Michigan Heritage Bancorp (MHBC) 10QSB 2001 Q3 Quarterly report (small business)

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-QSB

Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the period ended

SEPTEMBER 30, 2001

or

Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from      to      

Commission file number: 333-17317

MICHIGAN HERITAGE BANCORP, INC.
(Exact name of small business issuer as specified in its charter)

Michigan	38-3318018
(State or other jurisdiction	(I.R.S. employer
of incorporation or organization)	identification no.)

28300 Orchard Lake Road, Suite 200, Farmington Hills, MI 48334
(Address of principal executive offices)

248-538-2525
(Issuer’s telephone number, including area code)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: No:

At October 31, 2001 there were 1,488,764 shares of Common Stock of the issuer issued and outstanding.

Transitional Small Business Disclosure Format (check one): Yes: No:

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TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENT OF EARNINGS
CONSOLIDATED STATEMENT OF CASH FLOW
NOTES TO FINANCIAL STATEMENTS
PART II—OTHER INFORMATION
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS
 
Michigan Heritage Bancorp, Inc.
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000
(Unaudited)

				(000s omitted for dollars)
				September 30, 2001			December 31, 2000
ASSETS
Cash and due from banks, noninterest bearing				$	1,133		$	1,271
Interest bearing deposits with banks					1,111			3,981
Federal funds sold					4,900			7,400
	Cash and cash equivalents				7,144			12,652
Securities available for sale					13,034			12,078
Federal Reserve Bank stock and other stock					730			419
	Total investments				13,764			12,497
Loans, gross					116,273			95,137
	Less: allowance for loan losses				1,734			1,887
		Net loans			114,539			93,250
			Total earning assets		134,314			117,128
Leasehold improvements, net					253			288
Furniture & equipment, net					487			554
	Total fixed assets				740			842
Interest receivable					805			704
Deferred income taxes					412			412
Other assets					385			211
	Total other assets				1,602			1,327
			Total assets	$	137,789		$	120,568
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total deposits				$	113,688		$	106,660
Other borrowed funds					10,500			500
Other liabilities					889			1,085
	Total liabilities				125,077			108,245
Stockholders’ Equity
	Preferred stock—no par value; 500,000 shares authorized, none issued and outstanding				0			0
		Common stock—no par value; 4,500,000 shares authorized, issued and outstanding— 1,488,764 shares			13,730			13,730
	Accumulated deficit				(1,258	)		(1,471	)
	Accumulated other comprehensive income				240			64
		Total stockholders’ equity			12,712			12,323
			Total liabilities and stockholders’ equity	$	137,789		$	120,568
	Total loan loss reserve ratio				1.49	%		1.98	%
	Total loan to asset ratio				84	%		79	%

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Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
Three and Nine Month Periods Ended
September 30, 2001 and September 30, 2000
(Unaudited)

		(000s omitted except per share data)
			Three Months Ended September 30,					Nine Months Ended September 30,
			2001			2000		2001		2000
OPERATING INCOME:
Interest income			$	2,744		$	2,430	$	8,014	$	7,075
Interest expense				1,581			1,430		4,751		4,056
	Net interest income before provision for loan losses			1,163			1,000		3,263		3,019
Less: provision for loan losses				285			15		347		45
	Net interest income after provision for loan losses			878			985		2,916		2,974
Gain on sale of securities held available for sale				0			0		44		0
Gain on sale of loans and other assets				167			14		478		28
Other income				27			28		77		83
	Total other operating income			194			42		599		111
Total operating income				1,072			1,027		3,515		3,085
OTHER OPERATING EXPENSES:
Salaries and employee benefits				646			448		1,858		1,398
Occupancy expense				106			93		315		275
Equipment expense				61			53		174		172
Data processing expense				30			25		75		70
Insurance expense				13			13		33		34
Advertising/promotion expense				37			43		124		127
Office supplies and printing expense				10			10		30		31
Professional fees				87			74		237		192
FDIC assessment				5			11		30		35
Lien, recording, and other loan fees, net				45			6		112		1
Michigan single business tax				15			12		45		33
Other expense				54			67		185		169
	Total other operating expense			1,109			855		3,218		2,537
Net operating income				(37	)		172		297		548
Provision for federal income taxes				(19	)		55		82		178
Net income			$	(18	)	$	117	$	215	$	370
Per Common Share Data
Basic earnings per share			$	(0.01	)	$	0.08	$	0.14	$	0.25
Diluted earnings per share			$	(0.01	)	$	0.08	$	0.14	$	0.25

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Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flow
Nine Month Periods Ended
September 30, 2001 and September 30, 2000
(Unaudited)

		(000s omitted)
		Nine Months Ended September 30,
		2001			2000
Operating activities:
	Net income	$	215		$	370
	Adjustments to reconcile net income to net cash provided in operating activities		(672	)		1,311
	Net cash provided (used) by operating activities		(457	)		1,681
Investing activities:
	Purchase of U.S. Treasury and agency securities		(1,000	)		(6,000	)
	Proceeds from matured or called U.S. Treasury and agency securities		3,500			3,500
	Purchase of other securities		(5,905	)		(2,775	)
	Proceeds from matured or called other securities		2,844			1,040
	Purchase of Federal Reserve Bank and other stock		(305	)		(34	)
	Purchase of leasehold improvements, furniture and equipment		(55	)		(301	)
	Net change in gross loans		(21,158	)		(8,680	)
	Net cash used by investing activities		(22,079	)		(13,250	)
Financing activities:
	Increase in deposits		7,028			5,389
	Payments of federal funds purchased		(500	)		—
	Proceeds from federal funds purchased		4,000			—
	Proceeds from Federal Home Loan Bank advances		6,500			—
	Net cash provided by financing activities		17,028			5,389
Decrease in cash and cash equivalents			(5,508	)		(6,180	)
Cash and cash equivalents at beginning of year			12,652			18,188
Cash and cash equivalents at end of period		$	7,144		$	12,008

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Michigan Heritage Bancorp, Inc.
Notes to Financial Statements
September 30, 2001

Item 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization:

Michigan Heritage Bancorp, Inc. (the “Company”) was incorporated in the State of Michigan on September 22, 1989. The Company was inactive from that time until its Articles of Incorporation were amended on November 6, 1996 into its current form. The Company is a bank holding company whose primary purpose is to own and operate Michigan Heritage Bank (the “Bank”) as the Bank’s sole stockholder. Organizational and other start-up costs were funded with loans from organizers. Proceeds from the Company’s initial public offering were primarily used to capitalize the Bank which is currently headquartered in Farmington Hills, Michigan. The Company completed an initial public offering of common stock during the first quarter of 1997, realizing a total of $10.9 million (after payment of underwriters’ commissions and offering expenses). During the fourth quarter of 1999, the Company completed a rights offering to existing shareholders raising $1.3 million in additional capital after payment of offering expenses. The consolidated financial statements of the Company include its only subsidiary, the Bank. All adjustments, which in the opinion of management are necessary in order to ensure that the interim financial statements are not misleading, have been included.

The Bank provides a focused core of banking services primarily for small- to medium-size businesses, as well as to individuals. The Bank’s lending services include commercial loans, commercial real estate, equipment leasing, and residential mortgages. The new mortgage division which began operations in January 2001 offers a wide range of products including variable and fixed rate mortgage loans, home equity lines of credit and other forms of consumer lending. The Bank also formed a new, wholly-owned leasing subsidiary, MHB Leasing, Inc., which began actively booking new business in June 2001. The new entity will expand the Bank’s capabilities in equipment leasing by providing tax-oriented true leases and other structured lease products.

For commercial customers who seek additional deposit services, the Bank offers the convenience of a“Rapid Courier Service.” This service offers prearranged pick-up times for all business banking transactions. The Bank’s commercial checking accounts also offer “Sweep” capabilities with low or no fees.

Michigan Heritage Bank’s primary goal is to provide personal service with an experienced staff using state-of-the-art technology. The Bank recently introduced convenient account access through a new telephone banking service and plans to offer internet banking sometime in the future.

Michigan Heritage Bank is a state chartered, full-service, commercial bank, a member of both the Federal Reserve System and the Federal Home Loan Bank and its deposits are FDIC insured.

Basis of Presentation:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates and assumptions.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PRELIMINARY NOTE: The Company wishes to caution readers not to place undue reliance on any “forward-looking statements” contained in the following discussion and advises readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

Comparative Results for the Three Months Ended September 30, 2001 and September 30, 2000

     The Company had a net loss of $18,000 for the quarter ending September 30, 2001. Net income for the same quarter last year was $117,000. The primary reason for the third quarter loss this year was a $270,000 increase in loan loss provision expense over the same quarter last year. Management believes that with the overall slowdown in the economy, especially the automotive sector, coupled with the recent tragic events of September 11, the additional loan loss provision was prudent to bring the total allowance for loan losses to a level which management believes is adequate relative to the overall quality of the loan portfolio. Net interest income before allowances for loan losses increased by $163,000 or 16% to $1,163,000 primarily due to a $19,871,000 or 19% increase in average earning assets offset partially by a reduction in net interest margin—3.68% for the third quarter 2001 compared to 3.77% for the third quarter 2000. As a combined result, net interest income after provision for loan losses decreased $107,000 or 11% to $878,000.

Other operating income increased by $152,000 or 362% to $194,000 due primarily to an increase of $153,000 in net gains on sale of loans due to the addition of the new mortgage division this year.

Other operating expenses increased by $254,000 or 30% to $1,109,000. Salaries and employee benefits increased by $198,000 to $646,000 due to additional mortgage salaries and commissions expense. Occupancy expense increased by $13,000 to $106,000 due primarily to the new mortgage center in Farmington, Michigan. Loan fees increased by $39,000 to $45,000 mostly due to the new mortgage division. All other remaining expenses increased by a net $4,000.

The resulting loss before federal income tax was $37,000 for the third quarter 2001 compared to earnings before federal income tax of $172,000 for the same quarter last year. Federal income tax was a $19,000 credit for the third quarter of 2001 compared to a $55,000 expense for the same time period last year.

Net loss per weighted average share outstanding was $0.01 for the quarter ended September 30, 2001 compared to net earnings of $0.08 per share for the same quarter last year. On a diluted basis, net loss per share was also $0.01 for the quarter ended September 30, 2001 compared to net earnings of $0.08 per share for the same quarter last year.

Comparative Results for the Nine Months Ended September 30, 2001 and September 30, 2000

Net income for the nine months ended September 30, 2001 was $215,000 compared to $370,000 for the same time period last year. Net interest income before allowances for loan losses increased by $244,000 or 8% to $3,263,000 primarily due to a $15,098,000 or 15% increase in average earning assets offset partially by a reduction in net interest margin—3.66% for the first nine months of 2001 compared to 3.88% for the first nine months of 2000. Provision for loan losses increased by $302,000 to $347,000 primarily due to third quarter 2001 loan loss provisions of $285,000 to bring the total allowance for loan losses to a level which management believes is adequate relative to the overall quality of the loan portfolio. As a combined result, net interest income after provision for loan losses decreased $58,000 or 2% to $2,916,000.

Other operating income increased by $488,000 or 440% to $599,000 due primarily to an increase of $450,000 in net gains on sale of loans due to the addition of the new mortgage division this year and a $44,000 net gain on sale of securities held available for sale. Other miscellaneous income decreased by $6,000.

Other operating expenses increased by $681,000 or 27% to $3,218,000. Salaries and employee benefits increased by $460,000 to $1,858,000 due to additional mortgage salaries and commissions expense. Occupancy expense increased by $40,000 to $315,000 due primarily to the new mortgage center in Farmington, Michigan. Professional fees increased by $45,000 mostly due to loan related legal fees. Other loan fees increased by $111,000 mostly due to the operation of the new mortgage division this year. All other remaining expenses increased by a net $25,000 primarily due to increases in

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data processing expense, Michigan single business tax, travel expenses, correspondent bank service charges and ATM related fees.

The resulting income before federal income tax decreased by $251,000 to $297,000 compared to the same period last year. Federal income tax was $82,000 for the first nine months of 2001 compared to $178,000 for the same time period last year.

Net income per weighted average share outstanding was $0.14 for the nine months ended September 30, 2001 compared to $0.25 per share for the same period last year. On a diluted basis, net income per share was also $0.14 for the nine months ended September 30, 2001 compared to $0.25 per share for the same period last year.

Balance Sheet Change—September 30, 2001 From December 31, 2000

Total assets increased by $17,221,000 or 14% to $137,789,000 from December 31, 2000 to September 30, 2001. Gross loans for the same nine-month time period increased by $21,136,000 or 22% to $116,273,000. The growth in loans was funded primarily from deposits, borrowed funds, and cash and cash equivalents. Deposits increased by $7,028,000 or 7% to $113,688,000. Borrowed funds increased by $10,000,000 to $10,500,000 in the form of $6,500,000 in notes payable to the Federal Home Loan Bank and $4,000,000 in federal funds purchased at September 30, 2001—there were only $500,000 in federal funds purchased at December 31, 2000. Cash and cash equivalents decreased by $5,508,000 or 44% to $7,144,000 primarily due to a $2,500,000 reduction in federal funds sold and a $2,870,000 reduction in interest bearing balances with banks.

Loans and Allowances for Loan Losses

The categories of loans outstanding at September 30, 2001 in dollars and as a percentage of total loans are as follows:

		(000s omitted for dollars)
				Pct of total
Loan Category		Amount		loans
Commercial, financial and agricultural		$	82,970		71.4	%
Real estate-construction			6,169		5.3	%
Real estate-mortgage			21,332		18.3	%
Installment loans to individuals			352		0.3	%
Lease financing			5,450		4.7	%
	Total loans	$	116,273		100.0	%

     Note: There were no agricultural loans as of September 30, 2001

The existing and forecasted economic downturns exacerbated by the tragic events of September 11 have increased the current perceived level of risk in the loan portfolio. However, management believes that the $285,000 loan loss provision expensed during the third quarter of this year brought the total allowance for loan losses to an adequate level relative to the current overall quality of the loan portfolio. In addition, the level of credit risk in the loan portfolio has not changed proportionately with the change in mix and size of the loan portfolio for the first nine months of 2001.

At September 30, 2001 there were $1,166,000 in non-accruing loans. There were 13 loans totaling $502,000 charged off against reserves during the first nine months of 2001. There were $2,294,000 in accruing loans past due 30 days or more: $709,000 past due 30 to 59 days, $252,000 past due 60 to 89 days and $1,333,000 past due 90 days or more. Management fully expects that diligent servicing of these loans will minimize delinquencies.

Total loan loss reserves of $1,734,000 at September 30, 2001 were 1.49% of total loans, which included $623,000 in specific allowances. The following highlights the allocations of allowances for loan losses as of September 30, 2001.

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		(000s omitted for dollars)
		Loan loss				Percent of loan
		allowance		Loan amounts		loss allowance
		amount		outstanding		to loan amounts
Domestic:
	Commercial, financial and agricultural	$	1,320	$	82,970		1.59		%
	Real estate-construction		64		6,169		1.04		%
	Real estate-mortgage		242		21,332			1.13	%
	Installment loans to individuals		4		352		1.25		%
	Lease financing		44		5,450		0.80		%
Foreign			—		—		0.00		%
Off-balance sheet items and unallocated			60		—		n/a
Total		$	1,734	$	116,273		1.49		%

     Note: There were no agricultural loans as of September 30, 2001

Liquidity and Capital Resources

Michigan Heritage Bank’s current cash projections as of September 30, 2001 indicate adequate cash balances. The Bank has additional line of credit facilities with national lending institutions to add funding capacity. Bank management has also established a network of banks that can be used to sell or participate a portion of the Bank’s loan portfolio. These techniques allow the Bank to service its business relationships and generate fee and servicing revenue.

The Company’s liquidity remained adequate during the nine-month period ended September 30, 2001. Michigan Heritage Bancorp had $7,144,000 in cash and cash equivalents as of September 30, 2001 including $1,111,000 in interest bearing deposits in other banks and $4,900,000 in federal funds sold. The Bank has proven its ability to attract deposits and build a stable deposit base from which to fund loans. In addition, as of September 30, 2001, the Bank had $6,500,000 in notes payable to the Federal Home Loan Bank at a weighted average rate of 4.43%.

Michigan Heritage Bank is subject to various regulatory capital requirements. To be considered adequately-capitalized or well-capitalized, Michigan Heritage Bank must maintain a Tier 1 leverage capital ratio of 4.0% and 5.0%, respectively. The Bank’s Tier 1 leverage capital ratios were 9.0% and 9.5% at September 30, 2001 and December 31, 2000, respectively. Michigan Heritage Bank plans to remain well-capitalized on an ongoing basis.

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PART II—OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     No exhibits have been filed for this report.

(b)  Reports on Form 8-K

     No reports on Form 8-K have been filed during the quarter for which this report is filed.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		MICHIGAN HERITAGE BANCORP, INC.
	By:	/s/ Anthony S. Albanese
		Anthony S. Albanese President and Chief Operating Officer
	And:	/s/ Darryle J. Parker
		Darryle J. Parker Secretary, Treasurer, and Chief Financial Officer (Duly authorized officer)
DATED: October 31, 2001

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