invalid or unenforceable provisions, to alter the
balance of this Agreement in order to render the same valid and enforceable and
the legality, validity and enforceability of the remaining provisions contained
in this Agreement shall not in any way be affected or impaired thereby.
8.2 Moreover, if any one or more of the provisions of this
Agreement is for any reason held excessively broad, it shall be construed or
rewritten so as to be enforceable to the extent of the greatest protection to
Employer compatible with applicable law.
8.3 This Agreement is entered into in the State of Michigan and
shall be construed and interpreted according to the statutes, rules of law and
court decisions of such State.
8.4 This Agreement may be amended, modified or superseded only by
an agreement, in writing, and signed by an authorized Executive Officer of
Employer and Employee.
8.5 No waiver or any breach of any term or provision of this
Agreement shall be construed to be a waiver of any preceding or succeeding
breach of the same or any other term or provision. Any waiver must be in
writing signed by the party waiving any such breach to be effective.
8.6 Employee expressly consents to the jurisdiction of the courts
of the State of Michigan and in the event of any dispute arising under this
Agreement, further expressly agrees to accept service of process by certified
mail, return receipt requested, to his last known address.
8.7 The headings of Sections are inserted only for the purposes of
convenient reference and shall not be deemed to govern, limit, modify, or in
any other manner affect the meaning or intent of any of the provisions of this
Agreement.
8.8 All notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be sufficiently
given if and when mailed by registered or certified mail, return receipt
requested, or personally delivered to the party entitled thereto at the address
stated below or to such other address as the addressee may indicate by similar
notice:
To Employer: Robert J. Mylod, Chairman
Michigan National Corporation
27777 Inkster Road
P.O. Box 9065
Farmington Hills, MI 48333-9065
81
<PAGE> 82
To Employee: Douglas E. Ebert
27777 Inkster Road
P.O. Box 9065
Farmington Hills, MI 48333-9065
8.9 This Agreement constitutes the entire agreement between the
parties and shall be binding upon and inure to the benefit of the parties
hereto and their legal representatives, heirs, successors and assigns, provided
that Employee shall have no right to assign, pledge or otherwise dispose of or
transfer any interest in this Agreement without the prior written consent of
Employer.
8.10 Nothing contained herein shall limit any other rights
Employer has at law in connection with Employee's obligations to Employer, all
of which are preserved.
ARTICLE NINE
AGREEMENTS OUTSIDE OF CONTRACT
9.1 This Agreement contains the complete agreement concerning the
employment arrangement between the parties and shall, as of the effective date
hereof, supersede all other agreements between the parties. The parties
stipulate that neither of them has made any representation with respect to the
subject matter of this Agreement or any representations including the execution
and delivery hereof except such representations as are specifically set forth
herein, and each of the parties hereto acknowledges that he or it has relied on
its own judgment in entering into this Agreement. The parties hereto further
acknowledge that any payments or representations that may have heretofore been
made by either of them to the other are of no effect and that neither of them
has relied thereon in connection with his or its dealings with the other.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the day and year first above written.
MICHIGAN NATIONAL CORPORATION
By: /s/ ROBERT J. MYLOD
-------------------------
Robert J. Mylod
Chairman
By: /s/ DOUGLAS E. EBERT
--------------------------
Douglas E. Ebert
82
<PAGE> 83
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is entered into this 2nd day of March, 1994, between Michigan
National Bank, a national banking association, ("Employer") and Joseph J.
Whiteside ("Employee").
WHEREAS, the Employee has considerable knowledge and experience relating to
banking and the operations of financial institutions;
WHEREAS, Employer wishes to avail itself of Employee's experience and
management skills in connection with the operation of Employer's business; and
WHEREAS, the Employee desires to be employed by Employer as an officer.
NOW, THEREFORE, for the reasons set forth above, and in consideration of the
promises and conditions set forth herein, Employer and the Employee agree as
follows:
ARTICLE ONE
EMPLOYMENT
1.1 Employer hereby employs and hires Employee as a Executive Vice
President, Chief Financial Officer and Cashier for Michigan National Bank. In
addition, Employee will be appointed Executive Vice President and Chief
Financial Officer of Employer's holding company, Michigan National Corporation.
Employee accepts and agrees to such hiring and employment, subject to the
general supervision and pursuant to the orders, advice, and direction of
Employer. Employee shall perform all duties as are customarily performed by
one holding such position in other, or similar, businesses or enterprises as
that engaged in by Employer, and shall also additionally render such other and
unrelated services and duties as may be assigned to him from time to time by
Employer. Employee further agrees to perform such services and act in such
executive capacity as the Board of Directors of Employer shall direct.
1.2 Employee agrees that he will at all times to the best of his ability,
experience, and talents, perform all of the duties and services that may be
required of him pursuant to the express and implied terms hereof, to the
reasonable satisfaction of Employer. Such duties shall be rendered at the
principal offices of Employer or at such other place or places as Employer and
Employee may mutually agree to conduct the business of Employer.
1.3 Employee shall make available to Employer all information related to
duties and services performed under this Agreement of which Employee shall have
any knowledge and shall make all suggestions and recommendations that will be
of mutual benefit to Employer and himself.
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1.4 Employee agrees to adhere strictly to any and all rules and regulations
established by Employer as may be amended from time to time, including but not
limited to rules and regulations set forth in any compliance or procedures
manual prepared by Employer. Employee further agrees to adhere strictly to all
of the rules, regulations and reporting requirements of any applicable
governmental agencies, including but not limited to, the Board of Governors of
the Federal Reserve System, the Securities and Exchange Commission, the
Comptroller of the Currency and the State of Michigan.
ARTICLE TWO
TERM; TERMINATION
2.1 The initial term of this Agreement shall be three (3) years to conclude
on March 31, 1997 ("Term"), which may be extended for an additional one-year
period at the discretion of the Board of Directors of Employer at the end of
the first and second years of the Term of this Agreement. Upon termination of
this Agreement, Employee's employment may continue on an "at will" basis.
2.2 This Agreement and Employee's employment hereunder shall terminate
before the end of the Original Term upon the happening of any of the following
events:
(a) Mutual written agreement between Employer and Employee to terminate
Employee's employment.
(b) Resolution of the Board of Directors of Employer pursuant to 12
USC 24 (Fifth).
2.3 If this Agreement is terminated because of the occurrence of the events
listed in sections 2.2(a) or 2.2(b), then Employee shall be entitled to receive
the balance of the compensation remaining under this Agreement, or the standard
corporate severance package, whichever is greater.
2.4 The provisions of Sections 2.2-2.3 notwithstanding, this Agreement may
be terminated during the Original Term for any reason by either party on ninety
(90) days written notice to the other. If Employee shall so terminate this
Agreement, he shall not be entitled to any further compensation whatsoever,
after the effective date of his resignation. If Employer shall so terminate
this Agreement, Employee shall be entitled to the balance of the compensation
remaining under this Agreement or the standard corporate severance package,
whichever is greater.
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ARTICLE THREE
EMPLOYMENT RESTRICTIONS
3.1 Employee shall devote substantially all of his business time, attention,
knowledge, and skills solely to the business and interest of Employer.
Employer shall be entitled to all of the benefits, profits or other issues
arising from or incident to all work, services, and advice of Employee, and
Employee shall not, during the term hereof, be interested directly or
indirectly, in any manner, as partner, officer, director, advisor, employee or
in any other capacity in any other financial institution (including bank
holding company, commercial bank, savings bank, savings and loan association or
credit union) during the term of this employment.
ARTICLE FOUR
COMPENSATION
4.1 Employer agrees to compensate Employee for services to be rendered
pursuant to this Agreement in the following manner:
(a) Employee shall receive an annual base salary of Two Hundred
Seventy-Five Thousand ($275,000.00) Dollars ("Base Salary") as
compensation for the performance of his duties under Section 1.1 of
this Agreement. Such Base Salary shall be adjusted annually in
accordance with Employer's policy on merit salary increases.
(b) Employee will be eligible to receive bonus compensation under the
Michigan National Corporation bonus program as adopted by the
Board of Directors. The maximum bonus opportunity will be 50% of
Employee's annual base salary.
(c) Employee shall receive a one-time lump sum payment of $35,000.00,
payable within ten (10) days after his date of hire.
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(d) Employee shall be provided with a Supplemental Executive Retirement
Plan which will provide pension benefits equal to 40% of Employee's
highest average total compensation for the three consecutive years
out of the last ten calendar years of employment. The Agreement
will have a ten year vesting schedule with 0% vesting for the
first two years, 30% vesting after three years and 10% vesting
each year for years four through ten. These benefits will be
offset by any benefits available under the Michigan National
Qualified Pension Plan, Social Security and any single premium
annuity purchased on Employee's behalf by the Corporation under
the terms of the Pension Agreement.
(e) Employee shall be granted 25,000 options on Michigan National
Corporation Stock with the option price based on the closing
price of the stock on Employee's date of hire. The options will
be 100% vested as of the date of grant.
(f) Employee will also be eligible for a Country Club membership of his
chose, full relocation benefits and eligibility under all of the
appropriate Michigan National Welfare and Deferred benefits.
ARTICLE FIVE
EMPLOYEE BENEFITS
5.1 During the term of this Agreement, Employer shall provide certain fringe
benefits to Employee, including vacation days, stock options, country club
membership, Employee life insurance policy, pursuant to such general policies
and procedures of Employer as adopted or amended from time to time in its sole
discretion by the Board of Directors of Employer. Employee shall also be
entitled to participate in such other plans or arrangements as the Board of
Directors of Employer may hereafter, in its sole discretion, adopt and approve
or change with respect to incentive compensation, deferred compensation and/or
retirement benefits for Employee or any class of Employees including Employee.
All such benefits shall be terminated by Employer upon the termination of this
Agreement.
5.2 Employee shall be reimbursed for all reasonable business expenses
incurred by him in connection with the conduct of Employer's business for which
he furnishes appropriate documentation and which has been approved in
accordance with Company policy.
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ARTICLE SIX
CONFIDENTIAL INFORMATION
6.1 Employee agrees, during the term of his employment, to treat as
confidential all memoranda, notes, computer software, records, data,
statistics, figures, customer information, manner of operations, plans, or
other documents or information not publicly available or generally known, made
or compiled or obtained by Employee, or made available or disclosed to
Employee, during his employment concerning the business of Employer
("Confidential Information"). The parties hereto stipulate the Confidential
Information is important, material, and confidential, and gravely affects the
effective and successful conduct of the business of Employer, and Employer's
goodwill. Any breach of the terms of this Section of the Agreement by Employee
shall be deemed a material breach.
6.2 Employee agrees that, during the term of his employment he will not use
such Confidential Information for his own use, advantage or benefit or for the
use, advantage or benefit of any person, corporation, partnership or
association whatsoever ("Persons"). Employee further agrees upon termination
for any reason, that he will continue to treat as privileged any such
Confidential Information, and will not release any such Confidential
Information to any Persons, whether by statement, deposition or as witness,
except upon written authority of Employer or as may be required by law.
6.3 Employee agrees that during the term of his employment Employee shall
not at any time or in any manner, either directly or indirectly, divulge,
disclose, duplicate, communicate or otherwise make available to any Persons in
any manner whatsoever, any such Confidential Information. Employee further
agrees that he will not allow any Persons to copy, reproduce or disclose, in
whole or in part, in any manner any such Confidential Information.
6.4 Notwithstanding the foregoing, Employee shall only use, disclose,
communicate or duplicate any such Confidential Information in a manner
consistent with or as required to fulfill the terms of his employment.
ARTICLE SEVEN
SURRENDER OF RECORDS ON TERMINATION
7.1 Upon termination of employment for whatever reason, Employee shall
immediately return to Employer, all of Employer's property, including any such
Confidential Information, as defined in Article Six, used by Employee in
fulfilling the terms of his employment, that is in Employee's possession or
under his control.
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ARTICLE EIGHT
MISCELLANEOUS
8.1 Employee expressly acknowledges that the limitations contained in this
Agreement are reasonable and properly required for the adequate protection of
the business of Employer. It is the intention of the parties hereto that the
provisions of this Agreement, be enforced to the fullest extent permissible
under all applicable laws and public policies, but that the unenforceability or
the modification to conform with such laws or public policies of any provision
contained herein shall not render unenforceable or impair the remainder of this
Agreement. Accordingly, if any provision of this Agreement shall be determined
to be invalid, illegal or unenforceable, in any respect, this Agreement shall
be deemed amended to delete or modify, as necessary, the invalid or
unenforceable provisions, to alter the balance of this Agreement in order to
render the same valid and enforceable and the legality, validity and
enforceability of the remaining provisions contained in this Agreement shall
not in any way be affected or impaired thereby.
8.2 If, moreover, any one or more of the provisions of this Agreement is for
any reason held excessively broad, it shall be construed or rewritten so as to
be enforceable to the extent of the greatest protection to Employer compatible
with applicable law.
8.3 This Agreement is entered into in the State of Michigan and shall be
construed and interpreted according to the statutes, rules of law and court
decisions of such State.
8.4 This Agreement may be amended or modified or superseded only by an
agreement, in writing, and signed by an authorized Executive Officer of
Employer and Employee.
8.5 No waiver or any breach of any term or provision of this Agreement shall
be construed to be a waiver of any preceding or succeeding breach of the same
or any other term or provision. Any waiver must be in writing signed by the
party waiving any such breach to be effective.
8.6 Employee expressly consents to the jurisdiction of the courts of the
State of Michigan and in the event of any dispute arising under this Agreement
further expressly agrees to accept service of process by certified mail, return
receipt requested, to his last known address.
8.7 The headings of articles are inserted only for the purposes of
convenient reference and shall not be deemed to govern, limit, modify, or in
any other manner affect the meaning or intent of any of the provisions of this
Agreement or the Agreement itself.
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8.8 All notices, requests, demands and other communications provided for
by this Agreement shall be in writing and shall be sufficiently given if and
when mailed by registered or certified mail, return receipt requested, or
personally delivered to the party entitled thereto at the address stated below
or to such other address as the addressee may indicate by similar notice:
To Employer: Robert J. Mylod
Michigan National Corporation
27777 Inkster Road
P. O. Box 9065
Farmington Hills, MI 48333-9065
To Employee: Joseph J. Whiteside
Michigan National Corporation
27777 Inkster Road
P. O. Box 9065
Farmington Hills, MI 48333-9065
8.9 This Agreement constitutes the entire agreement between the parties and
shall be binding upon and inure to the benefit of the parties hereto and their
legal representatives, heirs, successors and assigns, provided that Employee
shall have no right to assign, pledge or otherwise dispose of or transfer any
interest in this Agreement or any payments hereunder without the prior written
consent of Employer.
8.10 Nothing contained herein shall limit any other rights Employer has at
law in connection with Employee's obligations to Employer, all of which are
preserved.
ARTICLE NINE
AGREEMENTS OUTSIDE OF CONTRACT
9.1 With the exception of an Executive Change in Control Agreement, Stock
Option Agreement and an Executive Pension Agreement, this Agreement contains
the complete agreement concerning the employment arrangement between the
parties and shall, as of the effective date hereof, supersede all other
agreements between the parties. The parties stipulate that neither of them has
made any representation with respect to the subject matter of this Agreement or
any representations including the execution and delivery hereof except such
representations as are specifically set forth herein, and each of the parties
hereto acknowledges that he or it has relied on its own judgment in entering
into this Agreement. The parties hereto further acknowledge that any payments
or representations that may have heretofore been made by either of them to the
other are of no effect and that neither of them has relied thereon in
connection with his or its dealings with the other.
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ARTICLE TEN
MICHIGAN NATIONAL CORPORATION GUARANTEE
10.1 If Michigan National Bank's compensation obligations under this
Agreement are rendered void by any court or regulatory agency with jurisdiction
over Michigan National Bank, then the compensation obligations will be
fulfilled by Michigan National Corporation, the holding company of Michigan
National Bank.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed
as of the day and year first above written.
MICHIGAN NATIONAL BANK
a national banking association
By: /s/ ROBERT J. MYLOD
---------------------------
Robert J. Mylod
Title: Chairman
By: /s/ JOSEPH J. WHITESIDE
---------------------------
Joseph J. Whiteside
Date: 3/4/94
--------------------------
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SCHEDULE OF DIFFERENCES IN KEY PROVISIONS OF THE REFERENCED PENSION AGREEMENTS
<TABLE>
<CAPTION>
====================================================================================================================
| ITEM | (10q.) | (10t.) |
| | DOUGLAS E. EBERT * | JOSEPH J. WHITESIDE * |
- --------------------------------------------------------------------------------------------------------------------
| Effective Date | 1/10/94 | 3/11/94 |
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
| Pension Goal | 50% of the average of the three | 40% of the average of the three |
| | highest consecutive years total | highest consecutive years total |
| | compensation. | compensation. |
- --------------------------------------------------------------------------------------------------------------------
| Offsets | Pension goal less benefits under | Pension goal less benefits under |
| | the qualified plan, social security | the qualified plan, social security |
| | and the amount of the pretax | and the amount of the pretax |
| | equivalent of any single | equivalent of any single |
| | premium annuity purchased on | premium annuity purchased on |
| | the employee's behalf by the | the employee's behalf by the |
| | corporation under the terms | corporation under the terms |
| | of this agreement. | of this agreement. |
- --------------------------------------------------------------------------------------------------------------------
| Normal Retirement Age | 60 | 62 |
- --------------------------------------------------------------------------------------------------------------------
| Early Retirement Age | 58 | None |
- --------------------------------------------------------------------------------------------------------------------
| Early Retirement Deduction | 2% for each year prior to | N/A |
| | age 60. | |
- --------------------------------------------------------------------------------------------------------------------
| Vesting | 0% for the first three years, | 0% for the first three years, |
| | 30% after year 3, 10% for | 30% after year 3, 10% for |
| | years 4 through 10. | years 4 through 10. |
| | | |
- --------------------------------------------------------------------------------------------------------------------
| Change in Control | None | None |
| | | |
| | | |
- --------------------------------------------------------------------------------------------------------------------
| Form of Payment | Monthly for life. If he dies, | Monthly for life. If he dies, |
| | monthly payments will be | monthly payments will be |
| | made to the surviving | made to the surviving |
| | spouse during her lifetime. | spouse during her lifetime. |
| | | |
- --------------------------------------------------------------------------------------------------------------------
| Surviving Spouse | Must be age 55 to receive | Must be age 62 to receive |
| | benefit. | benefit. |
- --------------------------------------------------------------------------------------------------------------------
| Funding | From general assets, a trust | From general assets, a trust |
| | or an annuity. Currently | or an annuity. Currently |
| | unfunded status. | unfunded status. |
| | | |
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* DOCUMENT OMITTED. This pension agreement is substantially identical in
all material respects, except as indicated above, to the pension
agreement between Michigan National Corporation and Richard C. Webb dated
January 1, 1991, as amended March 5, 1992. The latter pension agreement
was filed in Item 14 (c) (10) (p) of the December 31, 1992 Form 10-K and
is incorporated herein by reference.
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ITEM 14(C)21. SUBSIDIARIES OF THE REGISTRANT
MNC operates two national banks, Michigan National Bank and Lockwood National
Bank of Houston, which are national banking associations established and
organized under the laws of the United States. MNC operates one Texas banking
corporation, First State Bank and Trust Company, organized under the laws of
the State of Texas. MNC has one savings bank, IOBOC, a federally chartered
stock savings bank. MNC's eight active non-banking subsidiaries are
incorporated as follows: Lockwood Banc Group, Inc., Independence One Investment
Services Corporation, Bloomfield Hills Bancorp, Inc., Independence One Asset
Management Corporation, and MNC Operation And Services, Inc. under the laws of
the State of Michigan; MNC Leasing Company and Independence One Holding Company
under the laws of the State of Delaware; and Independence One Life Insurance
Company under the laws of the State of Arizona.
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[LOGO]
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Michigan National Corporation:
We consent to the incorporation by reference in the following Registration
Statements of Michigan National Corporation (MNC) of our report dated
February 15, 1994 appearing in this Annual Report on Form 10-K of MNC for the
year ended December 31, 1993:
<TABLE>
<CAPTION>
REGISTRATION
FORM STATEMENT NO. DESCRIPTION
<S> <C> <C>
S-3 33-58644 $150,000,000 of Debt Securities at a rate to be determined,
filed as a shelf registration
S-3 33-24751 $55,000,000 of 8% Redeemable Subordinated Debentures
and Cancellable Mandatory Stock Purchase Contracts
S-8 33-22542 250,000 shares of Common Stock of MNC (MNC
Employees' Stock Bonus Plan, 401-(k) account)
S-3 33-22430 656,787 shares of Common Stock of MNC proposed to be
disposed of by Marine Midland Bank Inc.
S-8 33-18943 1,303,045 shares of Common Stock of MNC (MNC
Employee Stock Ownership Plan)
S-8 33-17222 500,000 shares of Common Stock of MNC (MNC Stock
Option and Performance Incentive Plan)
S-8 33-4515 500,000 shares of Common Stock of MNC (MNC 1985
Stock Option Plan)
</TABLE>
DELOITTE & TOUCHE
March 28, 1994
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FORM 10-K SIGNATURES February 23, 1994
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
_____________________________
Michigan National Corporation
(Registrant)
/s/ ROBERT J. MYLOD
_____________________________
Robert J. Mylod
Chairman, President and
Chief Executive Officer
/s/ ERIC D. BOOTH
_____________________________
Eric D. Booth
Chief Financial Officer
/s/ ROBERT V. PANIZZI
_____________________________
Robert V. Panizzi
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacity as its directors:
/s/ DANIEL T. CARROLL /s/ ROBERT J. MYLOD
___________________________ ___________________________
Daniel T. Carroll Robert J. Mylod
/s/ JOHN S. CARTON /s/ WILLIAM F. PICKARD
___________________________ ___________________________
John S. Carton William F. Pickard
/s/ DOUGLAS E. EBERT /s/ STANTON KINNIE SMITH, JR.
___________________________ ___________________________
Douglas E. Ebert Stanton Kinnie Smith, Jr.
/s/ SIDNEY E. FORBES /s/ WALTER H. TENINGA
___________________________ ___________________________
Sidney E. Forbes Walter H. Teninga
/s/ SUE L. GIN /s/ RICHARD T. WALSH
___________________________ ___________________________
Sue L. Gin Richard T. Walsh
/s/ MORTON E. HARRIS /s/ JAMES A. WILLIAMS
___________________________ ___________________________
Morton E. Harris James A. Williams
/s/ GERALD B. MITCHELL
___________________________
Gerald B. Mitchell
94
