Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-7638
FIRST MICHIGAN BANK CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2024376
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Financial Plaza, Holland, Michigan 49423
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 396-9200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No []
The number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date: 18,187,411 shares of the Company's
Common Stock ($1 par value) were outstanding as of September 30, 1995.
Page 1 of a Total of 16 Pages
The Exhibit Index Appears
on Page 15
INDEX
Page
Number
Part I. Financial Information (unaudited):
Item 1.
Financial Statements 3
Notes to Consolidated Financial Statements 6
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information 13
Signatures 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31, Sept. 30,
1995 1994 1994
(dollars in thousands)
Assets
Cash and due from banks. . . . . . . . . $ 108,617 $ 122,872 $ 106,054
Federal funds sold . . . . . . . . . . . 49,500 1,150 8,850
Total cash and cash equivalents . . 158,117 124,022 114,904
Interest bearing deposits with banks . . 6,914 3,912 4,490
Securities:
Available-for-sale . . . . . . . . . . 201,899 134,746 137,863
Held-to-maturity (market values
$498,448; $569,453 and $579,375
respectively) . . . . . . . . . . . . 487,521 579,287 582,334
Loans. . . . . . . . . . . . . . . . . . 2,080,864 1,891,480 1,826,814
Allowance for loan losses. . . . . . . . (25,947) (23,758) (23,181)
Premises and equipment . . . . . . . . . 67,159 64,567 62,722
Other assets . . . . . . . . . . . . . . 51,209 53,005 50,638
Total assets. . . . . . . . . . . .$3,027,736 $2,827,261 $2,756,584
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing . . . . . . . . . $ 306,519 $ 301,884 $ 280,990
Interest bearing:
Savings and NOW accounts . . . . . . 876,652 872,360 926,421
Time . . . . . . . . . . . . . . . . 1,444,838 1,230,425 1,174,764
Total deposits. . . . . . . . . . . 2,628,009 2,404,669 2,382,175
Short-term borrowings. . . . . . . . . . 125,239 172,779 130,044
Other liabilities. . . . . . . . . . . . 29,209 24,531 21,524
Long-term debt . . . . . . . . . . . . . 6,575 7,412 7,453
Total liabilities . . . . . . . . . 2,789,032 2,609,391 2,541,196
Shareholders' equity:
Preferred stock - no par value;
1,000,000 shares authorized . . . . . . -- -- --
Common stock - $1 par value; 24,000,000
shares authorized; issued and
outstanding: 18,187,411 at
September 30, 1995; 17,253,664 at
December 31, 1994; 17,322,983 at
September 30, 1994. . . . . . . . . . . 18,187 17,254 17,323
Surplus. . . . . . . . . . . . . . . . . 143,028 121,603 122,949
Retained earnings. . . . . . . . . . . . 76,752 81,898 76,727
Securities valuation, net of tax . . . . 737 (2,885) (1,611)
Total shareholders' equity. . . . . 238,704 217,870 215,388
Total liabilities and
shareholders' equity . . . . . . .$3,027,736 $2,827,261 $2,756,584
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
(in thousands, except per share data)
Interest Income
Interest and fees on loans . . . . . . $49,879 $39,519 $143,550 $109,200
Interest on securities: Taxable. . . . 7,102 6,867 21,669 20,262
Tax-exempt. . . . 3,410 3,556 10,429 10,725
Other interest income. . . . . . . . . 843 518 1,502 722
Total interest income . . . . . . . 61,234 50,460 177,150 140,909
Interest Expense
Interest on deposits . . . . . . . . . 28,032 19,777 80,078 53,719
Interest on short-term borrowings. . . 1,345 1,070 4,396 2,916
Interest on long-term debt . . . . . . 158 203 491 610
Total interest expense. . . . . . . 29,535 21,050 84,965 57,245
Net Interest Income . . . . . . . . . . 31,699 29,410 92,185 83,664
Provision for loan losses. . . . . . . 1,986 1,530 5,614 4,622
Net interest income after
provision for loan loss. . . . . . 29,713 27,880 86,571 79,042
Non-Interest Income
Service charges on deposits. . . . . . 3,187 3,061 9,351 8,705
Trust income . . . . . . . . . . . . . 1,351 1,293 3,900 3,888
Other operating income . . . . . . . . 3,238 2,883 8,753 8,809
Securities gains (losses). . . . . . . 18 (25) 36 (159)
Total non-interest income . . . . . 7,789 7,212 22,040 21,243
Non-Interest Expense
Salaries and employee benefits . . . . 13,997 12,391 40,045 36,219
Occupancy. . . . . . . . . . . . . . . 1,617 1,508 4,807 4,492
Equipment. . . . . . . . . . . . . . . 1,508 1,374 4,338 4,147
FDIC Insurance . . . . . . . . . . . . (140) 1,281 2,556 3,731
Other operating. . . . . . . . . . . . 7,854 7,155 21,994 20,331
Total non-interest expense. . . . . 24,836 23,709 73,740 68,920
Income Before Income Taxes. . . . . . . 12,666 11,383 34,871 31,365
Income taxes . . . . . . . . . . . . . 3,333 2,809 8,829 7,404
Net Income. . . . . . . . . . . . . . .$ 9,333 $ 8,574 $ 26,042 $ 23,961
Net income per share . . . . . . . . . $.51 $.47 $1.42 $1.30
Cash dividends declared per share. . . .19 .17 .56 .48
Average shares outstanding (in
thousands). . . . . . . . . . . . . . 18,438 18,458 18,402 18,458
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Nine Months Ended September 30,
1995 1994
Cash Flows From Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . $ 26,042 $ 23,961
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses. . . . . . . . . . . . 5,614 4,622
Origination of loans for sale in secondary
market. . . . . . . . . . . . . . . . . . . . . (105,643) (111,400)
Proceeds from sale of loans. . . . . . . . . . . 106,399 112,362
Gain on sale of loans. . . . . . . . . . . . . . (756) (962)
Realized securities (gains) losses . . . . . . . (36) 159
Provision for depreciation, amortization and
accretion . . . . . . . . . . . . . . . . . . . 5,191 4,315
Deferred income taxes. . . . . . . . . . . . . . (41) (29)
(Increase) decrease in interest receivable. . . . (1,874) (2,996)
Increase (decrease) in interest payable. . . . . 2,749 411
Other - net. . . . . . . . . . . . . . . . . . . 3,696 (1,706)
Total adjustments. . . . . . . . . . . . . . . 15,299 4,776
Net cash provided by operating activities. . . 41,341 28,737
Cash Flows From Investing Activities
Net (increase) decrease in interest bearing
deposits with banks . . . . . . . . . . . . . . . . 3,002 (1,805)
Purchase of securities available-for-sale. . . . . . (76,461) (34,031)
Proceeds from sales of securities
available-for-sale. . . . . . . . . . . . . . . . . 4,099 6,327
Proceeds from maturities and prepayments of
securities available-for-sale . . . . . . . . . . . 10,553 5,017
Purchase of securities held-to-maturity. . . . . . . (1,556) (101,834)
Proceeds from maturities and prepayments of
securities held-to-maturity . . . . . . . . . . . . 93,285 118,203
Net increase in loans. . . . . . . . . . . . . . . . (192,364) (210,702)
Purchase of premises and equipment and other
assets. . . . . . . . . . . . . . . . . . . . . . . (8,227) (8,798)
Net cash used in investing activities . . . . . (173,673) (227,623)
Cash Flows From Financing Activities
Net increase (decrease) in non-interest bearing
demand and savings deposits and NOW accounts. . . . 8,927 52,575
Net increase in time deposits. . . . . . . . . . . . 214,413 157,267
Net increase (decrease) in short-term borrowings . . (47,540) 15,182
Repayment of long-term debt. . . . . . . . . . . . . (837) (1,892)
Cash dividends and fractional shares . . . . . . . . (9,931) (8,006)
Proceeds from sales of stock . . . . . . . . . . . . 3,176 2,864
Common stock repurchased . . . . . . . . . . . . . . (1,781) (3,682)
Net cash provided by financing activities . . . 166,427 214,308
Increase in Cash and Cash Equivalents. . . . . . . . 34,095 15,422
Cash and Cash Equivalents, at Beginning of Period. . 124,022 99,482
Cash and Cash Equivalents, at End of Period. . . . .$ 158,117 $ 114,904
Notes to Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
1. In the opinion of management of the Registrant, the unaudited consolidated
financial statements contained herein include all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
consolidated financial position of the Registrant as of September 30, 1995,
September 30, 1994 and December 31, 1994 and consolidated results of
operations for the three and nine months ended September 30, 1995 and 1994
and consolidated cash flows for the nine months ended September 30, 1995
and 1994.
2. On March 10, 1995, First Michigan Bank Corporation (First Michigan)
acquired Superior Financial Corporation (Superior), a one bank holding
company located in Sault Ste. Marie, Michigan. The acquisition was
effected through the exchange of 22.931 shares of First Michigan common
stock (616,699 shares in total) for each outstanding share of Superior.
The acquisition was accounted for as a pooling-of-interests. Accordingly,
the accompanying consolidated financial statements have been restated to
include the balances and results of operation of Superior prior to the
acquisition.
3. On January 1, 1995, First Michigan adopted the accounting provisions for
impaired loans promulgated by Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (as amended
by Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures").
Under this new accounting standard, a loan is considered to be impaired
when it is probable that a subsidiary bank will be unable to collect all
principal and interest amounts due according to the contractual terms of
the loan agreement. Under this definition, loans that have been placed on
non-accrual status or which have been involved in a troubled debt
restructuring (TDR; also termed "renegotiated") are considered impaired.
Prior to 1995, all of those loans which would meet this newly-promulgated
definition of impairment were included in the non-accrual and renegotiated
classifications within the nonperforming loan totals disclosed in
management's discussion and analysis in First Michigan's annual report.
In accordance with the new standard, this accounting change and the
disclosures associated therewith have been adopted prospectively.
A portion of the total allowance for loan losses is related to impaired
loans as defined under this new accounting standard. The allowance for
loan losses for an impaired loan is recorded at the amount by which the
outstanding recorded principal balance exceeds the fair market value of
the collateral on the impaired loan. For a loan that is not collateral-
dependent, the allowance for loan losses is recorded at the amount by
which the outstanding recorded principal balance exceeds the current best
estimate of the future cash flows on the loan, discounted at the loan's
effective interest rate. Prior to 1995, the portion of the total
allowance for loan losses related to loans which would meet this new
definition of impairment was also based, in most cases, on the fair
market value of the collateral on that loan. As such, the implementation
of this new accounting standard has had virtually no impact on the
operations of First Michigan.
For impaired loans that are on non-accrual status, cash payments received
on impaired loans are generally applied to reduce the outstanding recorded
principal balance of the impaired loans. However, at the discretion of
the subsidiary bank, all or a portion of a cash payment received on a
non-accrual loan may be recognized as interest income to the extent
allowed by the loan contract, provided that the borrower's financial
condition or the underlying collateral on the loan support the collection
in full of the remaining outstanding recorded principal balance of the
loan. For an impaired loan that has been involved in a formal troubled
debt restructuring, interest income is recognized on an accrual basis
according to the modified contractual terms so long as the
restructured loan continues to perform in accordance with the modified
contractual terms.
4. The results of operations for the nine months ended September 30, 1995 are
not necessarily indicative of the results to be expected for the full year.
5. The accompanying unaudited consolidated financial statements should be read
in conjunction with the Notes to Consolidated Financial Statements contained
in the Registrant's Form 10-K for the year ended December 31, 1994.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations Interim Financial Statements
The following is a discussion of First Michigan Bank Corporation's
("Company's") results of operations for the three months and nine months
ended September 30, 1995 and 1994 and information relating to the Company's
financial condition, focusing on its liquidity and capital resources.
Net income of $9,333,000 for the three months ended September 30, 1995
increased 8.9% from the $8,574,000 earned during the three months ended
September 30, 1994. Earnings per share for the third quarter 1995 were
$.51 versus $.42 for the same period in 1994 and $1.42 versus $1.30 for
the nine month periods ending September 30, 1995 and 1994 respectively.
The increase in earnings is primarily attributable to the continued growth
in average earning assets, improvements in non-interest income, and the
reduction of Federal Deposit Insurance Corporation (FDIC) premiums.
Offsetting this, in part, were increases in the provision for loan losses
and other non-interest expenses. These changes are addressed in the analyses
that follow.
Net Interest Income Third Quarter Year-to-Date
(in thousands) 1995 1994 1995 1994
Interest Income $ 61,234 $ 50,460 $ 177,150 $140,909
Interest Expense 29,535 21,050 84,965 57,245
Net Interest Income $ 31,699 $ 29,410 $ 92,185 $ 83,664
The Company's third quarter 1995 net interest income of $31,699,000 increased
by $2,289,000 (7.8%) when compared with the same period of 1994. As shown in
the following table, in the third quarter of 1995 the rate on interest
earning assets increased 75 basis points from 8.23 to 8.98 while the rate
for interest bearing liabilities increased 105 basis points from 3.78 to
4.83. These changes resulted in a decrease of 30 basis points in the
interest spread. Primarily because of the decrease in spread, the net
interest margin decreased by 15 basis points when comparing the two periods.
The effect of the decrease in spread on the net interest margin was offset,
in part, by the 10.3% increase in average earning assets versus the third
quarter of 1994. The following table shows a comparison of average volumes,
effective yields earned, and rates paid during the comparable periods.
TABLE 1
INTEREST EARNING ASSETS AND INTEREST BEARING
LIABILITIES BY MAJOR CATEGORIES
September 30, 1995 and 1994
----------Third Quarter Averages------------
Yield Earned/
Volumes Rate Paid
1995 1994 1995 1994
(in thousands)
Interest Earning Assets
Loans $2,051,792 $1,786,335 9.70% 8.83%
Securities: Taxable 469,190 473,855 6.00 5.74
Tax-exempt 212,206 227,223 9.54 9.38
Short-term investments 59,691 44,502 5.60 4.62
Total interest earning assets 2,792,879 2,531,915 8.98 8.23
Interest Bearing Liabilities
Savings deposits 862,409 905,533 2.98 2.76
Time deposits 1,431,402 1,167,119 5.98 4.58
Short-term borrowings 127,302 126,601 4.20 3.35
Long-term debt 6,594 8,620 9.58 9.44
Total interest bearing
liabilities 2,427,707 2,207,873 4.83 3.78
Interest spread $ 365,172 $ 324,042 4.15% 4.45%
Net interest margin 4.78% 4.93%
-----------Year-to-Date Averages------------
Yield Earned/
Volumes Rate Paid
1995 1994 1995 1994
(in thousands)
Interest Earning Assets
Loans $1,994,634 $1,718,646 9.65% 8.52%
Securities: Taxable 480,075 480,620 5.99 5.59
Tax-exempt 218,817 227,979 9.44 9.42
Short-term investments 34,937 22,296 5.75 4.33
Total interest earning assets 2,728,463 2,449,541 8.94 7.99
Interest Bearing Liabilities
Savings deposits 857,562 899,271 3.14 2.60
Time deposits 1,381,831 1,104,457 5.80 4.38
Short-term borrowings 132,569 129,255 4.43 3.01
Long-term debt 6,815 8,781 9.60 9.26
Total interest bearing
liabilities 2,378,777 2,141,764 4.78 3.57
Interest spread $ 349,686 $ 307,777 4.16% 4.42%
Net interest margin 4.78% 4.87%
Average yields in the above table have been adjusted to a tax-equivalent
basis, and exclude the effect of any market value adjustments recorded under
Statement of Financial Standards No. 115.
Interest Earning Assets/ Interest Income
Interest income for the third quarter of 1995 increased $10,775,000 (21.4%)
from the third quarter of 1994. This is due to the 10.3% increase in average
volume of earning assets during the third quarter 1995 versus 1994 and to the
75 basis point increase in average yield on the earning assets as indicated
in the preceding table. Third quarter 1995 average loans increased by
$265,457,000 (14.9%) versus the same period in 1994, while interest earning
assets overall increased $260,964,000. Commercial and installment loan
categories showed strongest increases of more that 16%. Mortgage volumes
were also strong reflecting a 10.7% increase. The increases can generally
be attributed to the continuing economic strength in the Company's marketplace
and the resultant consumer confidence as well as competitive loan pricing.
Installment lending volumes reflect favorable consumer response to certain
direct loan campaigns particularly the subsidiary banks' personal line of
credit product. At the same time the Company is de-emphasizing certain
indirect consumer loan programs.
There has been a 2.85% decrease in the average volume of securities as
deposit increases alone have not kept pace with the increasing loan demand.
The decrease in the volume of securities reflects reinvestment in new
securities of only a portion of the proceeds from normally scheduled
maturities, as opposed to a program of sales for liquidity purposes.
Increases in the overall taxable portfolio yield and the tax equivalent
yield of the exempt portfolio between the periods reflect the generally
rising market of investment security yields in the last year.
Interest Bearing Liabilities/Interest Expense
The volume of interest bearing liabilities increased by $219,834,000 when
compared to the third quarter 1994. Substantially all of this 10.0% increase
occurred in the time deposit category as seen in the table above. This is
due to growth in large certificates of deposit and those with maturities of
24 months and longer. The volume growth in these deposits is due to consumer
preference for locking in higher rates and special marketing campaigns of
limited duration that have included rate incentives alone or rate and service
incentives combined. The rate paid on all deposit categories and short-term
borrowings increased with the competitive pressures in the marketplace. The
average rate on long-term debt reflects an increase as certain lower rate
obligations have been paid as scheduled since the third quarter 1994. The
overall rate on quarterly average interest bearing liabilities increased
105 basis points to 4.83% in this quarter from the third quarter 1994 average
rate of 3.78%.
Asset/Liability Management
The Company maintains an asset/liability management process whereby strategies
are developed and implemented to maintain the proper level of liquidity while
maximizing net interest income and minimizing the impact on earnings from
major interest rate changes. Particular attention is placed on the Company's
interest sensitivity, which is the degree net interest income is affected by
a change in market interest rates. Monitoring the balance of assets and
liabilities that are rate sensitive within 90 days and one year is a
continuing aspect of this process. When a cumulative rate sensitive ratio
of 1.00 is maintained, both the interest income and the interest expense
increase or decline in tandem with changes in market interest rates, with
the net interest income of the Company not changing significantly as a direct
result.
Liquidity is monitored in order to meet the needs of customers, such as
depositors withdrawing funds or borrowers requesting funds to meet their
credit needs. The Company's current internal and external sources of funds
are adequate to meet its liquidity needs.
Deposit gathering is a principal source of funds for the Company. Development
of consumer deposits is achieved by paying competitive rates and by maintaining
an active marketing program. Larger certificates of deposit, issued to
public authorities and the private sector, also provide an important source
of funds for the Company. These certificates of deposit are purchased
primarily from within the Company's market areas and are considered a
reliable source of funds. The Company also purchases brokered certificates
of deposit (CDs) from time to time for varying periods of up to three years.
Such purchases are made within established Company guidelines and currently
represent approximately 12% of large CDs and 2% of total deposits.
Another principal source of funds derives from the routine payments on loans
and the maturities of loans and securities. The Company's securities
portfolio is invested almost exclusively in investment grade issues, and, as
discussed in the next section, the Company continues to have a high-quality
loan portfolio. As a result, payments and maturities on these assets are
also a reliable source of funds.
Externally, the Company has the ability to enter the federal funds market as
a purchaser to meet daily liquidity needs. In addition, the Company has the
ability to enter into funding arrangements with other financial institutions.
Allowance for Loan Losses Third Quarter Year-to-Date
(in thousands) 1995 1994 1995 1994
Balance at beginning of period $25,203 $22,627 $23,758 $20,523
Provision for loan losses 1,986 1,530 5,614 4,622
Loans charged-off (1,803) (1,377) (4,986) (3,451)
Recoveries of loans previously
charged-off 561 401 1,561 1,487
Balance at end of period $25,947 $23,181 $25,947 $23,181
The provision for loan losses increased $456,000 for the third quarter of
1995 versus the 1994 period. The provision for the third quarter 1995 is
consistent with management's evaluation of the loan portfolio and its recent
growth, while giving due consideration to the consistently low nonperforming
asset ratios. The allowance for loan losses as a percent of loans at
September 30, 1995 is 1.25%, down 1 basis point from the 1.26% ratio at
December 31, 1994.
In assessing the adequacy of the loan loss allowance, management considers
many factors, including changes in the total size of the loan portfolio, the
size and type of credits in the portfolio, past loan loss experience,
existing and anticipated economic conditions and other factors that might
be pertinent. The amount actually provided in any period may be more or less
than actual net loan charge-offs for that period.
Net charge-offs in the third quarter 1995 increased by $666,000 compared to
the third quarter 1994. Net charge-offs as a percent (annualized) of average
loans outstanding during the quarter were .24% for the third quarter of 1995
and .17% in 1994. Despite this increase this ratio is within the range of
management's expectations and continues to reflect prudent lending practices.
Nonperforming assets, consisting of non-accrual and renegotiated loans and
other real estate owned, in total were .35% and .48% of total loans
outstanding at September 30, 1995 and September 30, 1994 respectively. The
Company continues to compare favorably with the banking industry nationwide
in these credit quality ratios. Following are the balances constituting the
nonperforming assets and loans 90 days past due and still accruing as of the
end of the respective periods.
September 30
1995 1994
Non-accrual loans $4,862 $5,412
Renegotiated loans 732 876
Other real estate owned 1,798 1,377
Total nonperforming assets $7,392 $7,665
Loans 90 days past due $3,493 $3,885
Non-interest Income Third Quarter Year-to-Date
(in thousands) 1995 1994 1995 1994
Total $7,789 $7,212 $22,040 $21,243
Non-interest income, which includes service charges on deposit accounts, loan
fees, trust income, other operating income and securities transactions,
increased $577,000 (8.0%) during the three months ended September 30, 1995
compared to the same period in 1994. The increase is due primarily to
improvements in service charges on deposits, brokerage and advisory fees as
well as loan fees from increased mortgage origination and refinancing
activity versus the third quarter 1994.
Non-interest Expense Third Quarter Year-to-Date
(in thousands) 1995 1994 1995 1994
Total $24,836 $23,709 $73,740 $68,920
Non-interest expense increased $1,127,000 (4.8%) when comparing the third
quarter of 1995 with 1994. Included in this total is the effect of a
reduction in the annual FDIC premium from $.23 to $.04 per $100 of insured
deposits. Since the refund from the rate reduction was retroactive for part
of the second quarter to June 1, 1995, this line item actually reflects a
credit for this quarter. Without this premium reduction, the non-interest
expense increase for the quarter would have been approximately 8.5%.
Salary and benefit costs increased by 13.0% when comparing the third quarter
1995 to 1994. This increase results from the effect of annual merit
increases, additional staffing in support of new products and staffing of
new branches. A continuing program of equipment upgrading, branching and
facilities remodeling caused an increase of 8.4% in occupancy and equipment
categories as well. Other non-interest expenses, excluding FDIC insurance,
increased by 9.8% from the third quarter 1994 due to increases in printing
and supplies for new product and employee training materials, data processing
and software related costs as a result of increased account volume and
technology upgrades, as well as costs associated with the Company's
introduction of its debit card product. Management monitors all increases
in non-interest expense and continues to explore opportunities to enhance
operating efficiencies through functional consolidation balanced against the
need to maintain a high level of service to customers.
Income Taxes Third Quarter Year-to-Date
(in thousands) 1995 1994 1995 1994
Total $3,333 $2,809 $8,829 $7,404
Fluctuations in income taxes result primarily from changes in the level of
profitability and variations in the amount of tax-exempt income. The
increase in pre-tax income and certain non-deductible expenses account for
$500,000 of the increased income tax expense of $524,000 between the third
quarter 1995 and 1994. The balance of the increase is due to a lower level
of tax-exempt income in the third quarter 1995 versus 1994.
Capital
Following are statements of changes in shareholders' equity for the three
and nine month periods ending September 30, 1995 (amounts in thousands):
Third Quarter Year-to-Date
Shareholders' equity at beginning
of period $232,323 $217,870
Net income 9,333 26,042
Shares issued upon exercise of
employee stock options 67 427
Shares issued under dividend
reinvestment, employee stock
purchase and director stock
purchase plans 950 2,722
Dividends to shareholders (3,456) (10,226)
Change in securities valuation,
net of tax 16 3,623
Common stock repurchased (529) (1,754)
Shareholders' equity at
September 30, 1995 $238,704 $238,704
Shareholder's equity is the Company's principal capital base and it is
important that it increase along with the growth in total assets in order
for adequate capital ratios to be maintained. The ratio of equity to total
assets at September 30, 1995 was 7.9% as compared to the December 31, 1994
ratio of 7.7%.
The Federal Reserve Board provides guidelines for the measurement of capital
adequacy of bank holding companies. The Company's capital, as adjusted under
these guidelines, is referred to as risk-based capital. The Company's Tier 1
risk-based capital ratio at September 30, 1995 is 10.6%, and total risk-based
capital ratio is 12.0%. At December 31, 1994 these ratios were 10.5% and
11.9% respectively. Minimum regulatory Tier 1 risk-based and total risk-based
capital ratios under the Federal Reserve Board guidelines are 4% and 8%
respectively.
These same capital ratios are applied at the subsidiary bank level by the
Federal Deposit Insurance Corporation under which a well-capitalized bank
is defined as one with at least a 10% risk-based capital level. All Company
subsidiary banks met this definition at December 31, 1994 and September 30,
1995.
The capital guidelines also provide for a standard to measure risk-based
capital to total assets. This is referred to as the leverage ratio. The
Company's leverage ratio at September 30, 1995 is 7.7%. The minimum standard
leverage ratio is 3%, and virtually all financial institutions subject to
these requirements are expected to maintain a leverage ratio of 1 to 2
percentage points above the 3% minimum.
In addition to shareholders' equity, the Company had long-term debt of
$6,575,000 at September 30, 1995 and $7,412,000 at December 31, 1994.
The Company has entered into an agreement with The Northern Trust Company
("Northern") whereby Northern extends a line of credit in the amount of
$25,000,000. This replaces an existing line of credit with Northern against
which the Company had drawn $10,000,000. The additional $15,000,000 is
available for general corporate purposes and to facilitate the acquisition
of the Company's common stock under its stock repurchase program.
PART II - OTHER INFORMATION
Item 5. Other Information
On October 23, 1995, the Company announced the signing of a letter of intent
to acquire Arcadia Financial Corporation ("Arcadia"), a one bank holding
company located in Kalamazoo, Michigan. Arcadia has total assets of
approximately $102,000,000. The merger will be effected through the
exchange of the Company's common stock for all of the outstanding shares
of Arcadia. Management expects to complete the merger at the end of the
first quarter 1996 and anticipates accounting for the transaction as a
pooling-of-interests.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See exhibit index on page 15.
(b) Reports on Form 8-K:
There were no reports on Form 8-K
filed during the third quarter 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995 to be signed on its behalf by the undersigned
hereunto duly authorized.
FIRST MICHIGAN BANK CORPORATION
/s/ Stephen A. Stream
Stephen A. Stream
President and Chief Operating Officer
/s/ William F. Anderson
William F. Anderson
Vice President and Controller (Chief Accounting Officer)
DATE: November 13, 1995
EXHIBIT INDEX
The following exhibits are filed herewith.
Exhibits Page
(11) Computation of Earnings Per Share 16
Part I, Exhibit (11)
COMPUTATION OF EARNINGS PER SHARE
FIRST MICHIGAN BANK CORPORATION
Three Months Nine Months
ended September 3 ended September 30,
1995 1994 1995 1994
(in thousands, except per share amounts)
Average shares outstanding 18,182.4 18,233.6 18,166.5 18,229.5
Net effect of the assumed
exercise of stock options
(based on the treasury
stock method using higher
of either ending or average) 255.2 224.4 235.6 228.7
Total shares 18,437.6 18,458.0 18,402.1 18,458.2
Net income $9,333 $8,574 $26,042 $23,961
Per share amount $.51 $.47 $1.42 $1.30