U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
| x | Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the period ended
MARCH 31, 2002
or
| o | 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 (State or other jurisdiction of incorporation or organization) | 38-3318018 (I.R.S. employer 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:xNo:o
At April 19, 2002 there were 1,488,764 shares of Common Stock of the issuer issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes:xNo:o
| PART I—FINANCIAL INFORMATION | ||||||||
| ITEM 1. FINANCIAL STATEMENTS | ||||||||
| PART II—OTHER INFORMATION | ||||||||
| SIGNATURES | ||||||||
PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Michigan Heritage Bancorp, Inc.
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
(Unaudited)
| (000s omitted for dollars) | ||||||||||||
| March 31, 2002 | December 31, 2001 | |||||||||||
| ASSETS | ||||||||||||
| Cash and due from banks, noninterest bearing | $ | 1,247 | $ | 966 | ||||||||
| Interest bearing deposits with banks | 104 | 66 | ||||||||||
| Federal funds sold | 0 | 5,700 | ||||||||||
| Cash and cash equivalents | 1,351 | 6,732 | ||||||||||
| Securities available for sale | 16,901 | 13,727 | ||||||||||
| Federal Reserve Bank stock and other stock | 1,105 | 1,005 | ||||||||||
| Total investments | 18,006 | 14,732 | ||||||||||
| Gross loans and leases | 117,253 | 119,365 | ||||||||||
| Less: Net deferred fees | 127 | 122 | ||||||||||
| Allowance for credit losses | 1,773 | 1,802 | ||||||||||
| Net loans and leases | 115,353 | 117,441 | ||||||||||
| Loans held for sale | 174 | 1,589 | ||||||||||
| Total earning assets | 133,637 | 139,528 | ||||||||||
| Leasehold improvements, net | 228 | 241 | ||||||||||
| Furniture & equipment, net | 470 | 489 | ||||||||||
| Total fixed assets | 698 | 730 | ||||||||||
| Interest receivable | 758 | 720 | ||||||||||
| Other real estate and assets owned | 454 | 540 | ||||||||||
| Other assets | 599 | 1,045 | ||||||||||
| Total other assets | 1,811 | 2,305 | ||||||||||
| Total assets | $ | 137,393 | $ | 143,529 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Total deposits | $ | 109,455 | $ | 111,252 | ||||||||
| Other borrowed funds | 14,540 | 18,500 | ||||||||||
| Other liabilities | 720 | 1,263 | ||||||||||
| Total liabilities | 124,715 | 131,015 | ||||||||||
| 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 | (1,138 | ) | (1,361 | ) | ||||||||
| Accumulated other comprehensive income | 86 | 145 | ||||||||||
| Total stockholders’ equity | 12,678 | 12,514 | ||||||||||
| Total liabilities and stockholders’ equity | $ | 137,393 | $ | 143,529 | ||||||||
| Credit loss reserve to gross loans and leases ratio | 1.51 | % | 1.51 | % | ||||||||
| Gross loans and leases to asset ratio | 85 | % | 83 | % | ||||||||
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
Three Month Periods Ended
March 31, 2002 and March 31, 2001
(Unaudited)
| (000s omitted | |||||||||||
| except per share data) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2002 | 2001 | ||||||||||
| OPERATING INCOME: | |||||||||||
| Interest income | $ | 2,802 | $ | 2,629 | |||||||
| Interest expense | 1,307 | 1,596 | |||||||||
| Net interest income before provision for credit losses | 1,495 | 1,033 | |||||||||
| Less: provision for credit losses | 75 | 30 | |||||||||
| Net interest income after provision for credit losses | 1,420 | 1,003 | |||||||||
| Gain on sale of securities held available for sale | 0 | 44 | |||||||||
| Gain on sale of loans, leases and other assets | 79 | 117 | |||||||||
| Other income | 26 | 26 | |||||||||
| Total other operating income | 105 | 187 | |||||||||
| Total operating income | 1,525 | 1,190 | |||||||||
| OTHER OPERATING EXPENSES: | |||||||||||
| Salaries and employee benefits | 630 | 578 | |||||||||
| Occupancy expense | 107 | 103 | |||||||||
| Equipment expense | 59 | 55 | |||||||||
| Data processing expense | 33 | 23 | |||||||||
| Insurance expense | 14 | 8 | |||||||||
| Advertising/promotion expense | 40 | 46 | |||||||||
| Office supplies and printing expense | 10 | 5 | |||||||||
| Professional fees | 131 | 80 | |||||||||
| FDIC assessment | 5 | 12 | |||||||||
| Lien, recording, and other loan and lease fees, net | 35 | 15 | |||||||||
| Michigan single business tax | 45 | 15 | |||||||||
| Other expense | 87 | 65 | |||||||||
| Total other operating expense | 1,196 | 1,005 | |||||||||
| Net operating income | 329 | 185 | |||||||||
| Provision for federal income taxes | 104 | 55 | |||||||||
| Net income | $ | 225 | $ | 130 | |||||||
Per Common Share Data | |||||||||||
| Basic earnings per share | $ | 0.15 | $ | 0.09 | |||||||
| Diluted earnings per share | $ | 0.15 | $ | 0.09 | |||||||
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flow
Three Month Periods Ended
March 31, 2002 and March 31, 2001
(Unaudited)
| (000s omitted) | |||||||||
| Three Months Ended March 31, | |||||||||
| 2002 | 2001 | ||||||||
| Operating activities: | |||||||||
| Net income | $ | 225 | $ | 130 | |||||
| Adjustments to reconcile net income to net cash provided in operating activities | 1,388 | (203 | ) | ||||||
| Net cash provided (used) by operating activities | 1,613 | (73 | ) | ||||||
| Investing activities: | |||||||||
| Purchase of U.S. Treasury and agency securities | (3,750 | ) | — | ||||||
| Proceeds from matured or called U.S. Treasury and agency securities | 1,000 | 1,500 | |||||||
| Purchase of other securities | (500 | ) | (2,251 | ) | |||||
| Proceeds from matured or called other securities | 20 | 2,250 | |||||||
| Purchase of Federal Reserve Bank and other stock | — | (105 | ) | ||||||
| Purchase of leasehold improvements, furniture and equipment | (20 | ) | (10 | ) | |||||
| Net change in loans and leases | 2,013 | (3,420 | ) | ||||||
| Net cash used by investing activities | (1,237 | ) | (2,036 | ) | |||||
| Financing activities: | |||||||||
| Decrease in deposits | (1,797 | ) | (6,606 | ) | |||||
| Payments of federal funds purchased | (5,000 | ) | (500 | ) | |||||
| Proceeds from federal funds purchased | 1,040 | — | |||||||
| Payments from Federal Home Loan Bank advances | (2,000 | ) | — | ||||||
| Proceeds from Federal Home Loan Bank advances | 2,000 | 4,000 | |||||||
| Net cash used by financing activities | (5,757 | ) | (3,106 | ) | |||||
| Decrease in cash and cash equivalents | (5,381 | ) | (5,215 | ) | |||||
| Cash and cash equivalents at beginning of year | 6,732 | 12,652 | |||||||
| Cash and cash equivalents at end of period | $ | 1,351 | $ | 7,437 | |||||
Michigan Heritage Bancorp, Inc.
Notes to Financial Statements
March 31, 2002
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, and its wholly owned subsidiary, MHB Leasing, Inc. 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 mortgage division 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’s wholly-owned leasing subsidiary, MHB Leasing, Inc., has expanded 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 offers convenient account access through a 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.
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 March 31, 2002 and March 31, 2001
The Company had net income of $225,000 for the quarter ending March 31, 2002 compared to $130,000 for the same quarter last year, an increase of $95,000 or 73%. Net interest income before provisions for credit losses increased by $462,000 or 45% to $1,495,000 primarily due to a $19,597,000 or 17% increase in average earning assets and an increase of 86 basis points in net interest margin—4.51% for the first quarter 2002 compared to 3.65% for the first quarter 2001. Provision for credit losses went up by $45,000 to $75,000 and as a combined result, net interest income after provision for credit losses increased $417,000 or 42% to $1,420,000.
Other operating income decreased by $82,000 to $105,000 due primarily to less gains on loans, leases and securities sold during the first quarter of 2002 compared to the same time frame in 2001.
Other operating expenses increased by $191,000 to $1,196,000. Salaries and employee benefits increased by $52,000 to $630,000 due to salary and other benefit increases. Professional fees increased $51,000 due mostly to MHB Leasing, Inc. management fees. Loan fees went up $20,000 due primarily to mortgage loan fees and the Michigan single business tax expense increased $30,000. All other remaining expenses increased by a net $38,000 due mostly to increases in data processing, equipment, insurance, office supplies, and other real estate expense.
The resulting net operating income before federal income tax was $329,000 for the first quarter 2002 compared to $185,000 for the same quarter last year. Federal income tax was a $104,000 compared to a $55,000 for the same time period last year.
Basic earnings per share was $0.15 for the quarter ended March 31, 2002 compared to $0.09 per share for the same quarter last year. Diluted earnings per share was $0.15 for the quarter ended March 31, 2002 compared to $0.09 per share for the same quarter last year.
Balance Sheet Change—March 31, 2002 From December 31, 2001
Total assets decreased by $6,136,000 to $137,393,000 from December 31, 2001 to March 31, 2002. Gross loans and leases for the same three-month time period decreased by $2,112,000 to $117,253,000. Cash and cash equivalents decreased by $5,381,000 to $1,351,000 due mostly to a $5,700 reduction in federal funds sold. Deposits decreased by $1,797,000 and federal funds purchased decreased by $3,960,000 to $1,040,000. Federal Home Loan Bank borrowings were $13,500,000 at the end of both March 31, 2002 and December 31, 2001.
Loans and Leases and Allowances for Credit Losses
The categories of loans and leases outstanding at March 31, 2002 in dollars and as a percentage of gross loans and leases are as follows:
| (000s omitted for dollars) | |||||||||
| Pct of total | |||||||||
| Loan and Lease Category | Amount | loans and leases | |||||||
| Commercial, financial and agricultural | $ | 78,131 | 66.7 | % | |||||
| Real estate-construction | 9,845 | 8.4 | % | ||||||
| Real estate-mortgage | 19,258 | 16.4 | % | ||||||
| Installment loans to individuals | 274 | 0.2 | % | ||||||
| Lease financing | 9,745 | 8.3 | % | ||||||
| Gross loans and leases | $ | 117,253 | 100.0 | % | |||||
Note: There were no agricultural loans or leases as of March 31, 2002.
The current level of perceived risk in the loan and lease portfolio has increased in part due to the tragic events of September 11 and due to the recent economic downturn experienced. However, management believes that the $75,000 credit loss provision expensed during the first quarter of this year brought the total allowance for credit losses to an adequate level relative to the current overall quality of the loan and lease portfolio. In addition, the level of credit risk in the loan and lease portfolio has not changed proportionately with the change in mix and size of the loan and lease portfolio for the first three months of 2002.
At March 31, 2002 there were $684,000 in non-accruing loans. There were 4 loans totaling $110,000 charged off against reserves during the first three months of 2002. There were $1,319,000 in accruing loans past due 30 days or more: $751,000 past due 30 to 59 days, $11,000 past due 60 to 89 days and $557,000 past due 90 days or more. Management fully expects that diligent servicing of these loans will minimize delinquencies. There have been no lease financing charged off to date and no lease financing categorized as non-accruing to date.
Total credit loss reserves of $1,773,000 at March 31, 2002 were 1.51% of total loans and leases, which included $607,000 in specific allowances. The following highlights the allocations of allowances for credit losses as of March 31, 2002.
| (000s omitted for dollars) | |||||||||||||
| Credit loss | Loan and | Percent of credit | |||||||||||
| allowance | lease amounts | loss allowance to | |||||||||||
| amount | outstanding | loan and lease amounts | |||||||||||
| Domestic: | |||||||||||||
| Commercial, financial and agricultural | $ | 1,299 | $ | 78,131 | 1.66 | % | |||||||
| Real estate-construction | 100 | 9,845 | 1.02 | % | |||||||||
| Real estate-mortgage | 160 | 19,258 | 0.83 | % | |||||||||
| Installment loans to individuals | 3 | 274 | 1.09 | % | |||||||||
| Lease financing | 59 | 9,745 | 0.61 | % | |||||||||
| Foreign | — | — | 0.00 | % | |||||||||
| Loans held for sale, off-balance sheet items and unallocated | 152 | — | n/a | ||||||||||
| Total | $ | 1,773 | $ | 117,253 | 1.51 | % | |||||||
Note: There were no agricultural loans or leases as of March 31, 2002.
Liquidity and Capital Resources
Michigan Heritage Bank’s current cash projections as of March 31, 2002 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 three-month period ended March 31, 2002. Michigan Heritage Bancorp had $1,351,000 in cash and cash equivalents as of March 31, 2002. The Bank has proven its ability to attract deposits and build a stable deposit base from which to fund loans. In addition, as of March 31, 2002, the Bank had $13,500,000 in notes payable to the Federal Home Loan Bank at a weighted average rate of 3.14%.
During the first quarter of 2002 Michigan Heritage Bancorp obtained a $3,000,000 Capital Note loan from a large Midwestern financial institution. This facility provides additional financing that can be downstreamed to the Bank as capital. This capital will allow the Bank to continue its growth while not diluting existing shareholders value.
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 9.1% and 9.0% at March 31, 2002 and December 31, 2001, respectively. Michigan Heritage Bank plans to remain well-capitalized on an ongoing basis.
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. |
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, Chief Operating Officer, and acting Chief Financial Officer | |||
| DATED: April 25, 2002 |
