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, 1994
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ( )
At February 28, 1995, the registrant's common stock, $10 par value held by
nonaffiliates, had an aggregate market value of $1,349,741,569 based on the
closing price of $101.875 and 13,248,997 common shares outstanding.
At February 28, 1995, the registrant had outstanding 13,248,997 shares of its
common stock, $10 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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MICHIGAN NATIONAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
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PART I
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Item 1 BUSINESS ................................................. 9
Statistical Disclosure By Bank Holding Companies
Summary of Consolidated Net Interest Income............ 32
Volume/Rate Analysis .................................. 34
Investment Securities Portfolio ....................... 96
Loans and Lease Financing Portfolio ................... 54
Loan Maturities and Interest Rate Sensitivity ......... 36
Non-Performing Loans .................................. 59
Cross-Border Outstandings ............................. 66
Analysis of the Allowance for Possible Credit
Losses ............................................... 64
Allocation of the Allowance for Possible Credit
Losses ............................................... 65
Average Deposits ...................................... 33
Time Deposits of $100,000 or More, Maturity
Distribution ......................................... 37
Financial Ratios ...................................... 17
Short-Term Borrowings .................................109
Item 2 PROPERTIES ............................................... 11
Item 3 LEGAL PROCEEDINGS ........................................131
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 1994.
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PART II
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Item 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS ...................................... 12
Item 6 SELECTED FINANCIAL DATA .................................. 17
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................... 13
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Michigan National Corporation and Subsidiaries
Consolidated Statement of Condition
December 31, 1994 and 1993 ............................ 78
Consolidated Statement of Income
Years Ended December 31, 1994, 1993 and 1992 .......... 80
Consolidated Statement of Changes in Shareholders' Equity
Years Ended December 31, 1994, 1993 and 1992 .......... 84
Consolidated Statement of Cash Flows
Years Ended December 31, 1994, 1993 and 1992 .......... 82
Notes to Consolidated Financial Statements ............. 85
Independent Auditors' Report ...........................140
Selected Quarterly Financial Data ......................141
Item 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE--None
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MICHIGAN NATIONAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K CONTINUED
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PART III
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Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Corporation........................144
(b) Executive Officers of the Corporation...............146
(c) Significant employees - not required
(d) Family relationships - none
(e) Business experience - included in Items 10(a) and 10(b)
(f) Involvement in certain legal proceedings - none
(g) Promoters and control persons - not applicable
(h) Exchange Act section 16 (a) compliance..............149
Item 11 EXECUTIVE COMPENSATION
(a) Compensation Committee Report.......................150
(b) Summary Compensation Table..........................153
(c) Option/SAR Table....................................155
(d) Option/ SAR exercises and value.....................156
(e) Long-term incentive plan awards - none
(f) Defined benefit or actuarial plans..................157
(g) Compensation of directors...........................159
(h) Employment contracts and termination of employment
and change-in-control arrangements..................160
(i) Report on repricing of option/SARs - none
(j) Additional information on compensation committee
interlocks and insider participation in compensation
decisions - None, except for information called for
by Item 404 of Regulation S-K which is disclosed
under Item 13 below.
(k) Board compensation committee report on executive
compensation........................................150
(l) Performance table...................................163
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Security ownership of certain beneficial owners.....164
(b) Security ownership of management....................164
(c) Changes in control - Agreement and Plan of Merger,
dated as of February 4, 1995, by and among Michigan
National Corporation, National Australia Bank Limited
and MNC Acquisition Co., incorporated herein by
reference to Item 7 Exhibit 1 of Form 8-K dated
February 4, 1995.
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with management and others.............166
(b) Certain business relationships......................166
(c) Indebtedness of management..........................166
(d) Transactions with promoters - not applicable
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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.
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MICHIGAN NATIONAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K CONTINUED
_____________________________________________________________________________
PART IV (CONTINUED)
(b) Reports on Form 8-K
A Form 8-K was filed on February 4, 1995, which described
under Item 5, an Agreement and Plan of Merger and Stock
Option Agreement which Michigan National Corporation
entered into with National Australia Bank Limited
and an amendment of a Rights Agreement, dated as of April 25,
1988, by and between Michigan National Corporation and Mellon
Bank, N.A. A copy of the above documents and Press Release
dated February 6, 1995, related to these documents were
filed as exhibits under Item 7.
(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, and as amended February 4, 1995. The
amendment is incorporated herein by reference to
Exhibit 4 of Form 8-K dated February 4, 1995.
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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MICHIGAN NATIONAL CORPORATION
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 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.
o. Stock Option Agreement between Michigan National
Corporation and National Australia Bank Limited dated
February 4, 1995, incorporated herein by reference to
Exhibit 2 of Form 8-K dated February 4, 1995.
10. Material Contracts
a. Employment Agreement dated January 16, 1985 between
Michigan National Corporation and Robert J. Mylod, as
amended............................................ (1)
b. Pension Agreement dated January 16, 1985 between Michigan
National Corporation and Robert J. Mylod, as amended
March 17, 1993......................................(4)
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MICHIGAN NATIONAL CORPORATION
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...................................... (4)
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 three current
Executive Officers including, Robert J. Mylod, Richard C.
Webb and Lawrence L. Gladchun (2), as amended February
4, 1995................................................. 169
h. Form Michigan National Corporation Director
Indemnification Agreement dated September 19, 1990 between
Michigan National Corporation and the members of the
Board of Directors..................................... (3)
i. Pension Agreement dated November 7, 1990 between Michigan
National Corporation and W. David Tull, as amended
March 9, 1993.......................................... (4)
j. Pension Agreement dated November 7, 1990 between Michigan
National Corporation and Charles W. Kight, as amended
March 12, 1993......................................... (4)
k. Pension Agreement dated January 1, 1991 between Michigan
National Corporation and Lawrence L. Gladchun, as
amended March 4, 1993.................................. (4)
l. Pension Agreement dated January 1, 1991 between Michigan
National Corporation and Richard C. Webb, as amended
March 5, 1993.......................................... (4)
m. Employment Agreement dated November 17, 1993 between
Michigan National Corporation and Douglas E. Ebert..... (5)
n. Pension Agreement dated January 10, 1994 between Michigan
National Corporation and Douglas E. Ebert (5), as amended
February 4, 1995....................................... 167
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MICHIGAN NATIONAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K CONTINUED
____________________________________________________________________________
PART IV (CONTINUED)
o. 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 (2), as amended
February 4, 1995....................................... 169
p. Employment Agreement dated March 2, 1994 between Michigan
National Corporation and Joseph J. Whiteside........... (5)
q. Pension Agreement dated March 11, 1994 between Michigan
National Corporation and Joseph J. Whiteside (5), as
amended February 4, 1995............................... 167
r. Purchase and Sale Agreement by and among Michigan National
Bank, Independence One Mortgage Corporation and Norwest
Mortgage, Inc., dated as of August 11, 1994, incorporated
herein by reference to Exhibit a on Form 10-Q for the
period ended September 30, 1994.
s. Termination Agreement by and among Federal Deposit
Insurance Corporation, as manager of the FSLIC Resolution
Fund, Michigan National Corporation and Independence One
Bank of California, FSB, dated as of September 29, 1994,
incorporated herein by reference to Exhibit b on Form 10-Q
for the period ended September 30, 1994.
11. Statement regarding computation of per share earnings..... 171
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............................ 172
23. Consent of independent auditors........................... 173
27. Financial data schedule................................... 174
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. This
Memorandum of Understanding was terminated by the Comptroller
of Currency in October 1994.
(d) Financial Statement Schedules required by Regulation S-X - not
applicable
SIGNATURES................................................................. 175
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MICHIGAN NATIONAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K CONTINUED
(1) This exhibit is incorporated herein by reference to Exhibit 10 on Form
10-K for the year ended December 31, 1987.
(2) This exhibit is incorporated herein by reference to Exhibit 10 on Form
10-K for the year ended December 31, 1989.
(3) This exhibit is incorporated herein by reference to Exhibit 10 on Form
10-K for the year ended December 31, 1990.
(4) This exhibit is incorporated herein by reference to Exhibit 10 on Form
10-K for the year ended December 31, 1992.
(5) This exhibit is incorporated herein by reference to Exhibit 10 on Form
10-K for the year ended December 31, 1993.
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FORM 10-K
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
PART I 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 a bank subsidiary, a savings and loan
subsidiary, and six non-bank subsidiaries. MNC sold several businesses during
1994 as part of a corporate restructuring. Refer to Note C to the Consolidated
Financial Statements for information on these transactions and to the Business
Review section of Management's Discussion and Analysis for information on the
Corporation's business activities during 1994 including the corporate
restructuring. MNC also sold its investment in Bloomfield Hills Bancorp Inc.
Refer to the Principles of Consolidation section of Note A to the Consolidated
Financial Statements for information on this transaction.
MNC has approximately 4,100 full-time equivalent employees. At the end of
1994, MNC was the fifth largest bank holding company in Michigan based upon
total assets. Michigan National Bank (MNB), MNC's principal banking
subsidiary, has 191 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.
SUBSEQUENT EVENT
On February 4, 1995, the Corporation executed an Agreement and Plan of Merger
by and among National Australia Bank Limited A.C.N. 004044937, a banking
corporation organized under the laws of Australia (the "National"), MNC
Acquisition Co., a Michigan corporation and wholly owned subsidiary of the
National ("Acquisition"), and the Corporation (the "Merger Agreement"). The
Merger Agreement provides that (i) Acquisition will be merged with and into the
Corporation (the "Merger"), with the Corporation continuing as the surviving
corporation; (ii) the Corporation will thereupon become a wholly owned
subsidiary of the National; and (iii) each outstanding share of common stock,
par value $10 per share, of the Corporation (the "Common Stock") (other than
certain shares owned by the Corporation, the National, or their respective
subsidiaries, which will be canceled) will be converted, upon the effectiveness
of the Merger, into the right to receive $110 in cash, without interest. The
transaction, which is expected to be completed in six to nine months, is
subject to approval by the Corporation's shareholders and various regulatory
approvals.
Further information about the Agreement and Plan of Merger is contained in the
Corporation's Current Report on Form 8-K, dated February 4, 1995, and which is
incorporated herein by reference.
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. BUSINESS (CONTINUED)
INDUSTRY SEGMENTS
MNC operates in two industry segments - financial services and residential
mortgage banking. Please refer to Note X to the Consolidated Financial
Statements for further information.
The primary businesses of the financial services segment are retail banking,
commercial banking and investment banking. These businesses are operated by
MNB. Independence One Bank of California (IOBOC) also operates retail and
commercial banking businesses.
MNB also operates a residential mortgage banking business and offers
residential mortgages to customers through MNB's branch network.
COMPETITION
Michigan is a highly competitive financial services market. Michigan laws
allow reciprocal interstate banking with the states of Illinois, Indiana,
Minnesota, Ohio and Wisconsin. Federal laws, beginning in 1995, will allow
interstate bank acquisitions, further expanding the banking market and
heightening 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 investment companies, savings and
loan associations, consumer finance companies, mortgage companies, and credit
unions. IOBOC does business in the highly competitive southern California
market. Financial institutions compete for deposit accounts, loans and other
business on the basis of interest rates, fees, convenience and quality of
service.
MNC's non-bank subsidiaries (included in the financial services 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.
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. BUSINESS (CONTINUED)
MNC currently operates one national bank, which is a member 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, MNC's bank subsidiary and 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.
During October 1994, the Central Office of the Comptroller of the Currency
terminated the Memorandum of Understanding it entered into with MNB in August
1993.
PART I ITEM 2. PROPERTIES
MNC's corporate headquarters is located at 27777 Inkster Road, Farmington
Hills, Michigan in a building owned by MNB. MNB occupies 191 branch offices
throughout the State of Michigan, of which 96 are owned and 95 are leased. MNB
also owns 6 non-branch buildings and leases 4 non-branch buildings. The
initial lease terms of these properties range from one year through 20 years,
while the majority have terms ranging from five through ten years. The
expiration of most of the leases will occur in the period 1995 through 2010.
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
PART II ITEM 5. SHAREHOLDER INFORMATION
The Corporation's common stock is traded on the NASDAQ over-the-counter market,
and as of December 31, 1994, there were approximately 7,200 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.
Cash Dividends
Closing Market Declared
High Low Per Share
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1994
First Quarter $65 1/4 $55 $.50
Second Quarter 79 59 5/8 .50
Third Quarter 79 1/4 72 1/4 .50
Fourth Quarter 80 9/16 73 1/2 .50
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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)
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(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
did not represent a change in the Corporation's dividend policy, but
rather a change only in the timing of the dividend declaration.
A dividend of $0.55 per share was declared January 18, 1995, payable to
Shareholders of record as of February 1, 1995.
Headquarters Dividend Reinvestment Plan
Michigan National Corporation Automatic reinvestment of dividends
27777 Inkster Road and voluntary cash purchases of
Farmington Hills, MI 48334 Michigan National Corporation
(810) 473-3000 common stock are available without
brokerage commissions or service
fees. Please direct requests for a
Michigan National Dividend Reinvestment Plan brochure
Corporation Stock and any inquiries related to the Plan
Michigan National Corporation to:
common stock is traded in the First Chicago Trust Company
over-the-counter market and of New York
quoted on the National Dividend Reinvestment Plan
Association of Securities P.O. Box 2598
Dealers Automated Quotations Jersey City, New Jersey 07303-2598
(NASDAQ) National Market 1-(800)-628-8585
System under the symbol
"MNCO."
Voluntary Cash Purchase Payments
First Chicago Trust Company
General Shareholder of New York
Correspondence Dividend Reinvestment Plan
(Inquiries related to disbursement P.O. Box 13531
of dividends, replacement of lost Newark, New Jersey 07188-0001
certificates, and address changes): 1-(800)-628-8585
First Chicago Trust Company
of New York Additional Shareholder Information
P.O. Box 2500 Please direct inquires to:
Jersey City, New Jersey 07303-2500 Michigan National Corporation
1-(800)-628-8585 Investor Relations Department
P.O. Box 9065
Farmington Hills, MI 48333-9065
Stock Transfers (810) 473-3076
First Chicago Trust Company
of New York
P.O. Box 2506
Jersey City, New Jersey 07303-2506
1-(800)-628-8585
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
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, 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, 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 under the terms of the Assistance Agreement,
against losses incurred on the disposition or write-down of Covered Assets.
EQUITY CONTRACTS
Detachable Cancelable Mandatory Stock Purchase Contracts (Equity Contracts)
issued with the Corporation's $55 million of 8% Redeemable Subordinated
Debentures on November 10, 1988. Approximately 294 thousand Equity Contracts
were repurchased by the Corporation in 1994. The remaining Equity Contract
holders at December 31, 1994, are required to purchase $37.5 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.
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.
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
FCSI
First Collateral Services, Inc., a mortgage warehousing business acquired by
IOBOC on April 13, 1992. Substantially all the assets and liabilities of FCSI
were sold December 29, 1994.
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 saving
institutions in the district.
FIRST STATE
First State Bank and Trust. A banking subsidiary of Michigan National
Corporation located in Port Lavaca, Texas, which was sold August 31, 1994.
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 guarantees 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.
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.
IOBOC
Independence One Bank of California, FSB, formerly Beverly Hills Federal
Savings Bank.
IOMC
Independence One Mortgage Corporation. A subsidiary of Michigan National Bank.
LOCKWOOD
Lockwood Banc Group, Inc., the holding company for Lockwood National Bank of
Houston, Texas (Lockwood Bank). Lockwood was sold August 4, 1994.
MNB
Michigan National Bank, the principal banking subsidiary of Michigan National
Corporation.
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
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 futures
contracts) 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 interest-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 and other real estate
owned, net.
NOTE RECEIVABLE-FDIC
A ten year note issued by the FSLIC to IOBOC in connection with the acquisition
of IOBOC that earned interest at a floating rate of FHLBB COF plus a stated
premium. The note was paid in full on September 30, 1994. The interest rates
applicable to the note during its term are as follows:
INTEREST PERIOD INTEREST RATE
--------------- -----------------
1989 - 1990 FHLBB COF + 200 Basis Points
1991 - 1993 FHLBB COF + 100 Basis Points
1994 FHLBB COF + 75 Basis Points
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. Lockwood was sold August 4, 1994.
PMSR
Purchased Mortgage Servicing Rights, an intangible asset that represents the
capitalized cost of purchasing the right to service loans originated by others.
SFAS
Statement of Financial Accounting Standards issued by the Financial Accounting
Standards Board. Each statement published is designated by a reference number.
15
16
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
TERMINATION AGREEMENT
An agreement entered into by Michigan National Corporation, IOBOC and the FDIC
to terminate the Assistance Agreement as of the close of business September 30,
1994.
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.
16
17
Michigan National Corporation and Subsidiaries - Form 10-K
Part II, Item 6
- --------------------------------------------------------------------------------
Table 1 Selected Financial Data
- --------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------------------
Operating Results (in thousands)
Net interest income $390,313 $401,611 $401,111 $368,999 $355,750 $378,513
Provision for possible credit losses 41,000 40,000 70,670 86,500 73,082 128,481
Non-interest income (1) 255,678 240,830 224,793 190,039 175,742 381,503
Non-interest expense (2) 481,703 580,685 488,776 410,836 400,917 424,339
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 123,288 21,756 66,458 61,702 57,493 207,196
Income tax (benefit) provision (6) (48,414) (2,007) 6,652 11,612 9,479 28,257
- -------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 171,702 23,763 59,806 50,090 48,014 178,939
Cumulative effect of accounting change 6,265 8,325
- -------------------------------------------------------------------------------------------------------------------------------
Net income $171,702 $23,763 $66,071 $50,090 $48,014 $187,264
==============================================================================================================================
Per Common Share
Income before cumulative effect of accounting change $11.03 $1.56 $3.96 $3.36 $3.21 $11.59
Cumulative effect of accounting change 0.42 0.54
- -------------------------------------------------------------------------------------------------------------------------------
Net income per common share - primary 11.03 1.56 4.38 3.36 3.21 12.13
- -------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change $10.94 $1.56 $3.96 $3.36 $3.21 $11.59
Cumulative effect of accounting change 0.42 0.54
- -------------------------------------------------------------------------------------------------------------------------------
Net income per common share - fully diluted 10.94 1.56 4.38 3.36 3.21 12.13
- -------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared 2.00 1.50 (3) 2.00 2.00 2.00 2.00
Book value end-of-period 60.16 53.74 53.65 51.50 49.93 48.28
Market value end-of-period 74.75 57.50 51.25 41.50 16.75 49.50
Closing market value: high 80.56 64.25 52.25 42.00 50.25 57.75
Closing market value: low 55.00 50.00 42.00 14.75 13.25 41.25
==============================================================================================================================
Table 1 - Selected Financial Data is continued on the next page. All footnotes
are located on the next page.
17
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
Table 1 Selected Financial Data (continued)
- --------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------------------
At Year End (in millions)
Total assets $8,692 $10,173 $10,663 $10,650 $10,956 $11,480
Earning assets 7,763 9,135 9,540 9,548 9,941 10,335
Total loans and lease financing, net of unearned income 6,014 6,671 6,731 6,588 6,784 6,796
Non-performing assets 143 255 304 328 304 125
Deposits 7,291 8,725 9,070 8,738 9,018 9,295
Long-term debt 70 77 83 92 99 120
Shareholders' equity 795 816 806 760 736 735
===============================================================================================================================
Average Balances (in millions)
Total assets $9,518 $10,292 $10,639 $10,580 $11,377 $11,053
Earning assets 8,575 9,205 9,562 9,626 10,416 10,119
Total loans and lease financing, net of unearned income 6,267 6,695 6,699 6,593 6,969 7,131
Deposits 7,978 8,738 8,857 8,657 9,079 9,122
Long-term debt 74 80 89 94 105 131
Shareholders' equity 881 784 791 744 740 649
===============================================================================================================================
Financial Ratios
Return on average shareholders' equity 19.50% 3.03% 8.35% 6.74% 6.49% 28.87%
Return on average total assets 1.80 0.23 0.62 0.47 0.42 1.69
Average equity to average total assets 9.25 7.62 7.43 7.03 6.51 5.87
Allowance to year-end loans 2.73 2.86 2.61 2.35 2.02 1.84
Non-performing Assets to year-end loans (net of unearned
income) plus property from defaulted loans and
other real estate owned, net 2.37 3.77 4.42 4.87 4.40 1.83
Net interest spread 3.97 3.86 3.84 3.50 3.08 3.34
Net interest margin 4.74 4.60 4.55 4.37 4.05 4.41
Efficiency ratio (2) 72.72 87.38 74.02 67.24 67.04 51.23
Equity to asset ratio (period-end) 9.15 8.02 7.56 7.14 6.72 6.40
Leverage ratio 7.72 7.56 7.24 7.01 6.49 6.31
Tier 1 risk-based capital ratio (4) 8.88 9.57 9.69 9.39 8.75 8.55
Total risk-based capital ratio (4) 10.82 11.73 11.91 11.60 10.96 10.79
Dividend payout ratio (5) 18.28 96.15 (3) 45.66 59.52 62.31 16.49
===============================================================================================================================
Other Statistics
Number of common shareholders end-of-period 7,200 8,100 8,800 9,500 10,200 8,900
Number of full-time equivalent employees end-of-period 4,100 5,900 5,900 5,700 5,700 6,200
===============================================================================================================================
(1) 1994 includes $68.6 million in non-recurring gains and 1989 includes a $225
million pre-tax gain from the sale of the Corporation's credit card
portfolio.
(2) 1994 includes a $37.6 million restructuring charge.
(3) A fourth quarter 1993 dividend of $0.50 per share was declared January 19,
1994, payable to shareholders of record as of February 1, 1994.
This did not represent a change in the Corporation's
dividend policy, but rather a change only in the timing of the dividend
declaration.
(4) Federal Reserve Board risk-based capital guidelines were first effective
March 15, 1989.
(5) Based on fully-diluted earnings per common share.
(6) 1994 includes non-recurring tax benefits of $41.7 million related to the
Termination Agreement and $40.2 related to the acquisition of IOBOC.
N/A Not applicable.
Certain prior period amounts were reclassified to conform to current period
presentation.
18
19
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL REVIEW
STRATEGIC RESTRUCTURING INITIATIVES
In early 1994, the Corporation launched a multi-faceted restructuring strategy
aimed at improving profitability and enhancing shareholder value. Many of the
restructuring initiatives were complete at December 31, 1994, and some remain
to be executed. Following is a summary of the major initiatives undertaken.
A refocus on the Corporation's strong Michigan banking franchise resulted in
the third quarter sales of its Texas subsidiaries - Lockwood and First State -
for a net after-tax gain of $12.7 million and the sale of IOMC's entire $8.6
billion mortgage servicing portfolio and non-Michigan loan origination
business to Norwest Mortgage, Inc. (Norwest) for a net after-tax gain of $27.0
million. These sales are discussed further in the Non-Interest Income section
of Management's Discussion and Analysis and in Note B and Note C to the
Consolidated Financial Statements.
In addition, on September 30, 1994, MNC, IOBOC, and the FDIC entered into an
agreement to terminate the Assistance Agreement (Termination Agreement). Under
the terms of the Termination Agreement, the Corporation recognized $9.7 million
in tax-exempt non-recurring gains and tax benefits of $41.7 million. The
Termination Agreement is discussed further in Note F to the Consolidated
Financial Statements. As part of its refocus on Michigan, the Corporation is
exiting the California market through the sale of IOBOC's assets. The fourth
quarter sale of the California mortgage warehouse lending business resulted in
a net after-tax loss of $0.2 million. In December 1994, the Corporation
entered into an agreement to sell approximately $205 million of deposit
liabilities and the retail branch operations of IOBOC. In addition, in January
1995, the Corporation signed a definitive agreement to sell substantially all
of the assets (approximately $85 million) and liabilities (approximately $30
million) of the Corporate and Private Banking divisions of IOBOC to Southern
California Bank of Anaheim, California. These two transactions are not
expected to result in a significant gain or loss and are expected to close in
the second quarter 1995.
As part of its strategic restructuring in June 1994, the Corporation initiated
Project Streamline, a comprehensive program to re-engineer internal operating
processes to strengthen the Corporation's financial performance. Once fully
implemented, the project is expected to result in an $85 million annualized
improvement in the Corporation's pre-tax income from an ongoing reduction in
operating expenses and increases in non-interest income by the end of the
fourth quarter 1995. The efficiency ratio is expected to improve to less than
55% by the end of the fourth quarter of 1995. A restructuring charge related
to Project Streamline of $37.6 million ($24.4 million after-tax) was recorded
in the fourth quarter of 1994 and is discussed further in the Non-Interest
Expense section of Management's Discussion and Analysis.
19
20
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
The divestitures discussed above produced significant increases in the
Corporation's capital levels beyond that necessary for its Michigan-based,
core banking business. The next step in the restructuring strategy was a
repositioning of the balance sheet to improve return on equity. The
Corporation repurchased, through a Dutch Auction completed on December 2, 1994,
approximately 2.2 million shares, or 14%, of its outstanding common stock at a
cost of $78 per share. In addition, the Corporation repurchased, through a
separate self tender offer, approximately 294 thousand of the Equity Contracts
at a cost equal to the difference between the exercise price of the Equity
Contract of $56.375 and $78.
The Corporation reassessed the under-performing assets within its commercial
loan portfolio during the fourth quarter, in light of changing underlying
economic trends, its balance sheet restructuring and peer asset quality ratios.
This reassessment resulted in the implementation of an accelerated disposition
program for specific assets. A $25.0 million pre-tax ($16.2 million after-tax)
charge was recorded to reflect this change in strategy. Selected commercial
and commercial real estate related assets were written down to estimated sales
value based on a plan of disposal during 1995, resulting in $36.8 million of
loan charge-offs and $8.0 million in REO write-downs. The provision for
possible credit losses was temporarily increased by $17 million to replenish
the allowance for credit losses to an appropriate level based on current
conditions.
1994 RESULTS OF OPERATIONS
Net income for the year 1994 was $171.7 million, or $10.94 per share on a fully
diluted basis, which includes the non-recurring items discussed above and a
$40.2 million one-time tax benefit in the second quarter (refer to the Income
Taxes section of Management's Discussion and Analysis for further information
on this transaction). Net income for the year 1993 was $23.8 million, or $1.56
per share.
The net interest margin expanded 14 basis points in 1994 compared to 1993,
principally due to the impact of the rise in interest rates on a slightly
asset-sensitive balance sheet. Due to lower asset balances attributable to the
disposition of non-Michigan businesses, net interest income on a fully
tax-equivalent basis declined $17.1 million. Both the core Michigan commercial
and consumer lines of business posted strong asset growth during 1994.
Commercial and industrial loan balances grew 13% from year-end 1993 (2%
increase in average balance), and consumer installment loans increased by 41%
during the same period (29% increase in average balance).
Excluding non-recurring gains, non-interest income was $187.1 million for 1994
compared to $215.3 million for 1993. The decline is principally due to a
significant reduction in mortgage banking income and from the disposition of
non-Michigan businesses. Core Michigan non-interest income grew 4% year over
year.
20
21
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Non-interest expense, excluding non-recurring items, was $429.2 million for
1994 compared to $571.6 million in 1993. Contributing to this decline was a
reduction in salaries and wages related to the implementation of Project
Streamline, successful implementation of a $30 million cost reduction program
announced earlier in 1994, and lower purchased mortgage servicing rights
amortization and other expenses and from the disposition of IOMC's servicing
business and non-Michigan businesses.
Partially due to charge-offs and write-downs resulting from accelerated
disposition program discussed above, Non-performing Assets decreased by $112.2
million, or 44%, from last year, to $143 million. Non-performing Assets as a
percent of loans plus REO declined from 3.77% to 2.37% during the year, and the
Non-performing Loan-to-total loan ratio decreased from 2.36% to 1.81%. Net
charge-offs for 1994 were 1.04% of average loans versus 0.38% in 1993.
Excluding charge-offs taken in connection with the accelerated disposition
strategy and bulk sales of non-performing commercial real estate assets
earlier in 1994, annualized net charge-offs for 1994 were 0.30% of average
loans. The Corporation's allowance for credit losses was $164.3 million at
year-end, representing 2.73% of total loans and 151% of Non-performing Loans.
SUBSEQUENT EVENT
On February 4, 1995, the Corporation executed an Agreement and Plan of Merger
by and among National Australia Bank Limited A.C.N. 004044937, a banking
corporation organized under the laws of Australia (the "National"), MNC
Acquisition Co., a Michigan corporation and wholly owned subsidiary of the
National ("Acquisition"), and the Corporation (the "Merger Agreement"). The
Merger Agreement provides that (i) Acquisition will be merged with and into the
Corporation (the "Merger"), with the Corporation continuing as the surviving
corporation; (ii) the Corporation will thereupon become a wholly owned
subsidiary of the National; and (iii) each outstanding share of common stock,
par value $10 per share, of the Corporation (the "Common Stock") (other than
certain shares owned by the Corporation, the National, or their respective
subsidiaries, which will be canceled) will be converted, upon the effectiveness
of the Merger, into the right to receive $110 in cash, without interest. The
transaction, which is expected to be completed in six to nine months, is
subject to approval by the Corporation's shareholders and various regulatory
approvals.
Further information about the Agreement and Plan of Merger is contained in the
Corporation's Current Report on Form 8-K, dated February 4, 1995, and which is
incorporated herein by reference.
21
22
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
OVERVIEW
Financial institutions are exposed to many forms of risks in the ordinary
course of business. These risks provide income opportunity as well as the
possibility of loss. The principal risks to which the Corporation is exposed
are credit and market risks. Credit risk is the risk that a counter party may
fail to meet its contractual obligation to the Corporation while market risk is
the risk caused by changes in the market value of the Corporation's financial
instruments as a result of fluctuation in price and interest rates.
Risk management is fundamental to the Corporation to ensure that business
activities are performed in a safe and sound manner. The Asset and Liability
Management Committee (ALCO), with the approval of the Board of Directors,
formulates policies designed to monitor the risks and profitability of the
Corporation. ALCO is composed of the Corporation's executive officers and
certain members of senior management of the Corporation's business units. The
Board of Directors has delegated to the Executive Credit Committee (ECC) the
responsibility of establishing maximum exposure to individual brokers/dealers,
other financial institutions, municipalities and countries. The ECC is also
responsible for approving loans to municipalities, approving foreign exchange
letters of credit, establishing exposure limits for new investments, and
reviewing actual exposure levels. Members of the ECC include the Chairman and
Chief Executive Officer as well as other senior officers of the Corporation.
The formation of the Risk Management Oversight Committee during the year
further underscores the importance of risk management in the Corporation. This
new committee, chaired by the Chief Financial Officer and composed of senior
officers, is responsible for the strategic and operational coordination of
various types of risk across the Corporation, thereby facilitating evaluation
of the overall risk profile of the Corporation.
The control environment for the Corporation's risk management activities is
supported and enhanced by qualified and trained professionals, appropriate
reporting systems and adequate accounting policies and procedures. This control
environment is subject to periodic examination by internal auditors and
regulatory agencies.
Reference Note E and Note I to the Consolidated Financial Statements for
further information on the Corporation's existing credit and market risk.
CREDIT RISK
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
22
23
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
collateral is required to support financial instruments when it is deemed
necessary.
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.
During the fourth quarter 1994, the Corporation changed from a committee-based
credit approval system to a signature authority credit approval system. The
signature authority system provides greater flexibility and significantly
reduces credit approval cycle time. Management has put in place appropriate
controls to oversee and review credit decisions, managed through the Credit
Review Department.
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 and closer management of the credit relationship.
Improvement in the financial condition of certain borrowers was a significant
factor contributing to the decline in Watch Credits during 1994.
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 status.
Non-performing 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.
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 Corporation's loan
portfolios.
Determining the adequacy of the allowance for possible 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
23
24
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 its overall adequacy. Management
believes the allowance for possible loan loss at December 31, 1994, is adequate
based on the risks identified in the various loan categories.
The Corporation places more emphasis on estimates of a property's net
realizable 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.
MARKET RISK
Market risk includes interest rate risk as well as price risk. ALCO, on an
on-going basis, reviews the Corporation's market risk exposure resulting from
off and on-balance sheet trading and asset/liability management activities.
The Chief Financial Officer is responsible for authorizing and implementing
trading, underwriting and portfolio trading limits. The Corporation's
guidelines for control of market risk resulting from trading activities include
limits on government securities trading positions and net foreign exchange
positions and limiting the maximum holding period for any trading account
security to twelve months. ALCO monitors cumulative gains and losses of each
trading account on an ongoing basis and establishes limits on total net trading
losses. Management also monitors the unrealized gains and losses attributed to
investment securities-available-for-sale on a periodic basis in order to
mitigate the market risk involved in these transactions.
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. ALCO, with the approval of the Board
of Directors, sets policies regarding the management of the interest rate risk
of the Corporation.
Changes in customer demand for various forms of loans and deposits are frequent
and unpredictable and the maturities or repricing of
24
25
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
these loans and deposits rarely match, subjecting the Corporation to interest
rate risk. The majority of the commercial loan portfolio is concentrated in
short-term prime-based loans which reprice faster than retail deposit
liabilities. Retail deposits, which provide the majority of funding for loans,
are intermediate to long term in maturity. This mismatch in the repricing of
loans and deposits creates a highly asset sensitive core (non-discretionary)
balance sheet.
The discretionary balance sheet (investment portfolio, discretionary funding,
off-balance sheet portfolio and capital accounts) is structured to offset the
underlying asset sensitivity of the core balance sheet. On-balance sheet tools
utilized include the investment portfolio and discretionary funding sources.
Typically investments are longer in maturity to offset the shorter maturity of
the variable rate prime based loans. Discretionary funding sources (time
deposits greater than $100,000, federal funds purchased, repurchase agreements,
dollar repurchase agreements and other borrowings) are typically shorter in
maturity to offset the longer maturity of the retail deposits.
Off-balance sheet hedges are also used to manage a significant portion of
interest rate risk that is inherent in the Corporation's core businesses. The
use of interest rate swap agreements enables the Corporation to offer customers
the products they desire without subjecting the balance sheet to earnings risk
when movements in interest rates occur. At December 31, 1994, the Corporation
was hedging a portion of its prime-based, variable-rate commercial loans with
approximately $1.7 billion of interest rate swap agreements. For further
discussion of off-balance sheet financial instruments, see Note S to the
Consolidated Financial Statements.
An interest rate sensitivity/gap analysis is presented in Table 4. The
analysis summarizes the Corporation's gap between repricing or maturing assets
and liabilities at December 31, 1994. However, assets and liabilities with
similar contractual repricing characteristics may not reprice at the same time
nor to the same degree. As a result, this static interest rate sensitivity gap
analysis does not necessarily predict the impact that interest rate
fluctuations have on Net Interest Income. The Corporation simulates the
potential effects of fluctuating interest rates on Net Interest Income through
the use of an income simulation model. The model facilitates the forecasting
of Net Interest Income under a variety of interest rate scenarios and
incorporates both the current gap position and the anticipated extent of the
repricing of specific asset and liability categories. At December 31, 1994,
the Corporation estimated that forecasted annual Net Interest Income would
increase $.5 million for a 100 Basis Point increase in the prime interest rate.
Conversely, forecasted annual Net Interest Income would decrease $2.2 million
for a 100 Basis Point decrease in the prime rate.
25
26
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME
OVERVIEW
An analysis of the Corporation's average balance sheet and associated interest
income, interest expense and average interest rates for each of the three years
ended December 31, 1994, 1993 and 1992, is presented in Tables 2 and 3.
Net Interest Income decreased $11.3 million, or 2.81%, in 1994 compared to 1993
and was relatively flat in 1993 compared to 1992. The decrease in Net Interest
Income in 1994 was due to a lower average balance in interest-earning assets
during the year. The average balance of earning assets also decreased during
1993, but not to the extent of the 1994 decrease. These decreases are
discussed below under Balance Sheet Composition.
Net Interest Margin increased 14 Basis Points in 1994 compared to 1993 and was
relatively flat in 1993 compared to 1992. Contributing to the strong
performance in Net Interest Margin in both years was effective asset/liability
management and a wide spread between the prime interest rate and money market
rates. (The spread has been wide since 1991.) During 1994, the average
interest rate paid on interest-bearing liabilities decreased more than the
yield received on earning assets due to changes in the mix of earning assets
and interest-bearing liabilities. In 1993, the Net Interest Margin was
enhanced by significant increases in non-interest-bearing demand deposits.
Partially offsetting these favorable conditions in 1994 and 1993 were decreases
in tax-exempt interest income from high yield tax-exempt assets. Tax-exempt
interest income decreased in both periods due primarily to lower average
balances in the Note Receivable-FDIC and Covered Assets and lower FHLBB COF
rates throughout both periods. Interest income from the Note Receivable-FDIC
was tax-exempt and a portion of the Guaranteed Yield on Covered Assets was
tax-exempt.
INTEREST RATE ENVIRONMENT
On balance, interest rates declined throughout 1992 and 1993 before increasing
during 1994. In addition, the spread between the prime rate and money market
rates during 1992 and 1993 was wider than historical spreads. The spread then
narrowed in the first quarter 1994 before widening again throughout the
remainder of 1994.
During 1992 and 1993, the favorable spread combined with the Corporation's
interest rate swap hedge positions had the effect of lowering the 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.
The spread between the prime rate and money market borrowing rates began to
narrow during the first quarter of 1994 as money market
26
27
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
rates increased, and widened again beginning in the second quarter as a result
of increases in the prime interest rate. As discussed in the Risk Management
section of Management's Discussion and Analysis, the Corporation utilizes
interest rate swap agreements to hedge the interest rate risk associated with a
portion of its prime-based, variable rate commercial loans. The hedges, which
are designed to stabilize the yield on these loans in the event of movement of
the prime interest rate, insulated the Net Interest Margin from most of the
volatility associated with the prime/LIBOR increases during 1994.
Five prime lending rate increases since March 24, 1994, totalling 250 Basis
Points pushed the prime rate to 8.50% at December 31, 1994. Increases in the
prime lending rate have a positive effect on Net Interest Income because of the
Corporation's overall asset sensitive position.
Contraction of the spread between prime and money market borrowing rates could
have the effect of reducing Net Interest Margin from current levels. Refer to
the Risk Management section of Management's Discussion and Analysis for a
discussion of interest rate risk management.
BALANCE SHEET COMPOSITION
In 1994 the average balance of total interest-earning assets decreased $629.4
million, or 6.84%, from 1993, and the average balance of interest-bearing
liabilities decreased $673.5 million, or 9.08%. In addition, the average
balance of non-interest bearing demand deposits decreased $177.2 million in
1994.
Earning Assets
Contributing to the decrease in earning assets in 1994 were the sales of the
Corporation's non-Michigan businesses, a reduction in the average balance of
loans and lease financing and the payoff of the Note Receivable-FDIC. The
Corporation sold its Texas subsidiaries, Lockwood and First State, and IOMC's
non-Michigan loan origination business during the third quarter 1994 and its
warehouse loan portfolio, operated as FCSI, in December 1994. Refer to Note C
to the Consolidated Financial Statements for additional information on these
transactions. The sales of Lockwood and First State resulted in a $189.4
million decrease in the average balance of earning assets, including $24.4
million in money market funds, $92.2 million in investments and $72.8 million
in loans.
A lower volume of loans originated due to the sale of IOMC's non-Michigan loan
origination business and, for the period preceding the sale, a slow-down in
lending activity resulting from rising residential mortgage interest rates
contributed to an approximate $452 million decrease in the average balance of
residential mortgage loans during 1994. Rising residential mortgage interest
rates also contributed to a $139.8 million decrease in FCSI's mortgage
warehouse lending portfolio.
27
28
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
The average balance of the Note Receivable-FDIC declined as a result of a $114
million principal payment in January, 1994, and the payoff of the balance on
September 30, 1994, in connection with the Termination Agreement.
Partially offsetting the above decreases in earning assets was an increase in
installment loans. The average balance of consumer installment loans in the
Corporation's core Michigan business increased $159.0 million in 1994 primarily
due to a higher volume of indirectly originated loans and successful marketing
of directly originated Capital Reserve and Equimoney loan products. In
addition, the average balance of commercial loans in the core Michigan business
increased $65.9 million.
The Corporation used the liquidity provided by the decreases in earning assets
to pay down higher cost funding sources and to purchase money market
investments. Money market investments provide the Corporation a ready source
of liquidity with which to fund future origination of loans, maturing deposit
liabilities and other corporate purposes. Money market investments were
utilized in December 1994 to fund the repurchase of the Corporation's common
stock and Equity Contracts.
Interest-Bearing Liabilities
The Corporation's funding mix continued to shift throughout 1993 and 1994 as a
result of the liquidity provided by the decrease in total earning assets, the
interest rate environment and a decrease in deposits due to the sale of its
Texas subsidiaries. As mentioned above, the Corporation used some of the
liquidity provided by the decrease in interest-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.
Customer preferences for shorter term and more liquid deposit products in the
low interest rate environment that existed for most of the last two years have
contributed to the shift in deposit mix. This interest rate environment has
also induced some customers to seek higher returns elsewhere (including
non-bank financial products), contributing to the decrease in time deposits
less than $100,000. However, the interest rate increases that occurred in the
later portion of 1994 may make the yields on bank certificates of deposit more
appealing to customers and reverse the deposit shift, discussed above, during
1995.
The sales of Lockwood and First State resulted in a $154.6 million decrease in
the average balance of interest-bearing liabilities in 1994 compared to 1993,
including $32.9 million in savings deposits, $45.0 million in insured money
market accounts and $74.8 million in time deposits.
28
29
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
1993 VS. 1992
The average balance of interest-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
F to the Consolidated Financial Statements 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. 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 remainder of the previously Covered Assets were sold at a
modest gain.
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.
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 (operated as FCSI).
The average balance of total investment securities was also lower in 1993
principally as a result of sales of securities from the "available for sale"
portfolio in December 1992 of approximately $125 million, and in 1993 of
approximately $221 million. These securities were sold in order to mitigate
the capital risk associated with lower-of-cost-or-market accounting
requirements for securities classified as "available for sale". 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.
29
30
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
The short-term commercial real estate-construction loan portfolio declined
significantly since the beginning of 1991. This decrease was 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 due to higher volume of loan
originations resulting from low residential mortgage interest rates and loan
purchases; the addition of earning assets from acquisitions; and an increase in
the average balance of consumer loans.
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. Refer to Note C to the
Consolidated Financial Statement for further information regarding these
acquisitions.
The average balance of the Corporation's consumer 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.
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.
EFFECT OF BALANCE SHEET COMPOSITION ON NET INTEREST MARGIN
The Net Interest Rate Spread and Net Interest Margin improved in 1994 compared
to 1993. The decline in the average rate paid on interest- bearing liabilities
resulting from the favorable change in funding mix was slightly larger than the
decline in the average yield received on interest earning assets resulting from
the change in asset mix.
The contribution to Net Interest Margin of non-interest bearing demand deposits
related to the Corporation's off-balance sheet mortgage servicing portfolios
decreased significantly during 1994. The decrease is due to the transfer to
Norwest in October 1994 of approximately $180 million of mortgage escrow
balances associated with the sale of IOMC's entire mortgage servicing rights
portfolio and, prior to the sale, a significant decline in the volume of
payoffs from the Corporation's off-balance sheet mortgage servicing portfolios
which were temporarily held and invested
30
31
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
before being remitted to investors along with a reduction of mortgage escrow
balances due to the sale of approximately $2.2 billion of mortgage servicing
rights recognized in the fourth quarter 1993.
During 1994, Lockwood and First State combined had interest-earning assets with
an average balance of $328.6 million, yielding 6.73%; interest- bearing
liabilities with an average balance of $256.6 million, yielding 3.25%; and
non-interest bearing demand deposits of $71.6 million.
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.
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 Corporation entered into an agreement to sell approximately $212 million of
deposits of IOBOC. The sale is expected to close during the second quarter
1995. At December 31, 1994, these deposits had a weighted average rate of
4.23%. For additional information regarding this agreement, refer to Note C to
the Consolidated Financial Statements.
31
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 2 Summary Of Consolidated Net Interest Income (Fully Taxable Equivalent)
Year Ended December 31 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and
resale agreements $323,659 $12,966 4.01% $442,703 $13,460 3.04% $395,070 $13,912 3.52%
Interest-bearing deposits
with banks 229,371 8,754 3.82% 102,421 3,432 3.35% 106,499 4,913 4.61%
Money market funds 13,119 484 3.69% 8,621 223 2.59% 6,392 222 3.47%
- ---------------------------------------------------------------------------------------------------------------------------------
Total money market investments 566,149 22,204 3.92% 553,745 17,115 3.09% 507,961 19,047 3.75%
Investment securities
available-for-sale
Investment securities-taxable 237,299 16,338 6.88% 22,891 2,615 11.42% 8,366 972 11.62%
Investment securities
held-to-maturity
Investment securities-taxable 1,138,622 65,182 5.72% 1,288,588 87,079 6.76% 1,530,698 123,204 8.05%
Investment securities-tax-exempt 32,173 2,812 8.74% 40,154 3,432 8.55% 45,547 4,055 8.90%
Trading securities 70,805 3,730 5.27% 139,565 6,710 4.81% 144,631 7,500 5.19%
- ---------------------------------------------------------------------------------------------------------------------------------
Sub-total securities 1,478,899 88,062 5.95% 1,491,198 99,836 6.70% 1,729,242 135,731 7.85%
Mark-to-market securities
adjustment 2,266
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities 1,481,165 88,062 1,491,198 99,836 1,729,242 135,731
Loans and lease financing (1) 6,266,973 522,390 8.34% 6,694,778 557,706 8.33% 6,464,527 574,903 8.89%
Covered Assets and FDIC
assistance 234,744 19,702 8.39%
Note Receivable-FDIC 260,958 18,086 6.93% 464,940 34,859 7.50% 625,117 56,836 9.09%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 8,575,245 650,742 7.59% 9,204,661 709,516 7.71% 9,561,591 806,219 8.43%
Allowance for possible credit
losses (190,871) (186,153) (170,530)
Cash and due from banks 516,227 529,836 479,000
Other assets 617,790 743,230 769,425
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $9,518,391 $10,291,574 $10,639,486
=================================================================================================================================
Table 2 - Summary of Consolidated Net Interest Income is continued on the next
page. All footnotes are located on the next page.
32
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 2 Summary Of Consolidated Net Interest Income (Fully Taxable Equivalent) (continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities
Money market accounts $2,052,236 $58,056 2.83% $2,116,458 $60,968 2.88% $2,060,358 $72,299 3.51%
Savings deposits 1,124,479 23,104 2.05% 1,105,627 30,044 2.72% 975,719 31,542 3.23%
Time deposits < $100,000 2,508,422 114,557 4.57% 2,869,212 141,066 4.92% 3,174,025 180,159 5.68%
Time deposits > $100,000 611,335 26,497 4.33% 787,894 32,113 4.08% 1,051,284 51,675 4.92%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,296,472 222,214 3.53% 6,879,191 264,191 3.84% 7,261,386 335,675 4.62%
Federal funds purchased and
repurchase agreements 280,616 11,841 4.22% 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 95,594 3,880 4.06% 119,988 3,994 3.33% 131,427 5,229 3.98%
Subordinated notes 56,092 4,715 8.41% 58,472 4,875 8.34% 59,584 4,958 8.32%
Long-term debt 14,037 995 7.09% 16,873 1,017 6.03% 23,997 1,329 5.54%
Capital lease obligations 3,816 407 10.67% 4,632 495 10.69% 5,508 593 10.77%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 6,746,627 244,052 3.62% 7,420,101 285,757 3.85% 8,082,127 370,700 4.59%
Demand deposits 1,681,413 1,858,639 1,595,921
Other liabilities 209,606 228,752 170,450
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 8,637,646 9,507,492 9,848,498
Shareholders' equity 880,745 784,082 790,988
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $9,518,391 $10,291,574 $10,639,486
=================================================================================================================================
Net interest income (fully
taxable equivalent basis) $406,690 $423,759 $435,519
Tax equivalent adjustment (2) 16,377 22,148 34,408
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $390,313 $401,611 $401,111
=================================================================================================================================
Net interest rate spread 3.97% 3.86% 3.84%
=================================================================================================================================
Net interest margin 4.74% 4.60% 4.55%
=================================================================================================================================
(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 35% in 1994, and 34% in 1993 and 1992, 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.
33
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 3 Consolidated Net Interest Income Volume/Rate Analysis (Fully Taxable Equivalent)
- ----------------------------------------------------------------------------------------------------------------------------------
1994/1993 1993/1992
Change in Interest Due to: Change in Interest Due to:
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Net Average Average Net
(in thousands) Balance Rate Change Balance Rate Change
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and
resale agreements ($4,153) $3,659 ($494) $1,568 ($2,020) ($452)
Interest-bearing deposits with banks 4,781 541 5,322 (182) (1,299) (1,481)
Money market funds 144 117 261 65 (64) 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total money market investments 772 4,317 5,089 1,451 (3,383) (1,932)
Investments securities available-for-sale
Investments securities-taxable 15,161 (1,438) 13,723 1,659 (16) 1,643
Investments securities held-to-maturity
Investment securities-taxable (9,483) (12,414) (21,897) (17,874) (18,251) (36,125)
Investment securities-tax-exempt (695) 75 (620) (468) (155) (623)
Trading securities (3,571) 591 (2,980) (256) (534) (790)
- ----------------------------------------------------------------------------------------------------------------------------------
Sub-total securities 1,412 (13,186) (11,774) (16,940) (18,955) (35,895)
Mark-to-market securities adjustment
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities 1,412 (13,186) (11,774) (16,940) (18,955) (35,895)
Loans and lease financing (35,979) 663 (35,316) 19,940 (37,137) (17,197)
Covered Assets and FDIC assistance (19,702) (19,702)
Note Receivable-FDIC (14,297) (2,476) (16,773) (13,062) (8,915) (21,977)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets ($48,092) ($10,682) ($58,774) ($28,312) ($68,391) ($96,703)
==================================================================================================================================
Liabilities
Money market accounts ($1,853) ($1,059) ($2,912) $1,927 ($13,258) ($11,331)
Savings deposits 503 (7,443) (6,940) 3,868 (5,366) (1,498)
Time deposits < $100,000 (16,931) (9,578) (26,509) (16,209) (22,884) (39,093)
Time deposits > $100,000 (7,563) 1,947 (5,616) (11,633) (7,929) (19,562)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (25,844) (16,133) (41,977) (22,047) (49,437) (71,484)
Federal funds purchased and
repurchase agreements (711) 3,127 2,416 473 (1,250) (777)
Dollar repurchase agreements (1,760) (1,760) (12,247) 1,293 (10,954)
Other short-term borrowings (898) 784 (114) (429) (806) (1,235)
Subordinated notes (200) 40 (160) (95) 12 (83)
Long-term debt (186) 164 (22) (422) 110 (312)
Capital lease obligations (87) (1) (88) (94) (4) (98)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ($29,686) ($12,019) ($41,705) ($34,861) ($50,082) ($84,943)
==================================================================================================================================
Net interest income (fully taxable
equivalent basis) ($18,406) $1,337 ($17,069) $6,549 ($18,309) ($11,760)
Tax equivalent adjustment ($5,771) ($12,260)
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income ($11,298) $500
==================================================================================================================================
Net interest rate spread 0.11% 0.02%
==================================================================================================================================
Net interest margin 0.14% 0.05%
==================================================================================================================================
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.
Certain prior period amounts have been reclassified to conform to current period
presentation.
34
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
Table 4 Interest Rate Sensitivity/Gap Analysis
- ----------------------------------------------------------------------------------------------------------------------------
December 31, 1994 (in thousands) Interest Rate Sensitivity Period
- ----------------------------------------------------------------------------------------------------------------------------
1-90 91-365 1-5 Over
Days Days Years 5 Years Total
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements $350,350 $350,350
Money market investments 13,433 13,433
Mortgage-backed securities 28,329 $186,294 $317,762 $188,492 720,877
Other investment securities 152,804 139,465 334,830 16,077 643,176
Trading securities 10,720 10,720
Loans 4,144,310 178,110 715,465 975,882 6,013,767
Other earning assets 10,200 10,200
Non-earning assets 929,446 929,446
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $4,710,146 $503,869 $1,368,057 $2,109,897 $8,691,969
- ----------------------------------------------------------------------------------------------------------------------------
Funding Sources
Money market accounts and savings $1,865,230 $991,983 $2,857,213
Time deposits < $100,000 540,525 $851,058 $939,373 40,531 2,371,487
Time deposits > $100,000 387,835 85,765 38,709 598 512,907
Federal funds purchased and repurchase agreements 195,585 195,585
Other short-term borrowings 123,445 123,445
Long-term borrowings 15,289 8,631 45,995 69,915
Non-interest-bearing sources 2,561,417 2,561,417
- ----------------------------------------------------------------------------------------------------------------------------
Total funding sources $3,127,909 $945,454 $1,024,077 $3,594,529 $8,691,969
- ----------------------------------------------------------------------------------------------------------------------------
Repricing/Maturity Gap Before Interest Rate Swaps
Period $1,582,237 ($441,585) $343,980 ($1,484,632)
Cumulative $1,582,237 $1,140,652 $1,484,632
Period Gap/Total Assets 18.2% -5.1% 4.0% -17.1%
- ----------------------------------------------------------------------------------------------------------------------------
Sensitivity Impact of Interest Rate Swaps
Period ($1,716,898) $76,394 $1,629,993 $10,511
Cumulative ($1,716,898) ($1,640,504) ($10,511)
Interest Rate Swaps/Total Assets -19.8% 0.9% 18.8% 0.1%
- ----------------------------------------------------------------------------------------------------------------------------
Repricing/Maturity Gap Adjusted For Interest Rate Swaps
Period ($134,661) ($365,191) $1,973,973 ($1,474,121)
Cumulative ($134,661) ($499,852) $1,474,121
Period Gap/Total Assets -1.5% -4.2% 22.7% -17.0%
- ----------------------------------------------------------------------------------------------------------------------------
35
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Table 5 Loan Maturities and Interest Rate Sensitivity (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Due One
Within Through After
December 31, 1994 (in thousands) One Year Five Years Five Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $1,428,538 $1,319,614 $516,691 $3,264,843
Short-term real estate-construction 82,081 33,867 10,210 126,158
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,510,619 $1,353,481 $526,901 $3,391,001
===================================================================================================================================
Predetermined Floating
Interest Rates Interest Rates Total
- -----------------------------------------------------------------------------------------------------------------------------------
Loans due after one year $585,369 $1,295,013 $1,880,382
===================================================================================================================================
(1) Excluding commercial and residential real estate-mortgage, Non-performing
Loans held for sale, installment and lease
financing loans. Demand loans and overdrafts are classified as due
within one year.
36
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------
Table 6 Time Deposits of $100,000 or More, Remaining Term to Maturity Distribution
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1994 (in thousands)
- ------------------------------------------------------------------------------------------------------------------------
Three months or less $387,835
Over three through six months 54,703
Over six through twelve months 31,062
Over twelve months 39,307
- ------------------------------------------------------------------------------------------------------------------------
Total $512,907
========================================================================================================================
37
38
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NON-INTEREST INCOME
Table 7 presents a comparative analysis of non-interest income for the years
ended December 31, 1994, 1993, and 1992. Following is a discussion of the
major transactions included in the comparative analysis in Table 7.
1994 VS. 1993
Non-Recurring Income
During 1994, the Corporation launched a major strategic restructuring which
included a refocus on its Michigan core banking franchise and the sale,
therefore, of its non-Michigan businesses and IOMC's servicing business. These
sales and other transactions resulted in non-recurring net gains of $68.6
million which included:
1. Gains of $19.6 million from the third quarter sale of the Corporation's
Texas subsidiaries - Lockwood and First State.
2. A $42.3 million net gain from the third quarter sale of residential mortgage
servicing rights to Norwest. The gain is net of the unamortized value of PMSR
and ESF assets of $44.9 million and net of transaction costs and reserves of
$28.8 million.
Effective July 31, 1994, IOMC sold its entire $8.6 billion portfolio of
mortgage servicing rights to Norwest. This included both the rights to service
off-balance sheet investor loans as well as the rights to service MNB and
affiliate-owned loans formerly serviced by IOMC.
MNB will continue to originate residential mortgage loans in Michigan through
its branch network. The loans will be originated in MNB's name and sold to
other mortgage banking businesses under correspondent lending arrangements.
IOMC acted as interim servicer during the period between the effective date
(July 31, 1994) and the transfer dates of the servicing rights to Norwest
(September 30 - October 17, 1994). During this period, IOMC received an
interim servicing fee of $6 per loan, per month, for each loan serviced plus
normal ancillary loan servicing income.
Norwest also purchased, at book value, the leasehold improvements, furniture,
fixtures and equipment of most of IOMC's non-Michigan branch locations and its
national servicing center located in Southfield, Michigan. Norwest also
assumed the lease obligations for these facilities.
Norwest will service MNB and affiliate-owned performing residential mortgage
loans for a monthly servicing fee of one-twelfth of 37.5 Basis Points of the
outstanding principal balance. Residential mortgage Non-performing Loans will
be serviced by Norwest at a cost of $55 per loan per month.
38
39
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
3. A $9.7 million gain recognized in connection with the Termination Agreement
dated September 30, 1994. Under the terms of the Termination Agreement, the
FDIC waived their right under the Assistance Agreement to receive at March 31,
1999, up to 20% of IOBOC's equity at December 31, 1998. The Corporation
reversed $10.3 million in expense previously accrued in connection with this
right. Certain interpretative disputes which arose under the Assistance
Agreement were also resolved with the Termination Agreement. This resulted in
a charge against other gains of $0.6 million. Refer to Note F to the
Consolidated Financial Statements for further information regarding the
Termination Agreement.
4. Partially offsetting these gains in the third quarter was a $4.5 million
pension and postretirement curtailment loss. As a result of the IOMC,
Lockwood and First State sale transactions, the number of active participants
in the Corporation's pension and postretirement benefit plans was significantly
reduced, causing a plan curtailment as defined by SFAS No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits, and SFAS No. 106, Employer's Accounting for
Postretirement Benefits Other Than Pension. The plan curtailment resulted in a
loss of $4.3 million for postretirement benefits and $0.2 million for pension
benefits.
5. A $1.5 million net gain from a 1993 servicing sale. In the fourth quarter
of 1994, the Corporation negotiated early termination of a three-year recourse
provision included in a 1993 servicing sale agreement. In exchange for cash
consideration of approximately $0.4 million plus IOMC's waiver of rights to a
$0.3 million purchase price hold back the buyer agreed to release the
Corporation from further liability under a three year recourse provision of the
original sales agreement. Accordingly, the Corporation recognized a $2.2
million gain deferred in 1993 as a result of the recourse provision.
Excluding non-recurring gains discussed above, and 1993 securities gains, the
Michigan business non-interest income for 1994 approximated $143.6 million, a
$6.0 million increase over 1993.
1993 VS. 1992
Michigan Business
Excluding non-recurring securities gains, Michigan business non-interest income
in 1993 increased $10.1 million compared to 1992, principally due to increased
deposit account and merchant card processing fees.
IOMC
During 1993, IOMC realized a $10.1 million gain from the sale of approximately
$300 million of prime plus residential mortgage loans and a net gain of $9.3
million from the sale of the mortgage servicing rights for approximately
$2.5 billion of loans. The gain of $9.3 million was net of approximately $15.2
million of the unamortized value of PMSR and ESF assets. Net gains in 1992
were $5.8 million from sales of the mortgage servicing rights for
39
40
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 and a resulting increase in ESF
amortization expense.
40
41
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 7 Non-Interest Income
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 (in thousands) 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Michigan
Businesess
Michigan Non-Recurring Non Michigan Consolidated
Businesses (1) Income IOMC Businesses (2) MNC
- ------------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $55,176 $2,807 $57,983
Merchant card processing fees 19,773 39 19,812
Mortgage servicing fees $26,507 26,507
Amortization of ESF (2,424) (2,424)
Loan service charges 7,932 1,173 2,108 11,213
- ------------------------------------------------------------------------------------------------------------------------------------
Service charges 82,881 25,256 4,954 113,091
- ------------------------------------------------------------------------------------------------------------------------------------
Trust and investment services income 18,195 62 18,257
Mortgage banking gains, net 9,375 9,375
Investments securities available-for-sale
losses, net (31) (31)
Other gains, net 24,757 43,819 68,576
Other Income:
Trading profits 639 639
Other 41,958 2,452 1,361 45,771
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income 42,597 2,452 1,361 46,410
- ------------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $143,642 $24,757 $80,902 $6,377 $255,678
====================================================================================================================================
(1) Includes inter-company eliminations.
(2) Non Michigan Businesses include IOBOC, First State Bank and Trust, Lockwood
and BancA Corp. (Note C)
Certain prior period amounts have been reclassified to conform to current
period presentation.
41
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 7 Non-Interest Income (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 (in thousands) 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Michigan
Businesess
Michigan Non-Recurring Non Michigan Consolidated
Businesses (1) Income IOMC Businesses (2) MNC
- ------------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $55,060 $4,483 $59,543
Merchant card processing fees 17,280 25 17,305
Mortgage servicing fees $62,947 62,947
Amortization of ESF (18,926) (18,926)
Loan service charges 8,072 168 3,041 11,281
- ------------------------------------------------------------------------------------------------------------------------------------
Service charges 80,412 44,189 7,549 132,150
- ------------------------------------------------------------------------------------------------------------------------------------
Trust and investment services income 19,434 88 19,522
Mortgage banking gains, net 29,582 29,582
Gains from sale of mortgage servicing rights 9,324 9,324
Investments securities available-for-sale
gains, net 6,139 6,139
Other Income:
Trading profits 2,368 2,368
Other 35,415 2,584 3,746 41,745
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income 37,783 2,584 3,746 44,113
- ------------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $137,629 $6,139 $85,679 $11,383 $240,830
====================================================================================================================================
(1) Includes inter-company eliminations.
(2) Non Michigan Businesses include IOBOC, First State Bank and Trust, Lockwood
and BancA Corp. (Note C)
Certain prior period amounts have been reclassified to conform to current
period presentation.
42
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 7 Non-Interest Income (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 (in thousands) 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Michigan
Businesess
Michigan Non-Recurring Non Michigan Consolidated
Businesses (1) Income IOMC Businesses (2) MNC
- ------------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $49,406 $3,196 $52,602
Merchant card processing fees 15,171 16 15,187
Mortgage servicing fees $66,336 66,336
Amortization of ESF (9,485) (9,485)
Loan service charges 6,802 226 1,232 8,260
- ------------------------------------------------------------------------------------------------------------------------------------
Service charges 71,379 57,077 4,444 132,900
- ------------------------------------------------------------------------------------------------------------------------------------
Trust and investment services income 17,759 118 17,877
Mortgage banking gains, net 11,476 11,476
Gains from sale of mortgage servicing rights 5,799 5,799
Investment securities gains, net 1,303 1,303
Investments securities available-for-sale
gains, net 7,946 7,946
Other Income:
Trading profits 7,707 7,707
Other 30,647 2,977 6,161 39,785
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income 38,354 2,977 6,161 47,492
- ------------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $127,492 $9,249 $77,329 $10,723 $224,793
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes inter-company eliminations.
(2) Non Michigan Businesses include IOBOC, First State Bank and Trust,
Lockwood and BancA Corp. (Note C)
Certain prior period amounts have been reclassified to conform to current
period presentation.
43
44
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NON-INTEREST EXPENSE
Table 8 presents a comparative analysis of non-interest expense for the years
ended December 31, 1994, 1993, and 1992. Following is a discussion of the
major transactions included in the comparative analysis in Table 8.
1994 VS. 1993
Non-Recurring Items
As part of its strategic restructuring, in June 1994 the Corporation initiated
Project Streamline, a comprehensive program to re-engineer internal operating
processes to achieve greater efficiency while at the same time reducing the
Corporation's expense base. Once fully implemented, the project is expected to
result in an annualized $85 million improvement in the Corporation's pre-tax
income from an ongoing reduction in operating expenses and increases in
non-interest income. The efficiency ratio is expected to improve to less than
55% by the end of the fourth quarter of 1995. All Project Streamline
initiatives will be implemented within 12 months. These initiatives will
improve the efficiency of the business and administrative work processes of all
operations of the Corporation's principal bank subsidiary, MNB.
A restructuring charge related to Project Streamline of $37.6 million was
recorded in the fourth quarter of 1994. Included in the restructuring charge
were:
1. Severance costs of $10.5 million associated with the elimination of
approximately 1,000 jobs. The reduction in workforce will take place throughout
1995. The severance costs include salary and benefits that will continue
following termination and the cost of out-placement services that are provided
by the Corporation. The positions that will be eliminated have been
specifically identified. In addition, all team members corporate wide were
notified of the severance benefits they will receive if they are to be
terminated under Project Streamline.
2. Costs of $13.5 million associated with owned and leased facilities that will
be vacated and furniture, equipment, and leasehold improvements that will be
sold or abandoned as a result of business and process changes under Project
Streamline. These costs include: the future lease payments of leased
facilities that will be vacated; estimated loss from the sale of owned
facilities that will be vacated; and estimated losses from the sale or
abandonment of furniture, equipment and leasehold improvements that will no
longer be utilized in the business operations of the Corporation. The
facilities that will be vacated are primarily Michigan office facilities.
3. Pension and postretirement curtailment losses of $4.1 million. The
elimination of approximately 1,000 jobs under Project Streamline results in a
further significant reduction in
44
45
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
the number of active plan participants in the Corporation's pension and
postretirement benefit plans and therefore causes the recognition of a
curtailment loss as defined by SFAS No. 88 and SFAS No. 106.
4. Outside service fees of $9.5 million, all of which were paid by January,
1995.
In addition to the Restructuring Charge, non-recurring salary expense of $7.0
million was recognized for severance related to cost-cutting initiatives
implemented earlier in 1994 and for a special performance incentive program
that applies to 1994 and 1995. Included in other employee benefits was a
one-time expense of $1.5 million recognized in connection with the January 1,
1994, adoption of SFAS No. 112, Employer's Accounting for Postemployment
Benefits. Non-recurring outside consulting and advisory fees of $4.8 million
were incurred in 1994 related to the Corporation's broad strategic
restructuring initiatives. Non-recurring goodwill amortization expense of $1.0
million is attributable to a write-off of the remaining goodwill associated
with the December 1986 acquisition of Morison International, Inc. The write-
off was taken as a result of a significant decline in the size and earnings
contribution of the acquired business. Other non-interest expense includes a
$0.5 million loss associated with the writedown of the Corporation's investment
in Bloomfield Hills Bancorp, Inc. (See Note A to the Consolidated Financial
Statements).
Michigan Business
Excluding the non-recurring items discussed above, non-interest expense for the
Corporations's Michigan businesses approximated $328.2 million in 1994, an
$11.0 million decrease from comparable 1993 non-interest expense.
Salaries and wages were relatively flat compared to last year. The fourth
quarter favorable effects of Project Streamline as well as cost cutting
initiatives implemented earlier in 1994 were offset by performance bonus
expense accrued in connection with the Corporation's normal bonus program.
Other employee benefits increased $7.1 million principally due to an increase
in pension expense accruals resulting from a change in the discount rate used
to measure pension expense from 8.5% in 1993 to 7.0% in 1994. This change in
discount rate also resulted in an increase in postretirement expense accruals
which was offset by the effects of an April 1, 1994 plan amendment. Due to
rising interest rates throughout 1994, effective December 31, 1994, the
Corporation has returned to a discount rate of 8.5% which, along with the plan
curtailments discussed above, will have the effect of reducing pension and
postretirement expense accruals in 1995.
Defaulted loan expense in 1994 includes write-downs of $8.0 million recorded in
connection with an accelerated disposition strategy for certain Non-performing
Assets. (Refer to the Loans and Lease Financing section of Management's
Discussion and
45
46
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Analysis for further discussion of this strategy).
IOMC
The third quarter sale of IOMC's $8.6 billion mortgage servicing portfolio
contributed to the decline in mortgage banking related expenses such as
uncollected interest on early payoffs, provision for foreclosure losses, and
PMSR amortization. Prior to the sale, the slow down in loan refinancings
resulting from increases in residential mortgage interest rates during 1994 and
a smaller servicing portfolio were major contributors to the decline in these
expenses.
1993 VS. 1992
Non-Recurring Items
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 non-recurring items recognized in 1993 were $3.0 million of severance
accruals related to 1993 work force reductions and $1.5 million in consulting
fees related to a 1993 efficiency study.
Michigan Business
Excluding the non-recurring items discussed above, 1994 non-interest expense
for the Corporation's Michigan businesses was $339.2 million, a $15.7 million
increase from comparable non-interest expense in 1992.
Effective January 1, 1993, the Corporation's FDIC deposit insurance assessment
increased from twenty-three Basis Points to twenty-six Basis Points
contributing to the $2.5 million increase in FDIC insurance expense.
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.
IOMC
The major contributor to higher expenses at IOMC 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 was 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.
46
47
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 8 Non-Interest Expense
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (in thousands) 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Michigan
Businesess
Michigan Non-Recurring Non Michigan Consolidated
Businesses (1) Expense IOMC Businesses (2) MNC
- ------------------------------------------------------------------------------------------------------------------------------------
Salaries and wages $136,551 $6,982 $18,311 $12,765 $174,609
Other employee benefits 42,499 1,500 5,894 3,063 52,956
Net occupancy 22,640 132 3,419 2,148 28,339
Equipment 33,102 3,014 1,626 37,742
Outside services 22,606 4,771 2,978 2,290 32,644
Defaulted loan expense, net:
Writedowns and losses from sale 11,035 5,278 126 16,439
Gains from sale (12,273) (496) (225) (12,994)
Other operating expenses, net 6,116 1,368 208 7,693
- ------------------------------------------------------------------------------------------------------------------------------------
Total defaulted loan expense, net 4,879 6,150 109 11,138
Amortization of PMSR 10,447 10,447
Restructuring charge 37,595 37,595
Other Expenses:
FDIC insurance 18,634 2,029 20,663
Communications 6,340 1,415 491 8,246
Stationery and supplies 6,584 848 515 7,947
Advertising 5,041 300 806 6,147
Michigan single business tax 7,754 946 8,700
Postage 3,688 970 295 4,953
Amortization of goodwill 475 1,045 463 1,983
Uncollected interest on early
payoffs of loans serviced 3,627 3,627
Provision for foreclosure costs
on loans serviced 2,850 2,850
Other 17,398 480 8,954 4,285 31,117
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expenses 65,914 1,525 19,910 8,884 96,233
- ------------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $328,190 $52,505 $70,123 $30,885 $481,703
====================================================================================================================================
Net Overhead Ratio (3) 2.58% -2.14% 2.63% 2.64%
- ------------------------------------------------------------------------------------------------------------------------------------
Efficiency Ratio (4) 66.89% 74.31% 58.69% 72.72%
====================================================================================================================================
(1) Includes inter-company eliminations.
(2) Non Michigan Businesses include IOBOC, First State Bank and Trust,
Lockwood and BancA Corp. (Note C)
(3) Non-interest expense less non-interest income divided by average
earnings assets.
(4) Non-interest expense divided by the sum of net interest income
(Fully Taxable Equivalent) and non-interest income.
Certain prior period amounts have been reclassified to conform to current
period presentation.
47
48
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------------
Table 8 Non-Interest Expense (continued)
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (in thousands) 1993
- --------------------------------------------------------------------------------------------------------------------------------
Michigan
Businesess
Michigan Non-Recurring Non Michigan Consolidated
Businesses (1) Expense IOMC Businesses (2) MNC
- --------------------------------------------------------------------------------------------------------------------------------
Salaries and wages $135,632 $3,000 $25,399 $18,267 $182,298
Other employee benefits 35,358 8,806 4,040 51,204
Net occupancy 23,839 3,341 2,761 29,941
Equipment 35,437 3,848 2,346 41,631
Outside services 26,622 1,500 3,855 3,741 34,218
Defaulted loan expense, net:
Writedowns and losses from sale 12,792 1,418 65 14,275
Gains from sale (4,778) (667) (60) (5,505)
Other operating expenses, net 7,482 1,937 314 9,733
- --------------------------------------------------------------------------------------------------------------------------------
Total defaulted loan expense, net 15,496 2,688 319 18,503
Amortization of PMSR 104,998 104,998
Restructuring charge
Other Expenses:
FDIC insurance 19,267 2,531 21,798
Communications 6,525 2,233 619 9,377
Stationery and supplies 7,457 1,629 858 9,944
Advertising 6,659 362 1,133 8,154
Michigan single business tax 6,681 6,681
Postage 3,986 1,834 416 6,236
Amortization of goodwill 497 640 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 15,753 4,600 12,958 9,614 38,325
- --------------------------------------------------------------------------------------------------------------------------------
Total other expenses 66,825 4,600 35,256 15,811 117,892
- --------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $339,209 $9,100 $188,191 $47,285 $580,685
================================================================================================================================
Net Overhead Ratio (3) 2.75% 10.61% 4.00% 3.69%
- --------------------------------------------------------------------------------------------------------------------------------
Efficiency Ratio (4) 72.87% 167.60% 58.60% 87.38%
================================================================================================================================
(1) Includes inter-company eliminations.
(2) Non Michigan Businesses include IOBOC, First State Bank and
Trust, Lockwood and BancA Corp. (Note C)
(3) Non-interest expense less non-interest income divided by
average earnings assets.
(4) Non-interest expense divided by the sum of net interest
income (Fully Taxable Equivalent) and non-interest income.
Certain prior period amounts have been reclassified to conform to current
period presentation.
48
49
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------
Table 8 Non-Interest Expense (continued)
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (in thousands) 1992
- -----------------------------------------------------------------------------------------------------------------------
Michigan Non Michigan Consolidated
Businesses (1) IOMC Businesses (2) MNC
- -----------------------------------------------------------------------------------------------------------------------
Salaries and wages $132,691 $19,973 $12,883 $165,547
Other employee benefits 34,601 7,267 3,002 44,870
Net occupancy 23,801 3,177 2,145 29,123
Equipment 33,203 3,439 1,654 38,296
Outside services 24,160 3,596 951 28,707
Defaulted loan expense, net:
Writedowns and losses from sale 18,900 276 903 20,079
Gains from sale (8,255) (179) (999) (9,433)
Other operating expenses, net 10,229 1,288 66 11,583
- -----------------------------------------------------------------------------------------------------------------------
Total defaulted loan expense, net 20,874 1,385 (30) 22,229
Amortization of PMSR 53,000 53,000
Restructuring charge
Other Expenses:
FDIC insurance 16,723 3,009 19,732
Communications 6,738 2,358 504 9,600
Stationery and supplies 6,790 1,702 598 9,090
Advertising 3,140 293 688 4,121
Michigan single business tax 4,484 812 5,296
Postage 3,803 1,779 317 5,899
Amortization of goodwill 497 376 873
Uncollected interest on early
payoffs of loans serviced 7,543 7,543
Provision for foreclosure costs
on loans serviced 12,653 12,653
Other 11,971 13,833 6,393 32,197
- -----------------------------------------------------------------------------------------------------------------------
Total other expenses 54,146 40,973 11,885 107,004
- -----------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense $323,476 $132,810 $32,490 $488,776
=======================================================================================================================
Net Overhead Ratio (3) 2.73% 6.11% 1.46% 2.76%
- -----------------------------------------------------------------------------------------------------------------------
Efficiency Ratio (4) 69.86% 127.86% 38.60% 74.02%
=======================================================================================================================
(1) Includes inter-company eliminations.
(2) Non Michigan Businesses include IOBOC, First State Bank and Trust,
Lockwood and BancA Corp. (Note C)
(3) Non-interest expense less non-interest income divided by average
earnings assets.
(4) Non-interest expense divided by the sum of net interest income
(Fully Taxable Equivalent) and non-interest income.
Certain prior period amounts have been reclassified to conform to current
period presentation.
49
50
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAXES
For the years ended December 31, 1994, 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 superseded SFAS No. 96.
During the third quarter 1994, the Corporation reached a settlement with the
FDIC to terminate the Assistance Agreement. Under the Assistance Agreement,
the Corporation was obligated to share certain tax benefits it realized with
the FDIC. To the extent such benefits were recognized in prior periods for
financial statement purposes, the Corporation also recorded a liability for the
FDIC's share of such benefits, reducing the benefit reflected in income tax
expense for that period. The Termination Agreement relieved the Corporation
from this obligation, and accordingly, the accrued liability was reversed.
This resulted in a reduction of 1994 income tax expense of approximately $41.7
million.
In the second quarter 1994, tax benefits associated with the IOBOC acquisition
of $42.8 million were recognized, $40.2 million of which were reflected in
earnings, and $2.6 million of which were added directly to shareholders' equity
- - surplus. The ability of the Corporation to realize these benefits was
challenged by the U.S. Treasury Department in a report issued in March 1991 to
Congress. Congress addressed this matter in the Revenue Reconciliation Act of
1993, and denied recognition of certain tax benefits occurring after March 3,
1991. As a result of this Congressional action and discussions during the
second quarter 1994 with the Federal government concerning the Corporation's
tax returns, the Corporation recognized pre-March 3, 1991 tax benefits in its
financial statements.
The Corporation's 1994 effective income tax rate, excluding the $41.7 million
reduction in tax expense resulting from the termination settlement and the
$40.2 million from tax benefits associated with the IOBOC acquisition, was
28.0%. The effective tax rates for 1993 and 1992 were (9.2)% and 10.0%,
respectively. The increase in the effective income tax rate from (9.2%) for
1993 to 28.0% for 1994 is due to higher pre-tax earnings in 1994, lower amounts
of tax-exempt interest income on the Note Receivable-FDIC and lower amounts of
FDIC assistance. These factors had the effect of increasing the ratio of
taxable income relative to total pre-tax financial income, resulting in a
higher effective tax rate. The decrease 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 due primarily to losses at IOMC during 1993.
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
50
51
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
value of the Corporation's net deferred tax assets, which contributed to the
reduction of the effective tax rate.
The statutory income tax rate was 35% in both 1994 and 1993, and 34% in 1992.
The difference between the effective income tax rate (excluding the one-time
benefits discussed above) and the statutory rate in each of the three years was
principally due to tax-exempt income from the Note Receivable-FDIC and other
FDIC assistance, as well as tax-exempt interest income from municipal
obligations. Further information regarding the assistance received from the
FDIC can be found in Note F to the Consolidated Financial Statements. A
detailed reconciliation to the statutory income tax rate is presented in Note W
to the Consolidated Financial Statements.
51
52
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
LOANS AND LEASE FINANCING PORTFOLIO AND CREDIT RISK ANALYSIS
OVERVIEW
Credit quality continued to improve during 1994 as evidenced by reductions in
the level of Watch Credits and Non-performing Assets. Watch Credits decreased
to $247 million at December 31, 1994, from $387 million at December 31, 1993.
Total Non-performing Assets declined to $143.0 million at December 31, 1994,
from $255.2 million at year-end 1993. However, net charge-offs for the year
ended 1994 increased $40.0 million to $65.4 million from $25.4 million for the
year 1993. The increase was due primarily to charge-offs related to a change
in strategy for managing certain Non-performing Assets and losses on bulk loan
sales.
The Corporation's total loans and lease financing, net of unearned income,
decreased $657 million in 1994 due to the sales of non-Michigan businesses
(refer to the Financial Review section of Management's Discussion and Analysis
for a discussion of these sale transactions).
A discussion of the loan portfolio composition and loan quality follows. Refer
to the Risk Management section of Management's Discussion and Analysis for
information on management of credit risk.
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, 1994 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, 1994.
Contributing to the decrease in total loans outstanding were the sales of the
Corporation's non-Michigan businesses. The Corporation sold its Texas
subsidiaries, Lockwood and First State, IOMC's non-Michigan loan origination
business and FCSI's warehouse loan portfolio in 1994. Lockwood and First State
combined had total loans and lease financing of $231.5 million at December 31,
1993, and FCSI's warehouse loan portfolio, which was included in commercial
loans, was $278.4 million at December 31, 1993. The residential real
estate-mortgage loan portfolio decreased due to the sale of IOMC's non-Michigan
loan origination business in the third quarter 1994.
52
53
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
These decreases were partially offset by other commercial loan and consumer
installment loan growth in the Corporation's core Michigan business.
Commercial loans increased $353.0 million, or 13%, to $3,129.3 million at
December 31, 1994, from $2,776.3 million at year-end 1993. Consumer
installment loans increased $280.8 million, or 41%, to $972.8 million at
December 31, 1994, from $692.0 million at year-end 1993, principally due to a
higher volume of indirectly originated loans and successful marketing of
directly originated Capital Reserve and Equimoney loan products.
53
54
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------
Table 9 Loans and Lease Financing Portfolio
December 31 (in thousands) 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural secured
by real estate (Table 9a) $867,468 $971,917 $977,616 $1,036,815 N/A
Other commercial, financial & agricultural (Table 9a) 2,397,375 2,373,707 2,378,753 2,118,710 N/A
- ------------------------------------------------------------------------------------------------------------------------
Subtotal 3,264,843 3,345,624 3,356,369 3,155,525 $3,197,514
Commercial real estate-mortgage (Table 9b) 1,105,007 1,238,177 1,168,669 1,260,416 1,333,155
Non-performing loans held for sale (1) 56,256
Residential real estate-mortgage
Mortgages held for sale 10,106 583,056 670,800 494,866 231,648
Mortgages held for investment 332,517 465,904 578,909 283,874 298,397
- ------------------------------------------------------------------------------------------------------------------------
Subtotal 1,503,886 2,287,137 2,418,378 2,039,156 1,863,200
Short-term commercial real estate-construction (Table 9b) 126,158 159,594 222,819 335,730 521,544
Installment 1,008,191 780,532 648,099 649,102 617,387
Lease financing 130,713 116,998 82,728 22,391 31,848
- ------------------------------------------------------------------------------------------------------------------------
Total 6,033,791 6,689,885 6,728,393 6,201,904 6,231,493
Unearned income (20,024) (18,619) (15,869) (3,834) (5,872)
- ------------------------------------------------------------------------------------------------------------------------
Total 6,013,767 6,671,266 6,712,524 6,198,070 6,225,621
Covered assets and FDIC assistance 18,524 389,698 558,335
- ------------------------------------------------------------------------------------------------------------------------
Total $6,013,767 $6,671,266 $6,731,048 $6,587,768 $6,783,956
========================================================================================================================
========================================================================================================================
Watch Credits (in millions) (2) $247 $387 $539 $616 $412
========================================================================================================================
(1) Represents loans identified for disposition in 1995. These loans are
carried at the lower of cost or estimated market value.
(2) Loans classified as Watch Credits are included in the above loan balance.
N/A: Not Available
54
55
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------------
Table 9a. Commercial, Financial and Agricultural Loans Outstanding at December 31, 1994 (in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Other Other
Industry (1) Michigan Midwest Northeast South States Total
- -------------------------------------------------------------------------------------------------------------------------------
Commercial, Financial and Agricultural Loans
Secured by Real Estate:
Service $228,828 $12,567 $9,627 $9,497 $834 $261,353
Finance, insurance and real estate 220,831 14,369 3,100 4,147 40 242,487
Retail Trade 96,486 844 38,506 2,739 138,575
Manufacturing 65,915 951 1,734 1,184 69,784
Automotive 63,729 1,409 65,138
Wholesale Trade 36,674 50 36,724
Transportation/utilities 15,885 313 1,683 17,881
Other 21,102 14,424 35,526
- -------------------------------------------------------------------------------------------------------------------------------
Total 749,450 30,503 51,233 18,117 18,165 867,468
- -------------------------------------------------------------------------------------------------------------------------------
Other Commercial, Financial and
Agricultural Loans:
Service 432,525 15,137 25,214 8,689 6,925 488,490
Finance, insurance and real estate 263,367 427 345 17,780 67,807 349,726
Manufacturing 262,720 24,385 7,879 6,853 5,611 307,448
Wholesale Trade 275,530 11,195 6,312 293,037
Automotive 276,688 6,621 2,775 286,084
Transportation/utilities 271,602 373 574 800 273,349
Retail Trade 218,096 7,999 3,408 8,741 8,870 247,114
Other 117,047 25 3,490 31,565 152,127
- -------------------------------------------------------------------------------------------------------------------------------
Total 2,117,575 66,162 37,420 49,128 127,090 2,397,375
- -------------------------------------------------------------------------------------------------------------------------------
Total Commercial, Financial and
Agricultural Loans Outstanding $2,867,025 $96,665 $88,653 $67,245 $145,255 $3,264,843
===============================================================================================================================
Percentage of geographic location to Total 87.82% 2.96% 2.71% 2.06% 4.45% 100.00%
===============================================================================================================================
(1)The industry categories are internally developed definitions based on the
primary markets in which the borrower operates.
55
56
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------
Table 9b. Short-Term Commercial Real Estate - Construction and Commercial Real Estate - Mortgage Loans Outstanding
at December 31, 1994. (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Other Other
Collateral Type Michigan Midwest Northeast South States Total
- ------------------------------------------------------------------------------------------------------------------------------
Short-term Commercial Real Estate-Construction:
Land development/acquisition $24,689 $100 $10,806 $35,595
Retail 15,110 15,110
Residential > 4 family 5,030 4,287 9,317
Office 1,707 1,707
Other 59,638 2,062 $2,729 64,429
- ------------------------------------------------------------------------------------------------------------------------------
Total 106,174 100 17,155 2,729 126,158
- ------------------------------------------------------------------------------------------------------------------------------
Commercial Real Estate-Mortgage:
Retail 235,091 1,103 24,054 721 260,969
Office 207,072 3,434 5,342 1,111 216,959
Residential > 4 family 157,559 1,205 3,000 28,460 190,224
Mobile home parks 87,962 12,330 $527 13,505 8,340 122,664
Hotels 60,812 119 17,252 3,800 33,073 115,056
Industrial 100,926 4,658 1,544 4,238 111,366
Warehouse 24,250 4,133 538 28,921
Other 27,894 754 3,064 27,136 58,848
- ------------------------------------------------------------------------------------------------------------------------------
Total 901,566 27,736 17,779 54,309 103,617 1,105,007
- ------------------------------------------------------------------------------------------------------------------------------
Total Commercial
Real Estate Loans Outstanding $1,007,740 $27,836 $17,779 $71,464 $106,346 $1,231,165
==============================================================================================================================
Percentage of geographic location to Total 81.85% 2.26% 1.44% 5.81% 8.64% 100.00%
==============================================================================================================================
56
57
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NON-PERFORMING ASSETS
Non-performing Assets continued to decrease in 1994 to $143 million from a high
of $348 million at March 30, 1991. The improvement was due to successful
management and marketing of Non-performing Assets, the favorable effect the
improved economy had on certain individual borrowers, planned reductions in the
higher risk commercial real-estate portfolios over the past few years and a
planned accelerated disposition strategy for certain Non-performing Assets
which is discussed below. The high level of Non-performing Assets in the past
few years was due to the then 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.
The Corporation reassessed the under-performing assets within its commercial
loan portfolio during the fourth quarter, in light of changing underlying
economic trends, its balance sheet restructuring and peer asset quality ratios.
This reassessment resulted in the implementation of an accelerated disposition
program for specific assets. Selected assets were written down to estimated
sales value based on a plan of disposal during 1995. This resulted in $36.8
million of loan charge-offs on $101.8 million of Non-performing Loans
classified as held for sale. One of these loans, with a net carrying value of
$8.7 million, was sold December 30, 1994. In addition, $8.0 million in
write-downs on $11.4 million of property from defaulted loans were recorded in
connection with this accelerated disposition program. The charge-offs
contributed to the improvement in the ratio of Non-performing Loans to total
loans from 2.36% in 1993 to 1.81% in 1994. The provision for possible credit
losses was increased by $17 million for the fourth quarter 1994 to replenish
the allowance for credit losses to an appropriate level based on current
conditions.
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 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.
At December 31, 1994, the Corporation had $1.7 million of unfunded commitments
associated with its Non-performing Assets which it may fund under certain
circumstances.
57
58
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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
YEAR ENDED DECEMBER 31 1994 1993 1992
---- ---- ----
(in millions)
Non-performing Loans $ 9.8 $ 9.7 $14.6
Real estate owned 2.2 4.5 7.2
In-substance foreclosures 1.1 3.4 3.4
----- ----- -----
Total proforma interest $13.1 $17.6 $25.2
----- ----- -----
Actual cash interest received during 1994, 1993 and 1992 on Non-performing
Assets held at December 31 of each year, while such assets were in an accruing
status, was $4.6 million, $14.7 million and $19.9, respectively.
Table 10 provides a five year presentation of the Corporation's Non-performing
Assets and Table 10a presents the 1994 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, 1994. A
breakdown 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, 1994, is presented in Table 10c.
In 1995, the Corporation will continue to focus its efforts on reducing
Non-performing Assets through an accelerated disposition program for certain
Non-performing Assets discussed above.
58
59
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Table 10 Non-performing Assets
- ------------------------------------------------------------------------------------------------------------------------------------
December 31 (in thousands) 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans
Commercial, financial and agricultural secured
by real estate $5,635 $36,872 $41,782 $37,305 N/A
Other commercial, financial and agricultural 21,976 32,243 24,843 54,601 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 27,611 69,115 66,625 91,906 $62,000
Commercial real estate-mortgage 10,220 8,886 14,606 45,484 47,817
Non-performing loans held for sale 56,256
Residential real estate-mortgages 2,330 22,271 11,713 9,393 4,805
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 68,806 31,157 26,319 54,877 52,622
Short-term commercial real estate-construction 9,696 55,189 56,337 34,540 51,259
Installment 1,618 1,002 2,520 2,632 2,138
Lease Financing 935 84 3 190
- ------------------------------------------------------------------------------------------------------------------------------------
Total Non-accrual Loans 108,666 156,463 151,885 183,958 168,209
Renegotiated Loans
Commercial, financial and agricultural secured by real estate 47 328 N/A
Other commercial, financial and agricultural 145 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 47 145 328 1,403
Commercial real estate-mortgage 338 488
Short-term commercial real estate-construction 283 313
- ------------------------------------------------------------------------------------------------------------------------------------
Total Renegotiated Loans 283 698 145 816 1,403
- ------------------------------------------------------------------------------------------------------------------------------------
Total Non-performing Loans 108,949 157,161 152,030 184,774 169,612
- ------------------------------------------------------------------------------------------------------------------------------------
Property from defaulted loans and other real estate owned, net 34,090 98,066 152,207 143,079 134,552
- ------------------------------------------------------------------------------------------------------------------------------------
Total Non-performing Assets $143,039 $255,227 $304,237 $327,853 $304,164
====================================================================================================================================
Non-performing Loans to loans, net of unearned income 1.81% 2.36% 2.26% 2.80% 2.50%
====================================================================================================================================
Allowance for possible credit losses to Non-performing Loans 150.84% 121.53% 115.42% 83.69% 80.89%
====================================================================================================================================
Non-performing Assets to total loans (net of unearned
income) plus property from defaulted loans and
other real estate owned, net 2.37% 3.77% 4.42% 4.87% 4.40%
====================================================================================================================================
In 1993, certain prior period amounts were restated for a change in reporting
classification to exclude loans that are 90 days or more past due and still
accruing and include real estate of discontinued operations. Loans 90 days or
more past due and still accruing at December 31, 1994, 1993, 1992, 1991, and
1990 amounted to $22,466, $118,363, $2,087, $2,049, and $4,445 respectively.
At December 31, 1994, 78.7% of loans 90 days or more past due and still
accruing were insured by the FHA.
N/A: Not Available
59
60
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------
Table 10a. Changes in Commercial and Commercial Real Estate Non-Performing Assets
- ------------------------------------------------------------------------------------------------------------------------
Short-Term
Commercial Commercial Commercial
Real Estate- Real Estate- Loans Secured Other Total
(in thousands) Mortgage Construction By Real Estate Commercial
- ------------------------------------------------------------------------------------------------------------------------
Non-performing Assets at
December 31, 1993 $22,417 $106,586 $55,917 $39,542 $224,462
Activity during 1994:
Additions 7,566 4,615 19,070 40,633 71,884
Pay-downs (3,593) (2,426) (14,755) (16,592) (37,366)
Disposition of assets (5,431) (33,991) (7,182) (2,075) (48,679)
Charge-offs (1,783) (10,283) (19,875) (24,173) (56,114)
Write-downs (400) (875) (7,280) (268) (8,823)
Return to accrual (1) (2,440) (618) (1,531) (2,895) (7,484)
Non-performing loans held for sale (33,497) (14,134) (5,315) (52,946)
Other(2) 609 (2,605) (1,012) (1,344) (4,352)
- ------------------------------------------------------------------------------------------------------------------------
Net activity during 1994 (5,472) (79,680) (46,699) (12,029) (143,880)
- ------------------------------------------------------------------------------------------------------------------------
Non-performing Assets at
December 31, 1994 $16,945 $26,906 $9,218 $27,513 $80,582
========================================================================================================================
Percentage of Non-performing Asset category
to Total 21.03% 33.39% 11.44% 34.14% 100%
========================================================================================================================
(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.
60
61
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
Table 10b. Commercial, Financial and Agricultural Non-performing Assets at December 31, 1994 (in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Other Other
Industry (1) Michigan Midwest Northeast South States Total
- -----------------------------------------------------------------------------------------------------------------------------
Commercial, Financial and Agricultural
Secured by Real Estate:
Services $3,389 $439 $157 $3,985
Finance, investment, real estate 927 257 1,184
Retail trade 526 626 1,152
Transportation and public utilities 377 377
Automotive 300 300
Manufacturing 232 232
Other 1,988 1,988
- -----------------------------------------------------------------------------------------------------------------------------
Total 7,739 696 783 9,218
- -----------------------------------------------------------------------------------------------------------------------------
Other Commercial, Financial and Agricultural:
Services 7,689 7,689
Retail trade 5,224 228 $153 5,605
Finance, investment, real estate 3,666 7 1,921 5,594
Transportation and public utilities 1,300 574 1,874
Wholesale trade 1,424 1,424
Manufacturing 649 649
Automotive 193 193
Other 2,864 700 $921 4,485
- -----------------------------------------------------------------------------------------------------------------------------
Total 23,009 7 802 2,774 921 27,513
- -----------------------------------------------------------------------------------------------------------------------------
Total Commercial, Financial
and Agricultural
Non-performing Assets $30,748 $703 $1,585 $2,774 $921 $36,731
=============================================================================================================================
Percentage of geographic location to Total 83.71% 1.91% 4.32% 7.55% 2.51% 100%
=============================================================================================================================
(1) The industry categories are internally developed definitions based on the
primary markets in which the borrower operates.
61
62
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
Table 10c. Short-Term Commercial Real Estate-Construction and Commercial Real
Estate-Mortgage Non-Performing Assets at December 31, 1994. (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Other Other
Collateral Type Michigan Midwest Northeast South States Total
- ----------------------------------------------------------------------------------------------------------------------------
Short-term Commercial Real Estate-Construction:
Hotels $12,319 $12,319
Land development/acquisition $2,759 $100 $1,700 7,286 11,845
Office 1,696 1,696
Residential > 4 family 1,046 1,046
- ----------------------------------------------------------------------------------------------------------------------------
Total 4,455 100 1,700 20,651 26,906
- ----------------------------------------------------------------------------------------------------------------------------
Commercial Real Estate-Mortgage:
Hotels 216 5,806 6,022
Office 3,356 3,356
Retail 1,517 937 2,454
Residential > 4 family 684 1,205 1,889
Industrial 1,198 1,198
Other 528 564 $934 2,026
- ----------------------------------------------------------------------------------------------------------------------------
Total 7,499 1,205 6,370 937 934 16,945
- ----------------------------------------------------------------------------------------------------------------------------
Total Commercial Real Estate
Non-performing Assets $11,954 $1,305 $8,070 $21,588 $934 $43,851
============================================================================================================================
Percentage of geographic location to Total 27.26% 2.98% 18.40% 49.23% 2.13% 100%
============================================================================================================================
62
63
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The methodology employed by the Corporation to determine the adequacy of the
allowance for possible credit losses is discussed in the Risk Management
section of Management's Discussion and Analysis. Table 11 presents a five year
summary of charge-off, recovery and provision activity within the allowance.
The decline in the provision in recent years and the 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. Charge-offs
related to the accelerated disposition program, discussed earlier in this
section under the heading Non-Performing Assets, and bulk sales of
Non-performing Loans also contributed to the improvement in the ratio of
allowance for possible credit losses to Non-performing loans in 1994. During
1994, the Corporation sold Non-performing Loans totalling $22.2 million. The
sales resulted in a loss of $9.7 million which was charged to the allowance for
possible credit losses.
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 will adopt this statement
effective January 1, 1995, and does not expect that implementation will have a
material effect on results of operations. Refer to the New Accounting
Standards section of Note A to the Consolidated Financial Statements for
further information on this new accounting standard.
63
64
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Table 11 Analysis of the Allowance for Possible Credit Losses
- -----------------------------------------------------------------------------------------------------------------------------------
December 31 (in thousands) 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
Beginning balance $190,992 $175,471 $154,638 $137,200 $124,744
Charge-offs
Commercial, financial and agricultural secured
by real estate 11,522 4,832 5,767 7,962 N/A
Other commercial, financial and agricultural 14,224 11,498 22,192 10,645 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 25,746 16,330 27,959 18,607 34,486
Commercial real estate-mortgage 1,283 4,318 11,734 14,253 N/A
Non-performing loans held for sale 36,809
Residential real estate-mortgage held for investment 1,528 1,281 61 59 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 39,620 5,599 11,795 14,312 2,102
Short-term commercial real estate-construction 4,000 12,360 33,603 24,812
Installment 7,886 8,012 8,558 9,538 5,047
Lease financing 20 66 537 4,064 398
- -----------------------------------------------------------------------------------------------------------------------------------
Total Charge-offs 73,272 34,007 61,209 80,124 66,845
Recoveries
Commercial, financial and agricultural secured
by real estate 571 917 770 59 N/A
Other commercial, financial and agricultural 2,851 3,986 4,811 6,514 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 3,422 4,903 5,581 6,573 3,787
Commercial real estate-mortgage 735 1,495 829 164 24
Residential real estate-mortgage held for investment 83
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 818 1,495 829 164 24
Short-term commercial real estate-construction 1,479 398 29 1,533
Installment 2,198 1,848 1,933 1,692 1,626
Lease financing 2 6 1 67
- -----------------------------------------------------------------------------------------------------------------------------------
Total Recoveries 7,919 8,650 8,372 9,963 5,504
Net charge-offs 65,353 25,357 52,837 70,161 61,341
Additions
Provisions charged to operating expense 41,000 40,000 70,670 86,500 73,082
Allowance of subsidiaries purchased 878 1,099 715
Allowance of cash discount received
from Covered Asset settlement 3,000
Less
Allowance of subsidiaries sold 2,295
- -----------------------------------------------------------------------------------------------------------------------------------
Ending balance $164,344 $190,992 $175,471 $154,638 $137,200
===================================================================================================================================
Allowance for possible credit losses
to year-end loans (net of unearned income) 2.73% 2.86% 2.61% 2.35% 2.02%
===================================================================================================================================
Net charge-offs to average loans 1.04% 0.38% 0.79% 1.06% 0.88%
===================================================================================================================================
Net charge-offs to average loans (excluding Covered Assets) 1.04% 0.38% 0.82% 1.14% 0.96%
===================================================================================================================================
N/A: Not Available
64
65
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Table 12 Allocation of the Allowance for Possible Credit Losses(1)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31 (in thousands) 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Related Related Related Related Related
Loans to Loans to Loans to Loans to Loans to
Dollar Total Dollar Total Dollar Total Dollar Total Dollar Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $38,572 54 $35,344 50 $44,966 50 $30,432 51 $26,480 51
Commercial real estate-mortgage 9,985 18 17,654 18 20,551 17 22,180 20 9,600 21
Non-performing loans held for sale 1
Residential real estate-mortgage:
Mortgages held for sale 9 10 8 4
Mortgages held for investment 2,616 6 11,556 7 4,679 9 1,729 5 5
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 12,601 25 29,210 34 25,230 36 23,909 33 9,600 30
Short-term commercial real estate-
contruction 5,053 2 17,823 2 20,056 3 27,477 5 15,389 8
Installment 7,402 17 10,494 12 9,258 10 16,331 10 3,872 10
Lease financing 912 2 72 2 900 1 97 1 4,783 1
Unallocated 99,804 98,049 75,061 56,392 77,076
- -----------------------------------------------------------------------------------------------------------------------------------
Total $164,344 100 $190,992 100 $175,471 100 $154,638 100 $137,200 100
===================================================================================================================================
(1)This table represents an estimated allocation of the allowance and is
provided only as an indication of the relative risk assessment of the
loan portfolio. The allowance for loan losses is a general allowance
available to cover losses in any category of the loan portfolio.
65
66
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
CROSS BORDER OUTSTANDINGS
At December 31, 1994, there were no cross-border outstandings which exceeded
0.75% of total assets. The Corporation's cross- border outstandings in excess
of 0.75% of total assets were $76 million in interest-bearing investments
outstanding with banks in the United Kingdom at December 31, 1993, and $118
million in deposits and interest-bearing investments outstanding with banks in
Japan at December 31, 1992.
66
67
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
LIQUIDITY
The purpose of liquidity management is to ensure sufficient cash flow to meet
all financial commitments and enable the Corporation to capitalize on
opportunities for business expansion.
The Corporation's liquidity management activities seek to provide flexibility
in the balance sheet in order to effect advantageous pricing decisions,
maximize leverage, meet balance sheet liquidity ratio targets, and assist in
managing interest rate sensitivity. Liquidity analysis, performed on an
on-going basis, includes the evaluation and measurement of liquid assets,
assessment of funding sources and determination of the asset/liability
repricing and maturity characteristics.
Asset liquidity is gauged in terms of its marketability. The Corporation's
highly liquid assets consist of cash and due from banks, fed funds sold,
securities purchased under resale agreement, interest-bearing deposits with
banks, investment securities available-for-sale, and trading accounts. The
Corporation's liquid assets as a percent of total assets increased from 11.73%
at December 31, 1993 to 13.15% at December 31, 1994.
The Corporation recognizes that core deposits are critical to its effective
funding ability. Core deposits (deposits less than $100,000) represented 90% of
total deposits at December 31, 1994 and 1993.
The stock buy-back program initiated by the Corporation in November 1994
prompted Moody's and S & P to review the Corporation's credit ratings. The
Corporation's credit ratings were reaffirmed by these agencies; however, the
current credit ratings preclude it from purchasing national market funds at
advantageous rates. Emphasis on core deposit growth as well as controlled
dependence on discretionary and credit-sensitive liabilities have minimized the
effects of the current credit ratings. The following chart presents the Moody's
and S&P credit ratings at December 31, 1994, of the parent company and its
principal bank subsidiary.
MICHIGAN NATIONAL MICHIGAN NATIONAL
CORPORATION BANK
MOODY'S S&P MOODY'S S&P
Short-term N/R A-3 P-2 A-2
Long-term
Senior Implied Baa-2 N/R A-3 BBB
Long-term
Subordinated Baa-3 BB + N/A N/A
N/R = NOT RATED
N/A = NOT APPLICABLE
67
68
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 $880.0 million at December 31,
1994, compared to $1,001 million at December 31, 1993, and $1,014 million at
December 31, 1992. Cash used by financing activities exceeded the cash
provided by operating activities and investing activities. The decrease in cash
and cash equivalents was primarily due to the strategic restructuring
initiatives undertaken in 1994. A refocus on the Corporation's Michigan
banking business resulted in the sale of: the Texas banking franchise; certain
assets of its mortgage banking business; the assets of FCSI; and the
termination of the Assistance Agreement with the FDIC. Cash proceeds from these
transactions were primarily applied to the purchase of approximately 2.2
million shares of the Corporation's common stock and 294 thousand shares of the
Equity Contracts, the pay down of higher cost funding sources and the purchase
of liquid assets.
Net cash provided by operating activities was $760.5 million at December 31,
1994 compared to $267.6 million and $95.7 million at December 31, 1993 and
December 31, 1992, respectively. The principal contributors to net cash
provided by operating activities in December 1994 were the decrease in IOMC's
residential mortgages held for sale and increased earnings for the year.
Cash provided by investing activities totaled $218.1 million, $428.9 million
and $130.5 million for the year ended December 31, 1994, 1993 and 1992,
respectively. The $218.1 million of net cash provided by investing activities
resulted primarily from: the termination of the Assistance Agreement with the
FDIC, $462.5 million; proceeds from the sale of certain assets, $362.0 million;
a decrease in interest-bearing deposits with banks, $111.2 million; partially
offset by a net increase in investment securities, $303.3 million; and a net
increase in loans and lease financing, $361.0 million.
Net cash used by financing activities for the year ended December 31, 1994, was
$1.1 billion, compared to $709.5 million and $23.4 million for 1993 and 1992,
respectively. The major contributor to this use of funds in 1994 was a $927.2
million decrease in deposits along with the Corporation's acquisition of its
common stock and Equity Contracts which amounted to $176.5 million.
PARENT COMPANY AND SUBSIDIARY LIQUIDITY
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.
68
69
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
The common stock cash dividend coverage ratio during December 31, 1994, was
364.29% compared with 63.7% during December 31, 1993.
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 bank and subsidiary savings and loan are in compliance with the
regulatory dividend limitation guidelines as of December 31, 1994. Dividends
paid to the parent company in 1994 totaled $115.5 million. At December 31,
1994, the subsidiaries had retained earnings of approximately $14.2 million
available to pay dividends to the parent company without regulatory approval.
The subsidiary bank and the 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.
69
70
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------
Table 13 Sources of Funds
- -------------------------------------------------------------------------------------------------------------------------
Michigan National Corporation
December 31 (in thousands) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
% of Total % of Total % of Total
Balance Asset Funding Balance Asset Funding Balance Asset Funding
- -------------------------------------------------------------------------------------------------------------------------
Core deposits $6,595,427 76% $7,872,824 76% $7,769,684 72%
Discretionary deposits (1) 695,677 8% 852,255 8% 1,300,287 12%
Short-term borrowings 319,030 4% 293,293 3% 528,094 5%
Long-term debt 69,915 1% 77,122 1% 82,651 1%
Equity 795,017 9% 815,590 8% 805,775 8%
Other liabilities 216,903 2% 261,724 4% 176,833 2%
=========================================================================================================================
Parent Company:
(in millions)
Subsidiaries' retained
earnings available for
dividends (2) $14 $65 $46
=========================================================================================================================
(1) Discretionary deposits consist of time deposits > $100,000 plus all
brokered deposits.
(2) Retained earnings available for dividends is calculated based on
current year net income plus two years prior income less
certain adjustments.
Certain prior period amounts have been reclassified to conform to current
period presentation.
70
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
CAPITAL
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 exceeds guidelines established by the industry
regulators.
SHAREHOLDER'S EQUITY
At December 31, 1994 total shareholder's equity was $795.0 million, compared
with $815.6 million at year-end 1993. The decrease in equity from year-end 1993
was primarily due to the Corporation's acquisition of approximately 2.2 million
shares of its common stock and Equity Contracts under which approximately 294
thousand shares of common stock were issuable at an exercise price of $56.375
per share. The cost of this repurchase was $78 per share, or $176.5 million.
These decreases were offset in part by a net increase in retained earnings of
$141.2 million.
On January 18, 1995 the Corporation increased the regular quarterly cash
dividend on its common stock by 10% from 50 cents ($.50) to 55 cents ($.55) per
share, payable February 15, 1995, to shareholders of record as of February 1,
1995. Reference Note P to the Consolidated Financial Statements for further
information on capital.
RISK-BASED CAPITAL
The Corporation's bank holding companies and national bank 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 each category of 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 capital (Tier 2). 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
71
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 1994 capital category designation is Well
Capitalized. Its excess capital under this capital category as of December 31,
1994, amounted to $370.4 million, $214.0 million and $412.0 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,
1994. The Corporation's capital position at December 31, 1994, 1993, and 1992,
is further illustrated in Table 14.
On January 12, 1995 the FRB and other federal agencies issued an amendment to
the Risk-Based Capital guidelines regarding "Concentration of Credit Risk and
Risks of Nontraditional Activities." Accordingly, these regulatory agencies, in
their assessment of the institution's overall capital adequacy, may require
higher minimum capital ratios for an individual bank which, in their opinion,
has significant exposure due to the risks from concentration of credit and
certain risks arising from nontraditional activities. Management's inability to
monitor and control the risks arising from these activities is also a factor in
assessing the overall capital adequacy of the institution. The Corporation
believes that its risk management process, as discussed previously, is adequate
and, therefore, this issue will not affect the Corporation's capital position.
The regulatory agencies are currently addressing issues that will potentially
impact future regulatory capital positions of the Corporation and its
subsidiary bank and savings and loan. One of the issues under consideration by
the federal agencies is the requirement to convert off-balance sheet
interest-rate and exchange-rate contracts into risk-weighted assets. Management
feels that this proposal will not have a material effect on the Corporation's
capital adequacy.
72
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------------
Table 14 Risk-Based Capital
- ---------------------------------------------------------------------------------------------------------------------------------
December 31 (in thousands) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
Tier 1
Common shareholders' equity (1) $796,346 $815,590 $799,048
Convertible preferred stock 6,000
Intangible assets (2,600) (14,279) (10,936)
PMSR capital limitation (2) (403)
SFAS No. 109 capital limitation (3) (119,587) (21,876) (19,955)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital $674,159 $779,032 $774,157
- ---------------------------------------------------------------------------------------------------------------------------------
Tier 2
Allowance for possible credit losses (4) 97,210 103,149 100,798
Equity commitment note 12,412 15,212 18,012
Equity Contract - Qualifying Subordinated Debt 37,157 57,715 58,735
- ---------------------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital $146,779 $176,076 $177,545
- ---------------------------------------------------------------------------------------------------------------------------------
Total qualifying capital $820,938 $955,108 $951,702
=================================================================================================================================
Risk-weighted assets $6,694,329 $7,233,972 $7,379,667
Risk-weighted off-balance sheet exposure 1,085,090 1,032,619 695,090
- ---------------------------------------------------------------------------------------------------------------------------------
Less: disallowance for loan loss, intangibles and PMSR 189,321 124,880 86,027
- ---------------------------------------------------------------------------------------------------------------------------------
Total risk-weighted assets and off-balance sheet exposure $7,590,098 $8,141,711 $7,988,730
=================================================================================================================================
Minimum Ratios for
Well-Capitalized Institution
=================================================================================================================================
Tier 1 capital ratio 6.00% 8.88% 9.57% 9.69%
=================================================================================================================================
Total capital ratio 10.00% 10.82% 11.73% 11.91%
=================================================================================================================================
Leverage ratio 5.00% 7.72% 7.56% 7.24%
=================================================================================================================================
(1) In 1994, common shareholders' equity excludes SFAS No. 115 net unrealized
losses on investment securities classified as available-for-sale in
accordance with regulatory capital guidelines. The 1992 common equity was
adjusted to conform to regulatory accounting principals (RAP) which
require a maximum 15 year amortization period for PMSR, the effect of
which was a $3.7 million decrease to earnings.
(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 No. 109
limits 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 quarter-end 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.
73
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS REVIEW
In March of 1994, the Corporation restructured its core businesses. This
action is intended to flatten the organizational structure, improve
profitability and bring the management closer to the customer. The
restructuring represents a move from a product/geographical business
orientation to a customer-driven business focused in Michigan. The plan
focuses on establishing business niches that correspond with customers' needs
and enable the Corporation to respond to those needs rapidly. The core
businesses are: Commercial Banking; Diversified Financial Services; Retail
Banking; and Upscale Consumer Banking. These businesses are operated by MNB.
During 1994, Commercial Banking's primary focus was to dramatically improve
response time to customer's requests for credit and other services. Changes
resulting from Project Streamline will enable relationship managers to spend
more time with their customers and participate more actively in a business
development role.
MNB's Commercial Banking business performance in 1994 was favorably affected by
improvements in credit quality and loan growth. 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. Also contributing to the reduction in
Non-performing Assets was an accelerated Non-performing Asset disposition
policy adopted in the fourth quarter 1994. During 1994, commercial and
industrial loan balances grew 13% from year-end 1993 (increase in average
balance of 2%).
The Diversified Financial Services business was formed to bring together the
fee income generating businesses that have synergies or niches in relation to
their sales distribution channels. Diversified Financial Services provides
commercial treasury, merchant bankard services, municipal finance, corporate
relocation, credit union and correspondent bank services. Merchant Bankard
Services is the 16th largest merchant credit card processor in the United
States. In 1994, the dollar value of merchant sales processed increased
approximately 20% over 1993. Also in 1994, revenue of Commercial Treasury
Services, a segment of Diversified Financial Services, grew 12% compared to
6.25% for the industry.
During 1994, the Retail Banking business underwent an extensive review of the
processes and procedures utilized. As a result, significant changes will be
implemented in 1995 that will enhance sales and service to Michigan National
customers. The Retail Banking business experienced slight growth in its core
households (those with one or more personal checking or savings accounts)
during 1994 to 309,267. Due to competitive pressures from
74
75
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
attractive yields offered by non-bank products, total deposits declined
approximately $200 million. However, MNB's total retail customer service fee
income grew 8.7% over 1993. The consumer installment loan portfolio increased
$280.8 million, or 41%, to $972.8 million at December 31, 1994, from $692.0
million at year-end 1993. This increase was principally attributable to a
higher volume of indirectly originated loans and successful marketing of
directly originated Capital Reserve and Equimoney loan products.
In 1995, the Retail Banking business will continue to focus on growth in
consumer deposits and consumer lending market share. Non-traditional branch
banking will be an important factor. The new supermarket branch network is
expected to expand. Also, the capabilities of the telephone banking system are
expected to expand and provide enhanced service to small business customers and
consumers. Emphasis on the small business segment will continue in 1995.
Plans to meet the needs of this group include the implementation of new
automated delivery systems and expansion of a dedicated sales force.
The Upscale Consumer Banking business provides trust, private banking and
investment management services to individuals, corporations, employee benefit
plans, institutions and municipal entities. During 1994, the Upscale Consumer
Banking group continued to introduce new products which helped to position the
business for continued growth.
A summary of financial information for the Corporation's principal subsidiaries
is presented in Table 15.
75
76
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ---------------------------------------------------------------------------------------------------------------------------------
Table 15 Business Review
- ---------------------------------------------------------------------------------------------------------------------------------
MNB
(excluding IOMC) IOMC IOBOC
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 (in thousands) 1994 1993 1992 1994 1993 1992 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income after provision
for possible credit losses $309,740 $288,114 $264,404 $4,739 $25,315 $25,278 $19,189 $26,542 $23,334
Non-interest income 135,673 134,536 129,161 39,507 95,280 81,015 2,664 3,123 1,359
Gains from sale of mortgage
servicing rights 9,324 5,799
Amortization of ESF (2,424) (18,926) (9,485)
Other gains, net (4,103) 43,819
Amortization of PMSR (10,447) (104,998) (53,000)
Other Non-interest expense (364,442) (330,707) (318,670) (59,676) (83,193) (79,810) (17,476) (19,326) (15,323)
- ---------------------------------------------------------------------------------------------------------------------------------
Income before taxes $76,868 $91,943 $74,895 $15,518 ($77,198) ($30,203) $4,377 $10,339 $9,370
=================================================================================================================================
At December 31 (in millions)
Total Assets $8,168 $8,749 $9,287 $201 $1,001 $1,327 $467 $916 $1,010
Total Liabilities $7,530 $8,109 $8,659 $161 $971 $1,287 $420 $813 $888
Total Equity $638 $640 $628 $40 $30 $40 $47 $103 $122
=================================================================================================================================
Mortgage Servicing Portfolio:
Originated Servicing $3,961 $3,960
Purchased Servicing 5,608 10,228
- ---------------------------------------------------------------------------------------------------------------------------------
Total $9,569 $14,188
=================================================================================================================================
Table 15 - Business Review is continued on the next page.
76
77
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Table 15 Business Review (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Holding Company Consolidated
Texas Subsidiaries (1) and other operations (2) MNC
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 (in thousands) 1994 1993 1992 1994 1993 1992 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income after provision
for possible credit losses $13,387 $22,400 $17,435 $2,258 ($760) ($10) $349,313 $361,611 $330,441
Non-interest income 3,606 6,504 3,804 8,076 10,989 13,140 189,526 250,432 228,479
Gains from sale of mortgage
servicing rights 9,324 5,799
Amortization of ESF (2,424) (18,926) (9,485)
Other gains, net 28,860 68,576
Amortization of PMSR (10,447) (104,998) (53,000)
Other Non-interest expense (13,025) (18,766) (13,849) (16,637) (23,695) (8,124) (471,256) (475,687) (435,776)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes $3,968 $10,138 $7,390 $22,557 ($13,466) $5,006 $123,288 $21,756 $66,458
====================================================================================================================================
At December 31 (in millions)
Total Assets $593 $493 ($144) ($1,086) ($1,454) $8,692 $10,173 $10,663
Total Liabilities $544 $456 ($214) ($1,109) ($1,512) $7,897 $9,357 $9,857
Total Equity $49 $37 $70 $23 $58 $795 $816 $806
====================================================================================================================================
Mortgage Servicing Portfolio:
Originated Servicing $3,961 $3,960
Purchased Servicing 5,608 10,228
- ------------------------------------------------------------------------------------------------------------------------------------
Total $9,569 $14,188
====================================================================================================================================
(1) The Texas subsidiaries were sold during the third quarter 1994. (Note C)
(2) Amounts include intercompany eliminations.
Certain prior period amounts have been reclassified to conform to current
period presentation.
77
78
Michigan National Corporation and Subsidiaries - Form 10-K
Part II, Item 8
CONSOLIDATED STATEMENT OF CONDITION
- --------------------------------------------------------------------------------------------------------------------------------
December 31 (in thousands) 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks (Note D) $529,658 $518,080
Federal funds sold and resale agreements 350,350 483,000
- --------------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 880,008 1,001,080
Interest-bearing deposits with banks 10,200 121,445
Money market investments 13,433 11,513
Investment securities available for sale (amortized cost of
$243,777 and $893 at 12/31/94 and 12/31/93, respectively) (Note E)
Mortgage-backed securities 104,593
Government and other securities 137,223 893
Investment securities held to maturity, (fair value of $1,094,551
and $1,343,657 at 12/31/94 and 12/31/93, respectively) (Note E)
Mortgage-backed securities 616,284 983,765
Government and other securities 505,953 330,008
Trading securities 10,720 70,113
Residential mortgages held for sale (Note G) 10,106 583,056
Non-performing loans held for sale (Note G) 56,256
Loans and lease financing (Note G) 5,967,429 6,106,829
- --------------------------------------------------------------------------------------------------------------------------------
Total Loans and Lease Financing 6,033,791 6,689,885
Unearned income (20,024) (18,619)
Allowance for possible credit losses (Note H) (164,344) (190,992)
- --------------------------------------------------------------------------------------------------------------------------------
Net Loans and Lease Financing 5,849,423 6,480,274
Note receivable-FDIC (Note F) 462,535
Premises and equipment, net (Note K) 165,675 199,142
Due from customers on acceptances 1,902 612
Accrued income receivable 56,653 77,347
Purchased mortgage servicing rights, net (Note M) 49,389
Capitalized excess service fees, net (Note M) 6,869
Property from defaulted loans and other real estate owned, net (Note L) 34,090 98,066
Other assets 305,812 279,757
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $8,691,969 $10,172,808
================================================================================================================================
The Consolidated Statement of Condition is continued on the next page.
78
79
Michigan National Corporation and Subsidiaries - Form 10-K
Part II, Item 8
CONSOLIDATED STATEMENT OF CONDITION (continued)
- --------------------------------------------------------------------------------------------------------------------------------
December 31 (in thousands, except share amounts) 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities
Non-interest bearing demand deposits $1,549,497 $1,995,940
Interest-bearing deposits:
Money market accounts 1,865,230 2,195,670
Savings deposits 991,983 1,183,280
Time deposits < $100,000 2,371,487 2,699,512
Time deposits > $100,000 512,907 650,677
- --------------------------------------------------------------------------------------------------------------------------------
Total Deposits 7,291,104 8,725,079
Short-term borrowings (Note N) 319,030 293,293
Customer acceptances outstanding 1,902 612
Accrued liabilities 215,001 261,112
Long-term debt (Note O) 69,915 77,122
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 7,896,952 9,357,218
Contingencies and Commitments (Notes S and V)
Shareholders' Equity (Note P)
Common stock, $10 par value, authorized 50,000,000 shares 132,146 151,764
Surplus 51,851 195,466
Retained earnings 624,761 483,572
Net unrealized losses on investment
securities available-for-sale (1,329)
Note receivable-ESOP (Note O and Q) (12,412) (15,212)
- --------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 795,017 815,590
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $8,691,969 $10,172,808
================================================================================================================================
Common stock outstanding 13,214,534 15,176,336
================================================================================================================================
Certain prior period amounts have been reclassified to current period
presentation.
See notes to consolidated financial statements.
79
80
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (In thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest-bearing deposits with banks $8,754 $3,432 $4,913
Federal funds sold and resale agreements 12,966 13,460 13,912
Money market investments 484 223 222
Investment securities available for sale 16,338 2,615 972
Investment securities held to maturity 67,134 89,539 126,139
Trading securities 3,286 6,117 6,832
Loans and lease financing, including related fees 520,561 555,841 572,505
Income from Covered Assets 8,999
FDIC assistance 7,063
- -----------------------------------------------------------------------------------------------------------------------------
Total Guaranteed Yield on Covered Assets (Note F) 16,062
Note receivable-FDIC (Note F) 11,756 23,009 37,516
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 641,279 694,236 779,073
INTEREST EXPENSE
Money market accounts 58,056 60,968 72,299
Savings deposits 23,104 30,044 31,542
Time deposits < $100,000 134,302 161,239 201,315
Time deposits > $100,000 26,513 32,145 51,731
Short-term borrowings 15,721 15,179 28,145
Long-term debt 6,117 6,387 7,020
FDIC assistance (Note F) (12,847) (13,337) (14,090)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 250,966 292,625 377,962
NET INTEREST INCOME 390,313 401,611 401,111
Provision for Possible Credit Losses 41,000 40,000 70,670
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision For
Possible Credit Losses 349,313 361,611 330,441
- -----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges 113,091 132,150 132,900
Trust and investment services income 18,257 19,522 17,877
Mortgage banking gains, net 9,375 29,582 11,476
Gains from sale of mortgage servicing rights 9,324 5,799
Investment securities gains, net (Note E) 1,303
Investments available-for-sale (losses) gains, net (Note E) (31) 6,139 7,946
Other gains, net (Note B) 68,576
Other income 46,410 44,113 47,492
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 255,678 240,830 224,793
NON-INTEREST EXPENSE
Salaries and wages 174,609 182,298 165,547
Other employee benefits 52,956 51,204 44,870
Net occupancy expense 28,339 29,941 29,123
Equipment expense 37,742 41,631 38,296
Outside services 32,644 34,218 28,707
Defaulted loan expense, net 11,138 18,503 22,229
Amortization of purchased mortgage servicing rights (Note M) 10,447 104,998 53,000
Restructuring charge (Note B) 37,595
Other expenses (Note U) 96,233 117,892 107,004
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 481,703 580,685 488,776
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 123,288 21,756 66,458
Income Tax (Benefit) Provision (Note W) (48,414) (2,007) 6,652
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect Of A Change In Accounting Principle 171,702 23,763 59,806
Cumulative Effect of a Change in Accounting Principle (Note A) 6,265
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $171,702 $23,763 $66,071
=============================================================================================================================
The Consolidated Statement of Income is continued on the next page.
80
81
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME (continued)
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 (In thousands, except per share amounts) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share - Primary
Income before cumulative effect of accounting change $11.03 $1.56 $3.96
Cumulative effect of accounting change $0.42
- -----------------------------------------------------------------------------------------------------------------------------
Net income per common share - primary $11.03 $1.56 $4.38
- -----------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share - Fully Diluted
Income before cumulative effect of accounting change $10.94 $1.56 $3.96
Cumulative effect of accounting change $0.42
- -----------------------------------------------------------------------------------------------------------------------------
Net income per common share - fully diluted $10.94 $1.56 $4.38
- -----------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding
Primary 15,664 15,230 15,079
Fully diluted 15,992 15,230 15,113
- -----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per common share $2.00 $1.50 (1) $2.00
=============================================================================================================================
(1) A fourth quarter 1993 dividend of $0.50 per share was declared January 19,
1994, payable to shareholders of record as of February 1, 1994.
This did not represent a change in the Corporation's dividend
policy, but rather a change only in the timing of the dividend
declaration.
Certain prior period amounts have been reclassified to conform to current
period presentation.
See notes to consolidated financial statements.
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82
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $171,702 $23,763 $66,071
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for possible credit losses 41,000 40,000 70,670
Depreciation and amortization expense 46,829 160,223 95,257
Net amortization associated with investment securities 5,474 924 2,123
Write-downs of property from defaulted loans 14,519 12,505 19,383
Net deferred income taxes (Note W) (87,406) (24,261) (15,959)
Gain from sale of securities (4,257)
Loss (Gain) from sale of investment securities available for sale 31 (6,000) (8,004)
Loss from sale of premises and equipment 92 1,902 100
Gain from sale of mortgage servicing rights (9,324) (5,799)
Gain from sales of subsidiaries and mortgage servicing portfolio (Note B, C) (62,008)
Gain from Termination of Agreement (excluding tax benefit) (Note F) (9,772)
Net gain from sale of property from defaulted loans (Note L) (11,017) (4,053) (8,721)
(Increase) decrease in operating assets:
Trading account securities 59,393 9,555 51,060
Accrued interest receivable 9,710 (8,236) 11,688
Residential mortgages held for sale 569,640 87,744 (175,934)
Pending investment and trading securities sales 52,612 49,633 55,792
Capitalized excess service fees (Note M) (1,510) (4,952) (18,738)
Other assets 13,607 (107,914) 16,444
Increase (decrease) in operating liabilities:
Accrued interest payable 4,856 (12,031) (1,884)
Pending investment and trading securities purchases (43,978) 21,292 (42,369)
Accrued liabilities (16,476) 30,191 (12,754)
Other, net 3,251 6,643 1,543
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $760,549 $267,604 $95,712
- ----------------------------------------------------------------------------------------------------------------------------------
Investing activities
Payments for:
Purchase of investment securities available for sale ($130,527) ($1,684)
Purchase of investment securities held to maturity (643,890) (508,427) ($664,392)
Purchase of premises and equipment (13,660) (28,304) (36,636)
Purchase of mortgage servicing rights (Note M) (1,979) (13,084) (20,788)
Capital expenditures for property from defaulted loans (Note L) (1,619) (7,076) (4,068)
Purchase of subsidiary, net of cash and cash equivalents (Note C) (727) (198,993)
Proceeds from:
Sale of investment securities held to maturity 161,420
Sale of investment securities available for sale 1,174 226,601 131,488
Principal collection of investment securities available for sale 29,373 21,781
Principal collection of investment securities held to maturity 440,565 466,439 531,448
Principal collection of note receivable - FDIC (Note F) 462,535 162,293 105,491
Sale of premises and equipment 2,153 307 659
Sale of mortgage servicing rights (Note B, C, M) 117,958 26,313 9,086
Sale of assets of subsidiary (Note B, C) 58,476
Sale of loans 74,233
Sale and principal collection of property
from defaulted loans (Note L) 65,402 48,795 55,449
Sale of subsidiaries, net of cash and cash equivalents (Note B, C) 43,812
Net decrease (increase) in:
Interest-bearing deposits with banks 111,245 15,120 (35,805)
Money market investments (36,220) (5,044) (2,086)
Loans and lease financing (360,967) 7,232 (191,771)
Covered assets and FDIC assistance (Note F) 18,410 290,012
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities $218,064 $428,945 $130,514
- ----------------------------------------------------------------------------------------------------------------------------------
The Consolidated Statement of Cash Flows is continued on the next page.
82
83
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (in thousands) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
Financing activities
Payments for:
Long-term debt (Note O) ($7,264) ($5,019) ($9,198)
Common stock dividends (30,513) (22,618) (29,573)
Repurchase of common stock (Note P) (170,152)
Repurchase of Equity Contracts (Note P) (6,367)
Preferred stock dividends (90) (360)
Proceeds from issuance of:
Common stock 13,286 6,392 6,939
Payments on note receivable -- ESOP (Note Q) 2,800 2,800 2,800
Net (decrease)increase in:
Deposits (927,212) (456,128) 319,816
Short-term borrowings (Note N) 25,737 (234,801) (313,816
- -------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities ($1,099,685) ($709,464) ($23,392
- -------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents ($121,072) ($12,915) $202,834
Cash and cash equivalents at beginning of year 1,001,080 1,013,995 811,161
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $880,008 $1,001,080 $1,013,995
===================================================================================================================
Supplemental disclosures of cash flow information:
a.) Cash transactions:
Interest paid $246,111 $304,656 $379,846
Federal income taxes paid (net of refunds) 22,764 14,017 2,000
State taxes paid (net of refunds) 213 661 540
Cash payments to FDIC in connection with Assistance Agreement
and Termination Agreement (Note F) 7,000
FDIC tax sharing payment (Note F) 11,909 6,464 3,272
b.) Non-cash transactions in loans and lease financing:
Transfer from loans to non-performing loans held for sale 56,256
Transfer from loans to property from defaulted loans 14,500 29,360 76,400
Loans originated to finance sales of property from defaulted loans 8,790 27,049 3,370
Transfer to loans from assets held for sale 84
Transfer from covered assets to assets held for sale 3,905
Transfer to loans from covered assets 114 77,257
c.) Non-cash transactions in investment securities (Note A):
Transfers into investment
securities available-for-sale 147,160 51,148 312,892
- ------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Acquisition (In thousands) 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Cash paid for common stock 16,746 205,186
Fair Market value of assets acquired 117,920 215,868
Fair Market value of liabilities assumed 105,293 12,482
- --------------------------------------------------------------------------------------------------------------------------------
Fair market value of net assets 12,627 203,386
- --------------------------------------------------------------------------------------------------------------------------------
Cost in excess of fair value of net assets
acquired ("goodwill") 4,119 1,800
- --------------------------------------------------------------------------------------------------------------------------------
Certain prior period amounts have been reclassified in order to conform to
current period presentation.
See notes to consolidated financial statements.
83
84
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized
losses on
investment
Convertible securities Note
Preferred Common Retained available Receivable
(in thousands) Stock Stock Surplus Earnings for sale ESOP Total
- -----------------------------------------------------------------------------------------------------------------------------------
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, net 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 Q) (432) (432)
Common stock issued, net 1,485 4,907 6,392
Conversion of preferred stock (Note P) (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
===================================================================================================================================
Balance, January 1, 1994 $151,764 $195,466 $483,572 ($15,212) $815,590
Net income 171,702 171,702
SFAS No. 115 adoption effect $6,828 6,828
Net unrealized losses on
securities classified as
available for sale (net of tax effect) (Note A) (8,157) (8,157)
Common stock issued, net 2,043 11,243 13,286
Purchase of common stock (Note P) (21,661) (148,491) (170,152)
Purchase of Equity Contracts (Note P) (6,367) (6,367)
ESOP payment 2,800 2,800
Cash dividends
Common stock ($2.00 per share) (30,513) (30,513)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $132,146 $51,851 $624,761 ($1,329) ($12,412) $795,017
===================================================================================================================================
(1) A fourth-quarter 1993 dividend of $0.50 per share was declared January 19,
1994, payable to shareholders of record as of February 1, 1994. This
did not represent a change in the Corporation's dividend policy, but
rather a change only in the timing of the dividend declaration.
See notes to consolidated financial statements.
84
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
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, for a significant portion of the year, used the equity method
to account for its 49% investment in Bloomfield Hills Bancorp, Inc. (BHB). The
amount of retained earnings from this subsidiary included in consolidated
retained earnings was approximately $390 thousand and $184 thousand at December
31, 1994 and 1993, respectively. In December 1994, the Corporation sold 300
shares (one half of its common stock in BHB for cash proceeds of $1,372,500.
The remaining 300 shares were placed in escrow under the terms of an
installment purchase agreement with the buyer who has voting rights for those
300 shares. Accordingly, effective the date of the sale, the Corporation
changed its method of accounting for its investment in BHB to the cost method
of accounting.
INVESTMENT AND TRADING SECURITIES
The Corporation adopted SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, effective January 1, 1994. This Statement requires
that 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.
Gains and losses from the sale of securities are computed using the specific
identification method. Realized and unrealized gains and losses from trading
securities are included in non-interest income. The change in the net
unrealized trading gains/losses included in 1994 non-interest income was not
material. Net interest earned on trading securities is included in interest
income.
Mortgage-backed securities are subject to prepayment risk. The related premiums
and discounts and, therefore, the effective annual yield of those securities,
are adjusted at least annually
85
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
for actual prepayment experience as well as future projected cash flows.
DERIVATIVES
The Corporation is party to a variety of derivatives such as interest rate
swaps, 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 fair 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.
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. Reference
Note S for further discussion on derivatives.
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 loans 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.
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 an accruing loan status when they become current as to both
principal and interest and when doubt no longer exists as to the collectability
of principal or interest. Such loans are returned to accrual at a carrying
value net of any cash interest payments previously applied to principal and net
of any previously recognized charge-offs.
86
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
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 which are generally 7 to 40 years for buildings, 3 to 15 years for
furniture and equipment and 5 years for software. 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 from 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.
87
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
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
Until September, 1994, the Corporation's consolidated subsidiary, IOMC,
originated, purchased, sold and serviced residential mortgage loans. In
September, 1994, the Corporation sold IOMC's entire servicing rights portfolio
and its non-Michigan origination business. Residential mortgage loans held for
sale to the secondary market are carried at the lower of cost or market,
determined on a net aggregate basis.
IOMC was party to forward contracts in the management of its interest rate
exposure. Hedge gains and losses were deferred and recognized upon sale and
delivery of the underlying mortgage loans and were included in gains from the
sale of mortgage loans.
Gains or losses on sales of mortgage loans were recognized at the time of sale
and were 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 sold loans with servicing rights retained. Mortgage servicing
fee income was 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 were sold and normal servicing fee income. PMSR
and ESF were recorded as assets and amortized in proportion to, and over the
period of, estimated net servicing income.
INCOME TAXES
Effective January 1, 1992, the Corporation adopted SFAS No. 109 and reported
the cumulative effect of that change in method of accounting for income taxes
in the 1992 consolidated statement of
88
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
income.
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.
EARNINGS PER SHARE
Primary and fully diluted earnings per common share (EPS) are based on the
weighted average number of common shares outstanding in each year, plus common
stock equivalents (CSE) which represent the dilutive effect of outstanding
stock options and Equity Contracts issued with the Corporation's 8% Redeemable
Subordinated Debentures (Debentures). If the inclusion of a CSE has the effect
of increasing EPS or decreasing loss per share, such CSE is excluded from the
EPS computation. Reference Note O and Note P for further information on the
Debentures and Equity Contracts.
For periods prior to fourth quarter 1994, the common stock equivalents were
calculated using the "treasury stock method" in accordance with Accounting
Principles Board Opinion (APB) No. 15, Earnings Per Share. During the fourth
quarter of 1994, the Debentures were valued at a discount, and accordingly the
"if-converted method" was used to calculate the CSE of the Equity Contracts. In
determining primary EPS, the CSE was calculated based on the quarterly CSE
average under the "treasury stock method" for the first three quarters plus the
fourth quarter average based on the "if-converted method". For purposes of
calculating fully diluted EPS, the "if-converted method" assumed that the CSE
relating to the Equity Contracts were converted to common stock at the
beginning of the period.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 119, Disclosure
about Derivative Financial Instruments and Fair Value of Financial Instruments.
This Statement requires disclosures about derivative financial instruments
covering futures, forward, swap and option contracts, and other financial
instruments with similar characteristics. It requires disclosures about
amounts, nature, and terms of derivative financial instruments. It also amends
the existing requirements of SFAS No. 105, Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments
with Concentration of Credit Risk, to require disaggregation of information by
class, business activity, risk or other category that is consistent with the
entity's management of those instruments. It amends SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, to require
89
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
that fair value information be presented without combining, aggregating or
netting (unless legally enforceable) the fair value of non-derivative
financial instruments and be presented together, with the related carrying
amounts in the body of the financial statements, a single footnote or summary
table in a form that makes it clear whether the amounts represent assets or
liabilities. This Statement further requires separate classification between
financial instruments held or issued for trading purposes and financial
instruments held or issued for purposes other than trading. Disclosures in
accordance with SFAS No. 119 are presented in Note S and Note T.
The Financial Accounting Standards Board has also issued SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. This Statement eliminates SFAS No. 114's (Accounting by Creditors
for Impairment of a Loan) provisions for recognizing interest income on an
impaired loan by instead allowing a creditor to use existing methods for
recognizing income on impaired loans. It amends the disclosure requirements in
SFAS No. 114 to require information about the recorded investment in certain
impaired loans and about how a creditor recognizes interest income related to
those impaired loans. This Statement does not change the provisions of SFAS No.
114 which 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.
SFAS No. 114, which addresses the accounting by creditors for impairment of
certain loans, requires that a loan be classified as 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. SFAS No. 114 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. This Statement, in conjunction with
SFAS No. 118, applies to financial statements for fiscal years beginning after
December 15, 1994. The Corporation will adopt these statements effective
January, 1995 and does not expect that implementation will have a material
effect on results of operations.
90
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
B. Other Gains, net and Restructuring Charge
Other Gains, net
The Termination Agreement entered into on September 30, 1994, resulted in the
recognition of $9.7 million pre-tax non-recurring income. Refer to Note F for
further information regarding the Termination Agreement and the related
recognition of non-recurring income.
The sales of Lockwood, First State, and certain assets of IOMC during 1994
resulted in pre-tax gains, net of transaction costs, totalling $61.9 million.
Refer to Note C for further information regarding these transactions.
As a result of the sales described above, the number of active participants in
the Corporation's pension and postretirement benefit plans was significantly
reduced, resulting in a plan curtailment as defined by SFAS No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits, and SFAS No. 106, Employer's Accounting for
Postretirement Benefits Other Than Pension. A curtailment loss of $4.3 million
for postretirement benefits and $0.2 million for pension benefits was charged
against other gains, net.
In the fourth quarter, the Corporation negotiated an early termination of a
three year recourse provision included in a 1993 servicing sale agreement. In
exchange for cash consideration of approximately $0.4 million plus IOMC's
waiver of rights to a $0.3 million purchase price hold back, the buyer agreed
to release the Corporation from further liability under the recourse provision.
Accordingly, the Corporation recognized a $1.5 million net gain which had been
deferred in 1993.
Restructuring Charge
As part of the Corporation's strategic restructuring, Project Streamline, a
comprehensive program to re-engineer internal operating processes to strengthen
the Corporation's financial performance, was initiated in June 1994. The
Corporation expects to implement all Project Streamline initiatives within 12
months. These initiatives will improve the efficiency and profitability of the
business and administrative work processes of all operations of the
Corporation's principal bank subsidiary, MNB.
A restructuring charge related to Project Streamline of $37.6 million was
recorded in the fourth quarter of 1994. Included in the restructuring charge
were:
1. Severance costs of $10.5 million associated with the elimination of
approximately 1,000 jobs which will take place throughout 1995. The
severance costs include salary and benefits that will continue following
termination and the cost of out-placement services that are provided by the
Corporation. The positions that will be eliminated have been specifically
identified. In addition, all team members corporate wide were notified of
the severance benefits they
91
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
will receive if they are to be terminated under Project Streamline.
2. Costs of $13.5 million associated with owned and leased facilities that will
be vacated and furniture, equipment and leasehold improvements that will be
abandoned or sold as a result of business and process changes under Project
Streamline. These costs include the future lease payments of leased
facilities that will be vacated, estimated losses from the sale of owned
facilities that will be vacated, and estimated losses from the sale or
abandonment of furniture, equipment and leasehold improvements that will no
longer be utilized in the business operations of the Corporation. The
facilities that will be vacated are primarily Michigan office facilities.
3. Pension and postretirement curtailment losses of $0.9 million and $3.2
million, respectively. The elimination of approximately 1,000 jobs under
Project Streamline will result in a further significant reduction in the
number of active plan participants in the Corporation's pension and
postretirement benefit plans. Accordingly, a curtailment loss, as defined
by SFAS No. 88 and SFAS No. 106, was recognized.
4. Outside service fees of $9.5 million, all of which were paid by January,
1995.
92
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
C. Sales and Acquisitions
On January 20, 1995, the Corporation entered into a definitive agreement to
sell substantially all of the assets (approximately $85 million) and
liabilities (approximately $30 million) of the Corporate and Private Banking
divisions of IOBOC to Southern California Bank of Anaheim, California. The
sale is not expected to result in a significant gain or loss and is expected to
close in the second quarter 1995.
The Corporation entered into a definitive agreement on December 6, 1994, to
sell approximately $205 million of deposit liabilities of IOBOC to Glendale
Federal Bank (Glendale). Glendale will also assume the lease obligations of
four branch offices and purchase the related leasehold improvements and other
furniture and equipment at book value. The transaction is not expected to
result in a significant gain or loss and is expected to close in the second
quarter of 1995.
On December 29, 1994, the Corporation sold substantially all the assets and
liabilities of FCSI to an affiliate of Associates Corporation of North America.
The sale resulted in a pre-tax loss, net of transaction costs, of $0.3 million.
A subsidiary of IOBOC originally purchased the mortgage warehouse lending
business and other net assets with a total book value of approximately $200
million from First Collateral Services, Inc., a subsidiary of Honfed Bank, FSB
on April 13, 1992. The assets were purchased for cash equal to their book
value plus a $400,000 premium. Subsequent to the acquisition, IOBOC's
subsidiary did business as FCSI.
Effective July 31, 1994, the Corporation sold to Norwest Mortgage, Inc. certain
assets of IOMC, including its $8.6 billion mortgage servicing rights portfolio,
its mortgage servicing operation and non-Michigan loan origination business.
Norwest also assumed certain liabilities including the lease obligations of 20
non-Michigan branch production offices and a large portion of IOMC's national
servicing facility. The transaction was completed September 30, 1994, and
resulted in a pre-tax gain of $42.3 million. The gain is net of the
unamortized book value of PMSR and ESF assets totalling $44.9 million and net
of transaction costs of $28.8 million.
On August 31, 1994, the Corporation sold the stock of First State to
International Bank of Commerce for a cash purchase price of approximately $28
million. The transaction resulted in a pre-tax gain, net of transaction costs,
of $5.4 million.
On August 4, 1994, the Corporation sold the stock of Lockwood to Comerica
Incorporated for a cash purchase price of $44 million. The transaction
resulted in a pre-tax gain, net of transaction costs, of $14.2 million.
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 by $4.6 million; no additional loss resulted from the sale transaction.
The
93
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
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/Community Banks and the banks were merged into
Lockwood Bank. The cash purchase price of 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.
On June 30, 1992, MNB 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 assumed all
the merchant transaction processing responsibilities of Central Fidelity Bank
and both Central Fidelity Bank and MNB conduct joint marketing efforts.
94
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
D. 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 $177 million and $216 million at December 31,
1994 and 1993, respectively.
95
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
E. Investment Securities
The following summarizes the book value, fair value, and gross unrealized gains
and losses of investment securities at December 31 of each year.
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities
available-for-sale:
Mortgage-backed securities $103,542 $1,051 $104,593
U.S. Treasury, Government
agencies and corporations 100,294 ($2,976) 97,318 $893 $893
Other securities 39,941 (36) 39,905
- -----------------------------------------------------------------------------------------------------------------------------------
Total 243,777 1,051 (3,012) 241,816 893 893
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities
held-to-maturity:
Mortgage-backed securities 616,284 915 (22,058) 595,141 983,765 25,900 (2,526) 1,007,139
U.S. Treasury, Government
agencies and corporations 404,035 (5,946) 398,089 275,484 4,351 (12) 279,823
State and municipal 25,234 517 (8) 25,743 38,918 2,181 (12) 41,087
Other securities 76,684 (1,106) 75,578 15,606 2 15,608
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,122,237 1,432 (29,118) 1,094,551 1,313,773 32,434 (2,550) 1,343,657
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities $1,366,014 $2,483 ($32,130) $1,336,367 $1,314,666 $32,434 ($2,550) $1,344,550
====================================================================================================================================
At December 31, 1994, $97 million of treasury securities available-for-sale,
$179 million of treasury securities held-to-maturity, $309 million of
mortgage-backed investment securities held-to-maturity and $24 million of state
and municipal securities held-to-maturity were pledged to collateralize
deposits of public funds and for other purposes required or permitted by law.
96
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
E. Investment Securities (continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income from investment securities at December 31 of each year
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Investment securities available-for-sale:
Mortgage-backed securities $10,524 $1,767 $690
U.S. Treasury, Government agencies
and corporations 4,113 848 282
Other securities 1,701
- -----------------------------------------------------------------------------------------------------------------------------------
Total $16,338 $2,615 $972
===================================================================================================================================
Investment securities held-to-maturity:
Mortgage-backed securities $42,013 $72,105 $112,015
U.S. Treasury, Government agencies
and corporations 19,851 14,077 9,287
State and municipal 1,953 2,460 4,056
Other securities 3,317 897 781
- -----------------------------------------------------------------------------------------------------------------------------------
Total $67,134 $89,539 $126,139
===================================================================================================================================
Income from Other securities available-for-sale represented dividends of $1.7
million for the year ended December 31, 1994. Income from Other securities
held-to-maturity included dividends of $0.6 million for the years ended
December 31, 1993 and 1992.
Gross realized losses from sales of investment securities available-for-sale
were $31 thousand and $600 thousand for the years ended December 31, 1994 and
1993, respectively, and none for year ended December 31, 1992. The Corporation
did not realize any gross gains from sales of investment securities
available-for-sale for the year ended December 31, 1994. Gross realized gains
from sales of investment securities available-for-sale were $6.6 million and
$8.0 million for the years ended December 31, 1993 and 1992, respectively.
The Corporation realized gross gains from the sale of investment securities
held-to-maturity of $4.3 million, for the year ended December 31, 1992. Gross
realized losses from the sale of investment securities held-to-maturity were
$25 thousand for the year ended December 31, 1992.
The remaining balance of security gains (losses) for the years ended December
31, 1993, and 1992 consisted of non-sales related activity, including
write-offs of premiums and discounts associated with early pay-offs of
securities.
97
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
E. Investment Securities (continued)
- --------------------------------------------------------------------------------
The following summarizes the remaining maturity and average yield of the
investment securities available-for-sale at December 31, 1994. (1) (2)
Fair
Amortized Value Average
(in thousands) Cost (Carrying Value) Yield
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities (3)
After one year through five years $103,542 $104,593 8.96%
- ------------------------------------------------------------------------------------------------------------------------------------
Total 103,542 104,593 8.96
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury, Government agencies and corporations
One year or less 397 396 4.09
After one year through five years 99,897 96,922 4.78
- ------------------------------------------------------------------------------------------------------------------------------------
Total 100,294 97,318 4.78
- ------------------------------------------------------------------------------------------------------------------------------------
Other securities
One year or less 1,518 1,482 6.02
After ten years 38,423 38,423 5.97
- ------------------------------------------------------------------------------------------------------------------------------------
Total 39,941 39,905 6.07
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities available-for-sale $243,777 $241,816 6.76%
====================================================================================================================================
Continued on next page where footnotes are located.
98
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
E. Investment Securities (continued)
- --------------------------------------------------------------------------------
The following summarizes the remaining maturity and average yield of the
investment securities held-to-maturity at December 31, 1994. (1)(2)
- --------------------------------------------------------------------------------
Amortized
Cost Fair Average
(in thousands) (Carrying Value) Value Yield
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities(3)
One year or less $158,474 $155,190 4.99%
After one year through five years 361,697 349,866 5.98
After five years through ten years 96,113 90,085 7.11
- ------------------------------------------------------------------------------------------------------------------------------------
Total 616,284 595,141 5.90
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury, Government agencies and corporations
One year or less 252,780 251,263 5.21
After one year through five years 151,226 146,797 5.37
After five years through ten years 29 29 6.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total 404,035 398,089 5.27
- ------------------------------------------------------------------------------------------------------------------------------------
State and municipal
One year or less 4,000 4,008 9.05
After one year through five years 16,503 16,829 9.11
After five years through ten years 2,864 2,925 9.47
After ten years 1,867 1,981 11.13
- ------------------------------------------------------------------------------------------------------------------------------------
Total 25,234 25,743 9.29
- ------------------------------------------------------------------------------------------------------------------------------------
Other securities
After one year through five years 76,684 75,578 6.39
- ------------------------------------------------------------------------------------------------------------------------------------
Total 76,684 75,578 6.39
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities held-to-maturity $1,122,237 $1,094,551 5.78%
====================================================================================================================================
(1) Weighted average yield is computed by dividing the annual income by the
security balance outstanding at December 31. Such computations for states
of the U.S. and political subdivisions are based on fully taxable
equivalent income using a federal tax rate of 35% in 1994.
(2) The average maturity of the investment securities held-to-maturity was
approximately 1.8 years and the average maturity of the investment
securities available-for-sale was approximately 3.9 years at at December
31, 1994.
(3) The weighted average expected life was used to determine the maturity of
mortgage-backed securities.
99
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
F. FDIC Assistance
Michigan National Corporation, IOBOC and the FDIC reached an agreement to
terminate the Assistance Agreement (Termination Agreement) as of the close of
business September 30, 1994, resulting in the recognition of $9.7 million in
non-recurring income and tax benefits of $41.7 million. The relevant terms of
the termination are as follows:
- The FDIC paid in full the outstanding principal balance of the Note
Receivable - FDIC, dated December 31, 1988, of $348.9 million. The note
($808 million initial amount, subsequently adjusted to $811 million
based on a beginning balance sheet audit completed in 1990), which
brought IOBOC's equity deficit to zero, was scheduled to mature on
December 31, 1998. The note agreement specified consecutive quarterly
interest payments during the term of the note and allowed 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.
- Under the Assistance Agreement, Michigan National Corporation and IOBOC
agreed to share realized tax benefits with the FDIC. The FDIC was to
receive 25% of these benefits until the Corporation realized a return of
its aggregate investment plus a 20% compound return on investment;
thereafter, the tax benefits were to be shared equally. The FDIC shared
tax benefits at a 25% rate each year since the acquisition. Tax
benefits 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.
The Termination Agreement discontinued the obligation of Michigan
National Corporation and IOBOC to return to the FDIC a portion of the
realized tax benefits, except for any future realization of IOBOC's
December 31, 1988, (pre-acquisition) net operating loss carryforwards and
tax credit carryforwards. Under SFAS No. 109 the Corporation previously
recognized deferred tax assets arising from post-1988 tax benefits. To
the extent such benefits were recognized, the Corporation recorded a
liability to the FDIC for their share of the benefit to be paid when the
benefit was realized. With IOBOC's obligation to share these realized tax
benefits canceled, the liability to pay the FDIC was reversed, resulting
in a reduction of 1994 income tax expense of $41.7 million (net of
deposit spread discount of $13.7 million and payment to the FDIC of $7.0
million discussed below).
- The Assistance Agreement provided the FDIC the right to receive a
payment at March 31, 1999, of up to 20% of IOBOC's December 31, 1998
equity. The Termination Agreement canceled this right. Accordingly,
the Corporation reversed the accrued liability related to this
obligation, resulting in a non-recurring gain of $10.3 million.
100
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
- Under the Assistance Agreement, IOBOC received a cost of funds subsidy
from the FDIC related to certain fixed term deposit liabilities which
limited the interest expense on those deposits to the FHLBB COF. The
Termination Agreement discontinued this subsidy as of October 1, 1994.
As a result of the termination, IOBOC established a deposit spread
discount of $13.7 million based on forecasted interest rates as of
September 30, 1994. The recording of the deposit discount created
goodwill which was immediately written off against post-1988 tax
benefits. This deposit spread discount will be accreted into income
over the remaining life of the time deposits, preserving the forecasted
cost of these deposits.
- The Assistance Agreement provided indemnification for certain claims and
any challenges to the assisted acquisition. As a result of the
termination, the FDIC will continue to indemnify IOBOC for all costs
associated with claims which have been specifically identified as of
September 30, 1994, and for any environmental claim which may arise
against IOBOC through December 31, 1998, the original term of the
Assistance Agreement.
- All other interpretative disputes which arose under the Assistance
Agreement, principally relating to tax sharing matters, were resolved
with the termination. As a result, IOBOC agreed to pay the FDIC $7.0
million as part of the settlement. This payment was recognized as
income tax expense. In addition, $0.6 million previously recorded as
income was reversed and charged against other gains, net.
Under the Assistance Agreement, the FDIC provided Capital Loss Coverage and
Guaranteed Yield on Covered Assets through December 31, 1992. In addition, the
Assistance Agreement required 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, effective December 31, 1992. The Corporation recognized
FDIC Capital Loss Coverage of $7.1 million and $57.9 million for the years
ended December 31, 1993 and 1992, respectively.
101
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
G. Loans and Lease Financing
- --------------------------------------------------------------------------------
The following summarizes loans and lease financing at December 31 of each year.
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural secured by real estate $867,468 $971,917
Other commercial, financial and agricultural 2,397,375 2,373,707
Commercial real estate-mortgage 1,105,007 1,238,177
Non-performing loans held for sale 56,256
Residential real estate mortgages held for sale 10,106 583,056
Residential real estate mortgages held for investment 332,517 465,904
Short-term commercial real estate-construction 126,158 159,594
Installment 1,008,191 780,532
Lease financing 130,713 116,998
- ------------------------------------------------------------------------------------------------------------------------
Total 6,033,791 6,689,885
Unearned income (20,024) (18,619)
Allowance for possible credit losses (164,344) (190,992)
- ------------------------------------------------------------------------------------------------------------------------
Net Loans and Lease Financing $5,849,423 $6,480,274
========================================================================================================================
102
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- -------------------------------------------------------------------------------
H. Allowance for Possible Credit Losses
- -------------------------------------------------------------------------------
The following summarizes the activity in the allowance for possible credit
losses.
- -------------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $190,992 $175,471 $154,638
Additions:
Provisions charged to expense 41,000 40,000 70,670
Recoveries 7,919 8,650 8,372
Subsidiaries purchased 878
Allocation of cash discount received from Covered Asset settlement 3,000
- ----------------------------------------------------------------------------------------------------------------------------------
239,911 224,999 236,680
Less:
Amounts charged-off 73,272 34,007 61,209
Subsidiaries sold 2,295
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $164,344 $190,992 $175,471
==================================================================================================================================
103
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
I. 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 industry concentrations in the
Commercial, Financial and Agricultural loan category as of December 31, 1994
and 1993.
- ---------------------------------------------------------------------------------------------------------------------------
1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Commercial, Financial and Agricultural Loans Outstanding:
Service 23% 18%
Finance, insurance and real estate 18 28
Retail Trade 12 13
Manufacturing 12 11
Automotive 11 8
Wholesale trade 10 8
- ---------------------------------------------------------------------------------------------------------------------------
Certain prior period amounts were restated to conform to current period
presentation.
The Corporation had highly leveraged transactions outstanding of approximately
$71 million and $92 million as of December 31, 1994 and 1993, respectively.
104
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
J. 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 related parties. 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, 1994, approximated $113 million at the beginning and $54 million
at the end of 1994. During 1994, advances and new loans to related parties
approximated $38 million and payments approximated $97 million. 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. The aggregate amount of such
loans at January 1, 1993, approximated $97 million.
105
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
K. Premises and Equipment
- --------------------------------------------------------------------------------
The following summarizes premises and equipment, including capital leases, at
December 31 of each year.
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Land $31,372 $34,543
Buildings and improvements 157,534 160,235
Equipment 175,346 194,319
- -----------------------------------------------------------------------------------------------------------------------------
Total 364,252 389,097
Less accumulated depreciation and amortization 198,577 189,955
- -----------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net $165,675 $199,142
=============================================================================================================================
The following summarizes capital leases included in premises and equipment, at
December 31 of each year.
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Land and buildings $8,438 $8,722
Less accumulated amortization 6,409 6,351
- -----------------------------------------------------------------------------------------------------------------------------
Capital leases, net $2,029 $2,371
=============================================================================================================================
The following summarizes rent expense for operating leases, at December 31 of
each year.
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
Operating rent expense $12,817 $13,960 $14,292
Operating rental income 3,491 3,498 3,515
- -----------------------------------------------------------------------------------------------------------------------------
Net operating lease expense $9,326 $10,462 $10,777
=============================================================================================================================
The following summarizes future minimum lease payments under noncancellable
leases at December 31, 1994.
- --------------------------------------------------------------------------------
Capital Operating
Year (in thousands) Leases Leases
- -----------------------------------------------------------------------------------------------------------------------------
1995 $897 $4,929
1996 850 4,113
1997 729 3,530
1998 633 2,828
1999 479 1,942
Later years 2,139 7,269
- -----------------------------------------------------------------------------------------------------------------------------
Total minimum lease payments 5,727 24,611
Less imputed interest and other costs 2,180
- -----------------------------------------------------------------------------------------------------------------------------
Net minimum lease payments (1) $3,547 $24,611
=============================================================================================================================
(1) Minimum payments have not been reduced by minimum sublease rentals of $1.2
million due in the future under noncancelable subleases.
106
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
L. Property From Defaulted Loans
- --------------------------------------------------------------------------------
The following summarizes property from defaulted loans at December 31 of each
year.
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Foreclosed property $22,156 $61,428
In-substance foreclosures 11,934 36,638
- ------------------------------------------------------------------------------------------------------------------------
Property from defaulted loans $34,090 $98,066
========================================================================================================================
- --------------------------------------------------------------------------------
The following summarizes the activity in property from defaulted loans for the
years ended December 31.
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $98,066 $152,207
Additions:
Foreclosures 14,500 22,077
In-substance foreclosures 7,283
Capital improvements/Payoff of senior liens 1,619 7,076
Purchase of Subsidiary 698
Reductions:
Disposition of assets 60,070 65,744
Pay-downs 1,893 6,045
Writedowns 14,519 12,505
Transfer of in-substance foreclosed loans to Non-performing Loan status 5,416
Sale of subsidiaries 1,104
Other, Net (2,509) (1,565)
- ------------------------------------------------------------------------------------------------------------------------
Net Activity (63,976) (54,141)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year $34,090 $98,066
========================================================================================================================
107
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
M. 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. PMSR and ESF are
discussed in Note A.
- --------------------------------------------------------------------------------
Purchased mortgage servicing rights
(in thousands) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $49,389 $155,083 $187,316
Additions:
Purchased servicing 1,979 13,084 20,788
Less:
Reductions due to servicing sale activity 40,921 13,780 21
Amortization:
Scheduled amortization (1) 16,941 34,340 26,563
Amortization due to changes in prepayment assumptions (6,494) 70,658 26,437
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal amortization 10,447 104,998 53,000
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $0 $49,389 $155,083
=================================================================================================================================
- --------------------------------------------------------------------------------
Capitalized excess service fees
- --------------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $6,869 $22,277 $16,290
Additions:
Capitalized servicing due to loan sale activity 1,510 4,952 18,738
Less:
Reductions due to servicing sale activity 5,955 1,434 3,266
Amortization:
Scheduled amortization (1) 2,454 10,150 3,660
Amortization due to changes in prepayment assumptions (30) 8,776 5,825
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal amortization 2,424 18,926 9,485
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $0 $6,869 $22,277
=================================================================================================================================
(1) Scheduled amortization represents annual amortization determined on the
basis of prepayment assumptions in effect at the beginning of the year.
108
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORTION AND SUBSIDIARIES
N. SHORT-TERM BORROWINGS
Effective May 31, 1994, the Corporation canceled a $25 million, three year line
of credit. The original commitment period would have expired April 30, 1995.
The commitment period of a second facility, a $20 million 364 day line of
credit, expired March 10, 1994. These two facilities were established in the
second quarter of 1992 to support the Corporation's commercial paper program
and for a variety of general corporate purposes. The facilities are no longer
necessary because the Corporation has not issued commercial paper for several
years and has sufficient sources of liquidity available to fund its operations.
In March, 1994, MNB received approval from the Federal Home Loan Bank (FHLB) of
Indianapolis for credit advances with a borrowing capacity of approximately
$225 million. As a condition of membership, MNB purchased approximately $27.1
Million in FHLB stock. Variable or fixed rate advances are available with
terms ranging from one day to ten years and must be fully collateralized.
IOBOC has a line of credit with the FHLB of San Francisco for advances. At
December 31, 1994, IOBOC'S borrowing capacity was approximately $11.5 Million.
Advances are available, at IOBOC'S option, at a variable or fixed rate with
terms up to 360 months. Advances must be fully collateralized and are based
upon residential mortgage collateral pledged. Neither MNB nor IOBOC had any
advances outstanding as of December 31, 1994. IOBOC did not have any advances
outstanding as of December 31, 1993.
109
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
N. Short-Term Borrowings
- --------------------------------------------------------------------------------
A summary of short-term borrowings for the past two years is presented below.
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and repurchase agreements at December 31
Outstanding $195,585 $133,925
Average interest rate 5.85% 3.09%
Average during year
Outstanding $280,616 $302,110
Interest rate 4.22% 3.12%
Maximum month-end balance during the year $558,885 $481,983
- ---------------------------------------------------------------------------------------------------------------------------------
Other borrowings at December 31
Outstanding $123,445 $159,368
Average interest rate 5.31% 3.12%
Average during year
Outstanding $95,594 $158,823
Interest rate 4.06% 3.62%
Maximum month-end balance during the year $191,915 $317,626
- ---------------------------------------------------------------------------------------------------------------------------------
Certain prior period amounts have been reclassified to conform to current
period presentation.
110
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORTION AND SUBSIDIARIES
O. 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 (Equity
Contracts). See Note P regarding the 1994 self tender offer for the Equity
Contracts. Interest on the Debentures 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: 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, 1994 and
1993. The floating rate note due through 1997 relates to the Employee Stock
Ownership Plan and Trust discussed in Note Q. The $3.2 million variable rate
subordinated debentures outstanding at December 31, 1993, were redeemed in
August 1994 in connection with the sale of Lockwood.
Annual maturities of consolidated long-term debt (exclusive of capital lease
obligations) for the five years ending December 31, 1995, through 1999,
respectively, are $2.8, $2.8, $6.8, $54.1 million and zero.
111
112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
O. Long-Term Debt
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
Parent company
Floating rate note due through 1997 (1) $12,412 $15,212
8% redeemable subordinated debentures due through 1998 53,851 54,555
- -------------------------------------------------------------------------------------------------------------------------------
Total 66,263 69,767
Subsidiaries
Variable rate subordinated debentures due through 1997 (2) 3,160
8.5% mortgage note due through 1997 105 140
- -------------------------------------------------------------------------------------------------------------------------------
Total 105 3,300
Capital lease obligations (Note K) 3,547 4,055
- -------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $69,915 $77,122
===============================================================================================================================
(1) Interest rate is Marine Midland Bank prime rate.
(2) Interest rate was First City National Bank of Houston prime rate with a
maximum of 11% and a minimum of 7%.
112
113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
P. Capital
The Corporation authorized a major repurchase program for its common stock and
Equity Contracts (described below) during the fourth quarter of 1994 to
reposition the balance sheet and, therefore, improve return on equity. The
Corporation repurchased, through a Dutch Auction, approximately 2.2 million, or
14%, of its outstanding common stock at a cost of $78 per share. In addition,
the Corporation repurchased, through a separate self tender offer,
approximately 294 thousand of the Equity Contracts at a cost of $21.625 for
each contract. The aggregate cost of the repurchase program was approximately
$176.5 million. This significant reduction in shareholders' equity was offset,
in part, by an increase in retained earnings of approximately $141.2 million.
The Corporation adopted SFAS 115, Accounting for Certain Investments in Debt
and Equity Securities, in 1994 which requires inclusion of unrealized gains and
losses on investment securities available-for-sale as a separate component of
shareholders' equity. As of December 31, 1994, after-tax unrealized losses
amounted to approximately $1.3 million which reduced shareholders' equity.
The factors described above were the primary contributors to the reduction of
shareholder's equity from $815.6 million as of December 31, 1993 to $795
million as of December 31, 1994.
On November 10, 1988, as part of the Debentures discussed in Note O, the
Corporation issued $55 million of Equity Contracts. The remaining Equity
Contract holders at December 31, 1994 are required to purchase $37.5 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 holders. The number of common stock shares issued
through the surrender of Debentures pursuant to the Equity Contracts was 13,478
and 1,773 during the years 1994 and 1993, respectively. In addition, there were
88 shares issued through cash exercise of Equity Contracts during 1994. There
were no shares of common stock issued pursuant to the Equity Contracts during
1992.
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
113
114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
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 February 4, 1995, the Corporation amended the Rights Plan, with the effect
of exempting the Agreement and Plan of Merger dated February 4, 1995, by and
among National Australia Bank Limited, MNC Acquisition Corporation, and
Michigan National Corporation, and the events and transactions contemplated
thereby from the Rights Plan. See Note Z regarding the Agreement and Plan of
Merger.
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.
The Corporation's tier 1 risk-based capital ratio at December 31, 1994 and
1993, was 8.88% and 9.57%, respectively. The total risk-based capital ratio was
10.82% and 11.73% at December 31, 1994 and 1993, respectively. The leverage
ratio at December 31, 1994 and 1993 was 7.72% and 7.56%, 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-based capital ratio, total risk-based capital ratio and leverage ratio,
respectively.
114
115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Q. 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).
At December 31, 1994, 615,832 shares have been granted and exercised; 458,342
were granted and outstanding; no shares were available for future grant under
the Plan provisions which limit the total number of shares authorized for
issuance to 8% of the Corporation's outstanding common stock.
Generally, stock options are granted with an exercise price equal to the market
value on the date of grant and are vested over a three-year period. The
options granted under the Plan are not exercisable before one year or after 10
years from date of grant. Total shares immediately exercisable under stock
options were 416,885, 508,760 and 498,153 at December 31, 1994, 1993, and 1992
respectively. Following is a summary of the activity with respect to stock
options offered by the Corporation.
- --------------------------------------------------------------------------------
Number of Option Price
Shares per Share
- -----------------------------------------------------------------------------------------------------------------------------------
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
Granted 28,500 61.50-78.25
Exercised (191,221) 16.75-61.50
Terminated (15,053) 34.25-59.50
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1994 458,342 $16.75-$78.25
===================================================================================================================================
(1) Includes 200,000 shares exercised under the 1985 stock options granted to
the Chief Executive Officer.
115
116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Q. Employee Benefit Plans (continued)
- --------------------------------------------------------------------------------
Pension
All eligible, salaried employees of the Corporation 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
the plan assets are invested in fixed income U. S. Government obligations and
equities, with the balance in cash and cash equivalents.
- --------------------------------------------------------------------------------
The following is a summary of the components of net periodic pension costs for
years ended December 31.
- --------------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
Service cost $4,515 $3,448 $2,794
Interest cost 5,547 4,598 4,009
Actual return on plan assets (4,775) (4,366) (3,832)
Net amortization and deferral 1,614 829 819
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost 6,901 4,509 3,790
August 31, 1994 curtailment loss (1) 183
October 31, 1994 curtailment loss (1) 935
- ------------------------------------------------------------------------------------------------------------------------------
Total pension cost $8,019 $4,509 $3,790
- ------------------------------------------------------------------------------------------------------------------------------
(1) Refer to Note B for a discussion of the curtailment losses.
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
8.5% at December 31, 1994 and 7.0% at December 31, 1993. The assumed rate of
increase in future salaries was 5% at December 31, 1994 and 1993. The expected
long-term rate of return on assets was 8.25% at December 31, 1994 and 1993.
The net obligation at the 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 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.
- --------------------------------------------------------------------------------
December 31 (in thousands) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Vested benefit obligation ($45,509) ($49,021)
Non-vested benefit obligation (1,471) (3,677)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation (46,980) (52,698)
Value of future pay increases (12,020) (24,499)
- ------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (59,000) (77,197)
Fair value of plan assets 57,414 56,262
- ------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets (1,586) (20,935)
Unrecognized net obligation at date of adoption 3,201 4,852
Unrecognized prior service cost 130 1,742
Unrecognized net gain 177 20,054
- ------------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost $1,922 $5,713
- ------------------------------------------------------------------------------------------------------------------------------
During the years ended December 31, 1994, 1993, and 1992 the Corporation
recognized additional pension expense of $1.7 million , $0.6 million, and $0.4
million, respectively, for supplemental pension benefits. The expense for 1994
includes approximately $0.5 million in settlement losses resulting from the
purchase of annuities for three plan participants terminated during 1994. The
unfunded recognized pension obligation for these benefits was $3.3 million and
$3.0 million at December 31, 1994 and 1993, respectively. The liability
balance includes an additional minimum liability of $0.7 million recognized in
1993 under the provisions of SFAS No. 87. The recognition of this additional
minimum 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.
116
117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
Q. Employee Benefit Plans (continued)
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.
When the plan was established, the Corporation loaned the ESOP approximately
$37.6 million to finance its purchase of the stock in exchange for a promissory
note. The outstanding principal of the note was $12.4 million at December 31,
1994, and is accounted for 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. discussed in Note O. The ESOP made
an annual principal payment of $2.8 million and interest payments of $1.0
million, $1.0 million and $1.3 million in 1994, 1993 and 1992, respectively, to
the Corporation.
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 makes contributions to the
plan in amounts which, when added to the dividends received on the
Corporation's shares owned by the ESOP and not yet allocated to participant
accounts, are at least enough to allow the ESOP to pay principal and interest
on its loan. The Corporation contributed $3.2 million, $3.0 million and $3.1
million in 1994, 1993 and 1992, respectively, to the ESOP.
117
118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
R. 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 the year ended December
31, 1992, the Corporation recognized expense of $1.3 million for postretirement
benefit claims paid. SFAS No. 106 allows the 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
transition obligation over a period of twenty years. The Corporation's cash
flows are not affected by the implementation of SFAS No. 106, but additional
expense for the year ended December 31, 1993 of approximately $5.6 million was
recorded.
- --------------------------------------------------------------------------------
The following is a summary of the components of net periodic postretirement
costs for the years ended December 31 determined under the provisions of SFAS
No. 106
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Service cost $784 $1,364
Interest cost 3,147 3,536
Amortization of transition obligation 1,193 2,012
Amortization of unrecognized loss 519
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement cost 5,643 6,912
August 31, 1994 curtailment loss (1) 4,350
October 31, 1994 curtailment loss (1) 3,143
- -----------------------------------------------------------------------------------------------------------------------------------
Total postretirement cost $13,136 $6,912
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Refer to Note B for a discussion of the curtailment losses.
- --------------------------------------------------------------------------------
The following table presents a reconciliation of amounts recorded in the
December 31 consolidated statement of condition.
- --------------------------------------------------------------------------------
(in thousands) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation (APBO):
Retirees ($28,499) ($27,617)
Fully eligible active plan participants (4,536) (6,004)
Other active plan participants (678) (20,939)
- -----------------------------------------------------------------------------------------------------------------------------------
Total (33,713) (54,560)
Unrecognized net loss 5,379 10,770
Unrecognized transition obligation 11,631 38,216
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit liability ($16,703) ($5,574)
- -----------------------------------------------------------------------------------------------------------------------------------
Effective April 1, 1994, the substantive postretirement benefit plan was
amended to reduce the amount of benefits to be paid to future retirees. This
plan amendment reduced the APBO by $17.9 million. The unrecognized transition
obligation was reduced by the same amount.
The assumed discount rate used in determining the accumulated postretirement
benefit obligation was 8.5% at December 31, 1994 and 7.0% at December 31,
1993.
The Corporation has not funded its postretirement obligation.
For purposes of measuring the accumulated benefit obligation and periodic cost,
a 13% annual rate of increase in the per capita cost of covered benefits (i.e.,
health care cost trend rate) was assumed for 1994; the rate was further assumed
to decline linearly over the next 13 years to 5.5%.
A one-percentage increase in the assumed health care cost trend rate for each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1994, by an estimated $3.2 million and the annual net periodic
postretirement health care cost by an estimated $0.3 million.
118
119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
S. Off-Balance Sheet Financial Instruments
The Corporation is a party to various financial transactions that generally do
not involve funding 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 transactions which are not reflected on
the Statement of Condition because they are not generally funded, are referred
to as off-balance-sheet financial instruments and they include: commitments to
extend credit, loans sold with recourse, standby and other letters of credit,
derivatives such as 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 these instruments expresses the
extent of involvement the Corporation has in particular classes of financial
instruments.
The following presents the Corporation's outstanding off-balance-sheet
financial instruments followed by a discussion of each type of off-
balance-sheet financial instrument pursuant to SFAS No. 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk and SFAS No. 119,
Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments.
119
120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
S. Off-Balance Sheet Financial Instruments
The following summarizes the financial instruments with off-balance sheet risk
at December 31 of each year.
Contract or Notional Amount
(in thousands) 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts
represent credit risk:
- ---------------------------------------------------------------------------------------------------------------------------
Contracts held for purposes other than trading:
Commitments to extend credit $2,847,236 $3,443,721
Standby and other letters of credit 281,719 221,580
Loans sold with recourse 97,511 115,681
===========================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract or notional
amounts exceed the amount of credit risk:
- ---------------------------------------------------------------------------------------------------------------------------
Contracts held for purposes other than trading:
Forward rate contracts
Commitments to sell 701,478
Interest rate swap contracts 1,738,038 2,514,207
Interest rate caps 40,750 10,000
Customer accommodation contracts held for trading:
Foreign exchange contracts 20,690 4,565
==========================================================================================================================
Certain prior period amounts have been reclassified to conform to current period
presentation.
120
121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
S. Off-Balance Sheet Financial Instruments (continued)
- --------------------------------------------------------------------------------
Off-Balance-Sheet Derivative Financial Instruments
December 31 (in thousands) 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
Notional End of Period Notional End of Period
Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------------
Contracts held for purposes other than trading:
Interest rate swaps $1,738,038 $2,514,207
Carrying amount $669 $11,787
Unrealized gross gain 2,103 36,822
Unrealized gross loss (86,413) (2,525)
- -------------------------------------------------------------------------------------------------------------------------
Total 1,738,038 (83,641) 2,514,207 46,084
- -------------------------------------------------------------------------------------------------------------------------
Interest rate caps
Options written 20,375 5,000
Carrying amount (149) (61)
Unrealized gross gain
Unrealized gross loss (462) (44)
- -------------------------------------------------------------------------------------------------------------------------
Sub-total 20,375 (611) 5,000 (105)
- -------------------------------------------------------------------------------------------------------------------------
Options purchased 20,375 5,000
Carrying amount 103 46
Unrealized gross gain 462 44
Unrealized gross loss
- -------------------------------------------------------------------------------------------------------------------------
Sub-total 20,375 565 5,000 90
- -------------------------------------------------------------------------------------------------------------------------
Total 40,750 (46) 10,000 (15)
- -------------------------------------------------------------------------------------------------------------------------
Total contracts for purposes other than trading $1,778,788 ($83,687) $2,524,207 $46,069
=========================================================================================================================
Customer accommodation contracts held for trading :
Foreign exchange forward contract $20,591 $31 $4,464 $23
Spot foreign exchange 99 101
- -------------------------------------------------------------------------------------------------------------------------
Total contracts held for trading $20,690 $31 $4,565 $23
=========================================================================================================================
121
122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
S. Off-Balance Sheet Financial Instruments (continued)
- --------------------------------------------------------------------------------
Interest Rate Swaps - Weighted Average Rate
December 31, 1994 (in thousands)
Weighted Average
------------------------------------------
Notional Rate Rate Months
Value Received Paid (1) Remaining (2)
- -------------------------------------------------------------------------------------------------------------------------
Receive fixed rate:
Non-amortizing swaps $1,066,750 6.37% 6.34% 29
Amortizing swaps 671,288 5.48% 5.96% 25
- -------------------------------------------------------------------------------------------------------------------------
Total interest rate swaps $1,738,038 6.03% 6.19% 27
=========================================================================================================================
(1) Rate paid on 78% of the outstanding notional value is tied to the three
month LIBOR rate and the remainder is primarily tied to the six month
LIBOR rate.
(2) The remaining maturity for non-amortizing swaps range from 8 months to
5.59 years while that for the amortizing swaps range from 2 months to
8.92 years.
- ----------------------------------------------------------------------------------------------------------
Interest Rate Swaps and Interest Rate Caps - Activity
(In thousands)
- ----------------------------------------------------------------------------------------------------------
Interest Rate Interest Rate
Swaps Caps Total
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 $1,809,672 $1,809,672
New transactions 1,523,549 $10,000 1,533,549
Maturities/amortization (819,014) (819,014)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 2,514,207 10,000 2,524,207
New transactions 697,174 30,750 727,924
Maturities/amortization (584,526) (584,526)
Terminations (1) (888,817) (888,817)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $1,738,038 40,750 $1,778,788
==========================================================================================================
(1) Approximately $874.7 million were terminated in connection with the sale of
IOMC servicing rights.
122
123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
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, 1994 and 1993, the Corporation had entered
into commitments to lend primarily to commercial customers in the amounts of
approximately $2.8 billion and $2.9 billion, respectively. 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 Corporation also has contractual commitments to close and fund residential
mortgage loan applications within a specified period of time at specified
interest rates. Simultaneously, the Corporation enters into best effort
delivery commitments with third party mortgage bankers. These best efforts
delivery commitments are at interest rates equivalent to the loan application
interest rates. The Corporation is only required to deliver those loans that
are closed and funded under best efforts correspondent sale agreements which,
therefore, present no market value risk to the Corporation. The Corporation had
contractual commitments to close and fund residential mortgage loan
applications of approximately $7.9 million as of December 31, 1994 compared to
$530 million as of December 31, 1993. Loans that were closed and funded
relating to the outstanding commitment balance at December 31, 1993 were
delivered to outside investors under previously contracted forward rate
agreements as discussed below under Forward Contracts.
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.
LOANS SOLD WITH RECOURSE
Prior to 1990, IOMC sold loans with recourse. Approximately $98 million and
$116 million of such loans were still outstanding as of December 31, 1994 and
1993, respectively. These transactions were recorded as sales with appropriate
liability established for such losses. Actual losses to date have not been
significant.
123
124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
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 is engaged in foreign
exchange trading, on a limited basis, on behalf of its customers. Approximately
half of the $20.7 million of outstanding notional value at December 31, 1994
represented customer accommodations which were directly offset with
transactions with other institutions for the same amount in order to manage the
risks involved in these transactions. The year-to-date average fair value of
foreign exchange forward contracts used by the Corporation during 1994 was
approximately $19 thousand. The net gain realized from foreign exchange trading
for 1994 was $1.4 million and this was recorded in other non-interest income.
FUTURES CONTRACTS
Futures contracts represent future commitments to purchase or sell securities
at a specified price and date.
The Corporation uses futures in connection with its trading activities. The
Corporation mitigates its credit risk by entering into futures contracts
through organized exchanges which control who can purchase and sell such
contracts. Net gains related to futures trading during 1994, amounted to $389
thousand and were recorded in other non-interest income. During 1994, the
average fair value of the Corporation's futures contract liability was $48.7
million. At December 31, 1994 and 1993, the Corporation did not have any
outstanding futures contracts.
FORWARD CONTRACTS
The Corporation used forward contracts to hedge the assets and liabilities of
its mortgage banking business. As a result of the sale of certain assets of
this business, the Corporation is no longer a party to such financial
instruments and therefore, has no outstanding forward rate agreements as of
December 31, 1994. The $701 million forward rate agreements outstanding at
December 31, 1993 represented commitments to sell loans to another party at a
specified price and specified date in the future. No losses occurred in the
aggregate as a result of the forward rate agreements outstanding as of December
31, 1993.
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, referred to as amortizing swaps, have a declining notional
feature. The notional balance and lives of the Corporation's amortizing swaps
are based on: a predetermined amortization period where the
124
125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
notional balance is amortized over such period and, an interest rate index
where the notional balance declines rapidly when the interest rate falls and
declines more slowly when rates increase. 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 collateral value received from the counterparty as required by
written agreements. Furthermore, in managing its credit risk, it is the
Corporation's policy to execute net counterparty payments on all new swap
transactions. At December 31, 1994, 100% of the swap portfolio was on a net
payment basis.
At December 31, 1994 and 1993, the Corporation had interest rate swap
agreements hedging variable rate commercial loans with a total notional
principal amount of $1.7 billion and $2.0 billion, respectively, of which $142
million and $152 million, respectively, were customer accommodation swaps. At
December 31, 1994 and 1993, the Corporation had credit exposure on these
interest rate swaps of $2.1 million and $23 million, respectively.
At December 31, 1993, the Corporation had interest rate swap agreements
outstanding with a notional principal amount of approximately $541 million
hedging a portion of its production of residential mortgage servicing. These
swap agreements were marked to market in the third quarter and terminated in
the fourth quarter of 1994 as a result of the sale of such assets. The
mark-to-market associated with this action was approximately $1.4 million which
was netted against the gain realized from the sale of certain assets of the
Corporation's mortgage banking business. For further information regarding
this sale, refer to Note B and Note C.
INTEREST RATE CAPS
Interest rate caps obligate the seller of the interest rate cap to make
payments to the buyer if an interest rate index exceeds a specified "capped"
level. Interest rate caps are offered by the Corporation to its existing
commercial loan customers as a means of managing their interest rate exposure
related to specific variable rate loans outstanding with the Corporation. At
December 31, 1994, the Corporation was party to interest rate cap agreements
with a notional principal of approximately $40.8 million. Of the outstanding
notional amount at December 31, 1994, approximately $20.4 million were written
customer accommodation caps which were directly offset in the market place with
approximately the same amount of purchased caps in order to mitigate the market
risks involved in these transactions.
OPTIONS
Options are contracts allowing, but not requiring, its holder to buy or sell a
specific financial instrument at a specified price on or before a specified
date. 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. The
Corporation uses options in connection with its trading activities.
125
126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
The year-to-date average fair value of options used by the Corporation during
1994 was insignificant. The total losses attributed to options trading during
1994 was $8 thousand and this loss was reported in other non-interest income.
The Corporation had no outstanding option contracts as of December 31, 1994 and
1993.
126
127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
T. 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 Statement 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.
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 premises and equipment and intangible assets.
The estimated fair value of financial instruments is presented in the following
table. A discussion of the methods and assumptions applied to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate such value follows the table.
127
128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidairies
- --------------------------------------------------------------------------------
T. Fair Value of Financial Instruments
- --------------------------------------------------------------------------------
The following summarizes the estimated fair value of financial instruments at
December 31 of each year. The estimated fair values are not intended to
reflect proceeds that could be realized in a current exchange.
(in thousands) 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $880,008 $880,008 $1,001,080 $1,001,080
Interest-bearing deposits 10,200 10,200 121,445 121,445
Money market investments 13,433 13,433 11,513 11,513
Investment securities 1,364,053 1,336,367 1,314,666 1,344,550
Trading securities 10,720 10,720 70,113 70,113
Loans (including unfunded commitments) 5,897,849 5,748,238 6,670,726 6,530,716
Allowance for loan loss (164,344) (190,992)
Loans, net of allowance 5,733,505 5,748,238 6,479,734 6,530,716
Other assets:
Accrued interest receivable 55,984 55,984 65,560 65,560
Excess service fees 6,869 7,221
Note receivable-FDIC 462,535 462,535
Financial liabilities:
Deposits $7,291,104 $7,275,032 $8,725,079 $8,885,082
Trading liabilities 5,234 5,234 13,881 13,881
Other short-term borrowing 313,796 313,796 279,412 279,412
Long-term debt 66,368 77,848 73,067 75,522
Accrued interest payable 30,910 30,910 7,320 7,320
Unrecognized financial instruments: (1)
Assets:
Foreign exchange contracts-held for trading N/A 31 N/A 23
Interest rate swaps - receivable 2,779 4,882 11,827 48,609
Liabilities:
Interest rate swaps - payable 2,110 88,523 40 2,525
Interest rate caps 46 46 15 15
====================================================================================================================================
(1) The amounts shown under the "carrying amount" represent on-balance-sheet
receivables, payables and deferred fees arising from these unrecognized
financial instruments. Commitments to extend credit and standby letters of
credit are included in Loans.
N/A: not applicable
128
129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
METHODS AND ASSUMPTIONS
Cash and cash equivalents, interest-bearing deposits, money market investments,
accrued interest receivable, short-term debt and accrued interest payable are
short-term instruments whose carrying amounts represent reasonable estimates of
fair value.
The carrying amounts for short-term investments approximate market value
because they mature in 90 days or less. The estimated fair value of longer term
investments, excluding investment securities available-for-sale, was based on
quoted market prices or bid quotations received from securities dealers.
Investment securities available-for-sale, investments held-for-trading and
trading liabilities were carried at their market values.
The estimated 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, short-term commercial
real estate-construction, installment, and residential mortgages 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 correspondent
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.
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, was equal to the amount payable on demand as of December 31,
1994. The fair value of certificates of deposit was 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.
The estimated fair value of the Corporation's Debentures was 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) was estimated to approximate market value.
The carrying value of commitments to extend credit and standby and other
letters of credit approximates fair value. Fees currently charged by the
Corporation to enter into similar agreements have remained unchanged over the
past year.
Foreign exchange contracts' fair value estimate was determined by quoted market
prices or quotes from broker dealers.
The estimated fair value of interest rate swaps and interest rate caps were
calculated on a present value basis using current interest rates, taking into
consideration the credit worthiness of the counterparties.
129
130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
U. Other Expenses
- --------------------------------------------------------------------------------
The following details other expenses for the years ended December 31.
- --------------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
FDIC insurance $20,663 $21,798 $19,732
Communications 8,246 9,377 9,600
Stationery and supplies 7,947 9,944 9,090
Advertising 6,147 8,154 4,121
Michigan single business tax 8,700 6,681 5,296
Postage 4,953 6,236 5,899
Amortization of goodwill 1,983 1,137 873
Uncollected interest on early payoffs of loans serviced 3,627 11,965 7,543
Provision for foreclosure costs on loans serviced 2,850 4,275 12,653
Other 31,117 38,325 32,197
- ----------------------------------------------------------------------------------------------------------------------------------
Total $96,233 $117,892 $107,004
==================================================================================================================================
130
131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
V. Legal Proceedings and Regulatory Matters
LEGAL PROCEEDINGS
On February 21, 1995, a class action lawsuit was instituted by a shareholder of
the Corporation, Gino Pittiglio, against Robert J. Mylod, Douglas Ebert, Joseph
Whiteside and the Corporation in the United States District Court for the
Eastern District of Michigan alleging violations of Sections 10(b), 13(e),
14(e) and 20(a) of Securities Exchange Act of 1934 and Rules 10b-5, 13e and
13e-4 thereunder, common law fraud and breach of fiduciary duty. The complaint
is a purported class action on behalf of all persons that sold the
Corporation's securities from November 3, 1994 through February 3, 1995 ("Class
Period") by either tendering the shares to the Corporation or selling them on
the open market. A second class action lawsuit, which is substantially
identical to the Pittiglio suit, was filed on behalf of Ms. Elizabeth Temrowski
on February 24, 1995 in the same court. Management and legal counsel believe
that there are numerous valid defenses to these claims. Based upon the
substantial defenses available, it is believed that the ultimate outcome of
these claims will not have a material adverse impact on the financial condition
of the Corporation.
A class action lawsuit was filed by Thomas Bradford against IOMC in the Supreme
Court of New York for Monroe County and subsequently removed to the U.S.
District Court for the Western District of New York and subsequently
transferred to the U.S. District Court for Northern District of Illinois (Civil
Action File No. 93-CV-6423T). The Plaintiff alleges that IOMC required its
mortgagors to deposit excessive funds into their escrow accounts for the
payment of property taxes, insurance and other obligations. The Plaintiffs
seek a refund to current mortgagors from their escrow accounts and the payment
of interest on the alleged "excess" funds held by IOMC. Management and legal
counsel believe that there are numerous valid defenses to this claim. Based
upon the substantial defenses available, it is believed that the ultimate
outcome of this claim will not have a material adverse impact on the financial
condition of the Corporation.
The 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.
Other than that which is stated above, there have been no material developments
in any previously reported legal proceedings brought against the Corporation,
nor any new material legal proceedings brought against the Corporation during
1994.
REGULATORY MATTERS
During October 1994, the Central Office of the Comptroller of the Currency
(OCC) terminated the Memorandum of Understanding (MOU) it entered into with MNB
in August 1993.
131
132
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
W. Income Taxes
- --------------------------------------------------------------------------------
The following is a summary of the components of income tax (benefit) provision
for the year ended December 31.
- --------------------------------------------------------------------------------
(in thousands) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Taxes estimated to be payable currently
Federal taxes $30,845 $18,453 $18,051
State taxes 254 972 808
FDIC's share of current tax benefits associated with IOBOC 7,893 2,829 3,752
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal 38,992 22,254 22,611
- ---------------------------------------------------------------------------------------------------------------------------
Deferred federal tax benefit
Deferred tax benefit (57,421) (10,971) (19,343)
Change in the valuation allowance for deferred tax assets (29,985) (13,290) 3,384
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal (87,406) (24,261) (15,959)
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax (benefit) provision ($48,414) ($2,007) $6,652
===========================================================================================================================
132
133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
W. Income Taxes (continued)
- --------------------------------------------------------------------------------
Significant deferred tax assets and liabilities as of December 31, 1994 and
1993 arising from temporary differences and carryforwards are as follows:
- --------------------------------------------------------------------------------
1994 1993
(in thousands) Asset Liability Asset Liability
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for possible credit losses $57,548 $10,472 $66,847 $10,503
Net operating loss (NOL) carryforward, in 1993 net of estimated
FDIC sharing (Note F) 29,216 29,598
IOBOC pre-acquisition NOL carryforwards,
net of estimated FDIC sharing (Note F) 40,075 40,462
Alternative minimum tax credit carryforward, in 1993 net of
estimated FDIC sharing (Note F) 73,608 26,902
Restructuring charges 10,141
IOMC sale transaction costs 6,417
All others 26,457 8,625 28,440 14,802
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal 243,462 19,097 192,249 25,305
Valuation allowance (40,075) (70,059)
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal 203,387 19,097 122,190 25,305
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized losses on investment securities classified as
available for sale 645
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred taxes $204,032 $19,097 $122,190 $25,305
- ---------------------------------------------------------------------------------------------------------------------------
A valuation allowance has been provided for IOBOC pre-acquisition net operating
loss carryforwards because of the uncertainty surrounding their realization.
The income tax (benefit) provision was different than the amount computed using
the U.S. statutory income tax rate (35% for 1994 and 1993, 34% for 1992) as a
result of the following:
(in thousands) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Expected income tax $43,152 $7,615 $22,596
Increases (reductions) in income tax expense resulting from:
Tax-exempt assistance received by IOBOC and
related transactions - net of FDIC sharing (90,182) (8,471) (12,742)
Other tax-exempt income (2,137) (2,447) (2,984)
Change in statutory tax rate (1,429)
Provision for tax contingencies (1,727) 2,263 480
State income tax provision 164 686 609
Goodwill amortization 760 398 297
All others 1,556 (622) (1,604)
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax (benefit) provision ($48,414) ($2,007) $6,652
- ---------------------------------------------------------------------------------------------------------------------------
At December 31, 1994, the Corporation had NOL carryforwards for federal income
tax purposes of approximately $83 million arising in the years 1989, 1990 and
1991. These carryforwards will expire in the years 2004, 2005 and 2006,
respectively. In addition NOL carryforwards of approximately $229 million were
acquired and are available at December 31, 1994 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 $37.4 million which are available to reduce future
federal regular income taxes over an indefinite period.
133
134
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
W. Income Taxes (continued)
As discussed in Note A, the Corporation adopted SFAS No. 109 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 superseded SFAS No. 96.
During the third quarter 1994, Michigan National Corporation and IOBOC reached
a settlement with the FDIC to terminate the Assistance Agreement. Under the
Assistance Agreement, the Corporation was obligated to share certain tax
benefits it realized with the FDIC. To the extent such benefits were
recognized in prior periods for financial statement purposes, the Corporation
also recorded a liability for the FDIC's share of such benefits, reducing the
benefit reflected in income tax expense for that period. The Termination
Agreement relieved the Corporation from this obligation, and accordingly, the
accrued liability was reversed. This resulted in a reduction of 1994 income
tax expense of approximately $41.7 million. For additional information on the
Termination Agreement, refer to Note F.
In the second quarter 1994, tax benefits associated with the IOBOC acquisition
of $42.8 million were recognized, $40.2 million of which were reflected in
earnings, and $2.6 million of which were added directly to shareholders' equity
- - surplus. The ability of the Corporation to realize these benefits was
challenged by the U.S. Treasury Department in a report issued in March 1991 to
Congress. Congress addressed this matter in the Revenue Reconciliation Act of
1993, and denied recognition of certain tax benefits occurring after March 3,
1991. As a result of this Congressional action and discussions during the
second quarter 1994 with the Federal government concerning the Corporation's
tax returns, the Corporation recognized pre-March 3, 1991 tax benefits in its
financial statements.
134
135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
X. Industry Segment Information
The Corporation operates in two industry segments (as defined by 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. As discussed in Note B and Note C, IOMC sold certain of its assets,
including its $8.6 billion mortgage servicing portfolio, its mortgage servicing
operation and non-Michigan loan origination business.
The Corporation continues to originate residential mortgage loans in the state
of Michigan. Following is a presentation of the revenues, expenses, operating
profits and identifiable assets for the Corporation's two industry segments for
the years ended December 31, 1994, 1993 and 1992.
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 (primarily escrow and custodial deposits) 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).
The mortgage banking servicing business deposits referred to above were
deposited with MNB and 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. There
were no escrow and custodial deposits at December 31, 1994.
135
136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
X. Industry Segment Information (continued)
- --------------------------------------------------------------------------------
Mortgage Banking Financial Institutions Consolidated Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31
(in thousands) 1994 1993 1992 1994 1993 1992 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible
credit losses $4,739 $25,315 $25,278 $344,574 $336,296 $305,163 $349,313 $361,611 $330,441
Non-interest income 39,507 95,280 81,015 150,019 155,152 147,464 189,526 250,432 228,479
Gain from sale of mort-
gage servicing rights 9,324 5,799 9,324 5,799
Amortization of EFS (2,424) (18,926) (9,485) (2,424) (18,926) (9,485)
Other gains, net 43,819 24,757 68,576
Amortization of PMSR (10,447) (104,998) (53,000) (10,447) (104,998) (53,000)
Other non-interest expense (59,676) (83,193) (79,810) (411,580) (392,494) (355,966) (471,256) (475,687) (435,776)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes $15,518 ($77,198) ($30,203) $107,770 $98,954 $96,661 $123,288 $21,756 $66,458
====================================================================================================================================
Intercompany income/
(expense) included in
income (loss) before taxes ($29,784) ($42,862) ($50,058) $29,784 $42,862 $50,058
====================================================================================================================================
At December 31
(in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Total identifiable assets $201 $1,001 $1,327 $8,617 $10,122 $10,605 $8,818 $11,123 $11,932
Intercompany assets included in
total identifiable assets (15) (20) (126) (935) (1,249) (126) (950) (1,269)
- ------------------------------------------------------------------------------------------------------------------------------------
Assets after intercompany
eliminations $201 $986 $1,307 $8,491 $9,187 $9,356 $8,692 $10,173 $10,663
====================================================================================================================================
Mortgage Servicing Portfolio:
Total $9,569 $14,188 $9,569 $14,188
Originated servicing as a
percentage of the total 41% 28% 41% 28%
====================================================================================================================================
Certain prior period amounts have been reclassified to conform to current period
presentation.
136
137
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Y. Parent Company Financial Information
- --------------------------------------------------------------------------------
Condensed Parent Company only Statement of Condition
- --------------------------------------------------------------------------------
December 31 (in thousands) 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Cash $119 $187
Interest-bearing deposits with banks 53,845 35,185
Short-term investments 1,482 36,399
Loans 20 40
Receivables from subsidiaries 6,700 2,348
Investment in bank and savings and loan subsidiaries 738,333 834,394
Investment in nonbank subsidiaries 20,904 22,042
Premises and equipment, net 9,146 11,002
Other assets 105,742 32,071
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $936,291 $973,668
==================================================================================================================================
Liabilities and Shareholders' Equity
Other liabilities $75,011 $88,311
Long-term debt and capital lease obligations 66,263 69,767
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 141,274 158,078
Shareholders' equity 795,017 815,590
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $936,291 $973,668
==================================================================================================================================
- --------------------------------------------------------------------------------
Condensed Parent Company only Statement of Income
- --------------------------------------------------------------------------------
Year Ended December 31 (in thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues
Dividends from bank and savings and loan subsidiaries $115,350 $40,500 $20,000
Service fees and interest from subsidiaries 53,586 34,337 45,056
Other gains, net 28,860
Other 7,422 8,619 9,371
- ----------------------------------------------------------------------------------------------------------------------------------
Total Revenues 205,218 83,456 74,427
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses
Interest on debt 5,641 5,797 6,017
Salaries, wages and employee benefits 30,562 23,157 22,954
Service fees paid to subsidiaries 7,359 6,752 4,955
Restructuring charge 5,030
Other operating expenses 18,769 15,079 16,351
- ----------------------------------------------------------------------------------------------------------------------------------
Total Expenses 67,361 50,785 50,277
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and net income
of subsidiaries 137,857 32,671 24,150
Federal income tax benefit (79,761) (5,485) (9,460)
Equity in undistributed net income (loss) of subsidiaries:
Banks and savings and loan (43,283) 18,780 25,841
Nonbanks (2,633) (33,173) 355
- ----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 171,702 23,763 59,806
Cumulative effect of a change in accounting principle 6,265
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $171,702 $23,763 $66,071
==================================================================================================================================
Certain prior period amounts were reclassified to conform to current period
presentation.
137
138
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Y. Parent Company Financial Information (continued)
- --------------------------------------------------------------------------------
Condensed Parent Company Only Statement of Cash Flows
- --------------------------------------------------------------------------------
Year Ended December 31 (in thousands) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $171,702 $23,763 $66,071
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Undistributed net loss (income) of subsidiaries 45,916 14,393 (26,196)
Depreciation and amortization expense 2,232 2,619 3,159
Net deferred income taxes (75,896) (77,403) 8,275
Loss from sale of short-term investments 31
Gain from sale of subsidiaries (19,707)
Gain from termination of FSLIC agreement (excluding tax benefit) (9,772)
Gain from sale of premises and equipment (18) (18) (208)
(Increase) decrease in operating assets:
Trading account securities 36,399 1,269 (12,101)
Receivables from subsidiaries (4,352) 5,683 (778)
Investment in subsidiaries 235 (20,385) (1,308)
Accrued interest receivable (41) 36 106
Other assets 2,007 54,020 (7,347)
Increase (decrease) in operating liabilities:
Accrued interest payable 20 (36) (106)
Accrued liabilities (2,937) (4,706) 3,610
Other, net (1,836) (14) (235)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities $143,983 ($779) $32,942
- ---------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Payments for:
Purchase of premises and equipment ($225) ($591) ($1,711)
Purchase of short-term investments (2,723) (24,421)
Purchase of subsidiaries (3,214)
Proceeds from:
Sale of short-term investments 1,174
Sale of investment securities to subsidiary bank 24,421
Sale of premises and equipment 58 41 225
Sale of subsidiaries 70,754
Net (increase) decrease in:
Interest-bearing deposits with banks (18,660) (6,815) 19,025
Loans and lease financing 20 20 20
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities $50,398 $17,076 ($10,076)
- ---------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Payments for:
Long-term debt and capital lease obligations ($3,504) ($2,848) ($2,751)
Common stock dividends (30,513) (22,618) (29,573)
Preferred stock dividends (90) (360)
Repurchase of common stock (170,152)
Repurchase of Equity Contracts (6,367)
Proceeds from issuance of:
Common stock 13,286 6,392 6,939
Payments on note receivable - ESOP 2,800 2,800 2,800
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities ($194,450) ($16,364) ($22,945)
- ---------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash ($68) ($67) ($79)
Cash at beginning of year 187 254 333
- ---------------------------------------------------------------------------------------------------------------------------------
Cash at December 31 $119 $187 $254
=================================================================================================================================
Certain prior period amounts have been reclassified to conform to current
period presentation.
138
139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
Z. Subsequent Event
On February 4, 1995, the Corporation executed an Agreement and Plan of Merger
by and among National Australia Bank Limited A.C.N. 004044937, a banking
corporation organized under the laws of Australia (the "National"), MNC
Acquisition Co., a Michigan corporation and wholly owned subsidiary of the
National ("Acquisition"), and the Corporation (the "Merger Agreement"). The
Merger Agreement provides that (i) Acquisition will be merged with and into the
Corporation (the "Merger"), with the Corporation continuing as the surviving
corporation; (ii) the Corporation will thereupon become a wholly owned
subsidiary of the National; and (iii) each outstanding share of common stock,
par value $10 per share, of the Corporation (the "Common Stock") (other than
certain shares owned by the Corporation, the National, or their respective
subsidiaries, which will be canceled) will be converted, upon the effectiveness
of the Merger, into the right to receive $110 in cash, without interest. The
transaction, which is expected to be completed in six to nine months, is
subject to approval by the Corporation's shareholders and various regulatory
approvals.
139
140
INDEPENDENT AUDITORS' REPORT
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, 1994 and
1993, 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, 1994. 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, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Notes A and R to the consolidated financial statements, the
Corporation adopted recently issued Statements of Financial Accounting
Standards, and, accordingly changed its method of accounting for investments in
debt and equity securities in 1994, its method of accounting for postretirement
benefits other than pensions in 1993, and its method for accounting for income
taxes in 1992.
Detroit, Michigan
February 7, 1995
(February 24, 1995 as to Note V)
140
141
Michigan National Corporation and Subsidiaries
SELECTED QUARTERLY FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
1994
- ------------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Results (in thousands)
Interest income $155,599 $163,263 $164,000 $158,417
Interest expense 61,226 63,535 63,068 63,137
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 94,373 99,728 100,932 95,280
Provision for possible credit losses 23,000 6,000 6,000 6,000
Non-interest income 40,575 109,692 51,893 53,518
Non-interest expense 140,669 109,432 113,512 118,090
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (28,721) 93,988 33,313 24,708
Income tax (benefit) provision (8,797) (16,060) (29,981) 6,424
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income ($19,924) $110,048 $63,294 $18,284
====================================================================================================================================
Per Common Share
Net (loss) income - primary ($1.33) $6.99 $4.06 $1.19
Net (loss) income - fully diluted (1.33) 6.99 4.05 1.19
Cash dividends declared 0.50 0.50 0.50 0.50
Book value end-of-period 60.16 65.14 58.32 54.70
Market value end-of-period 74.75 76.25 72.00 61.50
Closing market value: high 80.56 79.25 79.00 65.25
Closing market value: low 73.50 72.25 59.63 55.00
====================================================================================================================================
Selected Period-end Balances (in millions)
Total assets $8,692 $9,207 $10,036 $10,129
Earning assets 7,763 8,048 9,097 9,151
Total loans and lease financing, net of unearned income 6,014 6,176 6,405 6,295
Non-performing assets 143 195 193 235
Deposits 7,291 7,513 8,156 8,504
Long-term debt 70 71 76 77
Shareholders' equity 795 998 892 832
====================================================================================================================================
Selected Average Balances (in millions)
Total assets $8,703 $9,462 $9,950 $9,973
Earning assets 7,778 8,540 8,996 9,001
Total loans and lease financing, net of unearned income 6,111 6,281 6,280 6,399
Deposits 7,234 7,782 8,392 8,521
Long-term debt 70 72 76 77
Shareholders' equity 970 900 834 817
====================================================================================================================================
Selected Financial Ratios
Return on average shareholders' equity (8.22)% 48.90 % 30.36 % 8.95 %
Return on average total assets (0.92) 4.65 2.54 0.73
Average equity to average total assets 11.14 9.51 8.38 8.19
Allowance to period-end loans 2.73 3.01 2.94 3.09
Non-performing assets to total loans (net of unearned income)
plus property from defaulted loans and
other real estate owned, net 2.37 3.14 2.98 3.69
Net interest spread 4.08 4.06 3.97 3.79
Net interest margin 4.94 4.85 4.71 4.50
Efficiency ratio 102.33 51.13 72.09 76.96
Equity to asset ratio (period end) 9.15 10.83 8.89 8.21
Leverage ratio 7.72 9.13 8.20 7.84
Tier 1 risk-based capital ratio 8.88 11.00 10.09 9.85
Total risk-based capital ratio 10.82 13.12 12.26 12.03
Dividend payout ratio N/M 7.15 12.32 42.02
====================================================================================================================================
N/M = Not meaningful
Certain prior period amounts have been reclassified to conform to current
period presentation.
141
142
Michigan National Corporation and Subsidiaries
SELECTED QUARTERLY FINANCIAL INFORMATION (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
1993
- ------------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Results (in thousands)
Interest income $169,447 $176,053 $177,591 $171,142
Interest expense 67,616 72,646 73,682 78,678
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 101,831 103,407 103,909 92,464
Provision for possible credit losses 7,000 8,000 12,494 12,506
Non-interest income 67,763 65,966 55,674 51,427
Non-interest expense 130,463 135,852 138,187 176,183
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes 32,131 25,521 8,902 (44,798)
Income tax benefit (501) (1,506)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $32,632 $27,027 $8,902 ($44,798)
====================================================================================================================================
Per Common Share
Net income (loss) - primary $2.13 $1.77 $0.58 ($3.00)
Net income (loss) - fully diluted 2.13 1.76 0.58 (3.00)
Cash dividends declared (1) 0.50 0.50 0.50
Book value end-of-period 53.74 51.66 50.19 50.11
Market value end-of-period 57.50 58.88 56.50 60.00
Closing market value: high 62.75 59.88 61.63 64.25
Closing market value: low 57.50 54.50 52.00 50.00
====================================================================================================================================
Selected Period-end Balances (in millions)
Total assets $10,173 $10,395 $10,517 $10,442
Earning assets 9,135 8,932 9,388 9,291
Total loans and lease financing, net of unearned income 6,671 6,697 6,929 6,534
Non-performing assets 255 276 290 293
Deposits 8,725 8,657 8,710 8,678
Long-term debt 77 78 81 82
Shareholders' equity 816 781 759 757
====================================================================================================================================
Selected Average Balances (in millions)
Total assets $10,249 $10,390 $10,372 $10,184
Earning assets 9,156 9,292 9,255 9,117
Total loans and lease financing, net of unearned income 6,681 6,880 6,742 6,477
Deposits 8,811 8,710 8,814 8,646
Long-term debt 77 79 82 82
Shareholders' equity 791 770 766 810
====================================================================================================================================
Selected Financial Ratios
Return on average shareholders' equity 16.50 % 14.04 % 4.65 % (22.13)%
Return on average total assets 1.27 1.04 0.34 (1.76)
Average equity to average total assets 7.72 7.41 7.38 7.95
Allowance to period-end loans 2.86 2.82 2.68 2.79
Non-performing assets to total loans (net of unearned income)
plus property from defaulted loans and
other real estate owned, net 3.77 4.05 4.11 4.38
Net interest spread 3.82 3.89 4.00 3.72
Net interest margin 4.64 4.65 4.74 4.38
Efficiency ratio 74.63 77.73 83.67 117.59
Equity to asset ratio (period end) 8.02 7.51 7.22 7.25
Leverage ratio 7.56 7.09 6.90 7.12
Tier 1 risk-based capital ratio 9.57 9.01 8.79 9.12
Total risk-based capital ratio 11.73 11.16 10.99 11.34
Dividend payout ratio (1) 28.25 86.21 N/M
====================================================================================================================================
(1) A fourth quarter 1993 dividend of $0.50 per share was declared January 19,
1994, payable to shareholders of record as of February 1, 1994. This did
not represent a change in the Corporation's dividend policy, but rather a
change only in the timing of the dividend declaration.
N/M = Not meaningful
Certain prior period amounts have been reclassified to conform to current
period presentation.
142
143
Michigan National Corporation and Subsidiaries
CONSOLIDATED SUMMARY OF INCOME
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 (in thousands) 1994 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income
Short-term investments 22,205 17,115 $19,047 $32,125 $28,122 $43,052
Investment and trading securities 86,758 98,271 133,943 146,656 204,020 147,747
Loans and lease financing 520,561 555,841 588,567 667,713 741,975 834,539
Note receivable-FDIC 11,756 23,009 37,516 60,020 80,266 81,669
- --------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 641,278 694,236 779,073 906,514 1,054,383 1,107,007
Interest Expense
Interest-bearing deposits 229,127 271,059 342,889 477,748 592,431 642,280
Short-term borrowings 15,721 15,179 28,145 51,684 96,834 75,580
Long-term debt 6,117 6,387 6,928 8,083 9,368 10,634
- --------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 250,965 292,625 377,962 537,515 698,633 728,494
Net Interest Income 390,313 401,611 401,111 368,999 355,750 378,513
Provision for possible credit losses 41,000 40,000 70,670 86,500 73,082 128,481
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision
for Possible Credit Losses 349,313 361,611 330,441 282,499 282,668 250,032
Other Operating Income
Service charges 113,091 132,150 132,900 118,756 106,946 116,202
Trust and investment services income 18,257 19,522 17,877 15,481 15,790 14,569
Gains (losses) from sale of mortgage
servicing rights 9,324 5,799 7,102 5,958 (56)
Securities gains (losses) (31) 6,139 9,249 1,755 979 (11,652)
Gain on sale of credit card portfolio 225,003
Other gains, net 68,576
Other income 55,785 73,695 58,968 46,945 46,069 37,437
- --------------------------------------------------------------------------------------------------------------------------------
Total Other Operating Income 255,678 240,830 224,793 190,039 175,742 381,503
Other Operating Expenses
Salaries and wages 174,609 182,298 165,547 146,709 155,354 154,437
Other employee benefits 52,956 51,204 44,870 43,193 38,320 35,102
Net occupancy expense 28,339 29,941 29,123 29,353 26,539 29,237
Equipment 37,742 41,631 38,296 37,072 36,838 41,794
Outside services 32,644 34,218 28,707 24,511 29,045 35,337
Defaulted loan expense, net 11,138 18,503 22,229 16,390 14,396 5,337
Amortization of PMSR 10,447 104,998 53,000 19,656 14,573 17,990
Other expenses 96,233 117,892 107,004 93,952 85,852 105,105
- --------------------------------------------------------------------------------------------------------------------------------
Total Other Operating Expenses 444,110 580,685 488,776 410,836 400,917 424,339
- --------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 160,881 21,756 66,458 61,702 57,493 207,196
Income tax (benefit) provision (48,414) (2,007) 6,652 11,612 9,479 28,257
- --------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change
in accounting principle 209,295 23,763 59,806 50,090 48,014 178,939
Cumulative effect of a change in accounting principle 6,265 8,325
- --------------------------------------------------------------------------------------------------------------------------------
Net Income 209,295 23,763 66,071 50,090 48,014 187,264
================================================================================================================================
Certain prior period amounts have been reclassified to conform with the current
period presentation.
143
144
PART III
ITEM 10 (a)
DIRECTORS OF THE CORPORATION
PRINCIPAL OCCUPATION AND
BUSINESS EXPERIENCE
DIRECTOR DURING PAST 5 YEARS
NAME AGE SINCE AND OTHER DIRECTORSHIPS1
- ---- --- ----- -----------------------
Daniel T. Carroll 69 1985 Chairman and President, The Carroll Group, Inc. (management consulting firm);
Director, A. M. Castle and Co., AON Corporation, Comshare, Inc., Diebold Inc.,
Wolverine World Wide, Inc., American Woodmark Corporation, UDC Homes, Inc.,
Woodhead Industries, Inc., DeSoto, Inc. and Oshkosh Truck Corporation.
John S. Carton 54 1989 Chairman, President and Chief Executive Officer, Pineview Inc. (privately owned
golf club); Chairman, President and Chief Executive Officer, Turfside Inc.
(restaurant).
Douglas E. Ebert 49 1993 President and Chief Operating Officer, Michigan National Corporation (since Dec.
13, 1993), Michigan National Bank (since Dec. 13, 1993); President and Chief
Executive Officer, Lincoln Financial Corporation (1992-1993), Southeast Banking
Corporation (Jan. 1991-Sept. 1991); Chairman, President and Chief Executive
Officer, Southeast Bank, N.A. (Jan. 1991-Sept. 1991); President and Chief
Operating Officer, Southeast Banking Corporation (1990-1991), Southeast Bank,
N.A. (1990-1991).
Sidney E. Forbes 58 1989 Partner, Forbes/Cohen Properties (developer and owner of shopping malls and
other commercial properties).
Sue L. Gin 53 1989 Chairman and Chief Executive Officer, Flying Food Fare, Inc. (provider of food
service to airlines); President, New Management, Ltd.; Director, Commonwealth
Edison and Georgetown University; Trustee, DePaul University.
Morton E. Harris 75 1985 Managing Partner, Spectrum Associates (investments); Managing Partner, Harris
Foundation.
Gerald B. Mitchell 67 1979 Retired; Chairman, Dana Corporation (vehicular and industrial parts) (until
1990); Chairman and Chief Executive Officer, Dana Corporation (until 1989);
Director, George Weston LTD, Canada, Worthington Industries, Westpoint Stevens
and Eastman Chemical Co.
____________________
(1) Each of the Directors is also a Director of Michigan
National Bank, the Corporation's principal banking subsidiary.
144
145
PRINCIPAL OCCUPATION AND
BUSINESS EXPERIENCE
DIRECTOR DURING PAST 5 YEARS
NAME AGE SINCE AND OTHER DIRECTORSHIPS1
- ---- --- ----- -----------------------
Robert J. Mylod 55 1985 Chairman and Chief Executive Officer, Michigan National Corporation, Michigan
National Bank; Chairman and Director, Independence One Bank of California,
FSB(2); Chief Executive Officer, Independence One Bank of California, FSB(2)
(until Jan. 1991); Chairman, President and Director, Lockwood Banc Group,
Inc.(2) (Jan. 1994-Aug. 1994); Director, Federal Reserve Bank of
Chicago-Detroit Branch (1989-1991), CRI Insured Mortgage Association, Inc. and
CRI Liquidating REIT, Inc. (1989-1991); Director at-large, VISA U.S.A., Inc.
William F. Pickard 54 1989 Chairman and Chief Executive Officer, Regal Plastics Company (manufacturer of
plastic parts for automotive and other industries); Owner/operator, multiple
McDonald's restaurant franchises.
Stanton Kinnie
Smith, Jr. 64 1985 Vice Chairman, CMS Energy Corporation (holding company for gas and electric
power in Michigan) (since 1991); President and Director, CMS Energy Corporation
(1988-1991); Director, CLARCOR, Inc.
Walter H. Teninga 67 1979 Retired; President and Chief Executive Officer, American ClubStores, Inc.
(retailing company) (until 1993); Chairman and Director, Warehouse Club, Inc.
(until 1991); Director, Solo Serve Corporation, Great Lakes Real Estate
Investment Trust and Developers Diversified Realty Corporation.
Stephen A. 39 1994 Vice President and Chairman of Executive Committee, Amway Corporation
Van Andel (manufacturer and distributor through independent distributors of home,
personal care, nutrition and catalog products); Director, Amway Asia Pacific.
Richard T. Walsh 59 1985 Consultant; Director, Malan Realty Investors, Inc.; Chairman, Pioneer
Industries, Inc. (manufacturer of steel doors and frames); President, Chief
Executive Officer and Director, Core Industries Inc. (manufacturers of
electronic products, farm equipment, fluid control and construction products)
(until 1992); President, Chief Operating Officer and Director, Core Industries
Inc (1986-1991).
James A. Williams 53 1989 Chairman and President, Williams, Schaefer, Ruby & Williams, P.C. (law firm);
Director, Independence One Investment Services, Corp.(2) (until 1993).
____________________
(2) Independence One Bank of California, FSB (formerly Beverly
Hills Business Bank, FSB), Mission Viejo, CA; and Independence
One Investment Services, Corp., Farmington Hills, MI, are wholly-
owned subsidiaries of the Corporation. Lockwood Banc Group,
Inc., Houston, TX, was a wholly-owned subsidiary of the
Corporation until its sale, effective August 4, 1994.
145
146
PART III
ITEM 10 (b)
EXECUTIVE OFFICERS OF THE CORPORATION
NAME, PRINCIPAL POSITIONS AND
OFFICES WITH THE CORPORATION,
BUSINESS EXPERIENCE, PRINCIPAL OCCUPATION POSITION
AND EMPLOYMENT DURING PAST 5 YEARS AGE SINCE
- ----------------------------------------- --- -------
Marc L. Belsky, Senior Vice President, Strategic Planning, 39 1995
Investor Relations, Public Relations
Senior Vice President, Michigan National Bank (since 1995)
First Vice President, Michigan National Bank (1990-1995)
Vice President, Michigan National Bank (since 1986)
Treasurer, MNC Leasing Company(1) (since 1990)
Treasurer, MNC Financial Services(2) (since 1990)
Richard E. Blough, Senior Vice President, Audit and Credit Policy 51 1994
Senior Vice President, Michigan National Bank (since Oct. 1994)
First Vice President, Michigan National Bank (1989-Oct. 1994)
Douglas E. Ebert, President and Chief Operating Officer(3) 49 1993
Lawrence L. Gladchun, Senior Vice President, General Counsel and Secretary 44 1988
Executive Vice President, General Counsel and Secretary,
Michigan National Bank (since 1988)
Executive Vice President, Michigan National Bank (since 1987)
Director, Executive Relocation Corporation(2) (since 1990)
Director, Independence One Bank of California, FSB (1) (since 1989)
Director, Lockwood Banc Group, Inc.(1) (1991-Aug. 1994)
Robert J. Mylod, Chairman and Chief Executive Officer(3) 55 1985
146
147
NAME, PRINCIPAL POSITIONS AND
OFFICES WITH THE CORPORATION,
BUSINESS EXPERIENCE, PRINCIPAL OCCUPATION POSITION
AND EMPLOYMENT DURING PAST 5 YEARS AGE SINCE
- ----------------------------------------- --- --------
Robert V. Panizzi, Senior Vice President and Controller 43 1995
Senior Vice President, Michigan National Bank (since 1995)
First Vice President, Michigan National Bank (1987-1995)
First Vice President, Independence One Bank of California, FSB(1) (since 1990)
Director and Treasurer, Independence One Life Insurance Company(1) (since 1991)
William D. Ritsema, Senior Vice President, Commercial Banking 41 1994
Executive Vice President Michigan National Bank (since Oct. 1994)
Senior Vice President, Michigan National Bank (1990-Oct. 1994)
Director, General Audit Systems, Inc.(2) (since 1993)
Edward H. Sondker, First Vice President 47 1990
President, Chief Executive Officer,
Independence One Bank of California, FSB(1) (since 1990)
Chairman and Chief Executive Officer,
Independence One Asset Management Corporation(1) (since 1991)
Richard C. Webb, Senior Vice President, 55 1994
Commercial Real Estate, Special Assets
Senior Executive Vice President, Michigan National Bank (since Oct. 1994)
Executive Vice President, Michigan National Bank (1987-Oct. 1994)
Director, Detroit Diesel Capital Corporation (since 1995)
Director, Bank of Bloomfield Hills (since April 1994)
Chairman and Director, Executive Relocation Corporation(2) (since 1990)
Chairman and Director, MNC Leasing Company(1) (since 1990)
Chairman and Director, MNC Financial Services(2) (since 1990)
Director, MNC Operations and Services, Inc.(1) (since 1993)
147
148
NAME, PRINCIPAL POSITIONS AND
OFFICES WITH THE CORPORATION,
BUSINESS EXPERIENCE, PRINCIPAL OCCUPATION POSITION
AND EMPLOYMENT DURING PAST 5 YEARS AGE SINCE
- ----------------------------------------- --- --------
Joseph J. Whiteside, Executive Vice President and Chief Financial Officer 53 1994
Executive Vice President and Chief Financial Officer,
Michigan National Bank (since March 2, 1994)
Managing Director and Principal, Cornerstone Capital Advisors, Ltd.
(since 1993)
Executive Vice President and Chief Financial Officer,
Equimark Corporation (1990-1993)
Executive Vice President, Bank of New England Corporation (until 1990)
________________
(1)Independence One Asset Management Corporation, Irvine, CA;
Independence One Bank of California, FSB (formerly Beverly Hills Business Bank,
FSB), Mission Viejo, CA; Independence One Holding Company (formerly BancA
Corporation), Dallas, TX; Independence One Life Insurance Company, Phoenix, AZ;
MNC Leasing Company, Detroit, MI; and MNC Operations and Services, Inc.,
Farmington Hills, MI, are wholly-owned subsidiaries of the Corporation. First
State Bank and Trust Company of Port Lavaca, Port Lavaca, TX, was a
wholly-owned subsidiary of the Corporation until its merger into International
Bank of Commerce, Loredo, TX, effective September 1, 1994. Lockwood Banc
Group, Inc. Houston, TX, was a wholly-owned subsidiary of the Corporation until
its sale to Comerica Incorporated, Delaware, effective August 4, 1994.
(2)Executive Relocation Corporation, Farmington Hills, MI; General Audit
Systems, Inc., Farmington Hills, MI; Independence One Brokerage Services, Inc.,
Farmington Hills, MI; Independence One Financial Services, Inc., Southfield,
MI; and MNC Financial Services, Detroit, MI, are wholly-owned subsidiaries of
Michigan National Bank. Independence One Mortgage Corporation, Southfield, MI,
was a wholly-owned subsidiary of Michigan National Bank until its sale to
Norwest Mortgage, Inc., effective October 1, 1994.
(3)See the section entitled "Directors of the Corporation"
under Item 10 (a) for a description of Mr. Mylod's and Mr. Ebert's
principal positions and offices with the Corporation, business
experience, principal occupation and employment during the past five
years.
148
149
PART III
ITEM 10 (h)
EXCHANGE ACT, SECTION 16(a) COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's
directors and officers, and persons who own more than ten percent of a
registered class of the Corporation's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("Commission") and the National Association of Securities Dealers. Specific
due dates for these reports have been established and the Corporation is
required to report in this Annual Report on Form 10-K any failure to file by
these dates during 1994. All of these filing requirements were satisfied by
its officers and directors except that Morton E. Harris, Director and David M.
Zarnoch, Senior Vice President(1) each failed to file on a timely basis one
required report relating to one transaction involving Common Stock of the
Corporation. William F. Pickard, Director, failed to file on a timely basis
four required reports relating to four transactions involving Common Stock of
the Corporation, all of which occurred in years prior to 1994. In making this
statement, the Corporation has relied on the written representations of its
incumbent directors and officers and copies of the reports that they have filed
with the Commission.
__________________
(1) As a result of a reorganization announced on March 10, 1994, Mr.
Zarnoch no longer serves as an executive officer of the Corporation.
149
150
PART III
ITEM 11(a) AND 11(k)
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors is composed of outside
directors. The Compensation Committee's responsibilities include reviewing and
approving recommendations from senior management and, in turn, making
recommendations to the Board regarding the base salaries and the policies and
procedures that govern the various compensation programs for the Chief
Executive Officer and other executive officers of Michigan National
Corporation. Specifically, the Compensation Committee recommends and the Board
considers and approves: the corporate executive salary program; the corporate
bonus plan; the deferred compensation plans; the corporate stock option and
performance incentive plan; and all other plans that impact the Chief
Executive Officer's and the executive officers' total compensation. The
Board, when considering these matters, meets in executive session.
Michigan National Corporation's executive compensation programs are designed to
attract, retain, motivate and reward highly talented executives who are capable
of developing and achieving strategic business objectives that will allow the
Corporation to remain highly competitive in a very complex and demanding
industry.
On an annual basis, the Compensation Committee conducts a review of the
Corporation's executive compensation programs. This review includes the
presentation of salary survey information compiled by the Corporation's Human
Resources Department. The Human Resources Department gathers survey data from
independent sources it concludes are reliable for positions which are
comparable to positions within the Corporation. This allows the Committee to
evaluate competitive base salaries, bonuses and total compensation in
establishing the compensation of the Corporation's executives. Data from three
independent surveys covering regional banks with assets from $6 Billion to $20
Billion was utilized by the Committee in formulating its base salary and bonus
recommendations for 1994(1). If survey data is not available for a specific
position, the Human Resources Department analyzes the components of the
position and makes a salary recommendation to the Committee.
Robert J. Mylod, Chairman and Chief Executive Officer, Douglas E. Ebert,
President and Chief Operating Officer and Joseph J. Whiteside, Executive Vice
President and Chief Financial Officer have employment agreements approved by
the Compensation Committee establishing a starting salary and providing for
participation in all other welfare, deferred benefits, salary, bonus and
incentive plans, subject to Compensation Committee review and approval.
After reviewing the above described survey data in the context of the
Corporation's profitability, quality of its balance sheet, results of internal
and external audits and the position of the Corporation in its markets, the
Committee recommended and the Board approved a 1994 base salary of $534,500 for
Mr. Mylod(2). The
- ---------------
(1) Most of the banks included in the compensation surveys are not
included in the Keefe, Bruyette & Woods Bank Stock Index (KBW 50 Index) which
is the index to which the Corporation has compared the performance of its
common stock against since 1992 when stock performance comparisons became a
proxy statement requirement. See Stock Performance Chart under Item 11(l). The
KBW 50 Index provides an appropriate index for stock comparison purposes but is
less appropriate for compensation comparison purposes. For purposes of making
compensation comparisons, the Corporation compares its compensation to the
compensation of banks which more closely approximate its asset size.
(2) Mr. Mylod voluntarily reduced his 1994 base salary to $481,050.
150
151
Committee recommended and the Board approved 1994 base salaries of $450,000 for
Mr. Ebert(3), $275,000 for Mr. Whiteside, $216,900 for Richard C. Webb, Senior
Vice President and $194,900 for Lawrence L. Gladchun, Senior Vice President,
General Counsel and Secretary.
Mr. Mylod and the other executive officers of the Corporation participate in
the Corporation's bonus program. For 1994, the corporate bonus program
provided for the payment of bonuses based upon corporate and individual
performance. In analyzing the Corporation's performance, the Compensation
Committee considered the achievement of predetermined return on asset (ROA)
goals. A total of four progressively higher ROA goals were established with
commensurately higher bonus potentials. If the Corporation's ROA was below the
base level ROA goals, no bonuses would be paid. The bonus potential for the
Chief Executive Officer ranged from a minimum of 22% of base salary to a
maximum of 80% of base salary. The minimum bonus potential for the other
executive officers ranged from 17% to 22% of base salary and the maximum bonus
potential ranged from 45% to 70% of base salary. Under the program, 100% of
the bonuses for the Chief Executive Officer, Chief Operating Officer and Chief
Financial Officer are tied to the Corporation's performance. For the other
named executive officers, 75% of their bonus potential is tied to the
Corporation's performance and 25% to business unit performance. The Committee
and the Board considered numerous factors, including the following: (i) core
earnings and ROA grew significantly; (ii) tax issues were resolved and several
non-Michigan based businesses were sold, producing one-time profits of $131
million; (iii) the Corporation conceived and began the implementation of
Project Streamline, which will produce an $85 million improvement in pre-tax
profit when fully implemented; and (iv) the Corporation's stock price grew 30%
during 1994. Based on this strong financial performance, and considering the
individual contributions to this successful year, the Compensation Committee
recommended and the Board awarded bonus payments of $250,000 (47% of base
salary) for Mr. Mylod, $225,000 (50% of base salary) for Mr. Ebert, $125,000
(45% of base salary) for Mr. Whiteside, $65,000 (30% of base salary) for Mr.
Webb and $78,500 (40% of base salary) for Mr. Gladchun.
The 1994 total compensation for Mr. Mylod, including base salary and bonus, is
85% of the average total compensation for chief executive officers indicated by
the applicable salary surveys above described. The 1994 total compensation for
other named executive officers fall within a range of 95% to 127% of the
average total compensation indicated by such salary surveys.
The Compensation Committee recommended and the Board of Directors approved a
corporate bonus program for 1995 which is similar to the 1994 program. The
principal performance criteria will continue to be ROA. The bonus opportunity
for the Chief Executive Officer and other named executive officers will be
based primarily upon the Corporation's performance, with business unit
performance considered as a factor for officers other than the Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer. Similar to the
1994 program, no bonuses will be paid if the base level ROA target is not
achieved. Once the base level target is achieved, the executive officers'
bonus potential will increase with the achievement of each successive ROA goal,
up to a maximum of 62.5% of base salary for the Chief Executive Officer and
from 44% to 56% of base salary for the other named executive officers.
In 1985, the Corporation's shareholders approved the Michigan National
Corporation Stock Option and Performance Incentive Plan. Under the Plan, the
Corporation provides a report to the Compensation Committee
- ------------
(3) Mr. Ebert voluntarily reduced his 1994 base salary to
$405,000.
151
152
setting forth its recommendations. Stock options are granted to officers by
the Board of Directors upon a recommendation by the Compensation Committee.
The stock options are intended to reward officers for diligent performance of
their responsibilities and their contributions to the Corporation and to
provide incentive for future performance by increasing their ownership interest
in the Corporation. Historically, options are granted based upon grade level,
typically Vice President and above, with each team member in a respective grade
level being granted the same number of shares. Stock options are granted with
an exercise price equal to the market value on the date of grant and are vested
over a three-year period with a ten-year term. In 1994, the Compensation
Committee approved the granting of stock options to Mr. Whiteside, as part of
his employment agreement.
On an annual basis, the Compensation Committee reviews the qualified benefit
plans under which the executive officers are covered participants. This review
includes an analysis of any recommended plan amendments and how those
amendments and/or the existing plan provisions impact the total deferred
compensation of the executive officers. The plans included in this review are
the Michigan National Corporation Employees' Pension Plan and Trust Agreement,
the Michigan National Corporation Deferred Compensation Plan and Trust, the
Michigan National Corporation Employee Stock Ownership Plan and the Michigan
National Corporation Stock Option and Performance Incentive Plan. The
Compensation Committee has concluded that, in the aggregate, the total
compensation, including deferred compensation, of the named executive officers
is appropriate, competitive with the market and meets the Corporation's
compensation objectives.
Stanton Kinnie Smith, Jr., Chairman
Sidney E. Forbes
Gerald B. Mitchell
Walter H. Teninga
152
153
PART III
ITEM 11 (b)
EXECUTIVE COMPENSATION
The following table provides summary information concerning compensation paid
or accrued by the Corporation and its subsidiaries, to or on behalf of the
Corporation's Chief Executive Officer and each of the five other most highly
compensated executive officers of the Corporation (determined as of December
31, 1994) for the fiscal years ended December 31, 1992, 1993 and 1994.
SUMMARY COMPENSATION TABLE
Long Term Compensation
---------------------------------
Annual Compensation Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Other Restricted All Other
Principal Annual Stock LTIP Compen-
Position Year Salary Bonus Compen- Award(s) Options Payouts sation
($) ($) sation($) ($) (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Robert J. Mylod, 1994 503,447(1) 250,000 --- --- --- --- 9,194(2)
Chairman and Chief 1993 529,259 --- --- --- --- --- 6,558(3)
Executive Officer 1992 470,848 --- 665,803(4) --- --- --- 1,238,344(5)
Douglas E. Ebert,(6) 1994 422,831(1) 225,000 23,032(7) --- --- --- 9,142(2)
President and 1993 25,961 75,000(8) --- --- 100,000(9) --- ---
Chief
Operating Officer
Joseph J. 1994 231,657 160,000(11) 28,408(7) --- 25,000(12) --- 9,194(2)
Whiteside(10)
Executive Vice
President and
Chief Financial
Officer
Richard C. Webb 1994 219,150 65,000 --- --- --- --- 9,194(2)
Senior 1993 204,199 --- --- --- 1,000 --- 6,558(3)
Vice President 1992 176,003 --- --- --- --- --- 4,707(5)
Lawrence L. 1994 195,410 78,500 --- --- --- --- 9,194(2)
Gladchun 1993 189,540 75,000 --- --- --- --- 6,558(3)
Senior Vice 1992 175,610 --- --- --- --- --- 4,707(5)
President, General
Counsel and
Secretary
Eric D. Booth(13) 1994 226,317 216,000(14) 941,919(15) --- --- --- 1,487,594(16)
Executive Vice 1993 280,705 --- --- --- 1,000 --- 6,558(3)
President 1992 241,305 --- 52,353(4) --- --- --- 94,600(5)
====================================================================================================================================
153
154
1 Messrs. Mylod and Ebert voluntarily reduced their 1994 base salary on May
19, 1994 to $481,050 and $405,000, respectively.
2 The 1994 compensation figures of Messrs. Mylod, Ebert, Whiteside, Webb and
Gladchun in the All Other Compensation column are equal to the annual
contribution to the Employee Stock Ownership Plan (ESOP) for each executive
officer.
3 The 1993 compensation figures in the All Other Compensation column are
equal to the annual contribution to the ESOP for each executive officer.
4 The 1992 compensation figures of Messrs. Mylod and Booth in the Other
Annual Compensation column are equal to the tax gross-up provided to them as a
consequence of the Corporation's purchase of single premium annuities for them
in 1992. For an explanation of the purchase, see the section entitled "Pension
Plans" under Item 11 (f).
5 The 1992 compensation figures of Messrs. Mylod and Booth in the All Other
Compensation column are equal to the premium expense of the single premium
annuities purchased for them in 1992 (see reference in footnote #4) and the
annual contribution to the ESOP for each of them. For Mr. Mylod, the premium
expense was $1,232,630 and the ESOP contribution was $5,714. For Mr. Booth,
the premium expense was $88,886 and the ESOP contribution was $5,714. The 1992
entries in this column for Messrs. Webb and Gladchun represent the annual ESOP
contributions for their accounts.
6 Mr. Ebert joined the Corporation on December 13, 1993.
7 The 1994 compensation figures of Messrs. Ebert and Whiteside in the Other
Annual Compensation column represent compensation relating to their relocation.
8 The 1993 compensation figure of Mr. Ebert in the Bonus column represents
Mr. Ebert's signing bonus under his employment agreement.
9 The options of Mr. Ebert in the 1993 Options column were granted to Mr.
Ebert pursuant to his employment agreement.
10 Mr. Whiteside joined the Corporation on March 2, 1994.
11 The 1994 compensation figure of Mr. Whiteside in the Bonus column
represents Mr. Whiteside's $35,000 signing bonus under his employment
agreement, plus a $125,000 performance bonus.
12 The options of Mr. Whiteside in the 1994 Options column were granted to
Mr. Whiteside as part of his employment agreement.
13 As of October 21, 1994, Mr. Booth terminated his employment with the
Corporation.
14 The 1994 compensation figure of Mr. Booth in the Bonus column represents
the total of two bonuses paid to Mr. Booth; $135,000 as a stay-to-the-end
bonus and $81,000 based on the value realized from the sale of substantially
all of the assets of Independence One Mortgage Corporation (IOMC).
15 The 1994 compensation figure of Mr. Booth in the Other Annual
Compensation column is equal to the tax gross-up provided to Mr. Booth as a
consequence of the Corporation's purchase of a single premium annuity for him
in 1994 as a result of his termination of employment with the Corporation
subsequent to the sale of IOMC.
16 The 1994 compensation figure of Mr. Booth in the All Other Compensation
column represents the premium expense of a single premium annuity of
$1,186,900, a lump sum settlement payment of $291,500, and an ESOP contribution
of $9,194.
154
155
PART III
ITEM 11 (c)
STOCK OPTION GRANTS
The following table provides information, with respect to the named executive
officers, concerning the grant of stock options during the last fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR TABLE
Potential
Realizable Value at
Assumed Annual Alternative to
Rates of Stock Price (f) and (g):
Appreciation Grant Date
Individual Grants for Option Term Value
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Percent of
Total
Options
Granted to Exercise Grant
Options Employees or Base Date
Granted in Fiscal Price Expiration Present
Name (#) Year(%) ($/Sh) Date 5% ($)(1) 10% ($)(1) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Robert J. Mylod -- -- N/A N/A N/A N/A N/A
Douglas E. Ebert -- -- N/A N/A N/A N/A N/A
Joseph J. 25,000(2) 87.7% $64.375 03/02/04 $1,013,906 $2,558,906 N/A
Whiteside
Richard C. Webb -- -- N/A N/A N/A N/A N/A
Lawrence L. -- -- N/A N/A N/A N/A N/A
Gladchun
Eric D. Booth -- -- N/A N/A N/A N/A N/A
====================================================================================================================================
- ------------
(1) The 5% and 10% annual rates of stock price appreciation are hypothetical
assumptions. If the transaction contemplated by the Agreement and Plan of
Merger described under Item 12 (c) is consummated, these options will be
canceled in exchange for $1,140,625.
(2) Mr. Whiteside was granted 25,000 options as part of his Employment
Agreement on March 2, 1994. All 25,000 options are 100% vested as of his first
day of employment and expire 10 years and one day from the date of grant.
155
156
PART III
ITEM 11 (d)
STOCK OPTION EXERCISES AND HOLDINGS
The following table provides information, with respect to the named executive
officers, concerning the exercise of stock options during the last fiscal year
and unexercised options held as of the end of the last fiscal year. The
exercise price of all outstanding options were equal to the market value of the
shares as of the date of issuance.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-the-Money
Shares Acquired Value Options at Options at
Name on Exercise (#) Realized ($) FY-End (#) FY-End($)(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Robert J. Mylod -- -- Exercisable 34,000 Exercisable $988,500
Unexercisable -- Unexercisable --
Douglas E. Ebert -- -- Exercisable 100,000 Exercisable 1,588,000
Unexercisable -- Unexercisable --
Joseph J. Whiteside -- -- Exercisable 25,000 Exercisable 259,375
Unexercisable -- Unexercisable --
Richard C. Webb -- -- Exercisable 31,333 Exercisable 1,039,578
Unexercisable 667 Unexercisable 10,172
Lawrence L. Gladchun -- -- Exercisable 24,500 Exercisable 867,250
Unexercisable -- Unexercisable --
Eric D. Booth 16,666 $379,639 Exercisable -- Exercisable --
Unexercisable -- Unexercisable --
====================================================================================================================================
- ------------
(1) The closing price on 12/31/94 was $74.75 per share. If the
transaction contemplated by the Agreement and Plan of Merger described under
Item 12 (c) is consummated, these options will have the following values:
$2,187,000 for Mr. Mylod; $5,113,000 for Mr. Ebert; $1,140,625 for Mr.
Whiteside; $2,144,066 for Mr. Webb; and $1,730,875 for Mr. Gladchun.
156
157
PART III
ITEM 11 (f)
PENSION PLANS
The Corporation also has a Supplemental Pension Agreement (Mylod Pension
Agreement) dated January 16, 1985 with Mr. Mylod, under which he will be
entitled to an annual contractual pension benefit equal to the vested portion
of 60% of his average annual total compensation (salary plus bonus) for the 36
consecutive months his total compensation was the highest, less (i) the annual
amount of any benefits he is then entitled to receive under the Corporation's
Pension Plan, (ii) the annual amount of any benefits he is entitled to receive
under Social Security, and (iii) the pre-tax equivalent of any annual benefits
due him under any single premium deferred annuity contracts purchased by the
Corporation on his behalf. Under the vesting schedule of the Pension
Agreement, Mr. Mylod is currently 100% vested. Mr. Mylod will first be
eligible to receive pension benefits at age 55, but such payment will be
reduced by 2% for each year that the commencement of payments precedes his
attainment of age 60.
If Mr. Mylod retires at age 60 with average annual total compensation of
$714,428 and 15 years of service, his estimated annual contractual benefit
under the Pension Agreement would be $357,083. In combination with the
qualified pension plan and social security, his total estimated annual pension
benefits would be $428,657. Pension benefits are paid for Mr.Mylod's life and
then to his surviving spouse for life. If Mr. Mylod dies before receiving his
benefit, his surviving spouse will receive his lifetime monthly benefit
beginning at age 55.
The Corporation also has entered into Supplemental Pension Agreements and
amendments thereto (Pension Agreements) with, of the other named executive
officers, Messrs. Ebert, Whiteside, Webb and Gladchun. The Pension Agreements
entitle each executive officer to an annual contractual pension benefit equal
to the vested portion of a contractual benefit less (i) the annual amount of
any benefits each is entitled to receive under the Corporation's Pension Plan,
(ii) the annual amount of any benefit each is entitled to receive under Social
Security, and (iii) the pre-tax equivalent of any annual benefits due him under
any single premium deferred annuity contracts purchased by the Corporation on
his behalf. The contractual benefit for each of the above individuals is as
follows: Mr. Ebert (50% of his average total compensation for the 36
consecutive months his total compensation was the highest); Mr. Whiteside (40%
of his average total compensation for the 36 consecutive months his total
compensation was the highest); Mr. Webb ($100,000); Mr. Gladchun ($100,000);
and Mr. Booth ($200,000)1. Messrs. Ebert and Whiteside are presently 0%
vested; Mr. Booth is 100% vested; and Messrs. Webb and Gladchun are 40% vested.
Messrs. Ebert and Whiteside are 0% vested for the first 3 years of service, 30%
vested at the end of the third year, and then an additional 10% vested for each
year of service from year 4 through year 10 until they are 100% vested.
Messrs. Webb and Gladchun vest an additional 10% each year until they are fully
vested. The Pension Agreements for Messrs. Webb and Gladchun will become 100%
vested in the event of a change in control of the Corporation. The Pension
Agreements for Messrs. Ebert and Whiteside will be 30% vested in the event of a
change in control of the Corporation during the first three years of the
Agreements, with no accelerated vesting if a change in control occurs
thereafter. Generally, the pensions will be paid monthly for each executive
officer's life, and then to his surviving spouse for life. If the executive
officer dies before receiving his benefit, his surviving spouse will receive
his lifetime monthly benefit beginning at or after age 55 or 60, whichever is
applicable.
The Mylod Pension Agreement and the Pension Agreements allow for purchases of
individual non-participating non-qualified deferred annuities to fund a portion
of the Corporation's obligations under such agreements. The annuities so
purchased are owned by the executive officer. Pursuant to the Mylod Pension
Agreement and Mr. Booth's
157
158
Pension Agreement, the Corporation purchased single premium annuities for
Messrs. Mylod and Booth.(1) There have been no discretionary annuity purchases
for any of the other named executives officers.
The benefits purchased under the annuity policies will always be less than what
the Corporation would have otherwise paid because, unlike supplemental
retirement benefits paid directly by the Corporation, payments under the
annuity policies will not be fully taxable to the executive officer upon
receipt. Thus, the annuities purchased reflect the after-tax equivalent of
benefits which would otherwise be paid by the Corporation on a pre-tax basis.
The purchase of annuity policies by the Corporation constitutes taxable income
to the executive officer in the year of the purchase. The Corporation paid the
federal and state taxes resulting both from the purchases and such tax
payments.
There is an ongoing liability to the Corporation to purchase deferred annuities
under the Mylod Pension Agreement and the Pension Agreements. As of December
31, 1994, if all five current executive officers with Supplemental Pension
Agreements had terminated on that date, the total expense to purchase
annuities, including gross-ups, would have been $6,418,824. This liability
will increase on an annual basis as the vesting percentage in the individual
pension goals increase.
- ------------
(1) As of October 21, 1994, Mr. Booth terminated his employment with the
Corporation. Pursuant to Mr. Booth's Pension Agreement, the Corporation bought
a single premium annuity for Mr. Booth, as described in footnote #15 to the
Summary Compensation Table under Item 11 (b).
158
159
PART III
ITEM 11 (g)
DIRECTOR COMPENSATION
In 1994, the Board of Directors met on eighteen separate occasions. Outside
directors of the Corporation received $13,500 as a retainer for their services.
For their attendance at each board meeting, outside directors received $900.
The retainer and board meeting fees include fees paid to outside directors for
their service on the Board of Michigan National Bank. All outside directors
who served on a committee were paid $800 for their attendance at each committee
meeting. All outside directors who served on the Audit and Credit Committee
were paid $2,000 for their attendance at each Audit and Credit Committee
meeting, and the Chairman of the Audit and Credit Committee received a $5,000
retainer. These fees paid to outside directors will remain the same in 1995,
except that beginning in April 1995, all outside directors will be paid $300
for their participation in any telephonic board meetings.
159
160
PART III
ITEM 11 (h)
EMPLOYMENT CONTRACTS AND TERMINATION
OF EMPLOYMENT ARRANGEMENTS
The Corporation has an employment agreement dated January 16, 1985, with Mr.
Mylod, under which Mr. Mylod will serve as Chairman of the Board of Directors
and Chief Executive Officer of the Corporation. Under the contract, Mr.
Mylod's current salary as of December 31, 1994 was $534,500(1). The current term
of Mr. Mylod's employment agreement expires January 22, 1999. In addition to
participation in all standard employee benefit plans, Mr. Mylod is entitled to
other benefits afforded senior officers of the Corporation including
participation in the Corporation's bonus plans. If Mr. Mylod's employment as
an officer is terminated by the Corporation, other than for cause, as defined
in the employment agreement, he will continue to receive his salary and
benefits for the remaining term of the agreement. The employment agreement
also provides for certain benefits to be paid in the event of disability or
death. In addition to the employment agreement, Mr. Mylod has an Executive
Change in Control Severance Agreement (Severance Agreement) and a Supplemental
Pension Agreement with the Corporation, both of which are described below.
The Corporation has an employment agreement dated November 17, 1993 with Mr.
Ebert, under which Mr. Ebert will serve as President and Chief Operating
Officer of the Corporation. Under the contract, Mr. Ebert's salary as of
December 31, 1994 was $450,000(2). The current term of Mr. Ebert's employment
agreement expires December 31, 1997. In addition to participation in all
standard employee benefit plans, Mr. Ebert is entitled to other benefits
afforded senior officers of the Corporation including participation in the
Corporation's bonus plans. If Mr. Ebert's employment as an officer is
terminated by the Corporation other than for breach of his employment
agreement, he will continue to receive his salary for the remaining term of the
agreement. In addition to the employment agreement, Mr. Ebert has a Severance
Agreement and a Supplemental Pension Agreement with the Corporation, both of
which are described below.
The Corporation has an employment agreement dated March 2, 1994 with Mr.
Whiteside, under which Mr. Whiteside will serve as Executive Vice President and
Chief Financial Officer of the Corporation. Under the contract, Mr.
Whiteside's salary as of December 31, 1994 was $275,000. The current term of
Mr. Whiteside's employment agreement expires March 2, 1998. In addition to
participation in all standard employee benefit plans, Mr. Whiteside is entitled
to other benefits afforded senior officers of the Corporation including
participation in the Corporation's bonus plans. If Mr. Whiteside's employment
as an officer is terminated by the Corporation, he will continue to receive his
salary for the remaining term of the employment agreement. In addition to the
employment agreement, Mr.
------------
(1)Mr. Mylod voluntarily reduced his 1994 base salary to
$481,050 on May 19, 1994, and it will be restored to $534,500 on
April 20, 1995.
(2)Mr. Ebert voluntarily reduced his 1994 base salary to
$405,000 on May 19, 1994, and it will be restored to $455,000 on
April 20, 1995.
160
161
Whiteside has a Severance Agreement and a Supplemental Pension Agreement with
the Corporation, both of which are described below.
The Corporation has entered into Severance Agreements with current executive
officers of the Corporation including, of the named executive officers, Messrs.
Mylod, Ebert, Whiteside, Webb and Gladchun in order to reinforce and encourage
the continued dedication and attention of those executives as members of the
Corporation's management without distraction in potentially disturbing
circumstances arising from the possibility of a change in control of the
Corporation. The Severance Agreements are operative upon the occurrence of a
"change in control" of the Corporation, which would be deemed to occur (a) upon
any person or group of persons other than the Corporation, its subsidiaries or
employee benefit plans acquiring the beneficial ownership of 20% or more of the
combined voting power of the Corporation's then outstanding voting securities;
or (b) if during any two-year period during the term of the Severance
Agreement, individuals who at the beginning of such period constitute the
Corporation's Board of Directors, cease for any reason to constitute at least a
majority thereof; or (c) upon a merger, consolidation or any sale, lease,
exchange or other transfer of all or substantially all of the assets of the
Corporation, or any other similar business combination or transaction other
than any business combination or transaction which (i) would result in the
outstanding voting securities of the Corporation immediately prior thereto
continuing to represent (either by remaining outstanding or being converted
into voting securities of the surviving entity) more than 75% of the combined
voting securities immediately after such business combination or transaction or
(ii) would be effected to implement a recapitalization of the Corporation in
which no person or group of persons acquires 20% or more of the combined voting
power of the outstanding voting securities of the Corporation; or (d) upon the
adoption of any plan or proposal for the liquidation or dissolution of the
Corporation; or (e) upon the occurrence of any other event that requires
reporting in response to Item 6(e) of Schedule 14A of Regulation 14A of the
Securities Exchange Act of 1934.
The Severance Agreements provide that, in the event of certain terminations of
the executive's employment with the Corporation within two years of a change of
control of the Corporation, the executive will be entitled to receive the
following severance benefits: (1) a lump-sum payment equal to three times the
greater of (i) the executive's annual salary in effect at the time of the
notice of termination; or (ii) the executive's average salary based on the
previous 5 calendar years; (2) a lump-sum payment equal to (i) two times the
highest annual bonus paid during or with respect to the prior 5 calendar years
plus (ii) a pro rata portion of any bonus the executive shall be deemed to have
earned for the year termination occurred; (3) in addition to the executive's
vested benefits under the Pension Plan, a supplemental cash benefit equal to
the excess of (i) benefits payable under the Pension Plan if the executive
continued to be employed for the remainder of the period under the Severance
Agreement over (ii) the benefits actually payable under any such plan in
addition to their fully vested benefits; (4) a payment of $10,000 for
outplacement services; (5) an office, secretary and automobile for two years
and (6) the continuation of equivalent life, health, hospitalization,
disability and other similar benefits that the executive would have received
prior to termination for the remainder of the period under the Severance
Agreement. Benefits under the Severance Agreement, to the extent that
161
162
they conflict therewith, are paid in lieu of benefits provided under any other
agreement with the executive.
Under the Severance Agreement, the executive is not required to mitigate the
amount of payments by seeking employment or otherwise; nor shall the amount of
any benefit be reduced by any compensation or benefit earned by the executive
after termination. In addition, if an executive becomes subject to an excise
tax under the Internal Revenue Code as a result of any payments or benefits
received on a change in control, the Corporation will make an additional
payment to the executive to make him whole after payment of the excise tax and
any income taxes on the additional payment.
The Severance Agreement is inoperative when the termination of the executive is
made (i) by the Corporation due to death, permanent disability or cause, or
(ii) by the executive for other than "good reason". "Good reason" is broadly
defined in the Severance Agreements to include any significant adverse
alteration in duties or responsibilities of the executive, any reduction in
compensation or benefits or involuntary relocation. The Severance Agreements
terminate on their anniversary dates in 1997.
162
163
PART III
ITEM 11 (l)
STOCK PERFORMANCE CHART
Set forth below is a line-graph presentation comparing cumulative five-year
stockholder returns on the Corporation's Common Stock against the cumulative
total return of the NASDAQ Stock Market Index(1) and the Keefe, Bruyette & Woods
Bank Stock Index (KBW 50 Index)(2) for the five-year period commencing December
31, 1989 and ending December 31, 1994.(3)
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
Michigan National
Corporation 100.00 36.10 97.54 125.56 145.92 195.10
NASDAQ 100.00 84.92 136.28 158.58 180.93 176.92
KBW 50 Index 100.00 71.81 133.67 144.84 152.86 144.76
Total return includes reinvestment of dividends. All data as of full-year-end
December 31.
- ----------------------
(1) The NASDAQ Stock Market Index, a broad market equity index, is made up
of both U.S. and foreign companies listed on the NASDAQ exchange.
(2) The KBW 50 Index, a market-capitalization-weighted index, is made up of
fifty of the nation's most important banking companies, including all
money-center and most regional banks.
(3) Total return includes reinvestment of dividends. All data is as of
fiscal year-end December 31.
163
164
Part III
Item 12(a) and (b)
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding beneficial
ownership, as of February 4, 1995, of Common Stock of the Corporation by
directors of the Corporation, the Corporation's five most highly compensated
executive officers, and the Corporation's directors and executive officers as a
group.
PERCENT OF
AMOUNT AND NATURE OF OUTSTANDING
NAME OF DIRECTOR/NOMINEE BENEFICIAL OWNERSHIP COMMON STOCK
------------------------ -------------------- -------------
Daniel T. Carroll 1,000 *
John S. Carton 7,315 *
Douglas E. Ebert 100,200(1) *
Sidney E. Forbes 30,000 *
Sue L. Gin 3,600 *
Morton E. Harris 39,452(2) *
Gerald B. Mitchell 2,932(3) *
Robert J. Mylod 133,335(1) 1.01%
William F. Pickard 2,000 *
Stanton Kinnie Smith, Jr. 9,385(3) *
Walter H. Teninga 3,798 *
Stephen A. Van Andel 250 *
Richard T. Walsh 1,000 *
James A. Williams 11,907(4) *
NAME OF EXECUTIVE OFFICER (5)
-------------------------
Lawrence L. Gladchun 35,398(1) *
Richard C. Webb 45,985(1) *
Joseph J. Whiteside 25,300(1) *
ALL EXECUTIVE OFFICERS AND DIRECTORS AS
A GROUP (23 persons including those
named above) 482,436(1) 3.58%
- ------------
1 The beneficial ownership of shares shown in this column include currently
exercisable Corporation Stock Options exercisable within 60 days of the
filing, which were granted to various individuals named in this table, or
included in the group, pursuant to the Corporation's Stock Plans.
Corporation Stock Options currently exercisable or exercisable within 60 days
of the filing, include 34,000 shares for Robert J. Mylod, 100,000 shares
for Douglas E. Ebert, 24,500 shares for Lawrence L. Gladchun, 31,333 shares
for Richard C. Webb, 25,000 shares for Joseph J. Whiteside and 13,351 shares
held by the other executive officers in the group who are not named in the
table.
The shares shown in this column also include shares allocated to the
individual accounts of the named persons and all officers and directors
included as a group in the table, which are held by Corporation Stock Plans or
the ESOP. MNB is the "Trustee" of the Corporation Stock Plans. See "Other
Ownership of the Corporation's Common Stock."
Fully vested amounts accrued pursuant to the Deferred Compensation Plan
include 15 shares for Robert J. Mylod, 2,024 shares for Lawrence L. Gladchun,
5,291 shares for Richard C. Webb, and 9,840 shares held by the other executive
officers in the group who are not named in the table. Fully vested amounts
accrued pursuant to the ESOP include 3,007 shares for Robert J. Mylod, 1,082
shares for Lawrence L. Gladchun, 1,116 shares for Richard C. Webb, and 3,268
shares held by the other executive officers in the group who are not named in
the table.
2 Includes 36,325 shares held by Spectrum Associates of which Mr. Harris is
managing partner.
3 Includes 1,916 shares acquired by Mr. Mitchell and 1,985 shares acquired by
Mr. Smith pursuant to their elections to defer fees into Common Stock pursuant
to the Deferred Compensation Plan.
4 Includes 445 shares as to which Mr. Williams disclaims beneficial ownership.
5 For security ownership of Robert J. Mylod, Chairman and Chief Executive
Officer, and Douglas E. Ebert, President and Chief Operating Officer, refer to
their entries above with the list of directors.
* Less than 1% of the outstanding shares of Common Stock.
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165
OTHER OWNERSHIP OF THE CORPORATION'S COMMON STOCK
The following table sets forth information, as of December 31, 1994,
concerning persons known to the Corporation to be the beneficial owners of more
than 5% of the outstanding shares of Common Stock.
AMOUNT AND PERCENT
NATURE OF BENEFICIAL OF
NAME/ADDRESS OWNERSHIP CLASS
- ------------ --------- -----
Heine Securities Corporation(1)
51 John F. Kennedy Parkway
Short Hills, New Jersey................... 1,090,400 8.25%
Loomis Sayles and Company
1533 North Woodward, Suite 300
Bloomfield Hills, Michigan................ 1,050,930 7.95%
Michigan National Corporation
Deferred Compensation Plan and Trust(2)
Michigan National Bank
Grand Rapids, Michigan.................... 926,192 7.01%
Michigan National Corporation
Employee Stock Ownership Plan(3)
Michigan National Bank
Grand Rapids, Michigan.................... 877,569 6.64%
- ------------
(1)Heine Securities Corporation ("HSC") is an investment advisor
registered with the SEC. The shares reported herein were beneficially owned
by portfolios of Mutual Series Fund Inc., an investment company for whom HSC
acts as investment advisor. Pursuant to an advisory contract, HSC had sole
investment and voting power with respect to such shares. HSC disclaimed any
beneficial ownership over any of the shares reported herein. As of February
7, 1995, Heine Securities ceased to hold or own, beneficially or otherwise,
shares of Common Stock.
(2)Plan shares are held for the benefit of the participants in the Deferred
Compensation Plan, and are voted by the Trustee -- Michigan National Bank,
Trust Department, 77 Monroe Center, P.O. Box 1707, Grand Rapids, MI 49501.
The Deferred Compensation Plan participants have the right to direct the
vote of all shares allocated to their accounts in the Defered Compensation
Plan whether vested or unvested. Allocated shares (and in some instances
certain unallocated shares) for which timely and proper directions are not
received by the Trustee will be voted by the Trustee in the same proportion
as it votes the shares as to which timely and proper directions are
received. Shares allocated to the Payroll Based Stock Option Plan
("PAYSOP"), an account in the Deferred Compensation Plan, will not be
voted at all unless timely and proper instructions are received by the
Trustee. As of February 22, 1995, the total number of shares allocated
to such PAYSOP account was 34,662. Participants must approve certain
dispositions of the Corporation's stock by the Trustee of the Deferred
Compensation Plan. Various officers of the Corporation who are named or
included as a group in the section entitled "Security Ownership of
Directors and Officers" are participants in the Deferred Compensation Plan.
(3)Trust shares are held for the benefit of the participants in the ESOP
and are voted by the Trustee -- Michigan National Bank, Trust Department, 77
Monroe Center, P.O. Box 1707, Grand Rapids, MI 49501.
Participants have the right to direct the vote of all shares allocated
to their accounts in the ESOP whether vested or unvested. Shares which are
not allocated to the account of a particular participant, and allocated
shares for which timely and proper directions are not received by the
Trustee, will be voted by the Trustee in the same proportion as it votes the
shares as to which timely and proper directions are received. Participants
also have the right to respond to tender or exchange offers for the Common
Stock allocated to their accounts. See "Security Ownership of Directors
and Executive Officers."
As of the date hereof, the Corporation's management knows of no other
beneficial owner of more than 5% of any class of voting security of the
Corporation.
165
166
PART III
ITEM 13 (a), (b) AND (c)
CERTAIN TRANSACTIONS
Directors and executive officers of the Corporation, certain beneficial owners
of over 5% of the Corporation's Common Stock and members of their immediate
families were customers of, and had transactions (including loans and loan
commitments) with the Corporation and its subsidiaries during 1994. In the
opinion of management, all such loan 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 other persons not affiliated with the Corporation or its subsidiaries, and
did not involve more than the normal risk of collectibility or present other
unfavorable features.
During 1994, certain subsidiaries of the Corporation made lease payments
totalling $2,036,841 to FCN Associates, a general partnership in which Sidney
E. Forbes, a Director of the Corporation, has a 15 1/2% interest.
During 1994, Amway Hotel Corporation ("Amway Hotel") received lease payments
totalling $76,271 under a lease of a banking facility in the Amway Plaza Hotel,
Grand Rapids, Michigan, to a subsidiary bank of the Corporation. Amway Hotel
is a wholly-owned subsidiary of Amway Properties Corporation, which is a
wholly-owned subsidiary of Amway Corporation. Stephen A. Van Andel, a Director
of the Corporation, is Vice President and Chairman of the Executive Committee
of Amway Corporation.
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167
FIRST AMENDMENT TO PENSION AGREEMENT*
FIRST AMENDMENT dated as of February 4, 1995, to the Pension Agreement
(the "Pension Agreement") dated as of January 19, 1994, by and between Michigan
National Corporation, a Michigan corporation (the "Corporation"), and Douglas
E. Ebert (the "Executive").
WHEREAS, the Corporation and the Executive are a party to the Pension
Agreement; and
WHEREAS, the Corporation and the Executive desire to provide the
Executive with security with respect his retirement benefits in the event of a
Change in Control of the Corporation;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and obligations hereinafter set forth, the parties agree to amend the
Pension Agreement as follows:
1. Section 12 of the Pension Agreement is amended by adding new
subsections (c) and (d) to read in their entirety as follows:
(c) Immediately upon a termination of employment of Employee
following a Change in Control (as defined in the Employee's Executive Change in
Control Severance Agreement dated January 14, 1994, and amended on March 14,
1994 and February 4, 1995) ("purchase date"), the Corporation (or its
successor) shall purchase a Single Premium Annuity from an Insurer to fully
guarantee the vested benefits accrued to the purchase date under this Agreement
as described in sub-section (d) below.
(d) For purposes of this Section, the amount of the Single
Premium Annuity shall be calculated to place the Employee and/or his Surviving
spouse in the same after-tax position had no annuity been purchased, taking
into account the fact that a portion of the annuity payment will be
non-taxable to Employee (or Surviving Spouse). This will be deemed to occur
if, once the actual annuity payment is known, the following formula is
satisfied:
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x = After-Tax Benefit
--------------------
1 - [(1 - ER) x ATR]
where:
- After-Tax Benefit is the annual benefit being purchased under
Section 4 of this Agreement multiplied by the result obtained
by subtracting the Applicable Tax Rate from one (1).
- ER is the exclusion ratio calculated under Section 72 of the
Internal Revenue Code of 1986 (as amended from time to time)
which is based upon Employee's age, the actual annuity
payment, and its purchase price.
- ATR is the Applicable Tax Rate as of the date of purchase, and
will not change thereafter.
- X is the annual amount of the Single Premium Annuity.
2. Except as expressly provided herein, the Pension Agreement shall
remain in full force and effect in all respects.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Corporation has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
MICHIGAN NATIONAL CORPORATION
/s/
By: ______________________________
Robert J. Mylod, Chairman
and Chief Executive Officer
EXECUTIVE
/s/
__________________________________
Douglas E. Ebert
* The First Amendment To Pension Agreement between Michigan National
Corporation and Joseph J. Whiteside is substantially identical in all
material respects to this amendment agreement and therefore, is not included
as an exhibit.
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169
SECOND AMENDMENT TO MICHIGAN NATIONAL CORPORATION
EXECUTIVE CHANGE IN CONTROL AGREEMENT**
SECOND AMENDMENT dated as of February 4, 1995 to the Executive Change
in Control Severance Agreement (the "Agreement") dated as of September 14,
1989, by and between Michigan National Corporation, a Michigan corporation (the
"Corporation"), and Robert J. Mylod (the "Executive").
WHEREAS, the Corporation and the Executive are a party to the
Agreement; and
WHEREAS, the Corporation and the Executive desire to amend the
Agreement to represent more fully the original intent of the parties.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and obligations hereinafter set forth, the parties agree to amend the
Agreement as follows:
1. Section 5(b) of the Agreement is amended so that it reads in its
entirety as follows:
(b) INCENTIVE AWARDS. The Executive shall receive a cash payment
in a single sum, within 10 business days following the Executive's Date of
Termination, in an amount equal to (i) 2 times the highest annual bonus paid to
the Executive during or with respect to the prior 5 calendar years prior to the
year in which the Date of Termination occurs plus (ii) a pro-rata annual bonus
for the year in which the Date of Termination occurs pursuant to the terms of
the Corporation's annual incentive plan for such year based on actual
performance through the date of the Change in Control.
2. The first sentence of Section 5(i) of the Agreement is amended to
read in its entirety as follows:
If any payments made to the Executive, whether pursuant to this
Agreement or otherwise, are subject to the excise tax imposed by Section 4999
of the Internal Revenue Code of 1986, as amended, the Corporation shall pay to
the Executive such additional amounts as are necessary (taking into account all
Federal, state, and local income, excise and other taxes payable by the
Executive as a result of the payment of such additional amounts) to place the
Executive in the same after-tax position he would have been in had no such
excise tax (or any interest or penalties thereon) been imposed on any such
payments, including those made pursuant to this Section 5(i).
3. Except as expressly provided herein, the Agreement shall remain in
full force and effect in all respects.
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170
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Corporation has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
MICHIGAN NATIONAL CORPORATION
/s/
By: __________________________
Lawrence L. Gladchun,
Senior Vice President
EXECUTIVE
/s/
______________________________
Robert J. Mylod
** The Second Amendment To Michigan National Corporation Executive Change In
Control Agreements between Michigan National Corporation and four current
executive officers including, Douglas E. Ebert, Richard C. Webb, Joseph J.
Whiteside and Lawrence L. Gladchun are substantially identical in all
material respects to this amendment agreement and therefore, are not
included as exhibits.
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171
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
PART IV ITEM 14 (c) 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
- ------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS ENDED
DECEMBER 31
- ------------------------------------------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share)
PRIMARY
Net Income $171,702 $23,763 $66,071
If-converted-method adjustment (1) 1,045 N/A N/A
---------------------------------------------------------
172,747 23,763 66,071
Average common shares outstanding 15,168 15,083 14,747
Common stock equivalents 496 147 332
---------------------------------------------------------
AVERAGE PRIMARY SHARES OUTSTANDING 15,664 15,230 15,079
=========================================================
PRIMARY EARNINGS PER SHARE $11.03 $1.56 $4.38
=========================================================
FULLY DILUTED
Net Income $171,702 $23,763 $66,071
If-converted-method adjustment (1) 3,175 N/A N/A
---------------------------------------------------------
174,877 23,763 66,071
Average common shares outstanding 15,168 15,083 14,747
Common stock equivalents 824 147 366
---------------------------------------------------------
AVERAGE FULLY DILUTED SHARES OUTSTANDING 15,992 15,230 15,113
=========================================================
FULLY DILUTED EARNINGS PER SHARE $10.94 $1.56 $4.38
=========================================================
(1) Pursuant to the "If-converted-method" of calculating EPS, net income as
reported in the Consolidated Statement of Income was adjusted to exclude
interest expense relating to the Equity Contracts which are considered
common stock equivalents. Refer to Note A to Consolidated Financial
Statements under Item 8 regarding discussion on earnings per share.
N/A: not applicable
171
172
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
PART IV
ITEM 14(c)21. SUBSIDIARIES OF THE REGISTRANT
MNC operates one national bank, MNB, which is a national banking association
established and organized under the laws of the United States. MNC has one
savings bank, IOBOC, a federally chartered stock savings bank. MNC's six
non-banking subsidiaries are incorporated as follows: Independence One
Investment Services Corporation, 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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173
PART IV
ITEM 14(c)
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 7, 1995 (February 24, 1995 as to Note V) appearing in this Annual
Report on Form 10-K of MNC for the year ended December 31, 1994:
Registration
Form Statement No. Description
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)
S-8 33-45188 200,000 shares of Common Stock of MNC (MNC Nonqualified
Stock Option Plan)
March 7, 1995
Detroit, Michigan
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174
[ARTICLE] 9
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
[/LEGEND]
[MULTIPLIER] 1,000
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1994
[PERIOD-END] DEC-31-1994
[CASH] 529,658
[INT-BEARING-DEPOSITS] 10,200
[FED-FUNDS-SOLD] 350,350
[TRADING-ASSETS] 10,720
[INVESTMENTS-HELD-FOR-SALE] 241,816
[INVESTMENTS-CARRYING] 1,122,237
[INVESTMENTS-MARKET] 1,094,551
[LOANS] 6,013,767<F1>
[ALLOWANCE] (164,344)
[TOTAL-ASSETS] 8,691,969
[DEPOSITS] 7,291,104
[SHORT-TERM] 319,030
[LIABILITIES-OTHER] 216,903
[LONG-TERM] 69,915
[COMMON] 132,146
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 662,871
[TOTAL-LIABILITIES-AND-EQUITY] 8,691,969
[INTEREST-LOAN] 520,561
[INTEREST-INVEST] 87,242
[INTEREST-OTHER] 33,476
[INTEREST-TOTAL] 641,279
[INTEREST-DEPOSIT] 241,975
[INTEREST-EXPENSE] 250,966
[INTEREST-INCOME-NET] 390,313
[LOAN-LOSSES] 41,000
[SECURITIES-GAINS] (31)<F2>
[EXPENSE-OTHER] 481,703
[INCOME-PRETAX] 123,288
[INCOME-PRE-EXTRAORDINARY] 123,288
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 171,702
[EPS-PRIMARY] 11.03
[EPS-DILUTED] 10.94
[YIELD-ACTUAL] 4.74
[LOANS-NON] 108,666
[LOANS-PAST] 22,466
[LOANS-TROUBLED] 283
[LOANS-PROBLEM] 247,000
[ALLOWANCE-OPEN] 190,992
[CHARGE-OFFS] 73,272
[RECOVERIES] 7,919
[ALLOWANCE-CLOSE] 164,344<F3>
[ALLOWANCE-DOMESTIC] 164,344
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
<FN>
<F1>LOANS ARE NET OF UNEARNED INCOME OF $20,024.
<F2>TOTAL NON-INTEREST INCOME = $255,678.
<F3>ALLOWANCE OF $2,295 ASSOCIATED WITH THE LOANS OF SUBSIDIARIES SOLD WAS
ELIMINATED.
</FN>
174
175
FORM 10-K SIGNATURES February 21, 1995
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.
/s/ MICHIGAN NATIONAL CORPORATION
---------------------------------
Michigan National Corporation
(Registrant) by /s/ Robert J. Mylod
-------------------------
/s/ Robert J. Mylod
- ------------------------
Robert J. Mylod
Chairman and
Chief Executive Officer
/s/ Joseph J. Whiteside
- ------------------------
Joseph J. Whiteside
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/ Richard T. Walsh
- ------------------------ ------------------------
Douglas E. Ebert Richard T. Walsh
/s/ Sue L. Gin /s/ James A. Williams
- ------------------------ ------------------------
Sue L. Gin James A. Williams
175