Michigan National Corporation
Michigan National Corporation
27777 Inkster Road
P.O. Box 9065
Farmington Hills, Michigan 48333-9065
Fax: (810) 473-3086
Total Assets: $10 billion
Stock Exchanges: NASDAQ
SICs: 6712 Bank Holding Companies; 6021 National
Commercial Banks; 6022 State Commercial Banks; 6035
Federal Savings Institutions
Michigan National Corporation is a bank holding company for nationally and state-chartered commercial banks and federally-chartered savings and loan institutions. Its major subsidiaries operate in Michigan and California. In 1994, Michigan National’s principal subsidiary, Michigan National Bank (MNB) had assets valued at $8.8 billion. It ranked as the 58th largest bank in the United States. MNB operated 189 branches and boasted one of the largest Automated Teller Machine (ATM) networks in Michigan, consisting of about 300 ATMs.
Michigan National Bank was founded in 1941, when Howard J. Stoddard consolidated six Michigan banks: First National Bank (Battle Creek), First National Bank (Grand Rapids), Lansing National Bank (Lansing), First National Bank (Marshall), First National Bank (Port Huron), and Saginaw National Bank (Saginaw). At the time, this was the second largest bank merger in the United States.
Stoddard, an innovative executive, earned a reputation for actively seeking out consumers and introducing many new services. Under his direction in 1946, MNB pioneered extended banking hours. Saturday banking was first offered in 1947, and Michigan’s first drive-through window appeared in 1948. In 1955, MNB became the first Michigan bank to pay semi-annual interest on Certificates of Deposit. In 1960, it began offering “Full-Time” daily interest on savings accounts.
Stoddard’s son, Stanford “Bud” Stoddard, who had begun working as a teller at age 14 during the 1940s, became president of MNB’s flagship bank in Detroit in 1962. Following the elder Stoddard’s sudden death in 1971, Stanford Stoddard moved into his father’s office.
Regulatory changes led to the establishment of Michigan National Corporation in 1972. Prior to that year, Michigan state law did not permit banking institutions to own bank stocks, keeping statewide chains of affiliated banks from forming. The Stoddards, however, had circumvented the regulation by using employee pension funds (which were not subjected to the same regulatory prohibitions) and partnerships with investors to control related banks throughout the state. After regulatory modifications permitted the establishment of multiple-bank holding companies, Stoddard reorganized the MNB system establishing Michigan National Corporation.
The newly formed Michigan National Corporation, with Stanford Stoddard as president, immediately became the largest banking system in the state. Its five existing banks had a total of 360 offices. Stoddard led the company into an era of expansion. He worked to increase Michigan National’s market share through the opening of new branches and by engaging in heavy promotion of innovative banking products such as mortgages for mobile homes. By 1981, Michigan National had grown to incorporate 27 affiliate banks.
Stoddard also pioneered the fields of credit cards and ATMs. Under his leadership, Michigan National developed one of the largest ATM networks in Michigan and became one of the leading credit card issuers in the nation.
The early 1980s, however, brought difficulties to Michigan National. The company purchased $200 million in bad loans from Oklahoma City’s Penn Square Bank, which collapsed in 1982. As a result, Michigan National lost approximately one-third of its capital. In 1983, Michigan National failed to produce a profit. The U.S. Comptroller of the Currency expressed concern about the company’s methods of accounting for its loans with Penn Square Bank and Continental Illinois Bank, and the negative attention led to regulatory sanctions. According to a report in Bankers Monthly, Michigan National returned to only modest profits in 1984.
In 1984, Stanford Stoddard resigned. The controversial resignation took place after charges of mismanagement were made by the U.S. comptroller, who accused Stoddard of having diverted bank money for his personal use. In addition, Stoddard faced Federal fraud charges claiming that he had leased a building in which he held partial ownership to Michigan National at rates higher than the market rate. Although Stoddard was initially convicted, the Federal fraud charge conviction was overturned and charges made by office of the comptroller were withdrawn. In addition, in 1993, Stoddard reached a $4 million settlement with Michigan National for damages suffered in the aftermath of his resignation.
Robert J. Mylod, former executive of Federal National Mortgage Association, became chairperson and chief executive officer of Michigan National in 1985. Immediately after attaining the office, Mylod faced multiple challenges including a hostile takeover attempt from a competitor, Comerica, Inc. His attempts to restore profitability included staff cuts and consolidating or selling some affiliate banks and branches. At the time Mylod took over, Michigan National’s system of 700 ATMs and 340 branches was the largest in the state. Under his direction, 140 branches were closed, the number of ATM’s was cut in half, and employment was pared from 7,000 to 6,300.
Mylod’s struggle to boost profitability by controlling expenses led to an improvement in Michigan National’s overall financial picture. As a result, in 1986 regulatory sanctions were removed. Mylod also increased efforts aimed at promoting services to the consumer and commercial markets and expanding the company’s mortgage operations. Mylod’s management team focused on developing the company’s core business in four areas which were identified as commercial, consumer, investment, and mortgage banking. According to information published in Banker’s Monthly, the company’s mortgage portfolio increased from $500 million in 1985 to $6 billion in 1988.
Michigan National’s net income rose 36 percent in 1987. The number of nonperforming loans (non-accruing and renegotiated loans) dropped to 1.54 percent of total loans, compared with 1.97 percent in 1986. Return on equity, another measure of bank performance, was reached 14 percent, up from nine percent in 1985. By the end of 1988, return on equity had risen further to 17.18 percent. Michigan National’s total earnings of $93.2 million in 1988 set a company record.
Despite these successes, the late 1980s also brought new challenges. In 1988, a change in Michigan’s banking regulations allowed for mergers between Michigan banks and banks in other states. The new climate again raised the risk of hostile takeover and brought new rivals into the state. According to a statement made by Michigan National at the time, “Michigan laws that allow reciprocal interstate banking with contiguous states and nationwide interstate banking have enlarged the banking market and heightened competitive forces.” Michigan National took advantage of the regulatory changes by purchasing banks in California and Texas. Other acquisitions, however, yielded disappointing results. Michigan National purchased an investment advisory company and a commercial lending company, both of which sustained losses and were folded.
By establishing itself as a strong commercial lender, Michigan National found itself in a difficult position when the national economy suffered a downturn at the end of the 1980s. The company had increased commercial real estate lending by 73 percent during the last three years of the decade and suffered from the financial woes of its customers. According to a report in the Detroit News, commercial real estate accounted for 70 percent of Michigan National’s bad loans. In addition, Michigan National had made risky loans to out-of-state commercial ventures.
In order to offset losses from commercial real estate loans, Michigan National sold its credit card operations. The sale resulted in a pre-tax gain of $225 million, a figure representing more than half the corporation’s profits in 1989. Although the move drew controversy and criticism, Mylod defended it. According to his own projections, the credit card business faced increased competition not only among banks but from new corporate competitors such as General Motors Corp. Mylod expected the increased competition to lead to a reduction or elimination of annual fees making credit card operations less profitable. By the early 1990s, some industry analysts conceded that Mylod’s predictions had proved correct.
Another controversy occurred when Michigan National moved into new headquarters in Farmington Hills, Michigan, in 1989. The $30 million, 240,000-square-foot structure, built to accommodate 1,150 workers included athletic and dining facilities. In light of the company’s poor profit picture, some critics regarded the building as excessive.
Michigan National turned to fee-generating services in an attempt to bolster profits. According to a Forbes report, in 1991 Michigan National spent $252 million to purchase mortgage servicing rights to a large group of mortgages. Under the agreement, Michigan National would collect and process mortgage payments on behalf of other lenders for a fee. The servicing rights were purchased with the expectation that Michigan National would collect processing fees over the long-term duration of the mortgages. When interest rates subsequently fell to 30-year lows, homeowners refinanced in droves. As a result, the potential income to be generated from processing fees was lost.
Other types of fee-generating activities, such as credit card processing and personal investment advising, were also explored. In 1991, Michigan National was the nation’s 14th largest processor of credit-card purchases, processing retail charges totaling $3.2 billion. Personal investing services were conducted by a subsidiary, Independence One Capital Management. Independence One used ’ ’pattern recognition ’ ’ models to make investment decisions based on past market behavior.
Another attempt to expand fee income involved the purchase of a Dallas-based software producer, BancA Corp. BancA’s software package, POWER 1, was first used by Michigan National in 1989 to streamline commercial credit operations. POWER 1 provided the tools necessary for portfolio management and tracking customer profitability. The software enabled users to reduce expenses by implementing a uniform policy, working more efficiently with a reduced staff, and improving loan quality by weeding out applications that failed to meet pre-specified criteria. However, slower than expected software sales led to the 1993 decision to sell BancA’s products to Andersen Consulting.
In 1993, Michigan National was ranked at the bottom of a list of Michigan’s 18 largest banks. Rankings were made using standard industry measurements such as return on equity and growth in earnings per share. Moreover, according to an analysis made by Keefe, Bruyette & Woods, Michigan National’s return on assets placed it last among U.S. banks with assets over $10 billion. While disgruntled stockholders began pushing for the sale of the company, Mylod insisted that the organization was committed to remaining independent.
Michigan National’s earnings in 1993 fell to $23.8 million, down from the $66.1 million reported in 1992. A Memorandum of Understanding was then issued by the Office of the Comptroller of Currency, calling for Michigan National to review and improve its management structure, institute better policies for controlling risk management, and analyze its mortgage banking business.
Some of Michigan National’s profit woes were directly related to its high expenses. According to report a in Forbes, Michigan National’s efficiency ratio, expressed as a percentage of expenses to revenue, stood at 77 percent. The figure was much higher than other banks in Michigan, which posted efficiency ratios averaging about 63 percent. Efficiency ratios at some of the nation’s stronger banks were reported at less than 60 percent. In order to help reduce expenses and improve the corporation’s profitability, Michigan National’s management decided to refocus attention on its core businesses in Michigan. As a result, Michigan National began divesting itself of its diverse holdings. In 1993, some bank holdings in Texas were sold to the Lockwood Banc Group, Inc. for $16.7 million. Michigan National also announced plans to sell its remaining Texas affiliates.
As Michigan National entered 1994, its primary focus continued to be in mortgage banking and financial institutions. The company’s Independence One Mortgage Corporation originated and serviced residential mortgage loans through 23 offices in ten states. Its servicing portfolio totaled $8.9 billion. Other operating subsidiaries included: Independence One Bank of California (IOBOC), a savings and loan association with five branches and three business lending offices. IOBOC had assets totaling $757 million. Its primary market was in Southern California. First Collateral Services, Inc. (FCSI), a mortgage warehouse lender and subsidiary of IOBOC, also operated in California. Independence One Brokerage Services, Inc. (IOBSI), a broker-dealer established to assist clients in achieving their financial goals, was licensed to do business in 13 states. Independence One Capital Management Corporation provided investment advice and managed assets of more than $6.5 billion. Executive Relocation Corporation (ERC) served Fortune 500 firms and assisted in relocating employees throughout the United States.
The fastest growing segment of Michigan National’s loan portfolio, consumer loans, increased to $596.6 million in 1993, up $78.6 million over the previous year. In addition, consumer deposits grew. According to the company’s 1993 annual report, checking and savings deposits increased from $192 million to $2.2 billion. Debit card processing provided another rising source of income. Michigan National reported that it handled approximately 75 percent of point-of-sale transactions in Michigan. Fees generated from debit card activities increased 74 percent in 1993 and were projected to continue to swell.
Continuing its tradition of innovation, Michigan National, in partnership with Microsoft Corp., introduced an electronic home banking system in 1994. Michigan National was one of only three banks across the nation to offer the new services. Using Microsoft’s program Microsoft Money 3.0, users could access “Bank On-Line,” which permitted them to review transactions, balance checkbooks, and communicate with the bank. “Pay On-Line” users could pay bills electronically. A third electronic service, “Quote On-Line” enabled investors to track stocks and keep a watchful eye on the value of their investment portfolios.
Despite its efforts, bank profitability remained marginal, and Michigan National announced further cost cutting measures including the closing of 12 additional branches. In a display of dissatisfaction, one-third of the company’s shareholders voted against the slate of directors at the company’s annual meeting held in 1994. Some demanded that the organization be sold. In June, the company announced that it planned to sell its mortgage subsidiary, Independence One Mortgage.
Michigan National reported some improvement in the second quarter of 1994. The company’s quarterly net income increased to $63.3 million, compared with $8.9 million in the same quarter the previous year. Mylod attributed the improvement to refocused efforts in the Michigan market, higher net interest margins, lower mortgage servicing amortization, improved asset quality, and better performance in consumer and commercial banking sectors.
Amid much speculation about whether Michigan National’s management would sell or merge the company, Mylod remained adamant in his commitment to independence. According to a published statement, the corporation claimed, “Our vision is to remain a strong, independent financial services company which is able to provide shareholders with a competitive return on their investment.”
Michigan National Bank; Independence One Bank of California; First Collateral Services, Inc.; Independence One Brokerage Services, Inc.; Independence One Mortgage Corporation; Independence One Capital Management Corporation; Executive Relocation Corporation.
Fraser, Bruce, “Michigan National Takes Lead in Electronic Overhaul,” American Banker, February 1, 1993.
Hellauer, Brian, “Anderson Acquires Software Unit from Michigan National,” American Banker, October 21, 1993.
Klinkerman, Steve, “Michigan National Settles with Ex-Chairman for $4 Million,” American Banker, May 13, 1993.
Koselka, Rita, “Under Siege,” Forbes, May 23, 1994.
Kreuzer, Terese, “Born-Again Banks: Four Fabulous Turnarounds,” Bankers Monthly, April 1989.
“Michigan National’s Mortgage Unit Is for Sale,” New York Times, June 21, 1994.
Roush, Matt, “Breaking New Ground,” Grains Detroit Business, August 17, 1992.
Starkman, Eric M., “How Stanford Stoddard Fought Off the Regulators,” American Banker, November 19, 1991.
Waldsmith, Lynn, “Bank Hires N.Y. Firm for Financial Advice,” Detroit News, May 26, 1994.
Waldsmith, Lynn, “Michigan National to Close 12 Branch Offices, Cut Staff,” Detroit News, January 20, 1994; “Michigan National to Offer At-Home Banking,” Detroit News, January 12, 1994; “Sizing Up Michigan National,” Detroit News, April 10, 1994.
Zweig, Phillip L., “The Rehabilitation of Michigan National,” Financial World, November 17, 1987.