1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 1995
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------- -----------
Commission file number 0-7186
MICHIGAN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-0111135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
27777 Inkster Road, Farmington Hills, MI 48334
(Address of principal executive offices)
(810) 473-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Common stock outstanding at April 30, 1995 - 13,646,070 SHARES
2
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME:
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 1
CONSOLIDATED STATEMENT OF CONDITION:
MARCH 31, 1995 AND DECEMBER 31, 1994 3
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY:
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 5
CONSOLIDATED STATEMENT OF CASH FLOWS:
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 20
PART I EXHIBITS 50
PART II. OTHER INFORMATION 51
SIGNATURES 52
3
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Increase
March 31 (Decrease)
(in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Federal funds sold and resale agreements $2,781 $4,752 ($1,971)
Interest-bearing deposits with banks 11 2,276 (2,265)
Money market investments 181 74 107
Investment securities available for sale 4,109 3,532 577
Investment securities held to maturity 16,264 16,356 (92)
Trading securities 166 1,009 (843)
Loans and lease financing, including related fees 136,356 126,529 9,827
Note receivable-FDIC 3,889 (3,889)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 159,868 158,417 1,451
INTEREST EXPENSE
Money market accounts 16,429 14,153 2,276
Savings deposits 5,565 6,776 (1,211)
Time deposits < $100,000 31,867 35,004 (3,137)
Time deposits > $100,000 7,467 6,192 1,275
Short-term borrowings 4,642 2,762 1,880
Long-term debt 1,517 1,536 (19)
FDIC assistance (3,286) 3,286
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 67,487 63,137 4,350
NET INTEREST INCOME 92,381 95,280 (2,899)
Provision for possible credit losses (Note E) 7,500 6,152 1,348
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for
Possible Credit Losses 84,881 89,128 (4,247)
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges 19,534 32,830 (13,296)
Trust and investment services income 4,681 5,080 (399)
Mortgage banking gains, net 177 4,746 (4,569)
Investments available-for-sale losses, net (27) (27)
Other income 10,560 10,862 (302)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 34,925 53,518 (18,593)
NON-INTEREST EXPENSE
Salaries and wages 30,663 46,107 (15,444)
Other employee benefits 9,959 15,208 (5,249)
Net occupancy expense 5,573 7,652 (2,079)
Equipment expense 7,170 10,319 (3,149)
Outside services 8,158 7,755 403
Defaulted loan expense, net (Note E) 637 (223) 860
Amortization of purchased mortgage servicing rights 5,386 (5,386)
Other expenses 18,260 25,734 (7,474)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 80,420 117,938 (37,518)
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 39,386 24,708 14,678
Income tax provision 13,706 6,424 7,282
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $25,680 $18,284 $7,396
===================================================================================================================================
Certain prior period amounts have been reclassified to conform to current
period presentation.
The Consolidated Statement of Income is continued on the next page.
1
4
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Increase
March 31 (Decrease)
(in thousands, except per share amounts) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share - Primary $1.86 $1.19 $0.67
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share - Fully Diluted $1.86 $1.19 $0.67
- -----------------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding
Primary 14,095 15,377 (1,282)
Fully diluted 14,115 15,408 (1,293)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared Per Common Share $0.55 $0.50 $0.05
===================================================================================================================================
2
5
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CONDITION (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
(in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $525,274 $529,658
Federal funds sold and resale agreements 159,150 350,350
- --------------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 684,424 880,008
Interest-bearing deposits with banks 200 10,200
Money market investments 14,074 13,433
Investment securities available-for-sale (amortized cost of
$236,446 and $243,777 at 03/31/95 and 12/31/94, respectively) (Note D)
Mortgage-backed securities 102,278 104,593
Government and other securities 136,260 137,223
Investment securities held-to-maturity (fair value of $1,066,898
and $1,094,551 at 03/31/95 and 12/31/94, respectively) (Note D)
Mortgage-backed securities 590,245 616,284
Government and other securities 486,165 505,953
Trading securities 11,435 10,720
Residential mortgages held for sale (Note E) 2,173 10,106
Non-performing loans held for sale (Note E) 51,827 56,256
Loans and lease financing (Note E) 6,125,095 5,979,363
- --------------------------------------------------------------------------------------------------------------------------------
Total Loans and Lease Financing 6,179,095 6,045,725
Unearned income (20,044) (20,024)
Allowance for possible credit losses (Note E) (165,952) (164,344)
- --------------------------------------------------------------------------------------------------------------------------------
Net Loans and Lease Financing 5,993,099 5,861,357
Premises and equipment, net 160,629 165,675
Due from customers on acceptances 2,998 1,902
Accrued income receivable 57,578 56,653
Property from defaulted loans and other real estate owned, net (Note E) 23,669 22,156
Other assets 282,280 305,812
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $8,545,334 $8,691,969
================================================================================================================================
Certain prior period amounts have been reclassified to conform to current
period presentation.
The Consolidated Statement of Condition is continued on the next page.
3
6
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CONDITION (UNAUDITED) (continued)
- --------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
(in thousands, except share amounts) 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities
Non-interest bearing demand deposits $1,458,472 $1,549,497
Interest-bearing deposits:
Money market accounts 1,769,369 1,865,230
Savings deposits 967,192 991,983
Time deposits < $100,000 2,395,709 2,371,487
Time deposits > $100,000 519,541 512,907
- --------------------------------------------------------------------------------------------------------------------------------
Total Deposits 7,110,283 7,291,104
Federal funds purchased and repurchase agreements 239,611 195,585
Other short-term borrowings 84,805 123,445
Customer acceptances outstanding 2,998 1,902
Accrued liabilities 218,651 215,001
Long-term debt 69,741 69,915
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 7,726,089 7,896,952
Contingencies and Commitments (Notes H and I)
Shareholders' Equity
Common stock, $10 par value, authorized 50,000,000 shares 132,702 132,145
Surplus 54,445 51,852
Retained earnings 643,150 624,761
Net unrealized gains (losses) on investment
securities available-for-sale 1,360 (1,329)
Note receivable-ESOP (12,412) (12,412)
- --------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 819,245 795,017
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $8,545,334 $8,691,969
================================================================================================================================
Common stock outstanding 13,270,160 13,214,534
================================================================================================================================
4
7
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Net
unrealized
gains (losses)
on investment
securities Note
Common Retained available Receivable
(in thousands) Stock Surplus Earnings for sale ESOP Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 $151,763 $195,467 $483,572 ($15,212) $815,590
Net income 18,284 18,284
SFAS No. 115 adoption effect 6,828 6,828
Net unrealized losses on securities
classified as available-for-sale
(net of tax effect) (2,573) (2,573)
Common stock issued, net 274 767 1,041
Cash dividends
Common stock ($0.50 per share) (7,617) (7,617)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1994 152,037 196,234 494,239 4,255 (15,212) $831,553
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 $132,145 $51,852 $624,761 ($1,329) ($12,412) 795,017
Net income 25,680 25,680
Net unrealized gain on securities
classified as available-for-sale
(net of tax effect) 2,689 2,689
Common stock issued, net 557 2,593 3,150
Cash dividends
Common stock ($0.55 per share) (7,291) (7,291)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 132,702 54,445 643,150 1,360 (12,412) 819,245
- ------------------------------------------------------------------------------------------------------------------------------------
5
8
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31 (in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $25,680 $18,284
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for possible credit losses 7,500 6,152
Depreciation and amortization expense 6,602 15,576
Net amortization associated with investment securities (480) 480
Write-downs of property from defaulted loans 56 1,523
Net deferred income taxes 4,461 (7,044)
Loss from sale of investment securities available for sale 27
Loss (gain) from sale of premises and equipment 330 (66)
Net gain from sale of property from defaulted loans (339) (2,909)
(Increase) decrease in operating assets:
Trading account securities (715) (27,073)
Accrued interest receivable (925) 2,686
Residential mortgages held for sale 7,933 240,995
Non-performing loans held for sale 4,429
Pending investment and trading securities sales 252 (25,826)
Capitalized excess service fees (1,072)
Other assets 17,288 43,277
Increase (decrease) in operating liabilities:
Accrued interest payable (1,410) (1,972)
Pending investment and trading securities purchases 3,531 4,572
Accrued liabilities 1,529 32,438
Other, net 602 830
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $76,351 $300,851
- ------------------------------------------------------------------------------------------------------------------------------------
Investing activities
Payments for:
Purchase of investment securities available for sale ($503) ($100,735)
Purchase of investment securities held to maturity (356,830) (197,341)
Purchase of premises and equipment (2,210) (2,283)
Purchase of mortgage servicing rights (1,360)
Capital expenditures for property from defaulted loans (790) (741)
Proceeds from:
Sale of investment securities available for sale 2,675
Principal collection of investment securities available for sale 5,200 400
Principal collection of investment securities held to maturity 403,129 202,041
Principal collection of note receivable - FDIC 113,605
Sale of premises and equipment 13 159
Sale and principal collection of property
from defaulted loans 3,871 17,501
Net decrease (increase) in:
Interest-bearing deposits with banks 10,000 (255,578)
Money market investments (641) (263)
Loans and lease financing (156,084) 133,303
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities ($92,170) ($91,292)
- ------------------------------------------------------------------------------------------------------------------------------------
The Consolidated Statement of Cash Flows is continued on the next page.
6
9
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31 (in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Financing activities
Payments for:
Long-term debt ($189) ($384)
Common stock dividends (7,291) (7,617)
Proceeds from issuance of:
Common stock 3,150 1,041
Net (decrease) increase in:
Deposits (180,821) (220,165)
Short-term borrowings 5,386 125,440
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities ($179,765) ($101,685)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents ($195,584) $107,874
Cash and cash equivalents at beginning of year 880,008 1,001,080
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31 $684,424 $1,108,954
====================================================================================================================================
Supplemental disclosures of cash flow information:
a.) Cash transactions:
Interest paid $68,897 $65,109
Federal income taxes paid (net of refunds) (11,400) 294
State taxes paid (net of refunds) (303) 10
b.) Non-cash transactions in loans and lease financing:
Transfer from loans to property from defaulted loans 4,712 17,830
Loans originated to finance sales of property from defaulted loans 232 5,338
c.) Non-cash transactions in investment securities:
Transfers into investment securities available-for-sale 134,911
- ------------------------------------------------------------------------------------------------------------------------------------
Certain prior period amounts have been reclassified in order to conform to
current period presentation.
See notes to consolidated financial statements.
7
10
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The unaudited consolidated financial statements of Michigan National
Corporation and subsidiaries (Corporation) are prepared in accordance with
generally accepted accounting principles for interim financial information,
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and Item
303(b) of Regulation S-K.
These financial statements and related notes should be read in conjunction with
the Michigan National Corporation 1994 Form 10-K (1994 Form 10-K). Terms used
in this report are defined beginning on page 13 of the 1994 Form 10-K.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the consolidated operating results of the Corporation for the
three months ended March 31, 1995 and 1994, its financial position at March 31,
1995, and December 31, 1994, and cash flows for the three months ended March
31, 1995, and 1994. Certain prior period amounts were reclassified to conform
with the current period presentation. The operating results for the three
months ended March 31, 1995, are not necessarily indicative of operating
results to be expected for the year ending December 31, 1995.
In 1994, the Corporation 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 at December 31, 1994. In December 1994, the
Corporation sold 300 shares (one half of its common stock of 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 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.
8
11
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. AGREEMENT AND PLAN OF MERGER
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 by the end of 1995, is subject
to approval by the Corporation's shareholders and various regulatory agencies.
9
12
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. SALES
On January 20, 1995, the Corporation entered into a definitive agreement to
sell substantially all of the assets (approximately $72 million) and
liabilities (approximately $34 million) of the Corporate and Private Banking
divisions of IOBOC to Southern California Bank of Anaheim, California. The
transaction which closed May 1, 1995 did not result in a significant gain or
loss.
On April 10, 1995, the Corporation sold contracts to Magic Line, Inc. related
to the processing of ATM transactions by third party customers. The
Corporation realized a gain of approximately $2.5 million on the transaction.
D. INVESTMENT SECURITIES
For the three months ended March 31, 1995, gross losses of $27 thousand and no
gains were realized from sales of securities classified as available for sale.
There were no sales of securities classified as available-for-sale in the three
months ended March 31, 1994.
10
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
D. Investment Securities (Unaudited) (continued)
The following summarizes the book value, fair value, and gross unrealized gains
and losses of investment securities at March 31, 1995 and December 31, 1994.
(in thousands) 3/31/95 12/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
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 $98,726 $3,552 $102,278 $103,542 $1,051 $104,593
U.S. Treasury, Government
agencies and corporations 99,919 ($1,481) 98,438 100,294 ($2,976) 97,318
Other securities 37,801 21 37,822 39,941 (36) 39,905
- ------------------------------------------------------------------------------------------------------------------------------------
Total 236,446 3,573 (1,481) 238,538 243,777 1,051 (3,012) 241,816
====================================================================================================================================
Investment securities
held-to-maturity:
Mortgage-backed securities 590,245 2,638 (10,693) 582,190 616,284 915 (22,058) 595,141
U.S. Treasury, Government
agencies and corporations 390,696 489 (2,439) 388,746 404,035 (5,946) 398,089
State and municipal securities 25,775 706 (9) 26,472 25,234 517 (8) 25,743
Other securities 69,694 107 (311) 69,490 76,684 (1,106) 75,578
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,076,410 3,940 (13,452) 1,066,898 1,122,237 1,432 (29,118) 1,094,551
- ------------------------------------------------------------------------------------------------------------------------------------
Total Securities $1,312,856 $7,513 ($14,933) $1,305,436 $1,366,014 $2,483 ($32,130) $1,336,367
====================================================================================================================================
At March 31, 1995, $49 million of treasury securities available-for-sale, $241
million of treasury securities held-to-maturity, $314 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.
- -------------------------------------------------------------------------------
Interest and dividend income from investment securities for the three month
periods ended March 31, 1995 and 1994.
- -------------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Investment securities available-for-sale:
Mortgage-backed securities $2,225 $3,044
U.S. Treasury, Government agencies
and corporations 1,168 487
Other securities 716 1
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities available-for-sale $4,109 $3,532
=======================================================================================================================
Investment securities held-to-maturity:
Mortgage-backed securities $8,996 $11,678
U.S. Treasury, Government agencies
and corporations 5,710 3,867
State and municipal securities 387 578
Other securities 1,171 233
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities held-to-maturity $16,264 $16,356
=======================================================================================================================
Income from Other securities available-for-sale includes dividends of $716
thousand for the three months ended March 31, 1995. Income from Other
securities held-to-maturity includes dividends of $183 thousand for the three
months ended March 31, 1994.
11
14
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
E. LOANS AND LEASE FINANCING
The Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures," in January, 1995. Accordingly,
loans are classified as impaired when, based on the current information and
events, it is probable that the Corporation will be unable to collect all the
amounts due under the contractual terms of the loan agreement. Impaired loans
are 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 a loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. Impairment is recognized by adjusting the
Allowance for Credit Losses for the impaired loan with a corresponding charge
to Provision for Credit Losses. The adoption of SFAS No. 114 however, did not
result in a change to the level of the Allowance for Credit Losses and the
Provision for Credit Losses. The method used in recognizing income on impaired
loans remains unchanged, a practice allowed by SFAS No. 118.
In addition, the adoption of SFAS No. 114 changed the Corporation's accounting
for in-substance-foreclosed (ISF) assets from a classification of property from
defaulted loans to Non-performing Loans. SFAS No. 114 amends SFAS No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring," to
clarify that substantive repossession accounting is applicable in circumstances
only where the debtor surrenders the collateral to the creditor and the creditor
receives physical possession of the collateral. Therefore, a loan for which
foreclosure is probable, as in the case of ISF assets, should continue to be
accounted for as a loan. Accordingly, ISF properties presented in prior year
financial statements were reclassified and accounted for as loans for
comparative purposes. This resulted in the reclassification of ISF writedowns
from Defaulted Loan Expense to charge-offs to the Allowance for Possible Credit
Losses (offset by a corresponding increase in the Provision for Possible
Credit Losses) and the reclassification of ISF balances from Property from
Defaulted Loans to Non-performing Loans.
12
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
E. Loans and Lease Financing (Unaudited)
The following summarizes loans and lease financing at March 31, 1995 and
December 31, 1994.
(In thousands) 3/31/95 12/31/94
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural secured by real estate $877,008 $867,468
Other commercial, financial & agricultural 2,511,468 2,397,375
Commercial real estate-mortgage 1,104,603 1,105,007
Non-performing loans held for sale 51,827 56,256
Residential real estate mortgages held for sale 2,173 10,106
Residential real estate mortgages held for investment 338,910 332,517
Short-term commercial real estate-construction 125,010 126,158
Installment 1,041,781 1,008,191
Lease financing 126,315 130,713
SFAS No. 114 adjustment 11,934
- ----------------------------------------------------------------------------------------------------------------------------------
Total 6,179,095 6,045,725
Unearned income (20,044) (20,024)
Allowance for possible credit losses (165,952) (164,344)
- ----------------------------------------------------------------------------------------------------------------------------------
Total $5,993,099 $5,861,357
==================================================================================================================================
Certain prior period amounts have been reclassified to conform to current
period presentation.
- ------------------------------------------------------------------------------------------------------------
Impaired Loans (Unaudited)
- ------------------------------------------------------------------------------------------------------------
(in thousands) 03/31/95
- ------------------------------------------------------------------------------------------------------------
Gross recorded investment in impaired loans with related allowance $163,606
Related allowances for loan losses (34,872)
- ------------------------------------------------------------------------------------------------------------
Net impaired loans with related allowance 128,734
Impaired loans with no related allowance 50,965
- ------------------------------------------------------------------------------------------------------------
Total net impaired loans $179,699
============================================================================================================
Three Months Ended
March 31, 1995
- ------------------------------------------------------------------------------------------------------------
Average impaired loans outstanding $212,531
- ------------------------------------------------------------------------------------------------------------
Interest income recognized (1) $2,775
- ------------------------------------------------------------------------------------------------------------
(1) During the first quarter, $24 thousand was recognized using a cash-basis
method of accounting while the loans were classified as impaired.
13
16
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. 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 during
1995. 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 will receive if they are to be terminated under
Project Streamline. As of March 31, 1995, $3.8 million of severance benefits
were paid and charged against this liability.
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.
As of March 31, 1995, $1.2 million of costs were charged against the
liability. The Corporation has yet to vacate the facilities for which the
majority of this reserve was established. Accordingly, the $1.2 million
represents the write-off of abandoned equipment and leasehold improvements,
and lease payments for one vacated facility. The remaining facilities are
expected to be vacated during the remainder of 1995 and in 1996.
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 with an offsetting increase
in the Corporation's pension and post retirement accrued liabilities.
4. Outside service fees of $9.5 million, all of which were paid and charged
against the liability in the first quarter of 1995.
14
17
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. REDEMPTION OF SUBORDINATED DEBENTURES AND CANCELLATION OF EQUITY CONTRACTS
The Corporation has issued notice that it will redeem all of its outstanding 8%
Redeemable Subordinated Debentures (Debentures) due November 10, 1998 and
cancel all of its Equity Contracts as of June 15, 1995 (Redemption Date).
All Debentures not surrendered upon exercise of Equity contracts, described
below, will be redeemed at a price representing a premium of 2.67% above par
(Redemption Price), plus interest accrued to the Redemption Date of $20.00 for
each $1,000 unpaid principal amount of Debentures. The Redemption Date will
also be the cancellation date of all outstanding Equity Contracts. On the
Redemption Date, any unexercised Equity contracts will be canceled and holders
thereof will receive in exchange a payment equal to $10 for each $1,000
aggregate principal amount of the purchase obligations represented by such
Equity Contract, representing 1.00% of such aggregate principal amount,
(Cancellation Price) upon surrender of the Equity Contracts.
Holders of Equity Contracts have, as an alternative to redemption of
Debentures, the option to exercise such Equity Contracts by surrendering such
Debentures. In lieu of receiving the Redemption Price and the Cancellation
Price, holders of Equity Contracts may at any time prior to 5:00 p.m., New York
City time, on June 15, 1995, exercise Equity Contracts for that number of
shares of Common Stock of the Corporation, par value $10 per share, as have an
aggregate purchase price equal to the aggregate purchase obligation set forth
in the Equity Contract, at an exercise price of $56.375 per share, by
surrendering such Equity Contracts and Corresponding Commonly Registered
Debentures with an aggregate principal unpaid amount equal to such exercise
price.
Under certain circumstances, Equity Contract holders may at any time prior to
5:00 p.m., New York City time, on June 15, 1995, exercise the Equity Contracts
by the payment of cash equal to the exercise price of $56.375 per share.
The Corporation expects to recognize a loss on the redemption of Debentures in
accordance with Accounting Principals Board Opinion (APB) No. 26, "Early
Extinguishment of Debt", as amended by SFAS No. 76, "Extinguishment of Debt".
The loss is not expected to be significant.
H. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers,
to reduce its own exposure to fluctuations in interest rates, and to realize
profits.
15
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------
H. Off-balance Sheet Financial Instruments (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
The following summarizes financial instruments with off-balance sheet risk at March 31, 1995 and December 31, 1994.
- --------------------------------------------------------------------------------------------------------------------
Contract or Notional Amount
(in thousands) 3/31/95 12/31/94
- --------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts
represent credit risk:
- --------------------------------------------------------------------------------------------------------------------
Contracts held for purposes other than trading:
Commitments to extend credit $2,448,335 $2,847,236
Standby and other letters of credit 287,993 281,719
Loans sold with recourse 94,025 97,511
====================================================================================================================
- --------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract or notional
amounts exceed the amount of credit risk:
- --------------------------------------------------------------------------------------------------------------------
Contracts held for purposes other than trading:
Interest rate swap contracts 1,687,446 1,738,038
Interest rate caps 40,750 40,750
Customer accommodation contracts held for trading:
Foreign exchange contracts 21,864 20,690
====================================================================================================================
16
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
H. Off-Balance Sheet Financial Instruments (Unaudited) (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
Off-Balance-Sheet Derivative Financial Instruments
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands) March 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Notional End of Period Notional End of Period
Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
Contracts held for purposes other than trading:
Interest rate swaps $1,687,446 $1,738,038
Carrying amount ($1,066) $669
Unrealized gross gain 5,474 2,103
Unrealized gross loss (45,919) (86,413)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest rate swaps 1,687,446 (41,511) 1,738,038 (83,641)
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate caps
Options written 20,375 20,375
Carrying amount (135) (149)
Unrealized gross gain
Unrealized gross loss (193) (462)
- ----------------------------------------------------------------------------------------------------------------------------------
Sub-total 20,375 (328) 20,375 (611)
- ----------------------------------------------------------------------------------------------------------------------------------
Options purchased 20,375 20,375
Carrying amount 94 103
Unrealized gross gain 193 462
Unrealized gross loss
- ----------------------------------------------------------------------------------------------------------------------------------
Sub-total 20,375 287 20,375 565
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest rate caps 40,750 (41) 40,750 (46)
- ----------------------------------------------------------------------------------------------------------------------------------
Total contracts for purposes other than trading $1,728,196 ($41,552) $1,778,788 ($83,687)
==================================================================================================================================
Customer accommodation contracts held for trading:
Foreign exchange forward contract $20,202 $6 $20,591 $31
Spot foreign exchange 1,662 7 99
- ----------------------------------------------------------------------------------------------------------------------------------
Total contracts held for trading $21,864 $13 $20,690 $31
==================================================================================================================================
The credit risk associated with interest rate swaps was approximately $5.5
million as of March 31, 1995. Of this amount approximately $1.3 million is
with domestic banks, $1.5 million with foreign banks and $2.7 million with
broker dealers.
Customer accommodation swaps totaled $138 million of the $1.7 billion in
outstanding notional value of interest rate swaps as of March 31, 1995.
At March 31, 1995 unamortized deferred gains related to interest rate swaps
amounted to $2.5 million. Of this amount, approximately $49 thousand will be
amortized over 6 months, $643 thousand over 11 months and the remainder over 14
months. Such deferred gains are attributed to early termination of swaps.
Average fair value for foreign exchange contracts held for trading amounted to
$29 thousand as of March 31, 1995. The related net gains totaled $298 thousand
as of March 31, 1995 and were recorded in other non-interest income.
17
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------
H. Off-Balance Sheet Financial Instruments (Unaudited) (continued)
- ---------------------------------------------------------------------------------------------------------------------
Interest Rate Swaps - Weighted Average Rate
March 31, 1995 (in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Weighted Average
------------------------------------------------
Notional Rate Rate Months
Value Received Paid (1) Remaining (2)
- ---------------------------------------------------------------------------------------------------------------------
Receive fixed rate:
Non-amortizing swaps $1,068,500 6.38% 6.35% 26
Amortizing swaps 618,946 5.42% 6.28% 21
- ---------------------------------------------------------------------------------------------------------------------
Total interest rate swaps $1,687,446 6.03% 6.32% 24
=====================================================================================================================
(1) Rate paid on 77% 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 5 months to
5.34 years while that for the amortizing swaps range from 4 months to
8.67 years.
18
21
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. LEGAL PROCEEDINGS
There have been no material developments in any previously reported legal
proceedings brought against the Corporation. Other than the previously
reported class action law suits, there have been no new material legal
proceedings brought against the Corporation during the period January 1, 1995
through April 30, 1995.
J. INCOME TAXES
The Corporation's effective income tax rate for the first quarter 1995 based on
a projection for the full year is 34.8% compared to the federal statutory rate
of 35%.
The Corporation's effective tax rate for 1994 excluding a $41.7 million
reduction in tax expense resulting from the Termination Agreement and $40.2
million from tax benefits associated with the IOBOC acquisition, was 28.0%.
For information regarding these one-time tax benefits, refer to Note F and Note
W to the consolidated financial statements on pages 100 and 132, respectively,
of the 1994 Form 10-K.
The increase in the effective income tax rate from 28.0% for 1994 to 34.8% in
1995 is due to higher projected pre-tax earnings in 1995, lower tax-exempt
interest income due to the payoff of the Note Receivable-FDIC on September 30,
1994, and the absence of FDIC assistance due to the Termination Agreement.
Subsequent Event
- ----------------
During April 1995, the Corporation and the Internal Revenue Service resolved
certain tax matters related to the Corporation's income tax returns for the
years 1988 through 1993. Accordingly, the Corporation will reverse certain
income tax reserves which will result in a reduction of the Corporation's 1995
effective tax rate to approximately 30%.
19
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
1995 1994 1994 1994 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Table 1 Selected Quarterly Financial Information (Unaudited) First Fourth Third Second First Fourth
Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Results (in thousands)
Interest income $159,868 $155,599 $163,263 $164,000 $158,417 $169,447
Interest expense 67,487 61,226 63,535 63,068 63,137 67,616
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 92,381 94,373 99,728 100,932 95,280 101,831
Provision for possible credit losses (1) 7,500 26,918 6,289 6,351 6,152 7,452
Non-interest income 34,925 40,575 109,692 51,893 53,518 67,763
Non-interest expense (1) 80,420 136,751 109,143 113,161 117,938 130,011
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 39,386 (28,721) 93,988 33,313 24,708 32,131
Income tax provision (benefit) 13,706 (8,797) (16,060) (29,981) 6,424 (501)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $25,680 ($19,924) $110,048 $63,294 $18,284 $32,632
====================================================================================================================================
Per Common Share
Net income (loss) per common share - primary $1.86 ($1.33) $6.99 $4.06 $1.19 $2.13
Net income (loss) per common share - fully diluted $1.86 (1.33) 6.99 4.05 1.19 2.13
Cash dividends declared 0.55 0.50 0.50 0.50 0.50 (2) (2)
Book value end-of-period 61.74 60.16 65.14 58.32 54.70 53.74
Market value end-of-period 103.75 74.75 76.25 72.00 61.50 57.50
Closing market value: high 104.25 80.56 79.25 79.00 65.25 62.75
Closing market value: low 75.00 73.50 72.25 59.63 55.00 57.50
====================================================================================================================================
Selected Period End Balances (in millions)
Total assets $8,545 $8,692 $9,207 $10,036 $10,129 $10,173
Earning assets (1) 7,659 7,774 8,065 9,119 9,174 9,172
Total loans and lease financing, net of unearned income (1) 6,159 6,026 6,193 6,427 6,318 6,708
Non-performing assets 137 143 195 193 235 255
Deposits 7,110 7,291 7,513 8,156 8,504 8,725
Long-term debt 70 70 71 76 77 77
Shareholders' equity 819 795 998 892 832 816
====================================================================================================================================
Selected Average Balances (in millions)
Total assets $8,467 $8,703 $9,462 $9,950 $9,973 $10,249
Earning assets 7,642 7,778 8,540 8,996 9,001 9,156
Total loans and lease financing, net of unearned income 6,065 6,111 6,281 6,280 6,399 6,681
Deposits 7,063 7,234 7,782 8,392 8,521 8,811
Long-term debt 70 70 72 76 77 77
Shareholders' equity 802 970 900 834 817 791
====================================================================================================================================
Selected Financial Ratios
Return on average shareholders' equity 12.80% (8.22)% 48.90% 30.36% 8.95% 16.50%
Return on average total assets 1.21 (0.92) 4.65 2.54 0.73 1.27
Average equity to average total assets 9.47 11.14 9.51 8.38 8.19 7.72
Allowance to period-end loans after adoption
of SFAS No. 114 (1) 2.69 2.73 3.00 2.93 3.08 2.85
Allowance to period-end loans as previously reported 2.73 3.01 2.94 3.09 2.86
Non-performing assets to total loans (net of unearned
income) plus property from defaulted loans, net 2.22 2.37 3.14 2.98 3.69 3.77
Net interest spread 4.11 4.08 4.06 3.97 3.79 3.82
Net interest margin 5.02 4.94 4.85 4.71 4.50 4.64
Efficiency ratio after adoption of SFAS No. 114 (1) 62.05 99.48 51.00 71.87 76.86 74.37
Efficiency ratio as previously reported 102.33 51.13 72.09 76.96 74.63
Equity to asset ratio (period end) 9.59 9.15 10.83 8.89 8.21 8.02
Leverage ratio 8.30 7.72 9.13 8.20 7.84 7.56
Tier 1 risk-based capital ratio 9.36 8.88 11.00 10.09 9.85 9.57
Total risk-based capital ratio 11.30 10.82 13.12 12.26 12.03 11.73
Dividend payout ratio 29.57 N/M 7.15 12.32 42.02 (2) (2)
====================================================================================================================================
(1) As a result of the corporation adopting SFAS No. 114, "Accounting by
Creditors for Impairment of a loan," effective January 1, 1995, certain
prior period data related to asset quality has been reclassified for
comparative purposes. Specifically, loans that were previously classified
as "in-substance foreclosures" and accounted for as property from defaulted
loans are now classified and accounted for as non-performing loans.
(2) A fourth quarter 1993 dividend of $0.50 per share was declared January 19,
1994, payable to shareholders of record as of February 1, 1994. This 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
20
23
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL REVIEW
Net income for the three months ended March 31, 1995, was $25.7 million, or
$1.86 per share. For the same period last year, net income was $18.3 million,
or $1.19 per share.
This is the first full quarter to be impacted by the broad operational and
capital restructuring instituted in 1994. These actions positioned the
Corporation for the improvement in earnings noted above. Return on equity
improved to 12.80% from 8.95%; return on assets improved to 1.21% from 0.73%;
and the efficiency ratio improved to 62% from 77% for the same period last
year.
Net interest income on a fully taxable equivalent basis declined $5.3 million
from the same period last year due to lower asset balances attributable to the
1994 disposition of non-Michigan businesses. The Net Interest Margin expanded
52 Basis Points from the same period last year to 5.02%, principally due to the
impact of the rise in interest rates on a slightly asset-sensitive balance
sheet.
Non-interest income for the first quarter 1995 was $34.9 million, a decline of
$18.6 million from the same period in 1994. The decline was primarily due to
the 1994 disposition of non-Michigan businesses. Non-interest expense in the
first quarter 1995 was $80.4 million, $37.5 million less than the same period
last year. Project Streamline and other cost cutting initiatives accounted for
approximately $9 million of the improvement; the remainder came primarily from
the 1994 disposition of non-Michigan businesses.
Non-performing Assets of $137.1 million at March 31, 1995, decreased from
$143.0 million at the end of 1994. Non-performing Assets as a percent of loans
plus REO declined from 2.37% to 2.22% during the quarter, and the
Non-performing Loan-to-total loan ratio decreased from 2.01% to 1.84%.
Annualized net charge-offs for the quarter were 0.39% of average loans. The
Corporation's allowance for credit losses was $166.0 million at March 31, 1995,
representing 2.69% of total loans and 146% of Non-performing Loans at March 31,
1995. As a result of the Corporation's adoption of SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," effective January 1, 1995, certain
prior period data related to asset quality was reclassified for comparative
purposes. Specifically, loans that were previously classified as ISF and
accounted for as property from defaulted loans are now classified and accounted
for as Non-performing Loans.
As previously announced and disclosed in the December 31, 1994 Form 10-K, the
Corporation on February 4, 1995, 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 by the end of 1995, is subject
to approval by the Corporation's shareholders and various regulatory agencies.
21
24
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME
OVERVIEW
Net Interest Income for the first quarter 1995 decreased $2.9 million and Net
Interest Income on a Fully Taxable Equivalent Basis decreased $5.3 million
compared to the same period in 1994. These decreases were due primarily to a
lower average balance in interest-earning assets in the three months ended
March 31, 1995.
The Net Interest Rate Spread and Net Interest Margin in the first three months
of 1995 remained above five year historical ratios. The Net Interest Rate
Spread and Net Interest Margin increased thirty-two and fifty-two Basis
Points, respectively, in the first quarter 1995 compared to the same period
last year. This performance is primarily the result of assets repricing upward
due to six prime interest rate increases since March 24, 1994, while the
interest rates on deposits did not reprice as rapidly.
Please refer to Tables 2 through 4 for a presentation of various Net Interest
Margin related information.
INTEREST RATE RISK MANAGEMENT
The Corporation's Asset/Liability Committee, with the review of the Board of
Directors, sets policies regarding the management of the Net Interest Margin
and the interest rate risk of the Corporation. Policies implemented by the
Asset/Liability Committee utilize both on and off-balance sheet strategies to
manage such risk. At March 31, 1995, the Corporation was hedging the interest
rate risk associated with a portion of its prime-based, variable-rate
commercial loans with approximately $1.7 billion of interest rate swap
agreements, including approximately $494 million of indexed amortizing swaps.
For transactions involving indexed amortizing swaps, the amortization periods
lengthen as interest rates rise, and shorten as interest rates decline. At
March 31, 1995, the Corporation estimated that a 100 Basis Point increase in
the LIBOR rate would lengthen the amortization period of these swaps and
thereby increase the amount of the net settlement payment to the counterparties
by approximately $3.5 million for the remainder of the year 1995. In the
context of overall asset/liability management, this increase would not
necessarily result in an equivalent reduction in Net Interest Income.
The Corporation measures forecasted interest rate risk through the use of an
income forecasting simulation model. The model facilitates the forecasting of
Net Interest Income under a variety of interest rate scenarios. At March 31,
1995, the Corporation estimated that forecasted annual Net Interest Income
would increase $1.5 million for a 100 Basis Point increase in the prime rate.
Conversely, forecasted annual Net Interest Income would decrease $2.7 million
for a 100 Basis Point decrease in the prime rate.
22
25
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
BALANCE SHEET COMPOSITION
In the first quarter of 1995 the average balance of total interest-earning
assets decreased $1.4 billion, or 15.1%, from the same period in 1994, and the
average balance of interest-bearing liabilities decreased $1.1 billion, or
15.2%. In addition, the average balance of non-interest bearing demand
deposits decreased $393.4 million in the first quarter 1995 compared to the
same period in 1994.
EARNING ASSETS
Contributing to the decrease in earning assets in 1995 were the sale of the
Corporation's non-Michigan businesses, reductions in the average balance of
money market investments, 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 on page 93 of the 1994 Form 10-K for additional information on these
transactions. The sales of Lockwood and First State resulted in a $539.5
million decrease in the average balance of earning assets, including $30.6
million in money market funds, $278.2 million in investments and $230.7 million
in loans. The weighted average yield on these assets in the first quarter of
1994 was 6.67%.
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 resulting from rising residential mortgage interest rates contributed
to an approximate $557 million decrease in the average balance of residential
mortgage loans in the first quarter of 1995 compared to the same period last
year.
The sale of FCSI's warehouse loan portfolio in December 1994 also contributed
to the reduction in the average balance of loans. Warehouse loans had an
average balance of $178.5 million in the first quarter of 1994.
The average balance of money market investments was higher in the first quarter
of 1994 due to availability of excess liquidity resulting from a $114 million
principal payment on the Note Receivable-FDIC in January 1994 and proceeds from
decreases in certain other earning assets. Money market investments were
utilized in December 1994 to fund the repurchase of the Corporation's common
stock and Equity Contracts. In addition, the pay down of higher cost funding
sources throughout 1994, the decrease in core deposits in the first quarter of
1995, and a decrease in non-interest bearing demand deposits due to the sales
of non-Michigan business have reduced the amount of excess liquidity available
to invest.
The average balance of the Note Receivable-FDIC declined as a result of 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 increased
$293.2 million primarily due to a higher volume of indirectly originated loans
and successful marketing of directly originated Capital Reserve and Equimoney
loan products.
INTEREST-BEARING LIABILITIES
The average balance of interest-bearing liabilities decreased during the first
quarter of 1995 as a result of the sale of the Texas subsidiaries, the
liquidity provided by the decrease in total earning assets, and the current
interest rate environment. The Corporation's funding mix remained relatively
constant year over year. However, savings and money market accounts decreased
slightly as a percentage of total interest-bearing liabilities,
23
26
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
reversing a two year increasing trend.
The sales of Lockwood and First State resulted in a $422.1 million decrease in
the average balance of interest-bearing liabilities in the first quarter of
1995 compared to the same period last year. This decrease includes $98.3
million in savings deposits, $129.1 million in insured money market accounts
and $191.7 million in time deposits. During the first quarter of 1994, the
weighted average interest rate paid of these liabilities was 3.08%.
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.
In addition, the interest rate environment of the past year has also induced
some customers to seek higher returns elsewhere (including non-bank financial
products), contributing to the decrease in deposits.
EFFECT OF BALANCE SHEET COMPOSITION ON NET INTEREST MARGIN
The Net Interest Rate Spread and Net Interest Margin improved in first quarter
of 1995 compared to the same period in 1994. The increase in the average yield
received on interest-earning assets was moderately larger than the increase in
the average rate paid on interest-bearing liabilities. The primary on-balance
sheet contributor to the improved ratios was the change in asset mix resulting
from the activity discussed in the Earning Asset section above. Accordingly,
the average balance of the higher yielding loan portfolio grew as a percentage
of total interest-earning assets while lower yielding money market investments
decreased.
The contribution to Net Interest Margin from the investment of non-interest
bearing demand deposits was significantly lower during the first quarter of
1995 compared to the same period last year. The lower contribution was due to
a decrease in demand deposits resulting from the sale of the Corporation's
non-Michigan businesses in the third and fourth quarters of 1994.
On May 1, 1995, the Corporation sold substantially all of the assets
(approximately $72 million with a weighted average yield of 9.85%) and
liabilities (approximately $34 million with a weighted average rate of 1.60%)
of the Corporate and Private Banking divisions of IOBOC. In addition, the
Corporation entered into a separate agreement to sell approximately $207
million of deposits of IOBOC. At March 31, 1995, these deposits had a weighted
average rate of 4.91%. The sale is expected to close during the second quarter
1995.
INTEREST RATE ENVIRONMENT
On balance, interest rates increased steadily throughout 1994 and the first
quarter of 1995. In addition, the spread between the prime rate and money
market borrowing rates was slightly larger in the first quarter of 1995
compared to the same period in 1994 due to increases in the prime interest
rate.
As discussed on page 24 of the 1994 Form 10-K, 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 and the first
quarter of 1995.
Six prime lending rate increases since March 24, 1994, totalling 300 Basis
Points pushed the prime rate to 9.00% at March 31,
24
27
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
1995. 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 Interest Rate Risk Management section above for the estimated effects of
movements in the prime interest rate.
25
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Table 2 Summary of Consolidated Net Interest Income (Fully Taxable Equivalent) (Unaudited)
Three Months Ended March 31, 1995 December 31, 1994 September 30, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date Average Average Average Average Average Average
(in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements $191,208 $2,781 5.90% $277,673 $3,795 5.42% $163,586 $1,946 4.72%
Interest-bearing deposits with banks 1,200 11 3.72% 13,341 138 4.10% 197,563 2,023 4.06%
Money market funds 13,866 181 5.29% 13,584 157 4.59% 14,976 144 3.81%
- ------------------------------------------------------------------------------------------------------------------------------------
Total money market investments 206,274 2,973 5.85% 304,598 4,090 5.33% 376,125 4,113 4.34%
Investment securities available-for-sale
Investment securities-taxable 240,710 4,109 6.92% 246,682 4,221 6.79% 254,373 4,249 6.63%
Investment securities held-to-maturity
Investment securities-taxable 1,094,721 15,877 5.88% 1,061,343 15,163 5.67% 1,175,485 16,630 5.61%
Investment securities-tax-exempt 25,313 584 9.36% 24,539 555 8.97% 29,122 654 8.91%
Trading securities 10,127 184 7.37% 28,679 604 8.36% 76,118 955 4.98%
- ------------------------------------------------------------------------------------------------------------------------------------
Sub-total securities 1,370,871 20,754 6.14% 1,361,243 20,543 5.99% 1,535,098 22,488 5.81%
Mark-to-market securities adjustment (156) 693 3,027
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 1,370,715 20,754 1,361,936 20,543 1,538,125 22,488
Loans and lease financing 6,065,382 136,822 9.15% 6,111,274 131,787 8.56% 6,280,715 133,379 8.43%
Note receivable-FDIC 18 345,137 6,211 7.14%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7,642,371 160,549 8.52% 7,777,808 156,438 7.98% 8,540,102 166,191 7.72%
Allowance for possible credit losses (166,155) (186,449) (188,542)
Cash and due from banks 472,516 507,874 510,266
Other assets 518,461 603,952 600,184
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $8,467,193 $8,703,185 $9,462,010
====================================================================================================================================
Liabilities
Money market accounts $1,803,962 $16,429 3.69% $1,859,290 $14,975 3.20% $2,001,760 $14,267 2.83%
Savings deposits 969,867 5,565 2.33% 1,014,074 5,028 1.97% 1,099,672 5,436 1.96%
Time deposits < $100,000 2,383,908 30,293 5.15% 2,366,737 28,218 4.73% 2,448,196 27,905 4.52%
Time deposits > $100,000 515,926 7,467 5.87% 521,357 6,868 5.23% 576,990 6,968 4.79%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5,673,663 59,754 4.27% 5,761,458 55,089 3.79% 6,126,618 54,576 3.53%
Fed funds purchased and repo agreements 217,957 3,212 5.98% 158,383 2,127 5.33% 434,680 4,961 4.53%
Other short-term borrowings 100,840 1,430 5.75% 66,304 831 4.97% 74,425 815 4.34%
Subordinated notes 53,824 1,151 8.67% 54,291 1,147 8.38% 55,400 1,168 8.36%
Long-term debt 12,517 272 8.81% 12,517 257 8.15% 12,972 245 7.49%
Capital lease obligations 3,498 94 10.90% 3,628 97 10.61% 3,755 100 10.57%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,062,299 65,913 4.41% 6,056,581 59,548 3.90% 6,707,850 61,865 3.66%
Demand deposits 1,388,975 1,472,618 1,655,294
Other liabilities 213,711 204,335 198,619
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 7,664,985 7,733,534 8,561,763
Shareholders' equity 802,208 969,651 900,247
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $8,467,193 $8,703,185 $9,462,010
====================================================================================================================================
Net interest income (fully taxable equivalent basis) $94,636 $96,890 $104,326
Tax equivalent adjustment 2,255 2,517 4,598
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $92,381 $94,373 $99,728
====================================================================================================================================
Net interest rate spread 4.11% 4.08% 4.06%
====================================================================================================================================
Net interest margin 5.02% 4.94% 4.85%
====================================================================================================================================
Certain prior period amounts were reclassified to conform to current period
presentation.
26
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------
Table 2 Summary of Consolidated Net Interest Income (Fully Taxable Equivalent) (Unaudited)
Three Months Ended June 30, 1994 March 31, 1994
- -----------------------------------------------------------------------------------------------------------
Quarter-to-Date Average Average Average Average
(in thousands) Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements $258,420 $2,473 3.84% $600,261 $4,752 3.21%
Interest-bearing deposits with banks 462,420 4,318 3.75% 245,968 2,276 3.75%
Money market funds 14,268 110 3.09% 10,695 74 2.81%
- -----------------------------------------------------------------------------------------------------------
Total money market investments 735,108 6,901 3.77% 856,924 7,102 3.36%
Investment securities available-for-sale
Investment securities-taxable 261,404 4,336 6.65% 174,704 3,532 8.20%
Investment securities held-to-maturity
Investment securities-taxable 1,243,998 17,611 5.68% 1,085,285 15,778 5.90%
Investment securities-tax-exempt 36,544 788 8.65% 38,673 815 8.55%
Trading securities 86,516 1,048 4.86% 92,551 1,123 4.92%
- -----------------------------------------------------------------------------------------------------------
Sub-total securities 1,628,462 23,783 5.86% 1,391,213 21,248 6.19%
Mark-to-market securities adjustment 3,767 862
- -----------------------------------------------------------------------------------------------------------
Total securities 1,632,229 23,783 1,392,075 21,248
Loans and lease financing 6,280,037 130,276 8.32% 6,398,873 126,946 8.05%
Note receivable-FDIC 348,930 5,873 6.75% 352,717 5,984 6.88%
- -----------------------------------------------------------------------------------------------------------
Total interest-earning assets 8,996,304 166,833 7.44% 9,000,589 161,280 7.27%
Allowance for possible credit losses (195,642) (192,948)
Cash and due from banks 535,494 511,378
Other assets 613,515 654,256
- -----------------------------------------------------------------------------------------------------------
Total assets $9,949,671 $9,973,275
===========================================================================================================
Liabilities
Money market accounts $2,164,867 $14,662 2.72% $2,187,184 $14,153 2.62%
Savings deposits 1,191,567 5,865 1.97% 1,194,861 6,776 2.30%
Time deposits < $100,000 2,566,196 28,477 4.45% 2,657,334 29,957 4.57%
Time deposits > $100,000 650,358 6,477 3.99% 698,963 6,184 3.59%
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,572,988 55,481 3.39% 6,738,342 57,070 3.43%
Fed funds purchased and repo agreements 333,217 3,278 3.95% 194,893 1,475 3.07%
Other short-term borrowings 100,398 947 3.78% 142,320 1,287 3.67%
Subordinated notes 57,240 1,199 8.40% 57,482 1,201 8.47%
Long-term debt 15,352 265 6.92% 15,352 228 6.02%
Capital lease obligations 3,879 103 10.65% 4,005 107 10.84%
- -----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,083,074 61,273 3.47% 7,152,394 61,368 3.48%
Demand deposits 1,819,038 1,782,393
Other liabilities 213,517 221,335
- -----------------------------------------------------------------------------------------------------------
Total liabilities 9,115,629 9,156,122
Shareholders' equity 834,042 817,153
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $9,949,671 $9,973,275
===========================================================================================================
Net interest income (fully taxable equivalent
basis) $105,560 $99,912
Tax equivalent adjustment 4,628 4,632
- -----------------------------------------------------------------------------------------------------------
Net interest income $100,932 $95,280
===========================================================================================================
Net interest rate spread 3.97% 3.79%
===========================================================================================================
Net interest margin 4.71% 4.50%
===========================================================================================================
Certain prior period amounts were reclassified to conform to current period
presentation.
27
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------------
Table 3 Change in Net Interest Income (Fully Taxable Equivalent) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Change in Change in Change in
Quarter-to-Date Average Balance Interest Average Rate
(in thousands) 03/31/95 vs 12/31/94 03/31/95 vs 12/31/94 03/31/95 vs 12/31/94
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements ($86,465) ($1,014) 0.48%
Interest-bearing deposits with banks (12,141) (127) -0.38%
Money market funds 282 24 0.70%
- --------------------------------------------------------------------------------------------------------------------------------
Total money market investments (98,324) (1,117) 0.52%
Investment securities available-for-sale
Investment securities-taxable (5,972) (112) 0.13%
Investment securities held-to-maturity
Investment securities-taxable 33,378 714 0.21%
Investment securities-tax-exempt 774 29 0.39%
Trading securities (18,552) (420) -0.99%
- --------------------------------------------------------------------------------------------------------------------------------
Sub-total securities 9,628 211 0.15%
Mark-to-market adjustment (849)
- --------------------------------------------------------------------------------------------------------------------------------
Total securities 8,779 211
Loans and lease financing (45,892) 5,035 0.59%
Note receivable-FDIC (18)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (135,437) 4,111 0.54%
Allowance for possible credit losses 20,294
Cash and due from banks (35,358)
Other assets (85,491)
- --------------------------------------------------------------------------------------------------------------------------------
Total assets ($235,992)
================================================================================================================================
Liabilities
Money market accounts ($55,328) $1,454 0.49%
Savings deposits (44,207) 537 0.36%
Time deposits < $100,000 17,171 2,075 0.42%
Time deposits > $100,000 (5,431) 599 0.64%
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (87,795) 4,665 0.48%
Fed funds purchased and repo agreements 59,574 1,085 0.65%
Other short-term borrowings 34,536 599 0.78%
Subordinated notes (467) 4 0.29%
Long-term debt 15 0.66%
Capital lease obligations (130) (3) 0.29%
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,718 6,365 0.51%
Demand deposits (83,643)
Other liabilities 9,376
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities (68,549)
Shareholders' equity (167,443)
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ($235,992)
================================================================================================================================
Net interest income (fully taxable equivalent basis) ($2,254)
Tax equivalent adjustment (262)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income ($1,992)
================================================================================================================================
Net interest rate spread 0.03%
================================================================================================================================
Net interest margin 0.08%
================================================================================================================================
28
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------------
Table 3 Change in Net Interest Income (Fully Taxable Equivalent) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date Change in Change in Change in
Average Balance Interest Average Rate
(in thousands) 03/31/95 vs 03/31/94 03/31/95 vs 03/31/94 03/31/95 vs 03/31/94
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements ($409,053) ($1,971) 2.69%
Interest-bearing deposits with banks (244,768) (2,265) -0.03%
Money market funds 3,171 107 2.48%
- -------------------------------------------------------------------------------------------------------------------------------
Total money market investments (650,650) (4,129) 2.49%
Investment securities available-for-sale
Investment securities-taxable $66,006 $577 -1.28%
Investment securities held-to-maturity
Investment securities-taxable 9,436 99 -0.02%
Investment securities-tax-exempt (13,360) (231) 0.81%
Trading securities (82,424) (939) 2.45%
- -------------------------------------------------------------------------------------------------------------------------------
Sub-total securities (20,342) (494) -0.05%
Mark-to-market adjustment (1,018)
- -------------------------------------------------------------------------------------------------------------------------------
Total securities (21,360) (494)
Loans and lease financing (333,491) 9,876 1.10%
Note receivable-FDIC (352,717) (5,984) -6.88%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1,358,218) (731) 1.25%
Allowance for possible credit losses 26,793
Cash and due from banks (38,862)
Other assets (135,795)
- -------------------------------------------------------------------------------------------------------------------------------
Total assets ($1,506,082)
=======================-=======================================================================================================
Liabilities
Money market accounts ($383,222) $2,276 1.07%
Savings deposits (224,994) (1,211) 0.03%
Time deposits < $100,000 (273,426) 336 0.58%
Time deposits > $100,000 (183,037) 1,283 2.28%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (1,064,679) 2,684 0.84%
Fed funds purchased and repo agreements 23,064 1,737 2.91%
Other short-term borrowings (41,480) 143 2.08%
Subordinated notes (3,658) (50) 0.20%
Long-term debt (2,835) 44 2.79%
Capital lease obligations (507) (13) 0.06%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (1,090,095) 4,545 0.93%
Demand deposits (393,418)
Other liabilities (7,624)
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities (1,491,137)
Shareholders' equity (14,945)
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ($1,506,082)
===============================================================================================================================
Net interest income (fully taxable equivalent basis) ($5,276)
Tax equivalent adjustment (2,377)
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income ($2,899)
===============================================================================================================================
Net interest rate spread 0.32%
===============================================================================================================================
Net interest margin 0.52%
===============================================================================================================================
29
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------------
Table 4 Volume/Rate Analysis (Fully Taxable Equivalent) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
03/31/95 vs 12/31/94
Quarter-to-Date Change in Interest Due to:
(in thousands) Average Balance Average Rate Net Change
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements ($2,864) $1,850 ($1,014)
Interest-bearing deposits with banks (115) (12) (127)
Money market funds 3 21 24
- -------------------------------------------------------------------------------------------------------------------------------
Total money market investments (2,976) 1,859 (1,117)
Investment securities available-for-sale
Investment securities-taxable (421) 309 (112)
Investment securities held-to-maturity
Investment securities-taxable 329 385 714
Investment securities-tax-exempt 12 17 29
Trading securities (355) (65) (420)
- -------------------------------------------------------------------------------------------------------------------------------
Sub-total securities (435) 646 211
Mark-to-market adjustment
- -------------------------------------------------------------------------------------------------------------------------------
Total securities (435) 646 211
Loans and lease financing (6,583) 11,618 5,035
Note receivable-FDIC (18) (18)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (10,012) 14,123 4,111
Allowance for possible credit losses
Cash and due from banks
Other assets
- -------------------------------------------------------------------------------------------------------------------------------
Total assets ($10,012) $14,123 $4,111
===============================================================================================================================
Liabilities
Money market accounts ($2,730) $4,184 $1,454
Savings deposits (1,304) 1,841 537
Time deposits < $100,000 153 1,922 2,075
Time deposits > $100,000 (475) 1,074 599
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (4,356) 9,021 4,665
Fed funds purchased and repo agreements 820 265 1,085
Other short-term borrowings 461 138 599
Subordinated notes (62) 66 4
Long-term debt 15 15
Capital lease obligations (14) 11 (3)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (3,151) 9,516 6,365
Demand deposits
Other liabilities
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities (3,151) 9,516 6,365
Shareholders' equity
===============================================================================================================================
Total liabilities and shareholders' equity ($3,151) $9,516 $6,365
Net interest income (fully taxable equivalent basis) ($6,861) $4,607 ($2,254)
Tax equivalent adjustment (262)
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income ($1,992)
===============================================================================================================================
Net interest rate spread 0.03%
===============================================================================================================================
Net interest margin 0.08%
===============================================================================================================================
30
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------
Table 4 Volume/Rate Analysis (Fully Taxable Equivalent) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date 03/31/95 vs 03/31/94
Change in Interest Due to:
(in thousands) Average Balance Average Rate Net Change
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements ($15,365) $13,394 ($1,971)
Interest-bearing deposits with banks (2,247) (18) (2,265)
Money market funds 28 79 107
- ---------------------------------------------------------------------------------------------------------------------------
Total money market investments (17,584) 13,455 (4,129)
Investment securities available-for-sale
Investment securities-taxable 3,572 (2,995) 577
Investment securities held-to-maturity
Investment securities-taxable 384 (285) 99
Investment securities-tax-exempt (673) 442 (231)
Trading securities (3,511) 2,572 (939)
- ---------------------------------------------------------------------------------------------------------------------------
Sub-total securities (228) (266) (494)
Mark-to-market adjustment
- ---------------------------------------------------------------------------------------------------------------------------
Total securities (228) (266) (494)
Loans and lease financing (36,138) 46,014 9,876
Note receivable-FDIC (5,984) (5,984)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (59,934) 59,203 (731)
Allowance for possible credit losses
Cash and due from banks
Other assets
- ---------------------------------------------------------------------------------------------------------------------------
Total assets ($59,934) $59,203 ($731)
===========================================================================================================================
Liabilities
Money market accounts ($13,366) $15,642 $2,276
Savings deposits (1,803) 592 (1,211)
Time deposits < $100,000 (13,652) 13,988 336
Time deposits > $100,000 (8,931) 10,214 1,283
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (37,752) 40,436 2,684
Fed funds purchased and repo agreements 193 1,544 1,737
Other short-term borrowings (1,962) 2,105 143
Subordinated notes (204) 154 (50)
Long-term debt (232) 276 44
Capital lease obligations (17) 4 (13)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (39,974) 44,519 4,545
Demand deposits
Other liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities (39,974) 44,519 4,545
Shareholders' equity
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ($39,974) $44,519 $4,545
===========================================================================================================================
Net interest income (fully taxable equivalent basis) ($19,960) $14,684 ($5,276)
Tax equivalent adjustment (2,377)
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income ($2,899)
===========================================================================================================================
Net interest rate spread 0.32%
===========================================================================================================================
Net interest margin 0.52%
===========================================================================================================================
31
34
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
LOANS AND LEASE FINANCING PORTFOLIO AND CREDIT RISK ANALYSIS
The Corporation's total loans and lease financing, net of unearned income, at
March 31, 1995, increased $133.4 million, or 2.2%, from December 31, 1994.
Please refer to Table 5 for a presentation of the Corporation's loans and lease
financing portfolio for the five most recent quarters, and Tables 5a and 5b,
respectively, for a presentation of the Corporation's commercial real estate
loans outstanding and commercial, financial and agricultural loans outstanding
at March 31, 1995, by geographic area. Refer to page 22 of the 1994 Form 10-K
for information on management of credit risk.
The increase in total loans outstanding was primarily attributable to increases
in the balance of the other commercial, financial and agricultural loan
portfolio and the installment loan portfolio. Growth in the other commercial,
financial and agricultural loan portfolio represents broad-based loan growth.
An increase in indirect lending was the primary contributor to the growth of
the installment loan portfolio. An improved economy and an emphasis on growing
these businesses by the Corporation were contributing factors to the growth in
these portfolios.
Partially offsetting the above increases was a decrease in the Non-performing
Loans held for sale portfolio. A charge-off of $2.0 million and loan payoff of
$1.1 million contributed to the decrease. This portfolio consists of loans
that the Corporation has targeted for disposal in 1995.
The level of Watch Credits at March 31, 1995, increased $10 million from their
level at December 31, 1994, primarily due to the addition of six commercial
loans. The increase is not expected to have a material impact on the
Corporation's financial condition. Watch Credits for the five most recent
quarters are presented in Table 5.
The Corporation adopted SFAS No. 114 "Accounting by Creditors for Impairment of
a Loan," effective January 1, 1995. As a result of this adoption, certain
prior period data related to asset quality has been reclassified for
comparative purposes. Specifically, loans that were previously classified as
ISF and accounted for as property from defaulted loans are now classified and
accounted for as Non-performing Loans. Please refer to Note E to the
Consolidated Financial Statements for further information regarding this
adoption.
Non-performing Assets decreased in the three months ended March 31, 1995, due
to charge-offs, pay-offs, pay-downs, sales and return of loans to accruing
status. Please refer to Table 6 for a presentation of Non-performing Assets
for the five most recent quarters and to Table 6a for a presentation of the
changes in commercial and commercial real estate Non-performing Assets during
the three months ended March 31, 1995.
32
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
Table 5 Loans and Lease Financing Portfolio (Unaudited)
Balance at:
(in thousands) 03/31/95 12/31/94 09/30/94 06/30/94 03/31/94
- ----------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural
secured by real estate (Table 5a) $877,008 $867,468 $892,899 $926,081 $927,047
Other commercial, financial and agricultural (Table 5a) 2,511,468 2,397,375 2,405,015 2,392,341 2,295,503
- ----------------------------------------------------------------------------------------------------------------------------
Subtotal 3,388,476 3,264,843 3,297,914 3,318,422 3,222,550
Commercial real estate-mortgage (Table 5b) 1,104,603 1,105,007 1,142,931 1,183,585 1,201,482
Non-performing loans held for sale (1) 51,827 56,256
Residential real estate-mortgage
Mortgages held-for-sale 2,173 10,106 108,783 331,300 342,061
Mortgages held-for-investment 338,910 332,517 401,402 436,257 459,674
- ----------------------------------------------------------------------------------------------------------------------------
Subtotal 1,497,513 1,503,886 1,653,116 1,951,142 2,003,217
Short-term commercial real estate-construction (Table 5b) 125,010 126,158 145,609 149,843 159,106
Installment 1,041,781 1,008,191 959,028 870,703 803,193
Lease financing 126,315 130,713 145,813 141,855 133,216
SFAS No. 114 adjustment (2) 11,934 16,217 21,250 23,077
- ----------------------------------------------------------------------------------------------------------------------------
Total 6,179,095 6,045,725 6,217,697 6,453,215 6,344,359
Unearned income (20,044) (20,024) (25,076) (26,706) (25,868)
- ----------------------------------------------------------------------------------------------------------------------------
Total $6,159,051 $6,025,701 $6,192,621 $6,426,509 $6,318,491
============================================================================================================================
============================================================================================================================
Watch Credits (in millions) (3) $257 $247 $319 $351 $356
============================================================================================================================
(1) Represents loans identified for disposition in 1995. These loans are
carried at the lower of cost or estimated market value.
(2) As a result of the corporation adopting SFAS No. 114, "Accounting by
Creditors for Impairment of a loan," effective January 1, 1995, certain
prior period data related to asset quality has been reclassified for
comparative purposes. Specifically, loans that were previously classified
as "in-substance foreclosures" and accounted for as property from defaulted
loans are now classified and accounted for as non-performing loans.
(3) Loans classified as Watch Credits are included in the above loan balances.
33
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Table 5a. Commercial, Financial and Agricultural Loans Outstanding at March 31, 1995 (in thousands) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Other Other
Industry (1) Michigan Midwest Northeast South States Total
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial, Financial and Agricultural Loans
Secured by Real Estate:
Service $234,057 $12,347 $9,505 $12,839 $829 $269,577
Finance, insurance and real estate 230,766 14,235 3,077 4,851 39 252,968
Retail Trade 94,458 1,061 38,018 2,004 135,541
Manufacturing 66,634 2,583 1,708 1,180 72,105
Automotive 55,372 1,383 56,755
Wholesale Trade 40,093 48 40,141
Transportation / utilities 15,652 312 1,676 17,640
Other 19,042 13,239 32,281
- ------------------------------------------------------------------------------------------------------------------------------------
Total 756,074 31,969 50,600 21,402 16,963 877,008
- ------------------------------------------------------------------------------------------------------------------------------------
Other Commercial, Financial and
Agricultural Loans:
Service 453,251 11,415 30,029 8,454 7,736 510,885
Finance, insurance and real estate 250,060 1,737 7,294 22,274 74,690 356,055
Wholesale Trade 303,211 15,508 8,746 327,465
Manufacturing 265,478 30,069 7,927 7,638 6,295 317,407
Automotive 287,187 5,561 1,960 294,708
Transportation / utilities 274,958 9,986 431 1,133 286,508
Retail Trade 235,697 10,775 3,512 6,259 9,687 265,930
Other 119,445 22 3,329 29,714 152,510
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2,189,287 85,073 49,193 51,047 136,868 2,511,468
- ------------------------------------------------------------------------------------------------------------------------------------
Total Commercial, Financial and
Agricultural Loans Outstanding $2,945,361 $117,042 $99,793 $72,449 $153,831 $3,388,476
====================================================================================================================================
Percentage of geographic location to Total 86.92% 3.45% 2.95% 2.14% 4.54% 100.00%
====================================================================================================================================
(1) The industry categories are internally developed definitions based on the
primary markets in which the borrower operates.
34
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Table 5b. Short-Term Commercial Real Estate - Construction and Commercial Real Estate - Mortgage Loans Outstanding
at March 31, 1995. (in thousands) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Other Other
Collateral Type Michigan Midwest Northeast South States Total
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term Commercial Real Estate-Construction:
Land development/acquisition $21,360 $56 $1,700 $11,025 $34,141
Retail 14,808 14,808
Residential > 4 family 8,477 3,664 12,141
Office 1,417 1,417
Other 57,380 2,280 $2,843 62,503
- ------------------------------------------------------------------------------------------------------------------------------------
Total 103,442 56 1,700 16,969 2,843 125,010
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial Real Estate-Mortgage:
Retail 231,909 3,459 22,895 713 258,976
Office 205,226 3,410 5,757 5,305 1,076 220,774
Residential > 4 family 153,155 3,000 28,369 184,524
Mobile home parks 94,965 11,240 13,395 8,314 127,914
Hotels 58,754 115 16,989 3,600 33,823 113,281
Industrial 103,316 4,629 1,487 4,204 113,636
Warehouse 22,145 4,117 501 26,763
Other 26,476 408 3,015 28,836 58,735
- ------------------------------------------------------------------------------------------------------------------------------------
Total 895,946 27,378 22,746 52,697 105,836 1,104,603
- ------------------------------------------------------------------------------------------------------------------------------------
Total Commercial
Real Estate Loans Outstanding $999,388 $27,434 $24,446 $69,666 $108,679 $1,229,613
====================================================================================================================================
Percentage of geographic location to Total 81.27% 2.23% 1.99% 5.67% 8.84% 100.00%
====================================================================================================================================
(1) The industry categories are internally developed definitions based on the
primary markets in which the borrower operates.
35
38
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------
Tables 6 Non-performing Assets (Unaudited)
(in thousands) 03/31/95 12/31/94 09/30/94 06/30/94 03/31/94
- -----------------------------------------------------------------------------------------------------------------------------
Non-accrual loans
Commercial, financial and agricultural secured by real estate $5,617 $5,635 $17,287 $18,875 $37,045
Other commercial, financial and agricultural 27,615 21,976 27,950 28,168 29,939
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 33,232 27,611 45,237 47,043 66,984
Commercial real estate-mortgage 10,790 10,220 13,863 11,796 12,443
Non-performing loans held-for-sale 51,827 56,256
Residential real estate-mortgage 2,396 2,330 31,166 21,950 19,437
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 65,013 68,806 45,029 33,746 31,880
Short-term commercial real estate-construction 11,831 9,696 52,781 52,913 53,588
Installment 2,190 1,618 1,750 1,771 1,421
Lease financing 931 935 1,118 22
SFAS No. 114 adjustment (1) 11,934 16,217 21,250 23,077
- -----------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans (1) 113,197 120,600 162,132 156,723 176,972
Renegotiated Loans
Commercial, financial & agricultural secured by real estate 41 44
Commercial real estate-mortgage 331
Short-term real estate-construction 273 283 283 290 300
- -----------------------------------------------------------------------------------------------------------------------------
Total renegotiated loans 273 283 283 331 675
- -----------------------------------------------------------------------------------------------------------------------------
Total Non-performing Loans (1) 113,470 120,883 162,415 157,054 177,647
- -----------------------------------------------------------------------------------------------------------------------------
Property from defaulted loans and other real
estate owned, net prior to adoption of SFAS No. 114 23,669 34,090 49,152 56,957 80,928
SFAS No. 114 adjustment (1) (11,934) (16,217) (21,250) (23,077)
- -----------------------------------------------------------------------------------------------------------------------------
Property from defaulted loans and
other real estate owned, net (1) 23,669 22,156 32,935 35,707 57,851
- -----------------------------------------------------------------------------------------------------------------------------
Total Non-performing Assets $137,139 $143,039 $195,350 $192,761 $235,498
=============================================================================================================================
Non-performing loans to total loans, net of unearned income
after adoption of SFAS No. 114 (1) 1.84% 2.01% 2.62% 2.44% 2.81%
Non-performing loans to total loans, net of unearned
income, as previously reported 1.81% 2.37% 2.12% 2.46%
=============================================================================================================================
Allowance for possible credit losses to Non-performing Loans
after adoption of SFAS No. 114 (1) 146% 136% 114% 120% 109%
Allowance for possible credit losses to Non-performing Loans,
as previously reported 151% 127% 139% 126%
=============================================================================================================================
Non-performing Assets to total loans (net of unearned income)
plus property from defaulted loans and other real estate
owned, net 2.22% 2.37% 3.14% 2.98% 3.69%
=============================================================================================================================
(1) As a result of the corporation adopting SFAS No. 114, "Accounting by
Creditors for Impairment of a loan," effective January 1, 1995, certain
prior period data related to asset quality has been reclassified for
comparative purposes. Specifically, loans that were previously classified
as "in-substance foreclosures" and accounted for as property from defaulted
loans are now classified and accounted for as non-performing loans.
Loans 90 days or more past due and still accruing at March 31, 1995, December
31, 1994, September 30, 1994, June 30, 1994, and March 31, 1994, amounted to
$15,466, $22,466, $94,848, $99,956, and $115,967. At March 31, 1995, 85.5% of
loans 90 days or more past due and still accruing were insured by the FHA.
36
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 6a. Changes in Commercial and Commercial Real Estate Non-Performing Assets (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
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, 1994 $16,945 $26,906 $9,218 $27,514 $80,583
Activity during 1995:
Additions 2,641 908 1,203 8,559 13,311
Pay-downs (1,149) (102) (28) (1,774) (3,053)
Disposition of assets (213) (326) (539)
Charge-offs (395) (430) (624) (2,231) (3,680)
Return to accrual (1) (5,703) (770) (853) (7,326)
Other (2) (282) (248) 370 (276) (436)
- ----------------------------------------------------------------------------------------------------------------------------------
Net activity during 1995 (4,888) (855) 595 3,425 (1,723)
- ----------------------------------------------------------------------------------------------------------------------------------
Non-performing Assets at
March 31, 1995 $12,057 $26,051 $9,813 $30,939 $78,860
==================================================================================================================================
Percentage of Non-performing Asset category
to Total 15.29% 33.03% 12.45% 39.23% 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.
37
40
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
ALLOWANCE AND PROVISION FOR POSSIBLE CREDIT LOSSES
Provisions are made to the allowance for possible loan losses in amounts
necessary to maintain the allowance at a level considered by management to be
sufficient to provide for risk of loss inherent in the loan portfolio.
Determining the adequacy of the allowance for possible loan losses involves a
disciplined quarterly analysis. The analysis ensures that all relevant factors
affecting loan collectability are consistently applied. The analysis of the
allowance relies mainly on historical loss ratios, current general economic and
industry trends, and the current and projected financial condition of certain
individual borrowers. Specific allocations of the allowance are assigned to
individual loans where serious doubt of full principal repayment as prescribed
by SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" exists
(refer to Note E to the Consolidated Financial Statements for discussion on
adoption of SFAS No. 114). General allocations of the allowance are assigned
to the remaining portfolio on the basis of historical loss factors. The
historical loss factors are determined on the basis of past charge-off
experience identified by portfolio type and, within each portfolio type,
identified by risk rating. A migration analysis is utilized to support the
calculation of the allowance and evaluate its overall adequacy. Management
believes the allowance for possible loan loss at March 31, 1995, is adequate
based on the risks identified in the various loan categories.
The Corporation places more emphasis on estimates of a property's net
realizable values and a borrowers' equity position in the collateral, and less
emphasis on secondary collateral values and personal guarantees when assessing
the need for charge-off. The Corporation's Appraisal Review Department is
responsible for establishing and maintaining property appraisal policies in
accordance with regulatory guidelines. The frequency of re-appraisal is based
upon several factors including management's evaluation of the loan's risk.
For the three month period ended March 31, 1995, the provision was $7.5
million, an increase of $1.3 million from the same period in 1994. While the
provision for possible credit losses increased year-over-year, the allowance
for possible credit losses as a percentage of Non- performing Loans improved to
146% at March 31, 1995, from 109% at March 31 of last year. The allowance for
possible credit losses as a percentage of total period-end loans decreased to
2.69% at March 31, 1995, from 3.08% at March 31 last year.
38
41
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 7 Analysis of the Allowance for Possible Credit Losses (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended 03/31/95 12/30/94 09/30/94 06/30/94 03/31/94
- ----------------------------------------------------------------------------------------------------------------------------------
Beginning balance $164,344 $185,731 $188,585 $194,521 $190,992
Charge-offs
Commercial, financial and agricultural secured by real-estate 624 2,238 1,716 7,308 260
Other commercial, financial and agricultural 2,237 4,929 4,190 3,927 1,178
- ----------------------------------------------------------------------------------------------------------------------------------
Subtotal 2,861 7,167 5,906 11,235 1,438
Commercial real estate-mortgage 395 756 40 40 447
Non-performing loans held-for-sale 2,000 36,809
Residential real estate-mortgage held-for-investment 215 167 428 493 440
- ----------------------------------------------------------------------------------------------------------------------------------
Subtotal 2,610 37,732 468 533 887
Short-term commercial real estate-construction 430
Installment 2,056 2,060 2,044 1,879 1,903
Lease financing 20
SFAS No. 114 adjustment (1) 3,918 289 351 152
- ----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 7,957 50,877 8,707 14,018 4,380
Recoveries
Commercial, financial & agricultural secured by real-estate 153 220 102 173 76
Other commercial, financial & agricultural 565 580 497 744 1,030
- ----------------------------------------------------------------------------------------------------------------------------------
Subtotal 718 800 599 917 1,106
Commercial real-estate-mortgage 356 198 124 240 173
Non-performing loans held-for-sale 445
Residential real estate-mortgage held-for-investment 17 40 39 4
- ----------------------------------------------------------------------------------------------------------------------------------
Subtotal 818 238 124 279 177
Short-term commercial real estate-construction 967 502 9 1
Installment 529 567 632 526 473
Lease financing 2
- ----------------------------------------------------------------------------------------------------------------------------------
Total Recoveries 2,065 2,572 1,859 1,731 1,757
Net charge-offs 5,892 48,305 6,848 12,287 2,623
Additions:
Provisions charged to operating expense 7,500 23,000 6,000 6,000 6,000
SFAS No. 114 adjustment to provision (1) 3,918 289 351 152
Less:
Allowance of subsidiaries sold 2,295
- ----------------------------------------------------------------------------------------------------------------------------------
Ending balance $165,952 $164,344 $185,731 $188,585 $194,521
==================================================================================================================================
Allowance for possible credit losses
to period-end loans (net of unearned income)
after adoption of SFAS No. 114 (1) 2.69% 2.73% 3.00% 2.93% 3.08%
Allowance for possible credit losses
to period-end loans (net of unearned income),
as previously reported 2.73% 3.01% 2.94% 3.09%
==================================================================================================================================
CHARGE-OFF RATIOS
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date 03/31/95 12/31/94 09/30/94 06/30/94 03/31/94
- ----------------------------------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average
loans, (net of unearned income)
after adoption of SFAS No. 114 (1) 0.39% 3.15% 0.43% 0.78% 0.16%
Annualized net charge-offs to average
loans, (net of unearned income),
as previously reported 2.91% 0.42% 0.76% 0.15%
==================================================================================================================================
(1) As a result of the corporation adopting SFAS No. 114, "Accounting by
Creditors for Impairment of a loan," effective January 1, 1995, certain
prior period data related to asset quality has been reclassified for
comparative purposes. Specifically, loans that were previously classified
as "in-substance foreclosures" and accounted for as property from defaulted
loans are now classified and accounted for as Non-performing Loans.
39
42
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest income for the first quarter of 1995 decreased $18.6 million over
the same period in 1994 principally as the result of the sale of the
Corporation's non-Michigan businesses in the third and fourth quarters of 1994.
Non-interest expense for the first quarter decreased $37.5 million over the
same period in 1994. The sale of non-Michigan businesses and the 1994
operational restructuring, particularly Project Streamline, contributed to the
decrease in non-interest expense.
The major components of the Corporation's non-interest income and non-interest
expense are presented in Table 8 and Table 9, respectively, for the five most
recent quarters. Also, refer to Table 10 Business Review for summary financial
information regarding the Corporation's principal subsidiaries, including the
non-Michigan businesses sold in 1994.
The discussion below focuses on the Corporation's remaining businesses.
Non-interest Income
Non-interest income in the Corporation's Michigan business decreased
approximately $1.5 million due primarily to lower business account analysis
fees. Business account analysis fees decreased as a result of a higher
earnings credit on compensating customer account balances due to several prime
interest rate increases over the past year.
Non-interest Expense
As mentioned above, the primary contributor to the reduction in non-interest
expense in the first quarter of 1995 compared to the same period last year was
the operational restructuring that took place in 1994, particularly the
initiatives resulting from Project Streamline. Project Streamline and other
cost cutting initiatives contributed to reductions in nearly every expense
category with the exception of defaulted loan expense and outside services.
Defaulted loan expense was lower in the first quarter of 1994 due to higher
gains realized on the sale of REO. Advisory fees of $2.9 million incurred in
connection with merger activity and the 1994 multi-faceted strategic
restructuring were the primary contributors to the increase in outside
services. The total cost of both of these advisory service contracts is
contingent upon future events and may result in an additional accrual in future
quarters.
40
43
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 8 Non-Interest Income (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
(in thousands) 03/31/95 12/31/94 9/30/94 6/30/94 3/31/94
- ----------------------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $12,925 $13,777 $13,897 $15,196 $15,113
Merchant card processing fees 4,763 5,407 5,024 4,866 4,515
Mortgage servicing fees 8 5,696 10,062 10,741
Amortization of capitalized excess service fees (579) (789) (1,056)
Loan service charges 1,846 2,818 2,745 2,133 3,517
- ----------------------------------------------------------------------------------------------------------------------------------
Service charges 19,534 22,010 26,783 31,468 32,830
- ----------------------------------------------------------------------------------------------------------------------------------
Trust and investment services income 4,681 4,383 4,322 4,472 5,080
Mortgage banking gains, net 177 201 22 4,406 4,746
Investments securities available-for-sale losses, net (27) (11) (20)
Other gains, net 1,480 67,096
Other Income:
Trading profits (losses) 306 298 510 210 (379)
Other 10,254 12,214 10,979 11,337 11,241
- ----------------------------------------------------------------------------------------------------------------------------------
Total other income 10,560 12,512 11,489 11,547 10,862
- ----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income $34,925 $40,575 $109,692 $51,893 $53,518
==================================================================================================================================
41
44
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 9 Non-Interest Expense (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
(in thousands) 03/31/95 12/31/94 9/30/94 6/30/94 3/31/94
- ----------------------------------------------------------------------------------------------------------------------------------
Salaries and wages $30,663 $39,676 $42,201 $46,625 $46,107
Other employee benefits 9,959 11,674 12,103 13,971 15,208
Net occupancy 5,573 6,121 6,921 7,645 7,652
Equipment 7,170 8,339 8,567 10,517 10,319
Outside services 8,158 7,851 8,732 8,306 7,755
Defaulted loan expense, net
Writedowns and losses from sale (1) 85 5,814 1,974 2,193 1,748
Gains from sale (374) (1,207) (925) (7,628) (3,234)
Other operating expenses, net 926 1,826 1,982 2,622 1,263
- ----------------------------------------------------------------------------------------------------------------------------------
Total defaulted loan expense, net (1) 637 6,433 3,031 (2,813) (223)
Amortization of purchased mortgage servicing rights 2,034 3,027 5,386
Restructuring charge 37,595
Other Expenses:
FDIC Insurance 4,606 4,876 5,017 5,384 5,386
Communications 1,558 1,642 1,996 2,287 2,321
Stationery and supplies 1,391 1,768 1,875 2,055 2,249
Advertising 880 1,128 1,792 1,608 1,619
Michigan single business tax 2,193 1,129 3,402 1,988 2,181
Postage 1,033 1,002 1,141 1,243 1,567
Amortization of goodwill 81 123 1,244 305 311
Uncollected interest on early payoffs of loans serviced 400 1,428 1,799
Provision for foreclosure costs on loans serviced 750 1,125 975
Other 6,518 7,394 7,937 8,460 7,326
- ----------------------------------------------------------------------------------------------------------------------------------
Other expenses 18,260 19,062 25,554 25,883 25,734
- ----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense (1) $80,420 $136,751 $109,143 $113,161 $117,938
==================================================================================================================================
Net overhead ratio (2) 2.38% 4.95% -0.03% 2.72% 2.87%
- ----------------------------------------------------------------------------------------------------------------------------------
Efficiency ratio, after adoption of SFAS No. 114 (1) (3) 62.05% 99.48% 51.00% 71.87% 76.86%
Efficiency ratio, as previously reported (3) 102.33% 51.13% 72.09% 76.96%
==================================================================================================================================
(1) As a result of the corporation adopting SFAS No. 114, "Accounting by
Creditors for Impairment of a loan," effective January 1, 1995, certain
prior period data related to asset quality has been reclassified for
comparative purposes. Specifically, loans that were previously classified
as "in-substance foreclosures" and accounted for as property from defaulted
loans are now classified and accounted for as non-performing loans.
(2) Non-interest expense less non-interest income divided by average earning
assets.
(3) Non-interest expense divided by the sum of net interest income on a fully
taxable basis and non-interest income.
42
45
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------------
Table 10 Business Review (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
MNB
(excluding IOMC) IOMC IOBOC
Three Months Ended March 31 (in thousands) 1995 1994 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible credit losses (2) $80,627 $75,172 $161 $3,210 $3,960 $5,354
Non-interest income 31,971 34,663 250 16,615 617 713
Gains from sale of mortgage servicing rights
Amortization of capitalized excess service fees (1,056)
Amortization of purchased mortgage servicing rights (5,386)
Other non-interest expense (2) (72,992) (80,445) (609) (19,901) (2,759) (5,092)
--------- --------- --------- --------- --------- ---------
Income before taxes $39,606 $29,390 ($198) ($6,518) $1,818 $975
========= ========= ========= ========= ========= =========
At March 31
Total assets $8,057,835 $8,669,624 $171,375 $764,649 $456,705 $756,567
Total liabilities $7,390,448 $8,015,691 $131,256 $738,923 $407,704 $652,818
Total equity $667,387 $653,933 $40,119 $25,726 $49,001 $103,749
Mortgage Servicing Portfolio:
Originated Servicing $3,863
Purchased Servicing $5,076
---------
Total $8,939
=========
(1) Amounts include intercompany eliminations.
(2) As a result of the corporation adopting SFAS No. 114, "Accounting by
Creditors for Impairment of a loan," effective January 1, 1995, certain
prior period data related to asset quality has been reclassified for
comparative purposes. Specifically, loans that were previously classified
as "in-substance foreclosures" and accounted for as property from
defaulted loans are now classified and accounted for as Non-performing
Loans.
43
46
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Table 10 Business Review (Unaudited) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Texas Bank Holding Company and Consolidated
Subsidiaries other operations (1) MNC
Three Months Ended March 31 (in thousands) 1995 1994 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible credit losses (2) $5,598 $133 ($206) $84,881 $89,128
Non-interest income 1,539 2,087 1,044 34,925 54,574
Gains from sale of mortgage servicing rights
Amortization of capitalized excess service fees (1,056)
Amortization of purchased mortgage servicing rights (5,386)
Other non-interest expense (2) (5,244) (4,060) (1,870) (80,420) (112,552)
--------- --------- --------- --------- ---------
Income before taxes $1,893 ($1,840) ($1,032) $39,386 $24,708
========= ========= ========= ========= =========
At March 31
Total assets $594,302 ($140,581) ($656,467) $8,545,334 $10,128,675
Total liabilities $544,332 ($203,319) ($654,642) $7,726,089 $9,297,122
Total equity $49,970 $62,738 ($1,825) $819,245 $831,553
(1) Amounts include intercompany eliminations.
(2) As a result of the corporation adopting SFAS No. 114, "Accounting by
Creditors for Impairment of a loan," effective January 1, 1995, certain
prior period data related to asset quality has been reclassified for
comparative purposes. Specifically, loans that were previously classified
as "in-substance foreclosures" and accounted for as property from
defaulted loans are now classified and accounted for as Non-performing
Loans.
44
47
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAX PROVISION
The Corporation's effective income tax rate for the first quarter 1995 based on
a projection for the full year is 34.8% compared to the federal statutory rate
of 35%.
The Corporation's effective tax rate for 1994 excluding a $41.7 million
reduction in tax expense resulting from the Termination Agreement and $40.2
million from tax benefits associated with the IOBOC acquisition, was 28.0%.
For information regarding these one-time tax benefits, refer to Note F and Note
W to the consolidated financial statements on pages 100 and 132, respectively,
of the 1994 Form 10-K.
The increase in the effective income tax rate from 28.0% for 1994 to 34.8% in
1995 is due to higher projected pre-tax earnings in 1995, lower tax-exempt
interest income due to the payoff of the Note Receivable-FDIC on September 30,
1994, and the absence of FDIC assistance due to the Termination Agreement.
Subsequent Event
- ----------------
During April 1995, the Corporation and the Internal Revenue Service resolved
certain tax matters related to the Corporation's income tax returns for the
years 1988 through 1993. Accordingly, the Corporation will reverse certain
income tax reserves which will result in a reduction of the Corporation's 1995
effective tax rate to approximately 30%.
45
48
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
CAPITAL RESOURCES
The capital position of the Corporation continues to be an important factor in
developing corporate strategies and achieving established goals. Management
reviews the various capital measures weekly and takes appropriate action to
ensure that they are within established internal and external guidelines.
Management believes the Corporation's capital position, which exceeds
guidelines established by industry regulators, is adequate to support its
various businesses. The Corporation's risk-based capital position for the five
most recent quarters is presented in Table 11.
On January 18, 1995 the Corporation increased the regular quarterly cash
dividend on its common stock by 10% from 50 cents ($.50) to 55 cents ($.55) per
share, payable February 15, 1995, to shareholders of record as of February 1,
1995.
Redemption of Subordinated Debentures and Cancellation of Equity Contracts
- --------------------------------------------------------------------------
The Corporation has issued notice that it will redeem all of its outstanding 8%
Redeemable Subordinated Debentures (Debentures) due November 10, 1998 and
cancel all of its Equity Contracts on June 15, 1995. At March 31, 1995, the
outstanding balance of Debentures was $54.1 million and there were Equity
Contracts associated with $37.5 million of the Debentures. Equity Contract
holders may convert their Equity Contracts into shares of the Corporation's
common stock at a purchase price of $56.375 by surrendering the Debentures or,
under certain circumstances, payment in cash. During April 1995, approximately
334 thousand shares of the Corporation's common stock were issued through the
exercise of Equity Contracts. On the Redemption Date, any unexercised Equity
Contracts will be canceled and the holder will receive a 1.00% cancellation
fee.
Based on the Corporation's share price at March 31, 1995, of $103.75, it is
likely that all Equity Contracts will be converted into common stock. This
transaction will not affect total risk-based capital. However, it will result
in the reclassification of the dollar value of Equity Contracts, currently
classified as Tier 2 capital, to common stock which is classified as Tier 1
capital. Please refer to Note G to the Consolidated Financial Statements for
further information regarding the redemption of Debentures and cancellation of
Equity Contracts.
The Corporation intends to utilize cash on hand to fund the redemption of
Debentures. No debt will be incurred in connection with this transaction.
In addition, the redemption of the Debentures and conversion of Equity
Contracts into common stock will not have a further dilutive effect on earnings
per share because the Corporation, in accordance with APB No. 15, "Earnings Per
Share", currently uses the "if converted method" of calculating common stock
equivalents. For further information regarding the calculation of earnings per
share, please refer to page 89 of the 1994 Form 10-K. The calculation for
earnings per share for March 31, 1995, appears in Exhibit (11).
46
49
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------
TABLE 11 Risk-Based Capital (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
Quarter Ended
(in thousands) 03/31/95 12/31/94 9/30/94 6/30/94 3/31/94
- --------------------------------------------------------------------------------------------------------------------------
Tier 1
Common shareholders' equity (1) $817,884 $796,346 $996,382 $889,930 $827,323
Intangible assets (2,446) (2,600) (3,245) (13,430) (13,901)
PMSR capital limitation (2) (1,697)
SFAS No. 109 capital limitation (3) (109,903) (119,587) (121,310) (59,584) (33,886)
- --------------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital $705,535 $674,159 $871,827 $816,916 $777,839
- --------------------------------------------------------------------------------------------------------------------------
Tier 2
Allowance for possible credit losses (4) $96,419 $97,210 $101,672 $103,042 $100,508
Equity commitment note 12,412 12,412 12,412 15,212 15,212
Equity contract note - qualifying subordinated debt 37,126 37,157 54,587 57,246 57,475
- --------------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital $145,957 $146,779 $168,671 $175,500 $173,195
- --------------------------------------------------------------------------------------------------------------------------
Total qualifying capital $851,492 $820,938 $1,040,498 $992,416 $951,034
- --------------------------------------------------------------------------------------------------------------------------
Risk-weighted assets $6,744,921 $6,694,329 $6,965,560 $7,088,791 $6,980,006
Risk-weighted off-balance sheet exposure 971,070 1,085,090 1,171,444 1,167,978 1,074,546
- --------------------------------------------------------------------------------------------------------------------------
Less: disallowance for loan loss, intangibles and PMSR 181,882 189,321 209,210 160,123 146,200
==========================================================================================================================
Total risk-weighted assets and off-balance sheet exposure $7,534,109 $7,590,098 $7,927,794 $8,096,646 $7,908,352
==========================================================================================================================
Minimum Ratios for
Well-Capitalized Institutions
==========================================================================================================================
Tier 1 risk-based capital ratio 6.00% 9.36% 8.88% 11.00% 10.09% 9.85%
==========================================================================================================================
Total risk-based capital ratio 10.00% 11.30% 10.82% 13.12% 12.26% 12.03%
==========================================================================================================================
Leverage ratio 5.00% 8.30% 7.72% 9.13% 8.20% 7.84%
==========================================================================================================================
(1) Common shareholders' equity excludes SFAS No. 115 net unrealized gains
(losses) on investment securities classified as available-for-sale in
accordance with regulatory capital guidelines.
(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.
47
50
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY
The purpose of liquidity management is to ensure sufficient cash flow to meet
all financial commitments and enable the Corporation to capitalize on
opportunities for business expansion. The parent company manages its liquidity
position to provide the cash necessary to service debt, pay dividends and
satisfy other operating requirements. The subsidiary bank and subsidiary
savings and loan manage liquidity to meet the needs of borrowers and to honor
deposit withdrawals. The Corporation is managing the asset/liability process
toward a prudent level of liquidity thereby enhancing balance sheet strength.
Management believes the Corporation's liquidity position is strong and is
adequate to support its various business activities. Please refer to Table 12
for a presentation of the Corporation's and parent company's sources of funds
for the most recent five quarters.
48
51
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Table 12 Sources of Funds (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Michigan National Corporation
Three Months Ended
(in thousands) 3/31/95 12/31/94 9/30/94 6/30/94 3/31/94
- -----------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Total Total Total Total Total
Asset Asset Asset Asset Asset
Balance Funding Balance Funding Balance Funding Balance Funding Balance Funding
- ------------------------------------------------------------------------------------------------------------------------------------
Core deposits $6,413,647 75% $6,595,427 76% $6,802,399 74% $7,338,660 73% $7,644,987 76%
Discretionary deposits (1) 696,636 8% 695,677 8% 710,550 8% 816,867 8% 858,732 8%
Short-term borrowings 324,416 4% 319,030 4% 401,036 4% 709,301 7% 418,733 4%
Long-term debt 69,741 1% 69,915 1% 70,779 1% 76,400 1% 76,752 1%
Equity 819,245 9% 795,017 9% 997,541 11% 891,835 9% 831,553 8%
Other liabilities 221,649 3% 216,903 2% 225,001 2% 203,303 2% 297,918 3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total $8,545,334 100% $8,691,969 100% $9,207,306 100% $10,036,366 100% $10,128,675 100%
====================================================================================================================================
Parent Company:
(in millions)
Subsidiaries' retained
earnings available for
dividends (2) $43 $14 $30 $65 $45
====================================================================================================================================
(1) Discretionary deposits consist of time deposits > $100,000 plus all
brokered deposits.
(2) Retained earnings available for dividends is calculated based on current
year-to-date net income plus two years prior income less certain
adjustments.
49
52
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
PART 1 - REGULATION S-K ITEM 601 -- EXHIBITS
Item 6(a):
(11) Statement regarding computation of earnings per common share
(27) Financial Data Schedule
50
53
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
PART II. OTHER INFORMATION
Item 1. - Legal Proceedings
See Note I. of the Notes to Consolidated Financial Statements and Note V.
of the 1994 Form 10-K
Item 6.(b) - Reports on Form 8-K
A Form 8-K was filed on February 15, 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.
51
54
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICHIGAN NATIONAL CORPORATION
(Registrant)
May 12, 1995 /s/ Joseph J. Whiteside
_____________________________
Joseph J. Whiteside
Executive Vice President
(Chief Financial Officer)
May 12, 1995 /s/ Robert V. Panizzi
_____________________________
Robert V. Panizzi
First Vice President and Controller
(Chief Accounting Officer)
52
55
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
INDEX TO EXHIBITS
(11) Statement regarding computation of earnings per common share
(27) Financial Data Schedule
53