1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1995
OR
( ) Transition Report Pursuant to Secion 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 Secion 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 July 31, 1995 - 14,007,793 shares
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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 June 30, 1995 and 1994 1
Six Months Ended June 30, 1995 and 1994 3
Consolidated Statement of Condition:
June 30, 1995 and December 31, 1994 5
Consolidated Statement of Changes in Shareholder's Equity:
Six Months Ended June 30, 1995 and 1994 7
Consolidated Statement of Cash Flows:
Six Months Ended June 30, 1995 and 1994 8
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Part I Exhibits 60
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 61
Item 4. Results of Votes of Security Holders 61
Signatures 62
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Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Increase
June 30 (Decrease)
(in thousands) 1995 1994
- -------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Federal funds sold and resale agreements $3,639 $2,473 $1,166
Interest-bearing deposits with banks 1 4,318 (4,317)
Money market investments 207 110 97
Investment securities available for sale 3,941 4,336 (395)
Investment securities held to maturity 14,471 18,169 (3,698)
Trading securities 232 964 (732)
Loans and lease financing, including related fees 139,619 129,812 9,807
Note receivable-FDIC 3,818 (3,818)
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 162,110 164,000 (1,890)
INTEREST EXPENSE
Money market accounts 16,329 14,662 1,667
Savings deposits 5,513 5,864 (351)
Time deposits < $100,000 33,171 33,604 (433)
Time deposits > $100,000 7,573 6,485 1,088
Short-term borrowings 5,200 4,225 975
Long-term debt 1,254 1,567 (313)
FDIC assistance (3,339) 3,339
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 69,040 63,068 5,972
NET INTEREST INCOME 93,070 100,932 (7,862)
Provision for possible credit losses (Note E) 7,500 6,351 1,149
- -------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for
Possible Credit Losses 85,570 94,581 (9,011)
- -------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges 21,723 31,468 (9,745)
Trust and investment services income 4,170 4,472 (302)
Mortgage banking gains, net 314 4,406 (4,092)
Other income 13,978 11,547 2,431
- -------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 40,185 51,893 (11,708)
NON-INTEREST EXPENSE
Salaries and wages 31,056 46,625 (15,569)
Other employee benefits 8,043 13,971 (5,928)
Net occupancy expense 5,288 7,645 (2,357)
Equipment expense 6,839 10,517 (3,678)
Outside services 6,370 8,306 (1,936)
Defaulted loan expense, net (Note E) (4,855) (2,813) (2,042)
Amortization of purchased mortgage servicing rights 3,027 (3,027)
Other expenses 20,160 25,883 (5,723)
- -------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 72,901 113,161 (40,260)
- -------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 52,854 33,313 19,541
Income tax provision (benefit) 13,228 (29,981) 43,209
- -------------------------------------------------------------------------------------------------------------
NET INCOME $39,626 $63,294 ($23,668)
=============================================================================================================
Certain prior period amounts have been reclassified to conform to current
period presentation.
The Consolidated Statement of Income is continued on the next page.
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Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Increase
June 30 (Decrease)
(in thousands, except per share amounts) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share - Primary $2.84 $4.06 ($1.22)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share - Fully Diluted $2.84 $4.05 ($1.21)
- -----------------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding
Primary 14,033 15,584 (1,551)
Fully diluted 14,034 15,616 (1,582)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared Per Common Share $0.55 $0.50 $0.05
====================================================================================================================================
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5
Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
Six Months Ended INCREASE
June 30 (DECREASE)
(in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Federal funds sold and resale agreements $6,420 $7,225 ($805)
Interest-bearing deposits with banks 11 6,593 (6,582)
Money market investments 388 183 205
Investment securities available for sale 8,050 7,868 182
Investment securities held to maturity 30,734 34,526 (3,792)
Trading securities 399 1,973 (1,574)
Loans and lease financing, including related fees 275,975 256,342 19,633
Note receivable-FDIC 7,707 (7,707)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 321,977 322,417 (440)
INTEREST EXPENSE
Money market accounts 32,758 28,815 3,943
Savings deposits 11,078 12,640 (1,562)
Time deposits < $100,000 65,038 68,608 (3,570)
Time deposits > $100,000 15,040 12,677 2,363
Short-term borrowings 9,842 6,987 2,855
Long-term debt 2,771 3,103 (332)
FDIC assistance (6,625) 6,625
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 136,527 126,205 10,322
NET INTEREST INCOME 185,450 196,212 (10,762)
Provision for possible credit losses (Note E) 15,000 12,503 2,497
- -----------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for
Possible Credit Losses 170,450 183,709 (13,259)
- -----------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges 41,257 64,298 (23,041)
Trust and investment services income 8,851 9,552 (701)
Mortgage banking gains, net 491 9,152 (8,661)
Investments available-for-sale losses, net (27) (27)
Other income 24,538 22,409 2,129
- -----------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 75,110 105,411 (30,301)
NON-INTEREST EXPENSE
Salaries and wages 61,719 92,732 (31,013)
Other employee benefits 18,002 29,179 (11,177)
Net occupancy expense 10,861 15,297 (4,436)
Equipment expense 14,009 20,836 (6,827)
Outside services 14,528 16,061 (1,533)
Defaulted loan expense, net (Note E) (4,218) (3,036) (1,182)
Amortization of purchased mortgage servicing rights 8,413 (8,413)
Other expenses 38,420 51,617 (13,197)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 153,321 231,099 (77,778)
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 92,239 58,021 34,218
Income tax provision (benefit) 26,933 (23,557) 50,490
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $65,306 $81,578 (16,272)
=======================================================================================================================
The Consolidated Statement of Income is continued on the next page.
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Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME (continued)
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended INCREASE
June 30 (DECREASE)
(in thousands, except per share amounts) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share - Primary $4.68 $5.27 ($0.59)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share - Fully Diluted $4.68 $5.23 ($0.55)
- -----------------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding
Primary 14,043 15,474 (1,431)
Fully diluted 14,053 15,594 (1,541)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared Per Common Share $1.10 $1.00 0.10
===================================================================================================================================
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Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CONDITION (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(in thousands) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $558,697 $529,658
Federal funds sold and resale agreements 243,000 350,350
- -------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 801,697 880,008
Interest-bearing deposits with banks 210 10,200
Money market investments 21,984 13,433
Investment securities available-for-sale (amortized cost of $231,599 (Note D)
Mortgage-backed securities 97,385 104,593
Government and other securities 137,232 137,223
Investment securities held-to-maturity (fair value of $1,016,946
and $1,094,551 at 6/30/95 and 12/31/94, respectively) (Note D)
Mortgage-backed securities 567,290 616,284
Government and other securities 448,567 505,953
Trading securities 20,517 10,720
Residential mortgages held for sale (Note E) 3,835 10,106
Non-performing loans held for sale (Note E) 45,153 56,256
Loans and lease financing (Note E) 5,907,456 5,979,363
- -------------------------------------------------------------------------------------------------------------------------
Total Loans and Lease Financing 5,956,444 6,045,725
Unearned income (20,134) (20,024)
Allowance for possible credit losses (Note E) (170,740) (164,344)
- -------------------------------------------------------------------------------------------------------------------------
Net Loans and Lease Financing 5,765,570 5,861,357
Premises and equipment, net 153,171 165,675
Due from customers on acceptances 3,194 1,902
Accrued income receivable 55,643 56,653
Property from defaulted loans and other real estate owned, net (Note E) 12,671 22,156
Other assets 234,742 305,812
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $8,319,873 $8,691,969
=========================================================================================================================
Certain prior period amounts have been reclassified to conform to current
period persentation.
The Consolidated Statement of Condition is continued on the next page.
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Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CONDITION (UNAUDITED) (continued)
- -----------------------------------------------------------------------------------------------------------
June 30, December 31,
(in thousands, except share amounts) 1995 1994
- -----------------------------------------------------------------------------------------------------------
Liabilities
Non-interest bearing demand deposits $1,515,019 $1,549,497
Interest-bearing deposits:
Money market accounts 1,682,913 1,865,230
Savings deposits 935,483 991,983
Time deposits < $100,000 2,239,792 2,371,487
Time deposits > $100,000 498,007 512,907
- -----------------------------------------------------------------------------------------------------------
Total Deposits 6,871,214 7,291,104
Federal funds purchased and repurchase agreements 184,363 195,585
Other short-term borrowings 153,150 123,445
Customer acceptances outstanding 3,194 1,902
Accrued liabilities 198,812 215,001
Long-term debt 15,802 69,915
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 7,426,535 7,896,952
Contingencies and Commitments (Notes H and I)
Shareholders' Equity
Common stock, $10 par value, authorized 50,000,000 shares 140,014 132,145
Surplus 88,506 51,852
Retained earnings 675,268 624,761
Net unrealized gains (losses) on investment
securities available-for-sale 1,962 1,329
Note receivable-ESOP (12,412) (12,412)
- -----------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 893,338 795,017
- ------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $8,319,873 $8,691,969
===========================================================================================================
Common stock outstanding 14,001,394 13,214,534
===========================================================================================================
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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 81,578 81,578
SFAS No. 115 adoption effect $6,828 6,828
Net unrealized losses on securities
classified as available-for-sale
(net of tax effect) (4,908) (4,908)
Common stock issued, net 1,169 6,790 7,959
Cash dividends
Common stock ($1.00 per share) (15,212) (15,212)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 $152,932 $202,257 $549,938 $1,920 ($15,212) $891,835
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 $132,145 $51,852 $624,761 ($1,329) ($12,412) $795,017
Net income 65,306 65,306
Net unrealized gain on securities
classified as available-for-sale
(net of tax effect) 3,291 3,291
Common stock issued, net 1,234 5,885 7,119
Common stock issued in connection
with exercise of equity contracts
and conversion of subordinated
debt (Note G) 6,635 30,769 37,404
Cash dividends
Common stock ($1.10 per share) (14,799) (14,799)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 $140,014 $88,506 $675,268 $1,962 ($12,412) $893,338
- ------------------------------------------------------------------------------------------------------------------------------------
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Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------
Six Months Ended June 30 (in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------------
Operating activities
Net income $65,306 $81,578
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for possible credit losses 15,000 12,503
Depreciation and amortization expense 13,182 28,658
Net amortization associated with investment securities 261 2,053
Write-downs of property from defaulted loans 513 3,175
Net deferred income taxes 10,215 (27,294)
Loss from sale of investment securities available for sale 27
Loss (gain) from sale of premises and equipment 5,210 233
Loss from extinguishment of subordinated debt 1,812
Gain on sale of certain assets and deposits of subsidiary (1,000)
Gain from sale of ATM business (2,500)
Net gain from sale of property from defaulted loans (10,736) (9,545)
(Increase) decrease in operating assets:
Trading account securities (9,797) (24,892)
Accrued interest receivable 467 (4,872)
Residential mortgages held for sale 6,271 251,756
Non-performing loans held for sale 11,103
Pending investment and trading securities sales (3,036) (29,881)
Capitalized excess service fees (1,380)
Other assets 60,706 62,592
Increase (decrease) in operating liabilities:
Accrued interest payable 3,307 11
Pending investment and trading securities purchases 4,834 (17,029)
Accrued liabilities (26,790) (43,915)
Other, net 1,615 1,170
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $145,970 $284,921
- --------------------------------------------------------------------------------------------------------
Investing activities
Payments for:
Purchase of investment securities available for sale ($835) ($128,695)
Purchase of investment securities held to maturity (480,812) (496,425)
Purchase of premises and equipment (6,820) (7,219)
Purchase of mortgage servicing rights (1,764)
Capital expenditures for property from defaulted loans (911) (1,397)
Proceeds from:
Sale of investment securities available for sale 2,942
Principal collection of investment securities available for sale 10,115 16,158
Principal collection of investment securities held to maturity 586,917 338,238
Principal collection of note receivable - FDIC 113,605
Sale of premises and equipment 311 1,447
Sale of ATM business 2,500
Sale of certain assets and deposits of subsidiary 76,519
Sale and principal collection of property
from defaulted loans 30,236 49,020
Net decrease (increase) in:
Interest-bearing deposits with banks 9,990 (319,271)
Money market investments (8,551) (2,221)
Loans and lease financing (18,920) (1,664)
- --------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities $202,681 ($440,188)
- --------------------------------------------------------------------------------------------------------
The Consolidated Statement of Cash Flows is continued on the next page.
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Michigan National Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30 (in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Financing activities
Payments for:
Long-term debt ($266) ($750)
Common stock dividends (14,799) (15,212)
Extinguishment of subordinated debt (34,664)
Proceeds from issuance of:
Common stock - stock options 7,119 7,959
Common stock - equity contracts 17,055
Net (decrease) increase in:
Deposits (419,890) (569,552)
Short-term borrowings 18,483 416,008
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities ($426,962) ($161,547)
- -----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents ($78,311) ($316,814)
Cash and cash equivalents at beginning of year 880,008 1,001,080
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at June 30 $801,697 $684,266
===================================================================================================================================
Supplemental disclosures of cash flow information:
a.) Cash transactions:
Interest paid $133,220 $126,195
Federal income taxes paid (net of refunds) (8,472) 13,194
State taxes paid (net of refunds) 195 187
FDIC tax sharing payment 1,862 5,604
b.) Non-cash transactions in loans and lease financing:
Transfer from loans to property from defaulted loans 10,716 9,071
Loans originated to finance sales of property from defaulted loans 570 7,982
Transfer to loans from other assets 84
c.) Non-cash transactions in investment securities:
Transfers into investment securities available-for-sale 147,160
d.) Non-cash transactions in shareholders' equity:
Conversion of debentures to equity 20,349
- -----------------------------------------------------------------------------------------------------------------------------------
Certain prior period amounts have been reclassified in order to conform to
current period presentation.
See notes to consolidated financial statements.
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO 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 and six months ended June 30, 1995 and 1994, its financial position at
June 30, 1995, and December 31, 1994, and cash flows for the six months ended
June 30, 1995, and 1994. Certain prior period amounts were reclassified to
conform with the current period presentation. The operating results for the
three and six months ended June 30, 1995, are not necessarily indicative of
operating results to be expected for the year ending December 31, 1995.
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO 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 was voted upon and approved by the Corporation's shareholders at a
special meeting on June 2, 1995. The merger is subject to approval by various
regulatory agencies and is expected to be completed by the end of 1995.
Cancellation and Purchase of Employee Stock Options
Subject to the requisite regulatory approvals, the Merger Agreement requires
that the Corporation purchase all outstanding common stock options granted
under the Corporation's employee stock option plan. The amount of the purchase
would equal the excess of $110 over the exercise price per option, multiplied
by the number of stock options outstanding. In the event of the Corporation's
compliance with this provision, based upon the number of stock options
outstanding at June 30, 1995, pre-tax compensation expense of approximately
$17.4 million would be recognized in accordance with Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees."
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
C. SALES
The Corporation entered into a definitive agreement on December 6, 1994, to
sell approximately $194 million of deposit liabilities of IOBOC to Glendale
Federal Bank (Glendale). Glendale assumed the lease obligations of four branch
offices and purchased the related leasehold improvements and other furniture and
equipment at book value. The transaction closed May 15, 1995.
On January 20, 1995, the Corporation entered into a definitive agreement to
sell substantially all of the assets (approximately $72 million) and
liabilities (approximately $35 million) of the Corporate and Private Banking
divisions of IOBOC to Southern California Bank of Anaheim, California. The
transaction closed May 1, 1995.
These two sales resulted in a combined pre-tax gain of approximately $1.0
million.
On April 10, 1995, the Corporation sold third-party ATM processing contracts to
Magic Line, Inc. The Corporation realized a pre-tax gain of approximately $2.5
million on the transaction.
D. INVESTMENT SECURITIES
There were no sales of securities during the second quarter 1995. For the six
months ended June 30, 1995, gross losses of thirty-seven thousand dollars were
realized from sales of securities classified as available for sale and no gains
were realized. There were no sales of securities during the second quarter and
six months ended June 30, 1994.
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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 June 30, 1995 and December 31, 1994.
- --------------------------------------------------------------------------------
(in thousands) 06/30/95 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 $93,794 $3,591 $97,385 $103,542 $1,051 $104,593
U.S. Treasury, Government
agencies and corporations 99,941 ($644) 99,297 100,294 ($2,976) 97,318
Other securities 37,864 71 37,935 39,941 (36) 39,905
- ----------------------------------------------------------------------------------------------------------------------------------
Total 231,599 3,662 (644) 234,617 243,777 1,051 (3,012) 241,816
==================================================================================================================================
Investment securities
held-to-maturity:
Mortgage-backed securities 567,290 3,811 (4,288) 566,813 616,284 915 (22,058) 595,141
U.S. Treasury, Government
agencies and corporations 362,113 1,533 (924) 362,722 404,035 (5,946) 398,089
State and municipal securities 23,885 866 (8) 24,743 25,234 517 (8) 25,743
Other securities 62,569 137 (38) 62,668 76,684 (1,106) 75,578
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,015,857 6,347 (5,258) 1,016,946 1,122,237 1,432 (29,118) 1,094,551
- ----------------------------------------------------------------------------------------------------------------------------------
Total Securities $1,247,456 $10,009 ($5,902) $1,251,563 $1,366,014 $2,483 ($32,130) $1,336,367
==================================================================================================================================
At June 30, 1995, $453 million of mortgage-backed investment securities
held-to-maturity, $46 million of treasury securities held-to-maturity and $21
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 and six month periods ended June 30, 1995 and 1994.
- ----------------------------------------------------------------------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
3 Months 6 Months 3 Months 6 Months
-------- -------- -------- --------
Investment securities available-for-sale:
Mortgage-backed securities $2,117 $4,342 $2,670 $5,714
U.S. Treasury, Government agencies
and corporations 1,166 2,334 1,215 1,702
Other securities 658 1,374 451 452
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities available-for-sale $3,941 $8,050 $4,336 $7,868
============================================================================================================================
Investment securities held-to-maturity:
Mortgage-backed securities $8,533 $17,529 $10,863 $22,541
U.S. Treasury, Government agencies
and corporations 4,328 10,037 6,176 10,044
State and municipal securities 378 765 558 1,136
Other securities 1,232 2,403 572 805
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities held-to-maturity $14,471 $30,734 $18,169 $34,526
============================================================================================================================
Income from Other securities available-for-sale includes dividends of $658
thousand and $451 thousand for the three months ended June 30, 1995 and 1994,
respectively and $1,374 thousand and $634 thousand for the six months ended
June 30, 1995 and 1994, respectively.
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MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO 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. SFAS No. 114 requires that impairment be
recognized by adjusting the Allowance for Credit Losses with a corresponding
charge to Provision for Credit Losses. However, the adoption of SFAS No. 114
did not result in an adjustment to the Corporation's Allowance 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
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.
14
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------
E. Loans and Lease Financing (Unaudited)
- --------------------------------------------------------------------------------
The following summarizes loans and lease financing at June 30, 1995 and
December 31, 1994.
- --------------------------------------------------------------------------------
(In thousands) 06/30/95 12/31/94
- ---------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural secured by real estate $809,709 $867,468
Other commercial, financial & agricultural 2,374,418 2,397,375
Commercial real estate-mortgage 1,082,927 1,105,007
Non-performing loans held for sale 45,153 56,256
Residential real estate mortgages held for sale 3,835 10,106
Residential real estate mortgages held for investment 328,945 332,517
Short-term commercial real estate-construction 124,500 126,158
Installment 1,066,937 1,008,191
Lease financing 120,020 130,713
SFAS No. 114 adjustment 11,934
- ---------------------------------------------------------------------------------------------------------------------
Total 5,956,444 6,045,725
Unearned income (20,134) (20,024)
Allowance for possible credit losses (170,740) (164,344)
- ---------------------------------------------------------------------------------------------------------------------
Total $5,765,570 $5,861,357
=====================================================================================================================
The following is presented in accordance with the requirements of SFAS No.
114 and No. 118.
- -----------------------------------------------------------------------------------------
Impaired Loans
(in thousands) 06/30/95
- -----------------------------------------------------------------------------------------
Gross recorded investment in impaired loans with related allowance $127,875
Related allowances for loan losses (23,699)
- -----------------------------------------------------------------------------------------
Net impaired loans with related allowance 104,176
Impaired loans with no related allowance 45,153
- -----------------------------------------------------------------------------------------
Total net impaired loans $149,329
=========================================================================================
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
- ---------------------------------------------------------------------------------------------------------------------
Average impaired loans outstanding $183,016 $207,338
- ---------------------------------------------------------------------------------------------------------------------
Interest income recognized (1) $2,127 $4,902
- ---------------------------------------------------------------------------------------------------------------------
(1) For the three months and six months ended June 30, 1995, interest
income of $98 thousand and $122 thousand, respectively, was recognized using
the cash-basis method of accounting while the loans were classified as
impaired.
15
18
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO 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 by the end
of 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 June 30, 1995, $5.9 million
of severance costs 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 June 30, 1995, costs of $1.8 million were charged against the
liability. The Corporation has yet to vacate the facilities for which the
majority of this reserve was established. The $1.8 million represents the
write-off of abandoned equipment, and operating costs of 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 postretirement 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.
16
19
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
G. REDEMPTION OF SUBORDINATED DEBENTURES AND CANCELLATION OF EQUITY CONTRACTS
The Corporation redeemed all of its outstanding 8% Redeemable Subordinated
Debentures (Debentures) due November 10, 1998 and canceled all of its Equity
Contracts as of June 15, 1995 (Redemption Date), in accordance with the terms
of the Debentures and Equity Contracts. The outstanding balance of the
Debentures was $54.1 million at March 31, 1995, and there were Equity Contracts
associated with $37.5 million of the Debentures as of that date. The amount of
Equity Contracts canceled at June 15, 1995 was approximately $0.1 million.
The Corporation recognized a loss of $1.8 million on the redemption of
Debentures and cancellation of Equity Contracts in accordance with Accounting
Principals Board Opinion (APB) No. 26, "Early Extinguishment of Debt," as
amended by SFAS No. 76, "Extinguishment of Debt."
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.
17
20
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 June 30, 1995 and December 31, 1994.
- --------------------------------------------------------------------------------------------------------------------------------
Contract or Notional Amount
(in thousands) 06/30/95 12/31/94
- --------------------------------------------------------------------------------------------------------------------------------
Financial instruments whose contract amounts
represent credit risk:
- --------------------------------------------------------------------------------------------------------------------------------
Contracts held for purposes other than trading:
Commitments to extend credit $2,433,667 $2,847,236
Standby and other letters of credit 314,037 281,719
Loans sold with recourse 94,697 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 1,613,085 1,738,038
Interest rate caps 40,750 40,750
Customer accommodation contracts held for trading:
Foreign exchange contracts 6,700 20,690
================================================================================================================================
18
21
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) June 30, 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 $1,613,085 $1,738,038
Carrying amount $996 $669
Unrealized gross gain 8,851 2,103
Unrealized gross loss (14,297) (86,413)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest rate swaps 1,613,085 (4,450) 1,738,038 (83,641)
- ----------------------------------------------------------------------------------------------------------------------------------
Interest rate caps
Options written 20,375 20,375
Carrying amount (122) (149)
Unrealized gross gain
Unrealized gross loss (86) (462)
- ----------------------------------------------------------------------------------------------------------------------------------
Sub-total 20,375 (208) 20,375 (611)
- ----------------------------------------------------------------------------------------------------------------------------------
Options purchased 20,375 20,375
Carrying amount 85 103
Unrealized gross gain 86 462
Unrealized gross loss
- ----------------------------------------------------------------------------------------------------------------------------------
Sub-total 20,375 171 20,375 565
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest rate caps 40,750 (37) 40,750 (46)
- ----------------------------------------------------------------------------------------------------------------------------------
Total contracts for purposes other than trading $1,653,835 ($4,487) $1,778,788 ($83,687)
==================================================================================================================================
Customer accommodation contracts held for trading :
Foreign exchange forward contract $6,101 $18 $ 20,591 $31
Spot foreign exchange 599 (1) 99
- ----------------------------------------------------------------------------------------------------------------------------------
Total contracts held for trading $6,700 $17 $ 20,690 $31
==================================================================================================================================
The credit risk associated with interest rate swaps was approximately
$8.9 million as of June 30, 1995. Of this amount approximately $1.1 million is
with domestic banks, $1.5 million with foreign banks and $6.3 million with
broker dealers.
Customer accommodation swaps totaled $131 million of the $1.6 billion
in outstanding notional value of interest rate swaps as of June 30, 1995.
At June 30, 1995 unamortized deferred gains and losses related to
interest rate swaps amounted to $1.9 million. The total amount will be fully
amortized within one year.
Average fair value for foreign exchange contracts held for trading
amounted to $28 thousand as of June 30, 1995. The related net gains totaled
$629 thousand for the six months ended June 30, 1995 and were recorded in other
non-interest income.
19
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Michigan National Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------
H. Off-Balance Sheet Financial Instruments (Unaudited) (continued)
- -------------------------------------------------------------------------------------------------------------
Interest Rate Swaps - Weighted Average Rate
June 30, 1995 (in thousands)
- -------------------------------------------------------------------------------------------------------------
Weighted Average
------------------------------------------
Notional Rate Rate Months
Value Received Paid (1) Remaining (2)
- -------------------------------------------------------------------------------------------------------------
Receive fixed rate:
Non-amortizing swaps $1,118,500 6.36% 6.15% 23
Amortizing swaps 494,585 5.33% 6.20% 17
- -------------------------------------------------------------------------------------------------------------
Total interest rate swaps $1,613,085 6.05% 6.16% 21
=============================================================================================================
(1) Rate paid on 76% 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 .18 years to
5.08 years while that for the amortizing swaps range from .06 years to 8.41
years.
20
23
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS
I. LEGAL PROCEEDINGS
In May 1995 a class action lawsuit was initiated by Hellmold Associates
Opportunity Fund III, L.P. (Hellmold) against the Corporation, Robert Mylod,
Douglas Ebert and the Corporation's Board of Directors in the United States
District Court, Southern District of New York (Civil Action File No. 95 CIV
3737) alleging violations of Sections 10b, 14e and 20 of the Securities
Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission.
Based upon the substantial defenses available, it is believed that the ultimate
outcome of these claims will not have a material adverse impact on the
financial condition of the Corporation.
There have been no material developments in any previously reported legal
proceedings brought against the Corporation. Other than that which is stated
above, there have been no new material legal proceedings brought against the
Corporation during the period January 1, 1995 through July 31, 1995.
J. INCOME TAXES
The Corporation's projection of its effective income tax rate for 1995 is 29.2%
compared to the federal statutory rate of 35%.
During the second quarter, the Corporation and the IRS resolved certain tax
matters related to the Corporation's income tax returns for the years 1988 -
1993. Accordingly, the Corporation reversed certain income tax reserves which
resulted in a reduction of the Corporation's projected 1995 effective tax rate
to 29.2% and which will be reflected in the tax rates of the second, third and
fourth quarters of 1995. The effective tax rate for the second quarter
includes an adjustment to first quarter 1995 for the decrease in the estimate
of the effective tax rate.
Tax exempt income from municipal securities held by MNB and subsidized interest
expense on deposits at IOBOC also contributed to the Corporation's effective
tax rate being less than the statutory rate.
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 29.2% 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 certain FDIC assistance due to the Termination
Agreement.
21
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
1995 1995 1994 1994 1994 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Table 1 Selected Quarterly Financial Information (Unaudited) Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Results (in thousands)
Interest income $162,110 $159,868 $155,599 $163,263 $164,000 $158,417
Interest expense 69,040 67,487 61,226 63,535 63,068 63,137
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 93,070 92,381 94,373 99,728 100,932 95,280
Provision for possible credit losses (1) 7,500 7,500 26,918 6,289 6,351 6,152
Non-interest income 40,185 34,925 40,575 109,692 51,893 53,518
Non-interest expense (1) 72,901 80,420 136,751 109,143 113,161 117,938
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 52,854 39,386 (28,721) 93,988 33,313 24,708
Income tax provision (benefit) 13,228 13,706 (8,797) (16,060) (29,981) 6,424
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $39,626 $25,680 ($19,924) $110,048 $63,294 $18,284
====================================================================================================================================
Per Common Share
Net income per common share - primary $2.84 $1.86 ($1.33) $6.99 $4.06 $1.19
Net income per common share - fully diluted $2.84 $1.86 (1.33) 6.99 4.05 1.19
Cash dividends declared 0.55 0.55 0.50 0.50 0.50 0.50
Book value end-of-period 63.77 61.74 60.16 65.14 58.32 54.70
Market value end-of-period 106.38 103.75 74.75 76.25 72.00 61.50
Closing market value: high 106.50 104.25 80.56 79.25 79.00 65.25
Closing market value: low 103.88 75.00 73.50 72.25 59.63 55.00
====================================================================================================================================
Selected Period End Balances (in millions)
Total assets $8,320 $8,545 $8,692 $9,207 $10,036 $10,129
Earning assets (1) 7,472 7,659 7,774 8,065 9,119 9,174
Total loans and lease financing, net of unearned income (1) 5,936 6,159 6,026 6,193 6,427 6,318
Non-performing assets 113 137 143 195 193 235
Deposits 6,871 7,110 7,291 7,513 8,156 8,504
Long-term debt 16 70 70 71 76 77
Shareholders' equity 893 819 795 998 892 832
====================================================================================================================================
Selected Average Balances (in millions)
Total assets $8,301 $8,467 $8,703 $9,462 $9,950 $9,973
Earning assets 7,562 7,642 7,778 8,540 8,996 9,001
Total loans and lease financing, net of unearned income 6,080 6,065 6,111 6,281 6,280 6,399
Deposits 6,842 7,063 7,234 7,782 8,392 8,521
Long-term debt 58 70 70 72 76 77
Shareholders' equity 849 802 970 900 834 817
====================================================================================================================================
Selected Financial Ratios
Return on average shareholders' equity 18.66 % 12.80 % (8.22)% 48.90 % 30.36 8.95
Return on average total assets 1.91 1.21 (0.92) 4.65 2.54 0.73
Average equity to average total assets 10.23 9.47 11.14 9.51 8.38 8.19
Allowance to period-end loans after adoption
of SFAS No. 114 (1) 2.88 2.69 2.73 3.00 2.93 3.08
Allowance to period-end loans as previously reported 2.73 3.01 2.94 3.09
Non-performing assets to total loans (net of unearned
income) plus property from defaulted loans, net 1.89 2.22 2.37 3.14 2.98 3.69
Net interest spread 3.95 4.11 4.08 4.06 3.97 3.79
Net interest margin 5.01 5.02 4.94 4.85 4.71 4.50
Efficiency ratio after adoption of SFAS No. 114 (1) 54.14 62.07 99.48 51.00 71.87 76.86
Efficiency ratio as previously reported 102.33 51.13 72.09 76.96
Equity to asset ratio (period end) 10.74 9.59 9.15 10.83 8.89 8.21
Leverage ratio 9.83 8.30 7.72 9.13 8.20 7.84
Tier 1 risk-based capital ratio 11.11 9.36 8.88 11.00 10.09 9.85
Total risk-based capital ratio 12.56 11.30 10.82 13.12 12.26 12.03
Dividend payout ratio 19.37 29.57 N/M 7.15 12.32 42.02
====================================================================================================================================
(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.
N/M: not meaningful
22
25
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL REVIEW
Net income for the three months ended June 30, 1995, was $39.6 million, or
$2.84 per share, compared to $63.3 million, or $4.06 per share, for the same
period in 1994. For the six months ended June 30, 1995, net income was $65.3
million, or $4.68 per share, compared to $81.6 million, or $5.27 per share for
the first half of 1994. Included in second quarter 1994 earnings were one-time
tax benefits of $40.2 million, or $2.58 per share. These one-time tax benefits
were related to the 1988 acquisition of IOBOC.
The strong earnings performance for the first six months of 1995 is
attributable to the broad operational and capital restructuring instituted in
1994, particularly Project Streamline. Compared to the second quarter last
year, the efficiency ratio improved in the second quarter 1995 to 54.14% from
71.87%.
For the second quarter and first six months of 1995, Net Interest Income on a
fully Taxable Equivalent Basis declined $11.2 million and $16.4 million,
respectively, from the same periods last year. These decreases were due
primarily to lower asset balances attributable to the completion of the
disposition of non-Michigan businesses.
Non-performing Assets of $112.5 million at June 30, 1995, decreased from $137.1
million at March 31, 1995. Non-performing Assets as a percent of loans plus
REO declined from 2.22% to 1.89% during the quarter; and the Non-performing
Loan-to-total loan ratio decreased from 1.84% to 1.68%. Annualized net
charge-offs for the quarter were 0.18% of average loans. The Corporation's
Allowance for Credit Losses was $170.7 million at June 30, 1995, representing
2.88% of total loans and 171% of Non-performing Loans at June 30, 1995.
As previously announced and disclosed in the 1994 Form 10-K, the Corporation on
February 4, 1995, executed an Agreement and Plan of Merger by and among the
National, Acquisition, and the Corporation. The Merger Agreement provides that
(i) Acquisition will be merged with and into the Corporation, 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
(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 prior to
year-end, was approved by the Corporation's shareholders on June 2, 1995, and
remains subject to various customary regulatory approvals.
23
26
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET INTEREST INCOME
OVERVIEW
Net Interest Income for the second quarter 1995 decreased $7.9 million and Net
Interest Income on a Fully Taxable Equivalent Basis decreased $11.1 million
compared to the same period in 1994. For the six months ended June 30, 1995,
Net Interest Income decreased $10.8 million and Net Interest Income on a Fully
Taxable Equivalent Basis decreased $16.4 million compared to the same period
last year. These decreases were due primarily to a lower average balance in
interest-earning assets in the three and six month periods ended June 30, 1995.
The Net Interest Rate Spread and Net Interest Margin for the first six months
of 1995 remained above five year historical ratios. The Net Interest Rate
Spread was flat in the second quarter 1995 compared to the same period last
year and the Net Interest Margin increased thirty Basis Points. For the six
months ended June 30, 1995, the Net Interest Rate Spread increased sixteen
Basis Points and the Net Interest Margin increased forty-two Basis Points over
the same period last year. The performance in both periods is primarily the
result of assets repricing upward due to six prime interest rate increases
since March 24, 1994, and a larger percentage of interest earning assets in the
form of higher yielding loans during 1995 than in the prior year. Also, for
the six months ended June 30, 1995, interest earning assets repriced upward
faster than interest bearing liabilities. Please refer to Tables 2 through 7
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 June 30, 1995, the Corporation was hedging the interest
rate risk associated with a portion of its prime-based, variable-rate
commercial loans with approximately $1.6 billion of interest rate swap
agreements, including approximately $377 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
June 30, 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 $2.0 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 June 30,
1995, the Corporation estimated that forecasted annual Net Interest Income
would increase $6.1 million for a 100 Basis Point increase in the prime rate.
Conversely, forecasted annual Net Interest Income would decrease $7.6 million
for a 100 Basis Point decrease in the prime rate.
24
27
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
BALANCE SHEET COMPOSITION
In the second quarter of 1995 the average balance of total interest-earning
assets decreased $1.4 billion, or 16.0%, from the same period in 1994, and the
average balance of interest-bearing liabilities decreased $1.2 billion, or
17.3%. During the first six months of 1995 the average balance of total
earning assets decreased $1.4 billion, or 15.5%, from the same period last year
and interest bearing liabilities decreased $1.2 billion, or 16.3%. In
addition, the average balance of non-interest bearing demand deposits decreased
$431.5 million in the second quarter and $412.6 million in the first six months
of 1995 compared to the same periods 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,
its warehouse loan portfolio, operated as FCSI, in December 1994 and other
IOBOC loans in May 1995. Refer to Note C on page 93 of the 1994 Form 10-K for
additional information on these transactions. For the second quarter 1994,
Lockwood and First State had earning assets with an average balance of $527.0
million, including $30.4 million in money market funds, $267.9 million in
investments and $228.8 million in loans. The weighted average yield of these
assets was 6.76%. For the six months ended June 30, 1994, the Texas
subsidiaries had earning assets with an average balance of $533.2 million,
yielding 6.75%.
A lower volume of loans originated due to the sale of IOMC's non-Michigan loan
origination business contributed to decreases of $434.5 million and $495.4
million in the average balance of residential mortgage loans in the second
quarter and first six months of 1995, respectively, when compared to the same
periods last year.
The sale of FCSI's warehouse loan portfolio in December 1994 and the sale of
other IOBOC loans in May 1995 also contributed to the reduction in the average
balance of loans. The average balance of IOBOC loans decreased $125.9 million
and $131.0 million in the second quarter and six months ended June 30, 1995,
respectively.
The average balance of money market investments was larger in both the second
quarter and first six months of 1994 compared to the same periods in 1995 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 paydown of higher cost funding sources
throughout 1994; the decrease in Michigan core deposits during the first six
months of 1995; IOBOC's deposit sales in May 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 for investment.
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 were increases in
installment loans and commercial loans in the Corporation's Michigan business.
The average balance of consumer installment loans increased approximately $297
million and $295
25
28
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
million in the second quarter and six months ended June 30, 1995, respectively,
compared to the same periods last year. The increases were primarily due to a
higher volume of indirectly originated loans. The average balance of the
commercial loan portfolios increased approximately $259 million and $262
million in the second quarter and six months ended June 30, 1995, respectively,
due primarily to broad-based loan growth in the commercial, financial and
agricultural loan portfolio.
INTEREST-BEARING LIABILITIES
The average balance of interest-bearing liabilities decreased during the
second quarter and first six months of 1995 as a result of the sales of the
Texas subsidiaries and IOBOC deposits, the liquidity provided by the decrease
in total earning assets, and the current interest rate environment. The
Corporation's funding mix shifted slightly year over year as savings and money
market accounts decreased as a percentage of total interest-bearing
liabilities, while time deposits under $100,000 increased. This is the second
consecutive quarter that savings and money market balances decreased as a
percentage of total interest bearing liabilities, reversing a two year
increasing trend.
The sales of Lockwood and First State resulted in a $407.4 million decrease in
the average balance of interest-bearing liabilities in the second quarter of
1995 compared to the same period last year. This decrease includes $98.2
million in savings deposits, $125.6 million in insured money market accounts
and $181.0 million in time deposits. During the second quarter of 1994, the
weighted average interest rate paid on these liabilities was 3.24%. For the
six months ended June 30, 1995, the average balance of total interest bearing
liabilities decreased $414.7 million. The weighted average rate paid during
the first six months of 1994 was 3.19%.
The average balance of interest-bearing liabilities at IOBOC decreased $324.5
million and $230.6 million in the second quarter and six months ended June 30,
1995, respectively, compared to the same periods last year. The decreases
resulted from lower funding needs in light of the sale of the warehouse loan
portfolio in December 1994. Also contributing to the decreases were sales of
deposits in May 1995.
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 has induced some customers to seek
higher returns elsewhere (including non-bank financial products), contributing
to the decrease in deposits.
Redemption of Subordinated Debentures
The Corporation redeemed all of its outstanding 8% Redeemable Subordinated
Debentures as of June 15, 1995. The Debentures had an outstanding balance of
$54.1 million at March 31, 1995. Please refer to Note G to the Consolidated
Financial Statements for further information.
EFFECT OF BALANCE SHEET COMPOSITION ON NET INTEREST MARGIN
The Net Interest Rate Spread in the second quarter of 1995 was flat compared to
that of the same period in 1994 and increased sixteen Basis Points in the six
month period ended June 30, 1995. During the second quarter and six months
ended June 30, 1995, the Net Interest Margin improved thirty Basis Points and
forty-one Basis Points, respectively, over the same periods last year. 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 during the six months ended June 30, 1995, while
both rates increased a similar amount
26
29
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
during the second quarter 1995. The primary on-balance sheet contributor to
these 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 three and six months
ended June 30, 1995 compared to the same periods 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.
INTEREST RATE ENVIRONMENT
On balance, interest rates increased steadily throughout 1994 and the first six
months of 1995. In addition, the spread between the prime rate and money
market borrowing rates was slightly larger in the first six months 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
six months of 1995.
Six prime lending rate increases since March 24, 1994, totalling 300 Basis
Points pushed the prime rate to 9.00% at June 30, 1995. Increases in the prime
lending rate have a positive effect on Net Interest Income because of the
Corporation's overall asset sensitive position.
The prime lending rate decreased twenty-five Basis Points to 8.75% on July 7,
1995. 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.
27
30
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, 1995 March 31, 1995 December 31, 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 $ 239,677 $ 3,639 6.09% $ 191,208 $ 2,781 5.90% $ 277,673 $ 3,795 5.42%
Interest-bearing deposits with banks 201 1 2.46% 1,200 11 3.72% 13,341 138 4.10%
Money market funds 15,323 207 5.42% 13,866 181 5.29% 13,584 157 4.59%
- -----------------------------------------------------------------------------------------------------------------------------------
Total money market investments 255,201 3,847 6.05% 206,274 2,973 5.85% 304,598 4,090 5.33%
Investment securities available-for-sale
Investment securities-taxable 234,059 3,941 6.75% 240,710 4,109 6.92% 246,682 4,221 6.79%
Investment securities held-to-maturity
Investment securities-taxable 951,463 14,093 5.94% 1,094,721 15,877 5.88% 1,061,343 15,163 5.67%
Investment securities-tax-exempt 24,364 583 9.59% 25,313 584 9.36% 24,539 555 8.97%
Trading securities 14,303 261 7.32% 10,127 184 7.37% 28,679 604 8.36%
- -----------------------------------------------------------------------------------------------------------------------------------
Sub-total securities 1,224,189 18,878 6.19% 1,370,871 20,754 6.14% 1,361,243 20,543 5.99%
Mark-to-market securities adjustment 2,649 (156) 693
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 1,226,838 18,878 1,370,715 20,754 1,361,936 20,543
Loans and lease financing 6,079,784 140,068 9.24% 6,065,382 136,822 9.15% 6,111,274 131,787 8.56%
Note receivable-FDIC 18
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7,561,823 162,793 8.63% 7,642,371 160,549 8.52% 7,777,808 156,438 7.98%
Allowance for possible credit losses (167,178) (166,155) (186,449)
Cash and due from banks 435,345 472,516 507,874
Other assets 470,919 518,461 603,952
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $8,300,909 $8,467,193 $8,703,185
===================================================================================================================================
Liabilities
Money market accounts $1,733,474 $ 16,329 3.78% $1,803,962 $ 16,429 3.69% $1,859,290 $ 14,975 3.20%
Savings deposits 949,138 5,513 2.33% 969,867 5,565 2.33% 1,014,074 5,028 1.97%
Time deposits < $100,000 2,274,618 32,448 5.72% 2,383,908 30,293 5.15% 2,366,737 28,218 4.73%
Time deposits > $100,000 496,888 7,573 6.11% 515,926 7,467 5.87% 521,357 6,868 5.23%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5,454,118 61,863 4.55% 5,673,663 59,754 4.27% 5,761,458 55,089 3.79%
Fed funds purchased and repo agreements 263,264 4,026 6.13% 217,957 3,212 5.98% 158,383 2,127 5.33%
Other short-term borrowings 80,184 1,174 5.87% 100,840 1,430 5.75% 66,304 831 4.97%
Subordinated notes 41,997 883 8.44% 53,824 1,151 8.67% 54,291 1,147 8.38%
Long-term debt 12,517 281 9.00% 12,517 272 8.81% 12,517 257 8.15%
Capital lease obligations 3,369 90 10.71% 3,498 94 10.90% 3,628 97 10.61%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,855,449 68,317 4.68% 6,062,299 65,913 4.41% 6,056,581 59,548 3.90%
Demand deposits 1,387,534 1,388,975 1,472,618
Other liabilities 208,537 213,711 204,335
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 7,451,520 7,664,985 7,733,534
Shareholders' equity 849,389 802,208 969,651
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $8,300,909 $8,467,193 $8,703,185
===================================================================================================================================
Net interest income (fully taxable
equivalent basis) $94,476 $94,636 $96,890
Tax equivalent adjustment 1,406 2,255 2,517
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $93,070 $92,381 $94,373
===================================================================================================================================
Net interest rate spread 3.95% 4.11% 4.08%
===================================================================================================================================
Net interest margin 5.01% 5.02% 4.94%
===================================================================================================================================
28
31
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 September 30, 1994 June 30, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Quarter-to-Date Average Average Average Average
(in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements $ 163,586 $ 1,946 4.72% $ 258,420 $ 2,473 3.84%
Interest-bearing deposits with banks 197,563 2,023 4.06% 462,420 4,318 3.75%
Money market funds 14,976 144 3.81% 14,268 110 3.09%
- ----------------------------------------------------------------------------------------------------------------------------------
Total money market investments 376,125 4,113 4.34% 735,108 6,901 3.77%
Investment securities available-for-sale
Investment securities-taxable 254,373 4,249 6.63% 261,404 4,336 6.65%
Investment securities held-to-maturity
Investment securities-taxable 1,175,485 16,630 5.61% 1,243,998 17,611 5.68%
Investment securities-tax-exempt 29,122 654 8.91% 36,544 788 8.65%
Trading securities 76,118 955 4.98% 86,516 1,048 4.86%
- ----------------------------------------------------------------------------------------------------------------------------------
Sub-total securities 1,535,098 22,488 5.81% 1,628,462 23,783 5.86%
Mark-to-market securities adjustment 3,027 3,767
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities 1,538,125 22,488 1,632,229 23,783
Loans and lease financing 6,280,715 133,379 8.43% 6,280,037 130,276 8.32%
Note receivable-FDIC 345,137 6,211 7.14% 348,930 5,873 6.75%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 8,540,102 166,191 7.72% 8,996,304 166,833 7.44%
Allowance for possible credit losses (188,542) (195,642)
Cash and due from banks 510,266 535,494
Other assets 600,184 613,515
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $9,462,010 $9,949,671
==================================================================================================================================
Liabilities
Money market accounts $2,001,760 $ 14,267 2.83% $2,164,867 $ 14,662 2.72%
Savings deposits 1,099,672 5,436 1.96% 1,191,567 5,865 1.97%
Time deposits < $100,000 2,448,196 27,905 4.52% 2,566,196 28,477 4.45%
Time deposits > $100,000 576,990 6,968 4.79% 650,358 6,477 3.99%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 6,126,618 54,576 3.53% 6,572,988 55,481 3.39%
Fed funds purchased and repo agreements 434,680 4,961 4.53% 333,217 3,278 3.95%
Other short-term borrowings 74,425 815 4.34% 100,398 947 3.78%
Subordinated notes 55,400 1,168 8.36% 57,240 1,199 8.40%
Long-term debt 12,972 245 7.49% 15,352 265 6.92%
Capital lease obligations 3,755 100 10.57% 3,879 103 10.65%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,707,850 61,865 3.66% 7,083,074 61,273 3.47%
Demand deposits 1,655,294 1,819,038
Other liabilities 198,619 213,517
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 8,561,763 9,115,629
Shareholders' equity 900,247 834,042
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $9,462,010 $9,949,671
==================================================================================================================================
Net interest income (fully taxable equivalent basis) $104,326 $105,560
Tax equivalent adjustment 4,598 4,628
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $99,728 $100,932
==================================================================================================================================
Net interest rate spread 4.06% 3.97%
==================================================================================================================================
Net interest margin 4.85% 4.71%
==================================================================================================================================
29
32
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) 06/30/95 vs 03/31/95 06/30/95 vs 03/31/95 06/30/95 vs 03/31/95
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements 48,469 $ 858 0.19%
Interest-bearing deposits with banks (999) (10) -1.26%
Money market funds 1,457 26 0.13%
- -----------------------------------------------------------------------------------------------------------------------------------
Total money market investments 48,927 874 0.20%
Investment securities available-for-sale
Investment securities-taxable (6,651) (168) -0.17%
Investment securities held-to-maturity
Investment securities-taxable (143,258) (1,784) 0.06%
Investment securities-tax-exempt (949) (1) 0.23%
Trading securities 4,176 77 -0.05%
- -----------------------------------------------------------------------------------------------------------------------------------
Sub-total securities (146,682) (1,876) 0.05%
Mark-to-market adjustment 2,805
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities (143,877) (1,876)
Loans and lease financing 14,402 3,246 0.09%
Note receivable-FDIC
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (80,548) 2,244 0.11%
Allowance for possible credit losses (1,023)
Cash and due from banks (37,171)
Other assets (47,542)
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets ($166,284)
===================================================================================================================================
Liabilities
Money market accounts ($70,488) ($100) 0.09%
Savings deposits (20,729) (52)
Time deposits < $100,000 (109,290) 2,155 0.57%
Time deposits > $100,000 (19,038) 106 0.24%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (219,545) 2,109 0.28%
Fed funds purchased and repo agreements 45,307 814 0.15%
Other short-term borrowings (20,656) (256) 0.12%
Subordinated notes (11,827) (268) -0.23%
Long-term debt (0) 9 0.19%
Capital lease obligations (129) (4) -0.19%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (206,850) 2,404 0.27%
Demand deposits (1,441)
Other liabilities (5,175)
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities (213,466)
Shareholders' equity 47,181
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ($166,285)
===================================================================================================================================
Net interest income (fully taxable equivalent basis) ($160)
Tax equivalent adjustment (849)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $689
===================================================================================================================================
Net interest rate spread -0.16%
===================================================================================================================================
Net interest margin -0.01%
===================================================================================================================================
30
33
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) 06/30/95 vs 06/30/94 06/30/95 vs 06/30/94 06/30/95 vs 06/30/94
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements (18,743) $ 1,166 2.25%
Interest-bearing deposits with banks (462,219) (4,317) -1.29%
Money market funds 1,055 97 2.33%
- -----------------------------------------------------------------------------------------------------------------------------------
Total money market investments (479,907) (3,054) 2.28%
Investment securities available-for-sale
Investment securities-taxable (27,345) (395) 0.10%
Investment securities held-to-maturity
Investment securities-taxable (292,535) (3,518) 0.26%
Investment securities-tax-exempt (12,180) (205) 0.94%
Trading securities (72,213) (787) 2.46%
- -----------------------------------------------------------------------------------------------------------------------------------
Sub-total securities (404,273) (4,905) 0.33%
Mark-to-market adjustment (1,118)
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities (405,391) (4,905)
Loans and lease financing (200,253) 9,792 0.92%
Note receivable-FDIC (348,930) (5,873) -6.75%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1,434,481) (4,040) 1.19%
Allowance for possible credit losses 28,464
Cash and due from banks (100,149)
Other assets (142,596)
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets ($1,648,762)
===================================================================================================================================
Liabilities
Money market accounts ($431,393) $1,667 1.06%
Savings deposits (242,429) (352) 0.36%
Time deposits < $100,000 (291,578) 3,971 1.27%
Time deposits > $100,000 (153,470) 1,096 2.12%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (1,118,870) 6,382 1.16%
Fed funds purchased and repo agreements (69,953) 748 2.18%
Other short-term borrowings (20,214) 227 2.09%
Subordinated notes (15,243) (316) 0.04%
Long-term debt (2,835) 16 2.08%
Capital lease obligations (510) (13) 0.06%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (1,227,625) 7,044 1.21%
Demand deposits (431,504)
Other liabilities (4,981)
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities (1,664,110)
Shareholders' equity 15,347
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ($1,648,763)
===================================================================================================================================
Net interest income (fully taxable equivalent basis) ($11,084)
Tax equivalent adjustment (3,222)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income ($7,862)
===================================================================================================================================
Net interest rate spread -0.02%
===================================================================================================================================
Net interest margin 0.30%
===================================================================================================================================
31
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------------
Table 4 Volume/Rate Analysis (Fully Taxable Equivalent) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
06/30/95 vs 03/31/95
Quarter-to-Date Change in Interest Due to:
(in thousands) Average Balance Average Rate Net Change
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements $ 762 $ 96 $ 858
Interest-bearing deposits with banks (7) (3) (10)
Money market funds 21 5 26
- -------------------------------------------------------------------------------------------------------------------------------
Total money market investments 776 98 874
Investment securities available-for-sale
Investment securities-taxable (89) (79) (168)
Investment securities held-to-maturity
Investment securities-taxable (2,872) 1,088 (1,784)
Investment securities-tax-exempt (71) 70 (1)
Trading securities 86 (9) 77
- -------------------------------------------------------------------------------------------------------------------------------
Sub-total securities (2,946) 1,070 (1,876)
Mark-to-market adjustment
- -------------------------------------------------------------------------------------------------------------------------------
Total securities (2,946) 1,070 (1,876)
Loans and lease financing 633 2,613 3,246
Note receivable-FDIC
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1,537) 3,781 2,244
Allowance for possible credit losses
Cash and due from banks
Other assets
- -------------------------------------------------------------------------------------------------------------------------------
Total assets ($1,537) $3,781 $2,244
========================================================================================================================
Liabilities
Money market accounts (1,979) 1,879 ($100)
Savings deposits (52) (52)
Time deposits < $100,000 (7,329) 9,484 2,155
Time deposits > $100,000 (1,125) 1,231 106
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (10,485) 12,594 2,109
Fed funds purchased and repo agreements 727 87 814
Other short-term borrowings (452) 196 (256)
Subordinated notes (239) (29) (268)
Long-term debt 9 9
Capital lease obligations (2) (2) (4)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (10,451) 12,855 2,404
Demand deposits
Other liabilities
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities (10,451) 12,855 2,404
Shareholders' equity
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ($10,451) $12,855 $ 2,404
========================================================================================================================
Net interest income (fully taxable equivalent basis) $ 8,914 ($9,074) ($160)
Tax equivalent adjustment (849)
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income $689
========================================================================================================================
Net interest rate spread -0.16%
========================================================================================================================
Net interest margin -0.01%
========================================================================================================================
32
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------------------------------------
Table 4 Volume/Rate Analysis (Fully Taxable Equivalent) (Unaudited)
- --------------------------------------------------------------------------------------------------------------
Quarter-to-Date 06/30/95 vs 06/30/94
Change in Interest Due to:
(in thousands) Average Balance Average Rate Net Change
- --------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements ($1,152) $2,318 $1,166
Interest-bearing deposits with banks (3,211) (1,106) (4,317)
Money market funds 10 87 97
- --------------------------------------------------------------------------------------------------------------
Total money market investments (4,353) 1,299 (3,054)
Investment securities available-for-sale
Investment securities-taxable (802) 407 (395)
Investment securities held-to-maturity
Investment securities-taxable (8,360) 4,842 (3,518)
Investment securities-tax-exempt (673) 468 (205)
Trading securities (3,140) 2,353 (787)
- --------------------------------------------------------------------------------------------------------------
Sub-total securities (12,975) 8,070 (4,905)
Mark-to-market adjustment
- --------------------------------------------------------------------------------------------------------------
Total securities (12,975) 8,070 (4,905)
Loans and lease financing (23,677) 33,469 9,792
Note receivable-FDIC (5,873) (5,873)
- --------------------------------------------------------------------------------------------------------------
Total interest-earning assets (46,878) 42,838 (4,040)
Allowance for possible credit losses
Cash and due from banks
Other assets
- --------------------------------------------------------------------------------------------------------------
Total assets ($46,878) $42,838 ($4,040)
==============================================================================================================
Liabilities
Money market accounts ($14,961) $16,628 $1,667
Savings deposits (4,705) 4,353 (352)
Time deposits < $100,000 (17,434) 21,405 3,971
Time deposits > $100,000 (8,146) 9,242 1,096
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (45,246) 51,628 6,382
Fed funds purchased and repo agreements (3,799) 4,547 748
Other short-term borrowings (1,060) 1,287 227
Subordinated notes (356) 40 (316)
Long-term debt (237) 253 16
Capital lease obligations (17) 4 (13)
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (50,715) 57,759 7,044
Demand deposits
Other liabilities
- --------------------------------------------------------------------------------------------------------------
Total liabilities (50,715) 57,759 7,044
Shareholders' equity
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ($50,715) $57,759 $7,044
==============================================================================================================
Net interest income (fully taxable equivalent basis) $3,837 ($14,921) ($11,084)
Tax equivalent adjustment (3,222)
- --------------------------------------------------------------------------------------------------------------
Net interest income ($7,862)
==============================================================================================================
Net interest rate spread -0.02%
==============================================================================================================
Net interest margin 0.30%
==============================================================================================================
33
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 5 Summary of Consolidated Net Interest Income (Fully Taxable Equivalent) (Unaudited)
Six Months Ended June 30, 1995 June 30, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreement $215,576 $6,420 6.01% $428,396 $7,225 3.40%
Interest-bearing deposits with banks 697 11 3.18% 354,792 6,593 3.75%
Money market funds 14,599 388 5.36% 12,491 183 2.95%
- ----------------------------------------------------------------------------------------------------------------------------------
Total money market investments 230,872 6,819 5.96% 795,679 14,001 3.55%
Investment securities available for sale
Investment securities-taxable 237,366 8,050 6.84% 224,208 7,868 7.08%
Investment securities held to maturity
Investment securities-taxable 1,034,923 29,970 5.84% 1,159,166 33,389 5.81%
Investment securities-tax-exempt 24,836 1,167 9.48% 37,603 1,603 8.60%
Trading securities 445 89,517 2,171 4.89%
- ----------------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities 1,297,125 39,632 6.16% 1,510,494 45,031 6.01%
Mark-to-market securities adjustment 1,254 2,322
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,298,379 39,632 1,512,816 45,031
Loans and lease financing 6,072,623 276,889 9.19% 6,339,128 257,223 8.18%
Note receivable-FDIC 350,812 11,857 6.82%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7,601,874 323,340 8.58% 8,998,435 328,112 7.35%
Allowance for possible credit losses (166,669) (194,302)
Cash and due from banks 453,772 523,503
Other assets 494,614 633,772
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $8,383,591 $9,961,408
==================================================================================================================================
Liabilities
Money market accounts $1,768,523 $32,758 3.74% $2,175,963 $28,815 2.67%
Savings deposits 959,445 11,078 2.33% 1,193,205 12,641 2.14%
Time deposits < $100,000 2,328,961 62,740 5.43% 2,612,290 58,434 4.51%
Time deposits > $100,000 506,355 15,040 5.99% 674,526 12,661 3.79%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5,563,284 121,616 4.41% 6,655,984 112,551 3.41%
Federal funds purchased & repurchase agreements 240,736 7,238 6.06% 264,438 4,753 3.62%
Other short-term borrowings 90,455 2,604 5.81% 121,243 2,234 3.72%
Subordinated notes 47,878 2,034 8.57% 57,360 2,399 8.43%
Long-term debt 12,517 553 8.91% 15,352 493 6.48%
Capital lease obligations 3,433 184 10.81% 3,942 210 10.74%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,958,303 134,229 4.54% 7,118,319 122,640 3.47%
Demand deposits 1,388,250 1,800,818
Other liabilities 211,109 216,627
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 7,557,662 9,135,764
Shareholders' equity 825,929 825,644
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $8,383,591 $9,961,408
==================================================================================================================================
Net interest income (fully taxable equivalent basis) $189,111 $205,472
Tax equivalent adjustment 3,661 9,260
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $185,450 $196,212
==================================================================================================================================
Net interest rate spread 4.04% 3.88%
==================================================================================================================================
Net interest margin 5.02% 4.60%
==================================================================================================================================
34
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------
TABLE 6 Change in Net Interest Income (Fully Taxable Equivalent) (Unaudited)
Change in Change in Change in
Year-to-Date Average Balance Interest Average Rate
06/30/95 vs 06/30/95 vs 06/30/95
(in thousands) 06/30/94 06/30/94 06/30/94
- ------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements ($212,820) ($805) 2.61%
Interest-bearing deposits with banks (354,095) (6,582) -0.57%
Money market funds 2,108 205 2.41%
- ------------------------------------------------------------------------------------------------------------------------
Total money market investments (564,807) (7,182) 2.41%
Investment securities available for sale
Investment securities-taxable 13,158 182 -0.24%
Investment securities held to maturity
Investment securities-taxable (124,243) (3,419) 0.03%
Investment securities-tax-exempt (12,767) (436) 0.88%
Trading securities (89,517) (1,726) -4.89%
- ------------------------------------------------------------------------------------------------------------------------
Sub-total investment securities (213,369) (5,399) 0.15%
Mark-to-market securities adjustment (1,068)
- ------------------------------------------------------------------------------------------------------------------------
Total investment securities (214,437) (5,399)
Loans and lease financing (266,505) 19,666 1.01%
Note receivable-FDIC (350,812) (11,857) -6.82%
- ------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (1,396,561) (4,772) 1.23%
Allowance for possible credit losses $27,633
Cash and due from banks (69,731)
Other assets (139,158)
- ------------------------------------------------------------------------------------------------------------------------
Total assets ($1,577,817)
========================================================================================================================
Liabilities
Money market accounts ($407,440) $3,943 1.07%
Savings deposits (233,760) (1,563) 0.19%
Time deposits < $100,000 (283,329) 4,306 0.92%
Time deposits > $100,000 (168,171) 2,379 2.20%
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (1,092,700) 9,065 1.00%
Federal funds purchased & repurchase agreements (23,702) 2,485 2.44%
Other short-term borrowings (30,788) 370 2.09%
Subordinated notes (9,482) (365) 0.14%
Long-term debt (2,835) 60 2.43%
Capital lease obligations (509) (26) 0.07%
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (1,160,016) 11,589 1.07%
Demand deposits (412,568)
Other liabilities (5,518)
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities (1,578,102)
Shareholders' equity 285
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ($1,577,817)
========================================================================================================================
Net interest income (fully taxable equivalent basis) ($16,361)
Tax equivalent adjustment (5,599)
- ------------------------------------------------------------------------------------------------------------------------
Net interest income ($10,762)
========================================================================================================================
Net interest rate spread 0.16%
========================================================================================================================
Net interest margin 0.42%
========================================================================================================================
35
38
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
TABLE 7 Volume/Rate Analysis (fully taxable equivalent (unaudited)
06/30/95 vs 06/30/94
Year-to-Date Change in Interest Due to:
Average Average Net
(in thousands) Balance Rate Change
- -----------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold and resale agreements ($9,103) $8,298 ($805)
Interest-bearing deposits with banks (5,711) (871) (6,582)
Money market funds 35 170 205
- -----------------------------------------------------------------------------------------------------------------
Total money market investments (14,779) 7,597 (7,182)
Investment securities available for sale
Investment securities-taxable 798 (616) 182
Investment securities held to maturity
Investment securities-taxable (3,926) 507 (3,419)
Investment securities-tax-exempt (844) 408 (436)
Trading securities (863) (863) (1,726)
- -----------------------------------------------------------------------------------------------------------------
Sub-total investment securities (4,835) (564) (5,399)
Mark-to-market securities adjustment
- -----------------------------------------------------------------------------------------------------------------
Total investment securities (4,835) (564) (5,399)
Loans and lease financing (27,530) 47,196 19,666
Note receivable-FDIC (5,928) (5,929) (11,857)
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets (53,072) 48,300 (4,772)
Allowance for possible credit losses
Cash and due from banks
Other assets
- -----------------------------------------------------------------------------------------------------------------
Total assets ($53,072) $48,300 ($4,772)
=================================================================================================================
Liabilities
Money market accounts ($13,570) $17,513 $3,943
Savings deposits (4,196) 2,633 (1,563)
Time deposits < $100,000 (15,189) 19,495 4,306
Time deposits > $100,000 (8,200) 10,579 2,379
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (41,155) 50,220 9,065
Federal funds purchased & repurchase agreements (1,222) 3,707 2,485
Other short-term borrowings (1,462) 1,832 370
Subordinated notes (477) 112 (365)
Long-term debt (227) 287 60
Capital lease obligations (30) 4 (26)
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (44,573) 56,162 11,589
Demand deposits
Other liabilities
- -----------------------------------------------------------------------------------------------------------------
Total liabilities (44,573) 56,162 11,589
Shareholders' equity
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ($44,573) $56,162 $11,589
=================================================================================================================
Net interest income (fully taxable equivalent basis) ($16,360)
=================================================================================================================
36
39
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
June 30, 1995, decreased $89.4 million, or 1.5%, from December 31, 1994.
Please refer to Table 8 for a presentation of the Corporation's loans and lease
financing portfolio for the five most recent quarters, and Tables 8a and 8b,
respectively, for a presentation of the Corporation's commercial real estate
loans outstanding and commercial, financial and agricultural loans outstanding
at June 30, 1995, by geographic area. Refer to page 22 of the 1994 Form 10-K
for information on management of credit risk.
The decrease in total loans outstanding was primarily attributable to IOBOC's
sale of loans in May 1995. The balance of total loans at IOBOC decreased $98.5
million since December 31, 1994. Also contributing to the decrease in total
loans outstanding was a reduction in the balance of the Non-performing Loans
held for sale portfolio due to charge-offs, sales, payoffs and principal
payments. This portfolio consists of loans that the Corporation has targeted
for disposal in 1995.
Partially offsetting the above decreases was an increase in the balance of the
installment loan portfolio. An increase in indirect lending was the primary
contributor to the growth of the installment loan portfolio.
The level of Watch Credits at June 30, 1995, was $203 million, a decrease of
$44 million from their level at December 31, 1994. Watch Credits for the five
most recent quarters are presented in Table 8.
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 June 30, 1995, due to
charge-offs, pay-offs, pay-downs, sales and return of loans to accruing status.
Please refer to Table 9 for a presentation of Non-performing Assets for the
five most recent quarters and to Table 9a for a presentation of the changes in
commercial and commercial real estate Non-performing Assets during the three
months ended June 30, 1995.
37
40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
Table 8 Loans and Lease Financing Portfolio (Unaudited)
Balance at:
(in thousands) 06/30/95 03/31/95 12/31/94 09/30/94 06/30/94
- ----------------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural
secured by real estate (Table 8a) $809,709 $877,008 $867,468 $892,899 $926,081
Other commercial, financial and agricultural (Table 8a) 2,374,418 2,511,468 2,397,375 2,405,015 2,392,341
- ----------------------------------------------------------------------------------------------------------------------------
Subtotal 3,184,127 3,388,476 3,264,843 3,297,914 3,318,422
Commercial real estate-mortgage (Table 8b) 1,082,927 1,104,603 1,105,007 1,142,931 1,183,585
Non-performing loans held for sale (1) 45,153 51,827 56,256
Residential real estate-mortgage
Mortgages held-for-sale 3,835 2,173 10,106 108,783 331,300
Mortgages held-for-investment 328,945 338,910 332,517 401,402 436,257
- ----------------------------------------------------------------------------------------------------------------------------
Subtotal 1,460,860 1,497,513 1,503,886 1,653,116 1,951,142
Short-term commercial real estate-construction (Table 8b) 124,500 125,010 126,158 145,609 149,843
Installment 1,066,937 1,041,781 1,008,191 959,028 870,703
Lease financing 120,020 126,315 130,713 145,813 141,855
SFAS No. 114 adjustment 11,934 16,217 21,250
- ----------------------------------------------------------------------------------------------------------------------------
Total 5,956,444 6,179,095 6,045,725 6,217,697 6,453,215
Unearned income (20,134) (20,044) (20,024) (25,076) (26,706)
- ----------------------------------------------------------------------------------------------------------------------------
Total $5,936,310 $6,159,051 $6,025,701 $6,192,621 $6,426,509
- ----------------------------------------------------------------------------------------------------------------------------
============================================================================================================================
Watch Credits (in millions) (3) $203 $257 $247 $319 $351
- ----------------------------------------------------------------------------------------------------------------------------
(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.
38
41
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Table 8a. Commercial, Financial and Agricultural Loans Outstanding at June 30, 1995 (in thousands) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Other Other
Industry (1) Michigan Midwest Northeast South States Total
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial, Financial and Agricultural Loans
Secured by Real Estate:
Service $227,448 $12,178 $8,774 $12,632 $300 $261,332
Finance, insurance and real estate 213,698 14,064 3,056 3,357 39 234,214
Retail Trade 96,244 802 35,098 1,969 134,113
Manufacturing 52,794 2,564 622 1,111 57,091
Automotive 47,321 1,355 48,676
Wholesale Trade 38,833 46 38,879
Transportation / utilities 15,000 311 1,670 16,981
Other 18,423 18,423
- -----------------------------------------------------------------------------------------------------------------------------------
Total 709,761 31,320 46,928 18,580 3,120 809,709
- -----------------------------------------------------------------------------------------------------------------------------------
Other Commercial, Financial and
Agricultural Loans:
Service 454,973 12,210 9,852 8,472 1,122 486,629
Finance, insurance and real estate 262,030 946 6,005 22,538 20,698 312,217
Wholesale Trade 283,491 13,480 435 15 9,576 306,997
Manufacturing 256,038 28,549 7,686 9,230 225 301,728
Transportation / utilities 293,362 3,900 336 1,333 298,931
Automotive 267,209 4,960 1,896 274,065
Retail Trade 238,402 11,360 4,638 6,787 11,209 272,396
Other 116,729 164 3,062 1,500 121,455
- -----------------------------------------------------------------------------------------------------------------------------------
Total 2,172,234 75,569 28,952 53,333 44,330 2,374,418
- -----------------------------------------------------------------------------------------------------------------------------------
Total Commercial, Financial and
Agricultural Loans Outstanding $2,881,995 $106,889 $75,880 $71,913 $47,450 $3,184,127
===================================================================================================================================
Percentage of geographic location to Total 90.51% 3.36% 2.38% 2.26% 1.49% 100.00%
===================================================================================================================================
(1) The industry categories are internally developed definitions based on
the primary markets in which the borrower operates.
39
42
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 8b. Short-Term Commercial Real Estate - Construction and Commercial Real Estate - Mortgage Loans Outstanding
at June 30, 1995. (in thousands) (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Other Other
Collateral Type Michigan Midwest Northeast South States Total
- ----------------------------------------------------------------------------------------------------------------------------------
Short-term Commercial Real Estate-Construction:
Land development/acquisition $22,704 $56 $1,350 $10,570 $34,680
Retail 19,766 1,568 21,334
Residential > 4 family 9,335 2,420 11,755
Office 1,340 1,340
Other 52,882 2,391 $118 55,391
- ----------------------------------------------------------------------------------------------------------------------------------
Total 106,027 1,624 1,350 15,381 118 124,500
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial Real Estate-Mortgage:
Retail 224,001 3,443 22,775 705 250,924
Office 206,048 3,378 5,744 5,266 1,052 221,488
Residential > 4 family 149,153 3,000 28,446 180,599
Industrial 107,759 4,593 16,727 1,431 4,180 134,690
Mobile home parks 92,582 11,184 13,291 8,294 125,351
Hotels 57,294 111 1,071 3,600 33,856 95,932
Warehouse 21,818 4,098 464 26,380
Other 31,535 636 2,962 12,430 47,563
- ----------------------------------------------------------------------------------------------------------------------------------
Total 890,190 27,443 23,542 52,325 89,427 1,082,927
- ----------------------------------------------------------------------------------------------------------------------------------
Total Commercial
Real Estate Loans Outstanding $996,217 $29,067 $24,892 $67,706 $89,545 $1,207,427
==================================================================================================================================
Percentage of geographic location to Total 82.51% 2.41% 2.06% 5.61% 7.42% 100.00%
==================================================================================================================================
40
43
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Tables 9 Non-performing Assets (Unaudited)
(in thousands) 06/30/95 03/31/95 12/31/94 09/30/94 06/30/94
- -----------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans
Commercial, financial and agricultural secured by real estate $6,042 $5,617 $5,635 $17,287 $18,875
Other commercial, financial and agricultural 25,216 27,615 21,976 27,950 28,168
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 31,258 33,232 27,611 45,237 47,043
Commercial real estate-mortgage 7,259 10,790 10,220 13,863 11,796
Non-performing loans held-for-sale 45,153 51,827 56,256
Residential real estate-mortgage 2,017 2,396 2,330 31,166 21,950
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 54,429 65,013 68,806 45,029 33,746
Short-term commercial real estate-construction 10,853 11,831 9,696 52,781 52,913
Installment 2,388 2,190 1,618 1,750 1,771
Lease financing 927 931 935 1,118
SFAS No. 114 adjustment (1) 11,934 16,217 21,250
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans (1) 99,855 113,197 120,600 162,132 156,723
Renegotiated Loans
Commercial, financial and agricultural
secured by real estate 41
Short-term real estate-construction 273 283 283 290
- -----------------------------------------------------------------------------------------------------------------------------------
Total renegotiated loans 273 283 283 331
- -----------------------------------------------------------------------------------------------------------------------------------
Total Non-performing Loans (1) 99,855 113,470 120,883 162,415 157,054
- -----------------------------------------------------------------------------------------------------------------------------------
Property from defaulted loans and other real
estate owned, net prior to adoption of SFAS No. 114 12,671 23,669 34,090 49,152 56,957
SFAS No. 114 adjustment (1) (11,934) (16,217) (21,250)
- -----------------------------------------------------------------------------------------------------------------------------------
Property from defaulted loans and
other real estate owned, net (1) 12,671 23,669 22,156 32,935 35,707
- -----------------------------------------------------------------------------------------------------------------------------------
Total Non-performing Assets $112,526 $137,139 $143,039 $195,350 $192,761
===================================================================================================================================
Non-performing loans to total loans, net of unearned income
after adoption of SFAS No. 114 (1) 1.68% 1.84% 2.01% 2.62% 2.44%
Non-performing loans to total loans, net of unearned
income, as previously reported 1.81% 2.37% 2.12%
===================================================================================================================================
Allowance for possible credit losses to Non-performing Loans
after adoption of SFAS No. 114 (1) 171% 146% 136% 114% 120%
Allowance for possible credit losses to Non-performing Loans,
as previously reported 151% 127% 139%
===================================================================================================================================
Non-performing Assets to total loans (net of unearned income)
plus property from defaulted loans and other real estate
owned, net 1.89% 2.22% 2.37% 3.14% 2.98%
===================================================================================================================================
(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 June 30, 1995, March 31,
1995, December 31, 1994, September 30, 1994, and June 30, 1994,
amounted to $20,048, $15,466, $22,466, $94,848, and $99,956. At
June 30, 1995, 75.1% of loans 90 days or more past due and still accruing were
insured by the FHA.
41
44
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Table 9a. 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 $27,513 $80,582
Activity during 1995:
Additions 5,681 1,084 2,317 14,270 23,352
Pay-downs (1,709) (756) (724) (7,195) (10,384)
Disposition of assets (351) (13,314) (2,294) (214) (16,173)
Charge-offs (789) (780) (624) (4,273) (6,466)
Return to accrual (1) (7,882) (770) (174) (853) (9,679)
Other (2) (1,030) (672) 677 (342) (1,367)
- ----------------------------------------------------------------------------------------------------------------------------------
Net activity during 1995 (6,080) (15,208) (822) 1,393 (20,717)
- ----------------------------------------------------------------------------------------------------------------------------------
Non-performing Assets at
June 30, 1995 $10,865 $11,698 $8,396 $28,906 $59,865
==================================================================================================================================
Percentage of Non-performing Asset category
to Total 18.15% 19.54% 14.02% 48.29% 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.
42
45
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 Credit 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 and or value of collateral. Specific allocations of the
allowance are assigned to individual impaired loans as defined by SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" (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 June 30, 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 June 30, 1995, the provision was $7.5 million,
an increase of $1.5 million from the same period in 1994. The Allowance for
Possible Credit Losses as a percentage of Non-performing Loans improved to 171%
at June 30, 1995, from 120% at June 30 last year. The Allowance for Possible
Credit Losses as a percentage of total period-end loans decreased to 2.88% at
June 30, 1995, from 2.93% at June 30, 1994. This decrease was primarily
attributable to the effect of loan charge-offs taken in December 1994 on
Non-performing Loans held for sale in connection with the implementation of an
accelerated disposition program for specific assets. Refer to page 57 of the
1994 Form 10-K for further information regarding this program.
43
46
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------
Table 10 Analysis of the Allowance for Possible Credit Losses (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended 06/30/95 03/31/95 12/31/94 09/30/94 06/30/94
- ----------------------------------------------------------------------------------------------------------------------
Beginning balance $165,952 $164,344 $185,731 $188,585 $194,521
Charge-offs
Commercial, financial and agricultural secured by real-estate 624 2,238 1,716 7,308
Other commercial, financial and agricultural 2,036 2,237 4,929 4,190 3,927
- ----------------------------------------------------------------------------------------------------------------------
Subtotal 2,036 2,861 7,167 5,906 11,235
Commercial real estate-mortgage 394 395 756 40 40
Non-performing loans held-for-sale 3,438 2,000 36,809
Residential real estate-mortgage held-for-investmen 1,881 215 167 428 493
- ----------------------------------------------------------------------------------------------------------------------
Subtotal 5,713 2,610 37,732 468 533
Short-term commercial real estate-construction 350 430
Installment 2,162 2,056 2,060 2,044 1,879
Lease financing 20
SFAS No. 114 adjustment (1) 3,918 289 351
- ----------------------------------------------------------------------------------------------------------------------
Total charge-offs 10,261 7,957 50,877 8,707 14,018
Recoveries
Commercial, financial & agricultural secured by re 528 153 220 102 173
Other commercial, financial & agricultural 1,990 565 580 497 744
- ----------------------------------------------------------------------------------------------------------------------
Subtotal 2,518 718 800 599 917
Commercial real-estate-mortgage 214 356 198 124 240
Non-performing loans held-for-sale 4,051 445
Residential real estate-mortgage held-for-investment 17 40 39
- ----------------------------------------------------------------------------------------------------------------------
Subtotal 4,265 818 238 124 279
Short-term commercial real estate-construction 74 967 502 9
Installment 692 529 567 632 526
Lease financing 2
- ----------------------------------------------------------------------------------------------------------------------
Total Recoveries 7,549 2,065 2,572 1,859 1,731
Net charge-offs 2,712 5,892 48,305 6,848 12,287
Additions:
Provisions charged to operating expense 7,500 7,500 23,000 6,000 6,000
SFAS No. 114 adjustment to provision (1) 3,918 289 351
Less:
Allowance of subsidiaries sold 2,295
- ----------------------------------------------------------------------------------------------------------------------
Ending balance $170,740 $165,952 $164,344 $185,731 $188,585
======================================================================================================================
Allowance for possible credit losses
to period-end loans (net of unearned income)
after adoption of SFAS No. 114 (1) 2.88% 2.69% 2.73% 3.00% 2.93%
Allowance for possible credit losses
to period-end loans (net of unearned income),
as previously reported 2.73% 3.01% 2.94%
======================================================================================================================
CHARGE-OFF RATIOS
- ----------------------------------------------------------------------------------------------------------------------
Quarter-to-Date 06/30/95 03/31/95 12/31/94 09/30/94 06/30/94
- ----------------------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average
loans, (net of unearned income)
after adoption of SFAS No. 114 (1) 0.18% 0.39% 3.15% 0.43% 0.78%
Annualized net charge-offs to average
loans, (net of unearned income),
as previously reported 2.91% 0.42% 0.76%
======================================================================================================================
Year-to-Date 06/30/95 06/30/94
- ----------------------------------------------------------------------------------------------------------------------
Annualized net charge-offs to average loans, net of unearned income, 0.28% 0.47%
after adoption of SFAS No. 114 (1)
Annualized net charge-offs to average loans, net of unearned income, 0.45%
as previously reported
======================================================================================================================
(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.
44
47
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
Non-interest income for the second quarter and six months ended June 30, 1995
decreased $11.7 million and $30.3 million, respectively, over the same periods
in 1994. The decreases were principally the result of the sale of the
Corporation's non-Michigan businesses. Non-interest expense for the second
quarter and six months ended June 30, 1995 decreased $40.3 million and $77.8
million, respectively, over the same periods 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 11 and Table 12, respectively, for the five most
recent quarters, and in Table 13 and Table 14, respectively, for the comparable
six month periods. Also, refer to Table 15 and 16, Business Review, for
summary financial information regarding the Corporation's principal
subsidiaries, including the non-Michigan businesses sold.
The discussion below focuses on the Corporation's remaining businesses.
Non-interest Income
During the second quarter 1995, non-interest income in the Corporation's
Michigan business increased approximately $3.6 million compared to the same
period last year. The increase was primarily due to a $2.5 million gain on the
sale of third-party ATM processing contracts to Magic Line, Inc. Also
contributing to the improvement were volume related increases in merchant
credit card processing fees and loan service charges.
For the six months ended June 30, 1995, non-interest income increased $1.8
million compared to the same period in 1994. During this period, the above
increases were partially offset by 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 second quarter and six months ended June 30, 1995, compared to
the same periods 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. However, for the six months ended June 30,
1995, increases occurred in the categories of outside services and other
expense. Advisory fees of $2.9 million in the first quarter 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. Contributing to the
increase in other expenses was a $1.8 million loss on the redemption of
Debentures and cancellation of Equity Contracts in June 1995. Refer to Note G
to the Consolidated Financial Statements for further information on this
transaction.
45
48
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cancellation and Purchase of Employee Stock Options
Subject to the requisite regulatory approvals, the Merger Agreement requires
that the Corporation purchase all outstanding common stock options granted
under the Corporation's employee stock option plan. The amount of the purchase
would equal the excess of $110 over the exercise price per option, multiplied
by the number of stock options outstanding. In the event of the Corporation's
compliance with this provision, based upon the number of stock options
outstanding at June 30, 1995, pre-tax compensation expense of approximately
$17.4 million would be recognized in accordance with APB Opinion No. 25
"Accounting for Stock Issued to Employees." Refer to Note B to the
Consolidated Financial Statements for information on the Merger Agreement.
46
49
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------------------------------
Table 11 Non-Interest Income (Unaudited)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended
(in thousands) 06/30/95 03/31/95 12/31/94 09/30/94 06/30/94
- ---------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $14,078 $12,925 $13,777 $13,897 $15,196
Merchant card processing fees 5,497 4,763 5,407 5,024 4,866
Mortgage servicing fees 8 5,696 10,062
Amortization of capitalized excess service fees -579 -789
Loan service charges 2,148 1,846 2,818 2,745 2,133
- ---------------------------------------------------------------------------------------------------------
Service charges 21,723 19,534 22,010 26,783 31,468
- ---------------------------------------------------------------------------------------------------------
Trust and investment services income 4,170 4,681 4,383 4,322 4,472
Mortgage banking gains, net 314 177 201 22 4,406
Investments securities available-for-sale losses, net -27 -11 -20
Other gains, net 1,480 67,096
Other Income:
Trading profits 369 306 298 510 210
Other 13,609 10,254 12,214 10,979 11,337
- ---------------------------------------------------------------------------------------------------------
Total other income 13,978 10,560 12,512 11,489 11,547
- ---------------------------------------------------------------------------------------------------------
Total Non-Interest Income $40,185 $34,925 $40,575 $109,692 $51,893
47
50
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------
Table 12 Non-Interest Expense (Unaudited)
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended
(in thousands) 06/30/95 03/31/95 12/31/94 09/30/94 06/30/94
- -----------------------------------------------------------------------------------------------------------------
Salaries and wages $31,056 $30,663 $39,676 $42,201 $46,625
Other employee benefits 8,043 9,959 11,674 12,103 13,971
Net occupancy 5,288 5,573 6,121 6,921 7,645
Equipment 6,839 7,170 8,339 8,567 10,517
Outside services 6,370 8,158 7,851 8,732 8,306
Defaulted loan expense, net
Writedowns and losses from sale (1) 541 85 5,814 1,974 2,193
Gains from sale (10,491) -374 (1,207) -925 (7,628)
Other operating expenses, net 5,095 926 1,826 1,982 2,622
- -----------------------------------------------------------------------------------------------------------------
Total defaulted loan expense, net (1) (4,855) 637 6,433 3,031 (2,813)
Amortization of purchased mortgage servicing rights 2,034 3,027
Restructuring charge 37,595
Other Expenses:
FDIC Insurance 4,831 4,606 4,876 5,017 5,384
Communications 1,648 1,558 1,642 1,996 2,287
Stationery and supplies 1,498 1,391 1,768 1,875 2,055
Advertising 1,032 880 1,128 1,792 1,608
Michigan single business tax 1,804 2,193 1,129 3,402 1,988
Postage 931 1,033 1,002 1,141 1,243
Amortization of goodwill 81 81 123 1,244 305
Uncollected interest on early payoffs of loans serviced 400 1,428
Provision for foreclosure costs on loans serviced 750 1,125
Other 8,335 6,518 7,394 7,937 8,460
- -----------------------------------------------------------------------------------------------------------------
Other expenses 20,160 18,260 19,062 25,554 25,883
- -----------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense (1) $72,901 $80,420 $136,751 $109,143 $113,161
- -----------------------------------------------------------------------------------------------------------------
Net overhead ratio (2) 1.73% 2.38% 4.95% -0.03% 2.72%
- -----------------------------------------------------------------------------------------------------------------
Efficiency ratio, after adoption of SFAS No. 114 (1)(3) 54.14% 62.07% 99.48% 51.00% 71.87%
Efficiency ratio, as previously reported (3) 102.33% 51.13% 72.09%
- -----------------------------------------------------------------------------------------------------------------
(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.
Certain prior period amounts have been reclassified to conform to current
period presentation.
48
51
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -------------------------------------------------------------------------
Table 13 Non-Interest Income (Unaudited)
- -------------------------------------------------------------------------
Six Months Ended
(in thousands) 06/30/95 06/30/94
- -------------------------------------------------------------------------
Service charges on deposit accounts $27,003 $30,309
Merchant card processing fees 10,260 9,381
Mortgage servicing fees 20,803
Amortization of capitalized excess service fees (1,845)
Loan service charges 3,994 5,650
- -------------------------------------------------------------------------
Service charges 41,257 64,298
Trust and investment services income 8,851 9,552
Mortgage banking gains, net 491 9,152
Investments available for sale losses, net (27)
Other income:
Trading profits (losses) 675 (169)
Other 23,863 22,578
- -------------------------------------------------------------------------
Other income 24,538 22,409
- -------------------------------------------------------------------------
Total Non-Interest Income $75,110 $105,411
=========================================================================
49
52
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------
Table 14 Non-Interest Expense (Unaudited)
- -----------------------------------------------------------------------------------------------
Six Months Ended
(in thousands) 06/30/95 06/30/94
- -----------------------------------------------------------------------------------------------
Salaries and wages $61,719 $92,732
Other employee benefits 18,002 29,179
Net occupancy 10,861 15,297
Equipment 14,009 20,836
Outside services 14,528 16,061
Defaulted loan expense, net
Writedowns and losses from sale (1) 626 3,941
Gains from sale (10,865) (10,862)
Other operating expenses, net 6,021 3,885
- -----------------------------------------------------------------------------------------------
Total defaulted loan expense, net (1) (4,218) (3,036)
Amortization of purchased mortgage servicing rights 8,413
Other Expenses:
FDIC Insurance 9,437 10,770
Communications 3,206 4,608
Stationery and supplies 2,889 4,304
Advertising 1,912 3,227
Michigan single business tax 3,997 4,169
Postage 1,964 2,810
Amortization of goodwill 162 616
Uncollected interest on early payoffs of loans serviced 3,227
Provision for foreclosure costs on loans serviced 2,100
Other 14,853 15,786
- -----------------------------------------------------------------------------------------------
Other expenses 38,420 51,617
- -----------------------------------------------------------------------------------------------
Total Non-Interest Expense (1) $153,321 $231,099
===============================================================================================
Net overhead ratio (2) 2.06% 2.80%
Efficiency ratio after adoption of SFAS No. 114 (1) (3) 58.03% 74.34%
Efficiency ratio as previously reported (3) 74.50%
===============================================================================================
(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, annualized, 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.
Certain prior period amounts have been reclassified to conform to current
period presentation.
50
53
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------------
Table 15 Business Review (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
MNB
(excluding IOMC) IOMC IOBOC (3)
Three Months Ended June 30 (in thousands) 1995 1994 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible credit losses (2) $82,096 $80,240 $398 $3,847 $2,399 $5,071
Non-interest income 35,106 33,324 123 15,301 1,057 333
Amortization of capitalized excess service fees (789)
Amortization of purchased mortgage servicing rights (3,027)
Other non-interest expense (2) (66,681) (77,649) (25) (19,091) (2,341) (4,441)
---------- --------- -------- -------- -------- --------
Income before taxes $50,521 $35,915 $497 ($3,759) $1,116 $963
========== ======== ======== ======== ======== ========
At June 30
Total assets $8,067,084 $8,740,647 $146,729 $681,789 $103,587 $645,704
Total liabilities $7,365,726 $8,064,904 $106,288 $658,406 $53,470 $541,024
Total equity $701,358 $675,743 $40,441 $23,383 $50,117 $104,680
Mortgage Servicing Portfolio :
Originated Servicing $3,839
Purchased Servicing $4,764
--------
Total $8,603
========
(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.
(3) Effective June 30, 1995, IOBOC relocated its home office from Mission
Veijo, California to Troy, Michigan and concurrently changed its name to
Michigan Bank, Federal Savings Bank.
51
54
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
Table 15 Business Review (Unaudited) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------------
Texas Bank Holding Company and Consolidated
Subsidiaries other operations (1) MNC
Three Months Ended June 30 (in thousands) 1995 1994 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible credit losses (2) $5,494 $676 ($71) $85,570 $94,581
Non-interest income 1,451 3,899 2,273 40,185 52,682
Amortization of capitalized excess service fees (789)
Amortization of purchased mortgage servicing rights (3,027)
Other non-interest expense (2) (5,165) (3,854) (3,788) (72,901) (110,134)
------- -------- -------- --------- ---------- -----------
Income before taxes $1,780 $721 ($1,586) $52,854 $33,313
======= ======== ======== ========= ========== ===========
At June 30
Total assets $573,871 $2,473 ($605,645) $8,319,873 $10,036,366
Total liabilities $522,741 ($98,949) ($642,544) $7,426,535 $9,144,531
Total equity $51,130 $101,422 $36,899 $893,338 $891,835
(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.
(3) Effective June 30, 1995, IOBOC relocated its home office from Mission
Veijo, California to Troy, Michigan and concurrently changed its name to
Michigan Bank, Federal Savings Bank.
52
55
Michigan National Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------------------------------------------------
TABLE 16 BUSINESS REVIEW (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
MNB
(excluding IOMC) IOMC IOBOC (3)
Six Months Ended June 30 (in thousands 1995 1994 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible credit losses $162,723 $155,412 $559 $7,057 $6,359 $10,425
Non-interest income 67,077 67,985 374 31,916 1,675 1,046
Amortization of capitalized excess service fees (1,845)
Amortization of purchased mortgage servicing rights (8,413)
Other non-interest expense (2) (139,673) (158,092) (634) (38,992) (5,100) (9,533)
-------- -------- ---- -------- ------ -------
Income before taxes $90,127 $65,305 $299 ($10,277) $2,934 $1,938
======== ======== ==== ======== ====== =======
(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.
(3) Effective June 30, 1995, IOBOC relocated its home office from Mission
Veijo, California to Troy, Michigan and concurrently changed its name to
Michigan Bank, Federal Savings Bank.
53
56
Michigan National Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------------------------------------------------
TABLE 16 BUSINESS REVIEW (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
Texas Bank Holding Company and Consolidated
Subsidiaries other operations (1) MNC
Six Months Ended June 30 (in thousands) 1995 1994 1995 1994 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible credit losses (2) $11,092 $809 ($277) $170,450 $183,709
Non-interest income 2,990 5,984 3,319 75,110 107,256
Amortization of capitalized excess service fees (1,845)
Amortization of purchased mortgage servicing rights (8,413)
Other non-interest expense (2) (10,408) (7,914) (5,661) (153,321) (222,686)
-------- ------- ------ ------ -------- --------
Income before taxes $3,674 ($1,121) ($2,619) $92,239 $58,021
======== ======= ======= ======= ======== =======
(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.
(3) Effective June 30, 1995, IOBOC relocated its home office from Mission
Veijo, California to Troy, Michigan and concurrently changed its name to
Michigan Bank, Federal Savings Bank.
54
57
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
INCOME TAX PROVISION
The Corporation's projection of its effective income tax rate for 1995 is 29.2%
compared to the federal statutory rate of 35%.
During the second quarter, the Corporation and the IRS resolved certain tax
matters related to the Corporation's income tax returns for the years 1988 -
1993. Accordingly, the Corporation reversed certain income tax reserves which
resulted in a reduction of the Corporation's projected 1995 effective tax rate
to 29.2% and which will be reflected in the tax rates of the second, third and
fourth quarters of 1995. The effective tax rate for the second quarter
includes an adjustment to first quarter 1995 for the decrease in the estimate
of the effective tax rate.
Tax exempt income from municipal securities held by MNB and subsidized interest
expense on deposits at IOBOC also contributed to the Corporation's effective
tax rate being less than the statutory rate.
The Corporation's effective tax rate for 1994, excluding a $41.7 million
reduction in tax expense resulting from the Termination Agreement and $40.2
million from tax benefits associated with the IOBOC acquisition, was 28.0%.
For information regarding these one-time tax benefits, refer to Note F and Note
W to the consolidated financial statements on pages 100 and 132, respectively,
of the 1994 Form 10-K.
The increase in the effective income tax rate from 28.0% for 1994 to 29.2% in
1995 is due to higher projected pre-tax earnings in 1995, lower tax-exempt
interest income due to the payoff of the Note Receivable-FDIC on September 30,
1994, and the absence of certain FDIC assistance due to the Termination
Agreement.
55
58
MICHIGAN NATIONAL CORPORATION AND SUBSIDIARIES (UNAUDITED)
MANAGEMENT'S DISCUSSION AND ANALYSIS
CAPITAL RESOURCES
The capital position of the Corporation continues to be an important factor in
developing corporate strategies and achieving established goals. Management
reviews the various capital measures weekly and takes appropriate action to
ensure that they are within established internal and external guidelines.
Management believes the Corporation's capital position, which exceeds
guidelines established by industry regulators, is adequate to support its
various businesses. The Corporation's risk-based capital position for the five
most recent quarters is presented in Table 17.
The Corporation increased the amount of its regular cash dividend during 1995.
On January 18, 1995, the Corporation increased the regular quarterly cash
dividend on its common stock by 10% from 50 cents ($.50) to 55 cents ($.55) per
share, payable February 15, 1995, to shareholders of record as of February 1,
1995. On April 18, 1995, the Corporation declared a regular quarterly cash
dividend of 55 cents ($.55) per share on common stock, payable May 15, 1995, to
shareholders of record as of May 1, 1995. In addition, on July 10, 1995, the
Corporation declared a regular quarterly cash dividend of 55 cents ($.55) per
share on common stock, payable August 15, 1995, to shareholders of record as of
August 1, 1995.
Redemption of Subordinated Debentures and Cancellation of Equity Contracts
The Corporation redeemed all of its outstanding 8% Redeemable Subordinated
Debentures (Debentures) due November 10, 1998 and canceled all of its Equity
Contracts as of June 15, 1995 (Redemption Date), in accordance with the terms
of the Debentures and Equity Contracts. At March 31, 1995, the outstanding
balance of Debentures was $54.1 million and there were Equity Contracts of
$37.5 million associated with 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. Approximately 632 thousand shares of the
Corporation's common stock were issued through the exercise of Equity
Contracts. On the Redemption Date, all unexercised Equity Contracts were
canceled and the holder received a 1.00% cancellation fee. The amount of
Equity Contracts canceled at June 15 was approximately $0.1 million.
The conversion of $37.4 million of Equity Contracts had a negligible affect on
total risk-based capital. However, it did result in the reclassification of
the dollar value of Equity Contracts, previously 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 utilized cash on hand to fund the redemption of Debentures. No
debt was incurred in connection with this transaction.
In addition, the redemption of the Debentures and conversion of Equity
Contracts into common stock did not have a further dilutive effect on earnings
per share because the Corporation, as required by APB No. 15, "Earnings Per
Share", uses the "if converted method" of calculating common stock equivalents
for Equity Contracts. 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 the three and six months ended June 30,
1995, appears in Part II, item 6 (a), exhibit (11).
56
59
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 17 Risk-Based Capital (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Quarter Ended
(in thousands) 06/30/95 03/31/95 12/31/94 09/30/94 6/30/94
- -----------------------------------------------------------------------------------------------------------------------------------
Tier 1
Common shareholders' equity (1) $891,376 $817,884 $796,346 $996,382 $889,930
Intangible assets (2,292) (2,446) (2,600) (3,245) (13,430)
SFAS No. 109 capital limitation (2) (70,311) (109,903) (119,587) (121,310) (59,584)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Tier 1 capital $818,773 $705,535 $674,159 $871,827 $816,916
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 2
Allowance for possible credit losses (3) $93,941 $96,419 $97,210 $101,672 $103,042
Equity commitment note 12,412 12,412 12,412 12,412 15,212
Equity contract note - qualifying subordinated debt 37,126 37,157 54,587 57,246
- -----------------------------------------------------------------------------------------------------------------------------------
Total Tier 2 capital $106,353 $145,957 $146,779 $168,671 $175,500
- -----------------------------------------------------------------------------------------------------------------------------------
Total qualifying capital $925,126 $851,492 $820,938 $1,040,498 $992,416
- -----------------------------------------------------------------------------------------------------------------------------------
Risk-weighted assets $6,495,907 $6,744,921 $6,694,329 $6,965,560 $7,088,791
Risk-weighted off-balance sheet exposure 1,021,703 971,070 1,085,090 1,171,444 1,167,978
- -----------------------------------------------------------------------------------------------------------------------------------
Less: disallowance for loan loss, intangibles and PMSR 149,402 181,882 189,321 209,210 160,123
===================================================================================================================================
Total risk-weighted assets and off-balance sheet exposure $7,368,208 $7,534,109 $7,590,098 $7,927,794 $8,096,646
===================================================================================================================================
Minimum Ratios for
Well-Capitalized Institutions
===================================================================================================================================
Tier 1 risk-based capital ratio 6.00% 11.11% 9.36% 8.88% 11.00% 10.09%
===================================================================================================================================
Total risk-based capital ratio 10.00% 12.56% 11.30% 10.82% 13.12% 12.26%
===================================================================================================================================
Leverage ratio 5.00% 9.83% 8.30% 7.72% 9.13% 8.20%
===================================================================================================================================
(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 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.
(3) The allowance for possible credit losses is limited to 1.25% of the total
risk-weighted assets and off-balance sheet exposure.
57
60
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 18
for a presentation of the Corporation's and parent company's sources of funds
for the most recent five quarters.
58
61
MANAGEMENT'S DISCUSSION AND ANALYSIS
Michigan National Corporation and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Table 18 Sources of Funds (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Michigan National Corporation
Three Months Ended
(in thousands) 06/30/95 03/31/95 12/31/94 09/30/94 06/30/94
- ------------------------------------------------------------------------------------------------------------------------------------
% 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 $6,185,131 75% $6,413,647 75% $6,595,427 76% $6,802,399 74% $7,338,660 73%
Discretionary deposits (1) 686,083 8% 696,636 8% 695,677 8% 710,550 8% 816,867 8%
Short-term borrowings 337,513 4% 324,416 4% 319,030 4% 401,036 4% 709,301 7%
Long-term debt 15,802 0% 69,741 1% 69,915 1% 70,779 1% 76,400 1%
Equity 893,338 11% 819,245 9% 795,017 9% 997,541 11% 891,835 9%
Other liabilities 202,006 2% 221,649 3% 216,903 2% 225,001 2% 203,303 2%
- ------------------------------------------------------------------------------------------------------------------------------------
Total $8,319,873 100% $8,545,334 100% $8,691,969 100% $9,207,306 100% $10,036,366 100%
====================================================================================================================================
Parent Company:
(in millions)
Subsidiaries' retained
earnings available for
dividends (2) $76 $43 $14 $30 $65
====================================================================================================================================
(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.
59
62
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
60
63
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 4. - Results of Votes of Security Holders
At the June 2, 1995, Special Meeting of Shareholders of Michigan National
Corporation, shareholders considered and voted upon two proposals. A summary
of the proposals and the results of the voting were as follows:
1) To approve and adopt an Agreement and Plan of Merger, dated as of
February 4, 1995, 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 Michigan National Corporation
(the "Corporation"). Under the agreement, (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 will be converted into the right to receive $110 in cash, without
interest.
This proposal was approved by a vote of shares as follows: 10,330,566 FOR,
179,049 AGAINST and 16,041 ABSTAIN.
2) To direct the Board of Directors to straightaway sell, exchange or
merge Michigan National Corporation on a tax free basis so as to maximize share
value of all shareholders.
This proposal was defeated by a vote of shares as follows: 1,424,809 FOR,
8,955,418 AGAINST and 145,429 ABSTAIN.
The Special Meeting of Shareholders was held to consider the above proposals,
and not to elect directors. Therefore, the Board of Directors of Michigan
National Corporation remains unchanged from that reported in the 1994 Form
10-K.
61
64
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)
August 11, 1995 /s/ Joseph J. Whiteside
------------------------------------
Joseph J. Whiteside
Executive Vice President
(Chief Financial Officer)
August 11, 1995 /s/ Robert V. Panizzi
------------------------------------
Robert V. Panizzi
Senior Vice President and Controller
(Chief Accounting Officer)
62
65
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------ -----------
11 Statement regarding computation of
earnings per common share
27 Financial Data Schedule