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
JUNE 30, 2003
or
| o | Transition report under Section 13 or 15(d) of the Exchange Act |
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:x No:o
At August 8, 2003 there were 1,488,764 shares of Common Stock of the issuer issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes:o No:x
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Michigan Heritage Bancorp, Inc.
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(Unaudited)
| (000s Omitted) | ||||||||||||
| June 30, 2003 | December 31, 2002 | |||||||||||
| ASSETS | ||||||||||||
| Cash and due from banks, noninterest bearing | $ | 930 | $ | 1,031 | ||||||||
| Interest bearing deposits with banks | 6,085 | 58 | ||||||||||
| Federal funds sold | 1,166 | 9,897 | ||||||||||
| Cash and cash equivalents | 8,181 | 10,986 | ||||||||||
| Securities available for sale | 22,609 | 17,913 | ||||||||||
| Federal Reserve Bank stock and other stock | 1,147 | 1,137 | ||||||||||
| Total investments | 23,756 | 19,050 | ||||||||||
| Gross Loans and Leases | 109,946 | 118,531 | ||||||||||
| Less: Net deferred fees | 45 | 87 | ||||||||||
| Allowance for credit losses | 1,850 | 2,013 | ||||||||||
| Net loans and leases | 108,051 | 116,431 | ||||||||||
| Loans held for sale | 3,627 | 3,136 | ||||||||||
| Total earning assets | 142,685 | 148,572 | ||||||||||
| Leasehold improvements, net | 187 | 208 | ||||||||||
| Furniture & equipment, net | 375 | 380 | ||||||||||
| Total fixed assets | 562 | 588 | ||||||||||
| Interest receivable | 716 | 713 | ||||||||||
| Other real-estate and assets owned | 825 | 400 | ||||||||||
| Other assets | 694 | 1,024 | ||||||||||
| Total other assets | 2,235 | 2,137 | ||||||||||
| Total assets | $ | 146,412 | $ | 152,328 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Total deposits | $ | 123,385 | $ | 120,242 | ||||||||
| Other borrowed funds | 6,500 | 16,700 | ||||||||||
| Other liabilities | 1,757 | 1,329 | ||||||||||
| Total liabilities | 131,642 | 138,271 | ||||||||||
| Stockholders’ Equity | ||||||||||||
| Preferred stock—no par value; 500,000 shares authorized, none issued and outstanding | — | — | ||||||||||
| Common stock—no par value; 4,500,000 shares authorized, issued and outstanding— 1,488,764 shares in 2003 and 2002 | 13,730 | 13,730 | ||||||||||
| Accumulated earnings (deficit) | 496 | (109 | ) | |||||||||
| Accumulated other comprehensive income | 544 | 436 | ||||||||||
| Total stockholders’ equity | 14,770 | 14,057 | ||||||||||
| Total liabilities and stockholders’ equity | $ | 146,412 | $ | 152,328 | ||||||||
| Total loan loss reserve ratio | 1.68 | % | 1.70 | % | ||||||||
| Total loan to asset ratio | 75 | % | 78 | % | ||||||||
2
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
Three and Six Month Periods Ended
June 30, 2003 and June 30, 2002
(Unaudited)
| (000s Omitted Except Per Share Data) | |||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
| OPERATING INCOME: | |||||||||||||||||||
| Interest income | $ | 2,429 | $ | 2,756 | $ | 5,097 | $ | 5,558 | |||||||||||
| Interest expense | 1,039 | 1,233 | 2,101 | 2,540 | |||||||||||||||
| Net interest income before provision for credit losses | 1,390 | 1,523 | 2,996 | 3,018 | |||||||||||||||
| Less: provision for credit losses | — | 185 | 18 | 260 | |||||||||||||||
| Net interest income after provision for credit losses | 1,390 | 1,338 | 2,978 | 2,758 | |||||||||||||||
| Gain on sale of securities held available for sale | — | — | 20 | — | |||||||||||||||
| Gain on sale of loans and other assets | 350 | 240 | 694 | 319 | |||||||||||||||
| Other income | 47 | 35 | 68 | 62 | |||||||||||||||
| Total other operating income | 397 | 275 | 782 | 381 | |||||||||||||||
| Total operating income | 1,787 | 1,613 | 3,760 | 3,139 | |||||||||||||||
| OTHER OPERATING EXPENSES: | |||||||||||||||||||
| Salaries and employee benefits | 747 | 613 | 1,537 | 1,243 | |||||||||||||||
| Occupancy expense | 126 | 100 | 249 | 207 | |||||||||||||||
| Equipment expense | 57 | 64 | 117 | 123 | |||||||||||||||
| Data processing expense | 33 | 31 | 68 | 64 | |||||||||||||||
| Insurance expense | 12 | 9 | 30 | 23 | |||||||||||||||
| Advertising/promotion expense | 63 | 55 | 115 | 95 | |||||||||||||||
| Office supplies and printing expense | 11 | 12 | 23 | 22 | |||||||||||||||
| Professional fees | 127 | 119 | 275 | 250 | |||||||||||||||
| FDIC assessment | 5 | 5 | 10 | 10 | |||||||||||||||
| Lien, recording, and other loan fees, net | 96 | 63 | 186 | 98 | |||||||||||||||
| Michigan single business tax | 22 | 15 | 37 | 60 | |||||||||||||||
| Other expense | 127 | 79 | 224 | 167 | |||||||||||||||
| Total other operating expense | 1,426 | 1,165 | 2,871 | 2,362 | |||||||||||||||
| Net operating income | 361 | 448 | 889 | 777 | |||||||||||||||
| Provision for federal income taxes | 114 | 142 | 283 | 246 | |||||||||||||||
| Net income | $ | 247 | $ | 306 | $ | 606 | $ | 531 | |||||||||||
| Per Common Share Data Basic earnings per share | $ | 0.17 | $ | 0.21 | $ | 0.41 | $ | 0.36 | |||||||||||
| Diluted earnings per share | $ | 0.16 | $ | 0.19 | $ | 0.39 | $ | 0.34 | |||||||||||
3
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flow
Six Month Periods Ended
June 30, 2003 and June 30, 2002
(Unaudited)
| (000s Omitted) | |||||||||
| Six Months Ended June 30, | |||||||||
| 2003 | 2002 | ||||||||
| Operating activities: | |||||||||
| Net income | $ | 606 | $ | 531 | |||||
| Adjustments to reconcile net income to net cash provided in operating activities | 175 | (6 | ) | ||||||
| Net cash provided by operating activities | 781 | 525 | |||||||
| Investing activities: | |||||||||
| Purchase of U.S. Treasury and agency securities | (1,000 | ) | (4,550 | ) | |||||
| Proceeds from sale, maturity or called U.S. Treasury and agency securities | 500 | 1,250 | |||||||
| Purchase of other securities | (5,800 | ) | (1,250 | ) | |||||
| Proceeds from sale, maturity or called other securities | 1,270 | 149 | |||||||
| Purchase of Federal Reserve Bank and other stock | (10 | ) | (100 | ) | |||||
| Purchase of leasehold improvements, furniture and equipment | (74 | ) | (20 | ) | |||||
| Net change in gross loans | 8,585 | 558 | |||||||
| Net cash provided by (used in) operating activities | 3,471 | (3,963 | ) | ||||||
| Financing activities: | |||||||||
| Increase in deposits | 3,143 | 4,587 | |||||||
| Payments of federal funds purchased | (4,000 | ) | (5,000 | ) | |||||
| Payments of other borrowed funds | (200 | ) | — | ||||||
| Payments of Federal Home Loan Bank advances | (7,000 | ) | — | ||||||
| Proceeds from Federal Home Loan Bank advances | 1,000 | — | |||||||
| Net cash used in financing activities | (7,057 | ) | (413 | ) | |||||
| Net decrease in cash and cash equivalents | (2,805 | ) | (3,851 | ) | |||||
| Cash and cash equivalents at beginning of year | 10,986 | 6,732 | |||||||
| Cash and cash equivalents at end of period | $ | 8,181 | $ | 2,881 | |||||
4
Notes to Financial Statements
General:
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 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 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.
Critical Accounting Policy:
The accounting and reporting policies of the Company and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The Company’s significant accounting policies are described in the notes to the consolidated financial statements within the annual report. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities, and the Company considers these to be critical accounting policies. The estimates and assumptions we use are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.
The Company believes that the evaluation of the allowance for credit losses is a critical accounting policy that requires significant estimates and assumptions that are particularly susceptible to a significant change in the preparation of the Company’s financial statements. The allowance for credit losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans and leases in light of historical experience, the nature and volume of the portfolio, underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.
5
Stock Compensation Plans:
The Company has chosen to measure compensation cost for employee stock compensation plans using the intrinsic value method of accounting, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company’s stock option plan have no intrinsic value at the grant date, and no compensation cost is recognized for them. The fair value-based method of accounting for employee stock compensation plans measures compensation cost at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company has provided pro forma disclosures of net income and earnings per share and other disclosures, as if the fair value-based method of accounting has been applied. The Company applies APB Opinion 25 and related Interpretations in accounting for the stock options plan. Accordingly, no compensation cost has been recognized. The Company has not elected to voluntarily expense options under SFAS 148. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by FAS Statement No. 123, the Company’s net income and earnings per share would have been adjusted to the pro forma amounts indicated below:
| (000s Omitted Except Per Share Data) | ||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||||
| Net income | As reported | $ | 247 | $ | 306 | $ | 606 | $ | 531 | |||||||||||
| Pro forma | $ | 247 | $ | 306 | 606 | 531 | ||||||||||||||
| Earnings per share | As reported | $ | 0.17 | $ | 0.21 | $ | 0.41 | $ | 0.36 | |||||||||||
| Pro forma | $ | 0.17 | $ | 0.21 | $ | 0.41 | $ | 0.36 | ||||||||||||
| Earnings per share - | As reported | $ | 0.16 | $ | 0.19 | $ | 0.39 | $ | 0.34 | |||||||||||
| assuming dilution | Pro forma | $ | 0.16 | $ | 0.19 | $ | 0.39 | $ | 0.34 | |||||||||||
6
PART I—FINANCIAL INFORMATION
| 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 June 30, 2003 and June 30, 2002 The Company had net income of $247,000 for the quarter ending June 30, 2003. Net income for the same quarter last year was $306,000. Net interest income before allowances for loan losses decreased by $133,000 or 8.73% to $1,390,000 primarily due to a reduction in loan volume and a decline in net interest margin to 3.91% for the second quarter of 2003 compared to 4.53% for the second quarter of 2002. The provision for loan losses decreased for the quarter by $185,000. As a combined result, net interest income after provision for loan losses increased $52,000 or 3.89% to $1,390,000.
Other operating income increased by $122,000 or 44% to $397,000 due primarily to an increase of $110,000 in net gains on sale of mortgage loans compared to the prior year, due to lower interest rates and an increase in refinancing.
Other operating expenses increased by $261,000 to $1,426,000. Salaries and employee benefits increased $134,000 to $747,000 due primarily to staff additions in the first quarter and an increase in commissions paid to mortgage originators. Occupancy expense increased $26,000 over the second quarter of 2002 due to an increase in rent upon the renewal of the Novi, Michigan branch lease and pro-rata operating expenses assessed on the Company’s headquarters and branch facilities in Farmington Hills, Michigan. Lien recording and other loan fees increased $33,000 to $96,000 due to an increase in the volume of residential mortgage closings compared to the same quarter last year.
Miscellaneous other expense increased by $48,000 for the second quarter of 2003 compared to the same quarter for 2002. Most of the increase was due to costs associated with other real estate owned (OREO).
The resulting income before federal income tax decreased by $87,000 to $361,000 compared to the same quarter last year. Federal income tax was $114,000 for the second quarter 2003 compared to $142,000 for the same period last year and reflects an anticipated annual effective tax rate of 32.0%. Net Income after tax declined $59,000 to $247,000 or 19% compared to $306,000 for the quarter ended June 30, 2002.
Net income per weighted average share outstanding was $0.17 for the quarter ended June 30, 2003 compared to $0.21 per share for the same period last year. On a diluted basis, net income per share was $0.16 for the quarter ended June 30, 2003 compared to $0.19 per share for the same quarter last year.
Comparative Results for the Six Months Ended June 30, 2003 and June 30, 2002.
Net income for the six months ended June 30, 2003 was $606,000 compared to $531,000 for the same time period last year. Net interest income before allowances for loan losses decreased by $22,000 or .73% to $2,996,000 primarily due to a reduction in loan volume and a decline in net interest margin of 21 BPS to 4.30% for the first 6 months of 2003 compared to 4.51% for the first six months of 2002. The provision for loan losses decreased by $242,000 for the first 6 months of 2003 compared to 2002. As a combined result, net interest income after provision for loan losses increased $220,000 or 7.98% to $2,978,000.
Other operating income increased by $401,000 or 105% primarily due to gain on sale of loans and leases of $375,000 and a $20,000 gain on sale of securities.
Other operating expenses increased by $509,000 or 22% to $2,871,000. Salaries and employee benefits increased $294,000 or 23.65% due to staff additions in the first quarter and an increase in commission paid to mortgage originators. Occupancy expense was up $42,000 for the first 6 months due to an increase in rent for the Novi, Michigan branch lease
7
renewal and an increase in pro-rata operating expenses assessed on the Company’s headquarter facilities and branch in Farmington Hills, Michigan. Advertising expense was up $20,000 from the same period last year due to local cable advertising designed to increase core deposits. This campaign was successful in providing a 14% increase in core deposits from December 31, 2002.
Lien recording and other fees were up $88,000 over the first 6 months of 2002 due primarily to an increase in the volume of residential mortgage refinancing. Miscellaneous other expense increased by $57,000 over the same period last year primarily due to costs associated with other real estate owned (OREO).
Net operating income for the 6 months ended June 30, 2003 was up $112,000 to $889,000 an increase of 14.41% resulting in a net income after tax for the 6 months of 2003 of $606,000 compared to $531,000 for the six months ended June 30, 2002, a 14.12% increase year over year, and reflects an anticipated annual effective tax rate of 32.0%.
Net income per weighted average share outstanding was $0.41 for the 6 months ended June 30, 2003 compared to $0.36 per share for the same period last year. On a diluted basis, net income per share was also $0.40 for the six months ended June 30, 2002 compared to $0.34 per share for the same period last year.
Balance Sheet Change — June 30, 2003 from December 31, 2002
Total assets from December 31, 2002 to June 30, 2003 declined by $5,916,000. Gross loans for the same 6-month time period decreased by $8,585,000 to $109,946,000. Borrowed funds decreased from $16,700,000 to $6,500,000. Cash and cash equivalents decreased by $2,805,000 or 25% to $8,181,000 due to a $2,704,000 reduction in federal funds sold and interest bearing deposits. Deposits increased by $3,143,000 or 2.61% to $123,385,000 due to a successful campaign to increase core deposits.
8
Loans and Leases and Allowances for Credit Losses
The categories of loans outstanding at June 30, 2003 in dollars and as a percentage of total loans and leases are as follows:
| (000s Omitted for Dollars) | |||||||||
| Pct of Total | |||||||||
| Loan & Leases Category | Amount | Loans & Leases | |||||||
| Commercial | $ | 74,348 | 67.6 | % | |||||
| Real estate-construction | 9,508 | 8.6 | % | ||||||
| Real estate-mortgage | 11,452 | 10.4 | % | ||||||
| Installment loans to individuals | 211 | 0.2 | % | ||||||
| Lease financing | 14,427 | 13.1 | % | ||||||
| Total loans | $ | 109,946 | 100.0 | % | |||||
The change in mix and size of the loan portfolio from December 31, 2002 to June 30, 2003 has not increased the proportionate level of credit risk in the loan portfolio. Management believes that this increased level of risk is not material relative to the level of risk in the past.
At June 30, 2003 there were $2,130,944 in non-accruing loans. There were 12 loans totaling $203,000 charged off against reserves during the first six months of 2003. There were $690,177 in accruing loans past due 30 to 59 days, $14,636 past due 60 to 89 days and $113,153 past due 90 days or more. Management fully expects that diligent servicing of these loans will minimize losses.
A total credit loss reserve of $1,850,000 at June 30, 2003 was 1.68% of total loans, which included $439,000 in specific allowances. The following highlights the allocations of the credit loss allowance as of June 30, 2003.
| (000s Omitted for Dollars) | |||||||||||||
| Credit Loss | Loan & Lease | Percent of Credit | |||||||||||
| Allowance | Amounts | Loss Allowance | |||||||||||
| Amount | Outstanding | to Loan & Lease Amounts | |||||||||||
| Domestic: | |||||||||||||
| Commercial | $ | 1,462 | $ | 74,348 | 1.97% | ||||||||
| Real estate-construction | 124 | 9,508 | 1.30% | ||||||||||
| Real estate-mortgage | 86 | 11,452 | 0.75% | ||||||||||
| Installment loans to individuals | 3 | 211 | 1.42% | ||||||||||
| Lease financing | 104 | 14,427 | 0.72% | ||||||||||
| Foreign | — | — | — | ||||||||||
| Off-balance sheet items and unallocated | 71 | — | n/a | ||||||||||
| Total | $ | 1,850 | $ | 109,946 | 1.68% | ||||||||
In management’s opinion, the total loan loss reserve position is adequate relative to the overall quality of the loan portfolio.
9
Allowance for Credit Losses
The following table summarizes changes in the allowance for credit losses arising from additions to the allowance which have been charged to expense, selected ratios, and the allocation of the allowance for credit losses as of and for the six month period ended June 30:
| ($ in 000s) | |||||||||
| 2003 | 2002 | ||||||||
| Average loans and leases outstanding | $ | 111,515 | $ | 116,693 | |||||
| Total loans and leases at period end | $ | 109,946 | $ | 118,789 | |||||
| Allowance for credit losses at beginning of period | $ | 2,013 | $ | 1,802 | |||||
| Loan and lease charge-offs during the period | |||||||||
| Commercial & Financial | 186 | 260 | |||||||
| Real Estate — Mortgages | 17 | 34 | |||||||
| Installment Loans to Individuals | — | — | |||||||
| Total charge-offs | 203 | 294 | |||||||
| Loan and lease recoveries during the period | |||||||||
| Commercial & Financial | 20 | 10 | |||||||
| Real Estate — Mortgages | 2 | 1 | |||||||
| Installment Loans to Individuals | — | — | |||||||
| Total recoveries | 22 | 11 | |||||||
| Net charge-offs | 181 | 283 | |||||||
| Provision charged to expense | 18 | 260 | |||||||
| Allowance for credit losses at end of period | $ | 1,850 | $ | 1,779 | |||||
| Ratio of net charge-offs during the period to average loans and leases outstanding | 0.16 | % | 0.24 | % | |||||
| Allowance for credit losses as a percentage of loans and leases at period end | 1.68 | % | 1.50 | % | |||||
| Specific allowance for impaired loans and leases | $ | 439 | $ | 131 | |||||
| Unallocated allowance | 1,411 | 1,648 | |||||||
| Total allowance for credit losses | $ | 1,850 | $ | 1,779 | |||||
10
Nonaccrual, Past Due and Restricted Loans and Leases
The following table summarizes the Banks non-performing loans and leases as of June 30.
| ($ in 000s) | |||||||||
| 2003 | 2002 | ||||||||
| Nonaccrual, Past Due and Restricted Loans and Leases | |||||||||
| Loans accounted for on a nonaccrual basis | $ | 2,131 | $ | 707 | |||||
| Accruing loans that are contractully past due 90 days or more as to interest or principle payments | 113 | 565 | |||||||
| Total | $ | 2,244 | $ | 1,272 | |||||
The increase in non-accrual loans resulted from three individual loans. When these impaired loans are analyzed on an individual basis, the Company believes the collateral is sufficient to cover the recorded loan amount.
Liquidity and Capital Resources
Michigan Heritage Bancorp’s current cash projections as of June 30, 2003 indicate adequate cash balances. The Company has additional line of credit facilities with national lending institutions to add funding capacity. The Company’s management has also established a network of banks that can be used to sell or participate in a portion of the Company’s loan portfolio. These techniques allow the Company to service its business relationships and generate fee and servicing revenue.
The Company’s liquidity remained adequate during the six-month period ended June 30, 2003. Michigan Heritage Bancorp had $8,181,000 in cash and cash equivalents as of June 30, 2003 including $6,085,000 in interest bearing deposits in other banks and $1,166,000 in federal funds sold. The Company has proven its ability to attract deposits and build a stable deposit base from which to fund loans. In addition, the Company is a member of the Federal Home Loan Bank of Indianapolis, Indiana and as of June 30, 2003 had $6,500,000 in notes payable to the Federal Home Loan Bank at a weighted average rate of 4.21%.
During the first quarter of 2002, Michigan Heritage Bancorp obtained a non-revolving $3,000,000 Capital Note loan from a large Midwestern financial institution. This facility provides additional financing that can be down streamed to the Bank as capital. This capital will allow the Company to continue its growth while not diluting existing shareholders value. As of June 30, 2003 Michigan Heritage Bancorp had no borrowing outstanding with $2,800,000 available for future use.
Michigan Heritage Bank is subject to various regulatory capital requirements. To be considered adequately-capitalized or well-capitalized, Michigan Heritage Bank must maintain a minimum Tier 1 leverage capital ratio of 4.0%. The Bank’s Tier 1 leverage capital ratios were 9.62% and 9.51% at June 30, 2003 and December 31, 2002, respectively. Michigan Heritage Bank plans to remain well-capitalized on an ongoing basis.
Item 3. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to cause the material information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.
11
PART II—OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 15, 2003, at which the shareholders voted on the election of directors. Each of the nominees for director was an incumbent and all nominees were elected. The following table sets forth the number of shares voted for and withheld with respect to each nominee.
| Nominees | Votes For | Votes Against | Votes Withheld | ||||||
| Phillip R. Harrison | 1,293,373 | 0 | 65,875 | ||||||
| Philip Sotiroff | 1,254,125 | 0 | 105,124 |
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
| 31 | Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act | |
| 32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(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 on next page]
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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, Chief | ||||
| Operating Officer, and | ||||
| Acting Chief Financial Officer | ||||
| And: | /s/ | Richard Zamojski | |
| Richard Zamojski | |||
| Chairman and Chief Executive Officer |
DATED: August 8, 2003
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| Exhibit No. | Description | |
| 31 | Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act | |
| 32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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