ITEM 1. BUSINESS
Michigan Financial Corporation, a Michigan corporation, (the "Company") is a registered bank holding company under the Bank Holding Company Act of 1956. The Company was incorporated on June 29, 1972. The Company has seven subsidiary banks, all wholly owned, as follows:
MFC First National Bank, Escanaba MFC First National Bank, Houghton MFC First National Bank, Iron Mountain MFC First National Bank, Iron River MFC First National Bank, Ironwood MFC First National Bank, Marquette MFC First National Bank, Menominee
The Company's only nonbank subsidiary is Michigan Financial Life Insurance Company ("MFLIC"). MFLIC, an Arizona Corporation, underwrites, as a reinsurer, credit life and credit accident and health insurance directly related to extensions of credit by the Company's subsidiary banks.
The Company is one of the ten largest commercial bank holding companies headquartered in the State of Michigan and operates primarily in the Upper Peninsula of the state. One of its banks also operates a loan production office in northeastern Wisconsin.
The Company provides advice and services to its subsidiary banks and coordinates their activities in such areas as lending, investment policies, business development, auditing, public relations, data processing, financial reporting, budgetary planning and compliance with government regulations. Each bank operates under the day-to-day management of its own officers and directors.
The seven subsidary banks of the Company, either individually or in the aggregate, provide full banking and trust services, including commercial and savings deposit account and safe deposit facilities, for individuals, partnerships, nonprofit organizations, corporations, and governmental units. Through their commercial loan departments, the banks provide funds for business and industry, both short-term (accounts receivable, inventory, working capital and floor-planning) and long-term (leasehold improvements and building construction) as well as funds for individuals. The installment loan departments of the banks extend loans to individuals and businesses to purchase consumer goods such as automobiles, household goods and materials for home modernization. The mortgage loan departments provide both residential and commercial real estate loans. The trust departments administer trust assets for individual trusts and estates as well as for pension and profit sharing trusts.
The Company's seven subsidiary banks have 33 banking offices in nine counties of Michigan's Upper Peninsula: Alger, Delta, Dickinson, Gogebic, Houghton, Iron, Marquette, Menominee, and Schoolcraft. The banks also operate 41 automated teller machines ("ATMs") in several market areas. One of its banks also operates a loan production office in northeastern Wisconsin. All the banks have a retail banking orientation and compete vigorously with other
commercial banks, savings banks, various finance companies, and public, religious and private credit unions. The banks receive direct banking competition from other banks with offices in the same cities.
The Company also competes with a much larger out-of-state multi-bank holding company which has banking offices located in the same market areas as five of the Company's banks and operates additional banking offices in other areas not served by the Company's banks. The Company also competes with smaller holding companies located in its market areas.
The Company is subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. Since it is a bank holding company, the services provided by the subsidiary banks and the operations of the corporation are required to be closely related to the business of banking or related financial services.
The deposits of all the Company's banks are insured by the Federal Deposit Insurance Corporation, and the banks are subject to supervision, examination and regulation by the Office of the Comptroller of the Currency (the "OCC").
The OCC has issued guidelines which impose upon national banks certain risk-based capital and leverage standards. These guidelines, as well as the capital requirements of bank regulators, are discussed in Note J, beginning on page 29, in the annual stockholders report for the year ended December 31, 1998 which is incorporated herein by reference. Failure to meet applicable capital guidelines could subject a national bank to a variety of enforcement remedies available to the federal regulatory authorities. Depending upon circumstances, the regulatory agencies may require an institution to surpass minimum capital ratios established and may also take more restrictive action.
No material part of the business of the Company or its subsidiaries is dependent upon a single customer. The loss of any one or any few customers would have no material adverse effect on the business of the Company.
Because banks do not have any backlog of orders, backlog has no effect on the business of the Company.
The business of the Company is not dependent on raw materials.
The business of the Company is not materially affected by the duration of patents, trademarks, licenses, franchises, or concessions.
The Company does not have a research and development department. No funds have been expended in this area during either of the last three fiscal years and there are no people employed by the Company in research and development.
The Company does not have any commitments requiring the investment of a material amount of total assets.
It is not expected that compliance with federal, state, or local provisions regulating the discharge of materials into the environment or otherwise relating to protection of the environment will have any material effect upon the capital expenditures, earnings, and competitive position of the Company and its subsidiaries.
The Company and its subsidiaries employed 657 people as of December 31, 1998.
No material portion of the Company's business is seasonal.
The commercial banking business, constituting one line of business, represents substantially all of the business conducted by the Company and its subsidiaries, and substantially all revenues of the Company are derived from that one line of business, commercial banking.
Neither the Company nor any of its subsidiaries is engaged in foreign operations.
CONSOLIDATED FINANCIAL AND STATISTICAL INFORMATION
The tables set forth on the next nine pages of this report contain selected consolidated statistical information for the Company and its subsidiaries for the years 1996 through 1998 (1994 through 1998 for certain loan portfolio and loan loss information). The financial and statistical data presented in these tables provide a detailed review of the Company's business activities.
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential
All of the above percentages are computed on a fully taxable statutory rate of 35%
The average balance of Loans includes nonaccrual loans.
The table below sets forth a summary of the reasons for changes in interest earned and interest paid due to changes in volume and changes in rates for 1998 as compared with 1997. The change in interest due to both rate and volume has been allocated proportionally to change due to volume and to change due to rate.
The table below sets forth a summary of the reasons for changes in interest earned and interest paid due to changes in volume and changes in rates for 1997 as compared with 1996. The change in interest due to both rate and volume has been allocated proportionally to change due to volume and to change due to rate.
INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities at the dates indicated:
December 31 -------------------------------- 1998 1997 1996 ------- ------- ------- (in thousands) Available for Sale Securities: U.S. Treasury and government agencies $78,848 $58,883 $ 71,256 Mortgage-backed 7,773 14,246 26,828 States and political subdivisions 5,259 -- -- Other 4,168 3,852 3,875 ------- ------ --------
$96,048 $76,981 $101,959 ======= ======= ========
Held to Maturity Securities: States and political subdivisions $10,952 $18,662 ------- -------
$10,952 $18,662 ======= =======
The table on the following page sets forth the maturities of investment securities at December 31, 1998, the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security) and the tax-equivalent adjustment used in calculating the yields.
MATURITIES (Amounts in thousands)
Weighted average yields on tax-exempt obligations have been computed on a fully tax-equivalent basis assuming a tax rate of 35 percent.
LOAN PORTFOLIO
The amounts of loans outstanding at the indicated dates are shown in the following table according to type of loan.
December 31 -------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands) Commercial, financial, and agricultural $260,360 $263,727 $247,344 $246,134 $248,785 Real estate-construction 13,450 13,648 12,771 10,095 9,175 Real estate-mortgage 228,379 235,228 212,863 186,838 174,186 Consumer 105,926 117,718 120,364 113,596 106,958 Leases 579 -- -- -- -- -------- -------- -------- -------- --------
$608,694 $630,321 $593,342 $556,663 $539,104 ======== ======== ======== ======== ========
The following table shows the amounts of loans (excluding real estate mortgages, consumer loans and leases) outstanding as of December 31, 1998, which, based on remaining scheduled repayments of principal, are due in the periods indicated.
Maturing -------------------------------------------------- Within After One But After One Year Within Five Years Five Years Total -------- ----------------- ---------- ----- (in thousands) Commercial, financial, and agricultural $79,855 $146,041 $34,464 $260,360 Real estate-construction 11,755 1,023 672 13,450 ------- -------- ------- --------
$91,610 $147,064 $35,136 $273,810 ======= ======== ======= ========
Included in the loans which are due after one year are $117,953,000 of loans with floating or adjustable interest rates. All other loans due after one year have fixed interest rates.
Nonaccrual, Past Due and Restructured Loans
The following table summarizes the Company's nonaccrual, past due and restructured loans:
December 31 -------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands) Nonaccrual loans $3,701 $1,594 $1,538 $2,061 $2,374
Accruing loans past due 90 days or more 1,152 1,068 901 915 830
Restructured loans 540 1,117 1,195 694 592
The 1998 and 1997 nonaccrual loan amounts include $3,389,000 and $1,302,000, respectively, for loans considered impaired. Impaired loans are discussed further on page 25 of the annual stockholders report for the year ended December 31, 1998 which is incorporated herein by reference.
Additional information with respect to nonaccrual and restructured loans for the two years ended December 31, 1998 is as follows:
1998 1997 ---- ---- (in thousands) Gross interest income that would have been recorded if the loans had been current in accordance with their original terms $331 $223
Interest income that was included in net income 93 89
The Company's policy with respect to nonaccrual loans and the recognition of loan interest income is explained on page 23 of the annual stockholders report for the year ended December 31, 1998 which is incorporated herein by reference.
Potential Problem Loans
Loans not past due but about which management has doubt as to the ability of the borrowers to comply with present repayment terms amounted to $19,076,000 at December 31, 1998, as detailed below. Management feels that the degree of risk associated with these loans is not significant enough to require them to be placed on a nonaccrual basis. These loans are subject to constant management attention and their classification is reviewed at least quarterly.
Potential Problem $ Amount Loans Collateralized --------- -------------- (in thousands) Commercial $16,642 $16,116 Real estate - construction 82 82 Real estate - mortgage 2,136 2,083 Consumer 216 193 Leases -- -- ------- -------
$19,076 $18,474 ======= =======
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Company's loan loss experience for the five years ended December 31, 1998.
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands) Balance of allowance for loan losses at beginning of period $9,533 $8,388 $7,589 $6,701 $6,553
Loans charged-off: Commercial, financial, and agricultural 762 339 746 409 691 Real estate-construction -- -- -- -- -- Real estate-mortgage 103 3 99 125 93 Consumer 563 637 545 411 485 Leases -- -- -- -- -- ------ ------ ------ ------ ------
Total loans charged-off 1,428 979 1,390 945 1,269
Recoveries of loans previously charged-off: Commercial, financial, and agricultural 292 187 66 79 106 Real estate-construction -- -- -- -- -- Real estate-mortgage 7 4 12 21 28 Consumer 152 152 182 150 162 Leases -- -- -- -- -- ------ ------ ------ ------ ------
Total recoveries 451 343 260 250 296 ------ ------ ------ ------ ------
Net loans charged-off 977 636 1,130 695 973
Additions to allowance charged to expense* 905 1,781 1,929 1,583 1,121 ------ ------ ------ ------ ------
Balance at end of period $9,461 $9,533 $8,388 $7,589 $6,701 ====== ====== ====== ====== ======
Ratio of net charge-offs during period to average loans outstanding .16% .10% .20% .13% .19%
* Management reviews the loan portfolios on a quarterly basis to determine the adequacy of the allowance for loan losses and to ensure that a proper provision for loan losses is being recognized. The amount charged to expense by each member bank is based on several factors, including the following: (a) analytical reviews of loan loss experience, by major loan category, in relation to loans outstanding to determine the minimum allowance for loan losses required for performing loans; (b) continuing reviews of problem or nonperforming loans and overall portfolio quality; (c) assumptions with respect to current and expected economic conditions and (d) the exercise of management judgment.
The following table shows an allocation of the allowance for loan losses at each of the five dates indicated:
The above allocation is based on estimates and subjective judgment and is not necessarily indicative of the specific amounts on loan categories in which losses may ultimately occur, nor does it necessarily reflect actual historical charge-off experience.
REGULATORY CAPITAL RATIOS
Capital adequacy regulations require minimum capital ratios. As summarized below, the Company's capital ratios at December 31 were well in excess of the regulatory minimum, as well as the levels for well capitalized institutions.
The Company Regulatory Requirements ----------------------- --------------------------- 1998 1997 1996 Well Capitalized Minimum ---- ---- ---- ---------------- ------- Leverage 11.7% 11.6% 11.1% 5.0% 4.0% Tier 1 15.4 14.6 14.6 6.0 4.0 Tier 1 + Tier 2 16.6 15.8 15.8 10.0 8.0
RETURN ON EQUITY AND ASSETS
The "Statistical Summary" on page 8 of the annual stockholders report for the year ended December 31, 1998 is incorporated herein by reference.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns seven subsidiary banks and one nonbank subsidiary, and has a total of 33 banking offices, all of which are located in the Upper Peninsula of Michigan. The Company owns 28 and leases five of these banking offices. The Company also owns all 41 of its ATM's. The owned properties are unencumbered. Four of the leases can be terminated or renewed at no longer than five-year intervals at the lessees' option, with the other lease having a ten-year term and none of these being materially significant to their businesses.
The Company's bank subsidiary in Menominee also operates a loan production office located in Marinette, Wisconsin. This facility uses leased office and retail space in a local supermarket. The lease is for one year and is renewable on a year-to-year basis, at the option of the lessee.
The Company also owns its item processing center in Kingsford, Michigan. This is a noncustomer facility that was constructed during 1994 and is the site for consolidated processing and operational functions. The executive offices of the Company are located in office space owned by and leased annually from the MFC First National Bank, Marquette, Michigan. The Company considers all of its facilities to be well maintained and in generally good operating condition and suitable for the purposes for which they are intended.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any litigation other than ordinary routine litigation incidental to the business conducted by the banks. None of the litigation is expected to result in adverse judgments materially affecting the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to instruction G(3), the following information is included as an unnumbered Item in Part I of this report in lieu of being included in the proxy statement for the annual stockholders' meeting to be held on April 27, 1999.
The executive officers of the Company are as follows:
Name Age Position ---- --- -------- Howard L. Cohodas 54 Chairman and President Kenneth F. Beck 61 Senior Vice President, Treasurer and Secretary Ward L. Rantala 47 Vice President - Human Resources
Howard L. Cohodas has been Chairman and President of the Company since prior to March, 1994.
Kenneth F. Beck has been Senior Vice President, Treasurer and Secretary of the Company since prior to March, 1994.
Ward L. Rantala has been Vice President - Human Resources of the Company since prior to March, 1994.
Terms of office for the executive officers expire April 27, 1999, the scheduled date of the annual reorganizational meeting of the Company. The officers serve at the pleasure of the Board of Directors.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The "Market Price and Dividend Information" on page 44 of the annual stockholders report for the year ended December 31, 1998 is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The "Consolidated Selected Financial Data" on page 8 of the annual stockholders report for the year ended December 31, 1998 is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 through 15 of the annual stockholders report for the year ended December 31, 1998 are incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The "Quantitative and Qualitative Disclosures about Market Risk" on pages 16 and 17 of the annual stockholders report for the year ended December 31, 1998, are incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements included on pages 18 through 41 of the annual stockholders report for the year ended December 31, 1998, are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 1 and 2 of the Company's Proxy Statement dated March 22, 1999, with respect to directors and executive officers of the Company, is incorporated herein by reference in response to this item.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on page 3 of the Company's Proxy Statement dated March 22, 1999, with respect to executive compensation and transactions, is incorporated herein by reference in response to this item.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 8 and 9 of the Company's Proxy Statement dated March 22, 1999, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 6 of the Company's Proxy Statement dated March 22, 1999, with respect to certain relationships and related transactions, is incorporated herein by reference in response to this item.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
The following documents are filed as a part of this report:
(1) Financial Statements as required by Item 8 of this Form incorporated by reference herein from the 1998 annual report to stockholders attached hereto as Exhibit 13:
Item Location
Consolidated Balance Sheets Annual report under the caption "Consolidated Balance Sheets."
Consolidated Statements of Income Annual report under the caption "Consolidated Statements of Income."
Consolidated Statements of Comprehensive Income Annual report under the caption "Consolidated Statements of Comprehensive Income."
Consolidated Statements of Cash Flows Annual report under the caption "Consolidated Statements of Cash Flows."
Consolidated Statements of Shareholders' Equity Annual report under the caption "Consolidated Statements of Changes in Stockholders' Equity."
Notes to Consolidated Financial Statements Annual report under the caption "Notes to Consolidated Financial Statements."
Report of Independent Accountants Annual report under the caption "Report of Independent Auditors."
(3) Listing of exhibits
(3a) Articles of Incorporation
(3b) Bylaws
(10) Material contracts - executive incentive plan*
*Management contract or compensatory plan or arrangement
(13) Incorporated portions from the annual report to security holders
(21) Subsidiaries of the registrant
(23) Consent of independent auditors
(24) Power of attorney
(27) Financial data schedule
(b) No reports on Form 8-K were filed in the fourth quarter of 1998.
(c) Exhibits
(3a) Articles of Incorporation--A copy of the Company's articles of incorporation is filed as Exhibit 3(a) to the Company's Registration Statement on Form S-4 (Registration #33-73064) filed with the Commission on December 20, 1993 and incorporated herein by this reference.
(3b) Bylaws--A copy of the Company's bylaws is filed as Exhibit 3(b) to the Company's Registration Statement on Form S-4 (Registration #33-73064) filed with the Commission on December 20, 1993 and incorporated herein by this reference.
(10) Material contracts--A description of the Company's executive incentive plan is filed as Exhibit 10 to the Company's Report on Form 10-K for 1993 filed with the Commission on March 25, 1994 and incorporated herein by this reference.
(13) Annual report to security holders--Incorporated portions from the Company's annual stockholders report for the year ended December 31, 1998 are filed as Exhibit 13 at page 22 of this report.
(21) Subsidiaries of the registrant--The information required for this Exhibit is included in Item 1, page 2, of this report.
(23) Consent of independent auditors--The consent of independent auditors is filed as Exhibit 23 at page 23 of this report.
(24) Power of attorney--Powers of attorney from those directors whose names appear on pages 19 and 20 hereof followed by an asterisk are filed as Exhibit 24 on pages 24 and 25 of this report.
(27) Financial data schedule--The required financial data schedule is filed as Exhibit 27 at page 26 of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 17, 1999.
MICHIGAN FINANCIAL CORPORATION (Registrant)
By: /s/ KENNETH F. BECK ---------------------------------------- KENNETH F. BECK, Senior Vice President Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 17, 1999.
Signature Title --------- -----
Howard L. Cohodas /s/ HOWARD L. COHODAS Chairman, President (Principal - ----------------------------- Executive Officer) and Director
Kenneth F. Beck /s/ KENNETH F. BECK Senior Vice President (Principal - ----------------------------- Financial and Accounting Officer), Treasurer, Secretary and Director
Gary L. Butryn /s/ GARY L. BUTRYN * Director - -----------------------------
Willard M. Carne /s/ WILLARD M. CARNE * Director - -----------------------------
Willard L. Cohodas /s/ WILLARD L. COHODAS * Director - -----------------------------
Clarence R. Fisher /s/ CLARENCE R. FISHER * Director - -----------------------------
Hugh C. Higley, Jr. /s/ HUGH C. HIGLEY, JR. * Director - -----------------------------
David Holli /s/ DAVID HOLLI * Director - -----------------------------
Daniel H. Lori /s/ DANIEL H. LORI * Director - ------------------------------
Wayne L. Nasi /s/ WAYNE L. NASI * Director - -----------------------------
Fred M. Saigh /s/ FRED M. SAIGH * Director - -----------------------------
James L. Smith /s/ JAMES L. SMITH * Director - -----------------------------
William C. Verrette /s/ WILLIAM C. VERRETTE * Director - -----------------------------
*By Kenneth F. Beck as Attorney-in-Fact pursuant to Powers of Attorney executed by the directors listed above, which powers of Attorney have been filed with the Securities and Exchange Commission.
INDEX TO EXHIBITS
Exhibit No. Description Page - ----------- ----------- ----
13 Incorporated portions from the annual stockholders report for the year ended December 31, 1998 22
23 Consent of independent auditors 23
24 Power of attorney 24
27 Financial data schedule 26