U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
| þ | Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the period ended
JUNE 30, 2004
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.
| Michigan | 38-3318018 | |
| (State or other jurisdiction of incorporation or organization) | (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: [X] No: [ ]
At August 10, 2004 there were 1,492,964 shares of Common Stock of the issuer issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes: [ ] No: [X]
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Michigan Heritage Bancorp, Inc.
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
| (000s omitted) | ||||||||
| June 30, 2004 | December 31, 2003 | |||||||
| ASSETS | (Unaudited) | |||||||
| Cash and due from banks, noninterest bearing | $ | 1,443 | $ | 1,807 | ||||
| Interest bearing deposits with banks | 87 | 84 | ||||||
| Federal funds sold | 2,852 | 711 | ||||||
| Cash and cash equivalents | 4,382 | 2,602 | ||||||
| Securities available for sale | 23,867 | 23,071 | ||||||
| Federal Reserve Bank stock and other stock | 1,196 | 1,177 | ||||||
| Total investments | 25,063 | 24,248 | ||||||
| Gross Loans and Leases | 125,834 | 117,348 | ||||||
| Less: Net deferred fees | (60 | ) | (64 | ) | ||||
| Allowance for credit losses | (1,760 | ) | (1,775 | ) | ||||
| Net loans and leases | 124,014 | 115,509 | ||||||
| Loans held for sale | 483 | — | ||||||
| Total earning assets | 152,499 | 140,552 | ||||||
| Leasehold improvements, net | 153 | 167 | ||||||
| Furniture & equipment, net | 387 | 387 | ||||||
| Total fixed assets | 540 | 554 | ||||||
| Interest receivable | 810 | 661 | ||||||
| Other real-estate and assets owned | 1,653 | 921 | ||||||
| Other assets | 618 | 888 | ||||||
| Total other assets | 3,081 | 2,470 | ||||||
| Total assets | $ | 157,563 | $ | 145,383 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Total deposits | $ | 133,762 | $ | 113,993 | ||||
| Other borrowed funds | 6,500 | 14,500 | ||||||
| Other liabilities | 1,876 | 1,714 | ||||||
| Total liabilities | 142,138 | 130,207 | ||||||
| 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— 1,492,964 shares in 2004 and 1,490,964 shares in 2003 | 13,757 | 13,744 | ||||||
| Retained earnings | 1,720 | 1,152 | ||||||
| Accumulated other comprehensive income (loss) | (52 | ) | 280 | |||||
| Total stockholders’ equity | 15,425 | 15,176 | ||||||
| Total liabilities and stockholders’ equity | $ | 157,563 | $ | 145,383 | ||||
| Total loan loss reserve ratio | 1.40 | % | 1.51 | % | ||||
| Total loan to asset ratio | 80 | % | 81 | % | ||||
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Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
| (Unaudited) | (000s omitted except per share data) | |||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| OPERATING INCOME: | ||||||||||||||||
| Interest income | $ | 2,493 | $ | 2,429 | $ | 4,904 | $ | 5,097 | ||||||||
| Interest expense | 930 | 1,039 | 1,818 | 2,101 | ||||||||||||
| Net interest income before provision for credit losses | 1,563 | 1,390 | 3,086 | 2,996 | ||||||||||||
| Less: provision for credit losses | 15 | — | 38 | 18 | ||||||||||||
| Net interest income after provision for credit losses | 1,548 | 1,390 | 3,048 | 2,978 | ||||||||||||
| Gain on sale of securities held available for sale | — | — | 9 | 20 | ||||||||||||
| Gain on sale of loans and other assets | 331 | 350 | 466 | 694 | ||||||||||||
| Other income | 32 | 47 | 66 | 68 | ||||||||||||
| Total other operating income | 363 | 397 | 541 | 782 | ||||||||||||
| Total operating income | 1,911 | 1,787 | 3,589 | 3,760 | ||||||||||||
| OTHER OPERATING EXPENSES: | ||||||||||||||||
| Salaries and employee benefits | 807 | 747 | 1,499 | 1,537 | ||||||||||||
| Occupancy expense | 117 | 126 | 233 | 249 | ||||||||||||
| Equipment expense | 59 | 57 | 119 | 117 | ||||||||||||
| Data processing expense | 36 | 33 | 73 | 68 | ||||||||||||
| Insurance expense | 23 | 12 | 36 | 30 | ||||||||||||
| Advertising/promotion expense | 53 | 63 | 99 | 115 | ||||||||||||
| Office supplies and printing expense | 10 | 11 | 24 | 23 | ||||||||||||
| Professional fees | 144 | 127 | 263 | 275 | ||||||||||||
| FDIC assessment | 2 | 5 | 9 | 10 | ||||||||||||
| Lien, recording, and other loan fees, net | 23 | 96 | 109 | 186 | ||||||||||||
| Michigan single business tax | 6 | 22 | 36 | 37 | ||||||||||||
| Director fees | 19 | 15 | 88 | 29 | ||||||||||||
| Other expense | 172 | 112 | 167 | 195 | ||||||||||||
| Total other operating expense | 1,471 | 1,426 | 2,755 | 2,871 | ||||||||||||
| Net operating income | 440 | 361 | 834 | 889 | ||||||||||||
| Provision for federal income taxes | 141 | 114 | 266 | 283 | ||||||||||||
| Net income | $ | 299 | $ | 247 | $ | 568 | $ | 606 | ||||||||
Per Common Share Data | ||||||||||||||||
| Basic earnings per share | $ | 0.20 | $ | 0.17 | $ | 0.38 | $ | 0.41 | ||||||||
| Diluted earnings per share | $ | 0.19 | $ | 0.16 | $ | 0.37 | $ | 0.39 | ||||||||
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Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flows
| (Unaudited) | (000s omitted) | |||||||
| Six Months Ended June 30, | ||||||||
| 2004 | 2003 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 568 | $ | 606 | ||||
| Adjustments to reconcile net income to net cash provided in operating activities | 666 | 175 | ||||||
| Net cash provided by operating activities | 1,234 | 781 | ||||||
| Investing activities: | ||||||||
| Purchase of U.S. Treasury and agency securities | — | (1,000 | ) | |||||
| Proceeds from sale, maturity or called U.S. Treasury and agency securities | 1,250 | 500 | ||||||
| Purchase of other securities | (4,345 | ) | (5,800 | ) | ||||
| Proceeds from sale, maturity or called other securities | 930 | 1,270 | ||||||
| Purchase of Federal Home Loan Bank Stock | (19 | ) | (10 | ) | ||||
| Net change in gross loans and leases | (8,969 | ) | 8,585 | |||||
| Purchase of leasehold improvements, furniture and equipment | (83 | ) | (74 | ) | ||||
| Net cash provided by (used in) operating activities | (11,236 | ) | 3,471 | |||||
| Financing activities: | ||||||||
| Net increase in deposits | 19,769 | 3,143 | ||||||
| Payments of federal funds purchased | — | (4,000 | ) | |||||
| Payments of other borrowed funds | — | (200 | ) | |||||
| Payments on Federal Home Loan Bank advances | (10,000 | ) | (7,000 | ) | ||||
| Proceeds from Federal Home Loan Bank advances | 2,000 | 1,000 | ||||||
| Proceeds from the exercise of stock options | 13 | — | ||||||
| Net cash provided by (used in) financing activities | 11,782 | (7,057 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 1,780 | (2,805 | ) | |||||
| Cash and cash equivalents at beginning of year | 2,602 | 10,986 | ||||||
| Cash and cash equivalents at end of period | $ | 4,382 | $ | 8,181 | ||||
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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 launched internet banking for both commercial and consumer customers in the third quarter of 2003.
During the second quarter of 2004, Michigan Heritage Bank announced the formation of a joint venture with one of its major customers. This joint venture named, MHB HELP, LLC, was formed to finance hospital patient receivables on a national basis. Michigan Heritage Bank owns 80% of the joint venture.
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 Policies:
The accounting and reporting policies of the Company and its direct and indirect 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
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inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.
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, | |||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||||
| Net income | As reported | $ | 299 | $ | 247 | $ | 568 | $ | 606 | |||||||||||
| Pro forma | $ | 299 | $ | 247 | 568 | 606 | ||||||||||||||
| Earnings per share | As reported | $ | 0.20 | $ | 0.17 | $ | 0.38 | $ | 0.41 | |||||||||||
| Pro forma | $ | 0.20 | $ | 0.17 | $ | 0.38 | $ | 0.41 | ||||||||||||
| Earnings per share - | As reported | $ | 0.19 | $ | 0.16 | $ | 0.37 | $ | 0.39 | |||||||||||
| assuming dilution | Pro forma | $ | 0.19 | $ | 0.16 | $ | 0.37 | $ | 0.39 | |||||||||||
Recent Accounting Pronouncements:
In April 2003 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149 which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No. 133, clarifies when a derivative contains a financing component, amends the definition to conform to language used in FASB Interpretation No. 45and amends certain other existing pronouncements. This statement is effective for contracts entered into or modified after September 30, 2003. The provisions of Statement No. 149 did not have a material impact on the financial position or results of operations of the Corporation.
In May 2003, the FASB issued SFAS No. 150, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The provisions of Statement No. 150 did not have a material impact on the financial position or results of operations of the Corporation.
FASB issued Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, clarifies the requirements of Statement of Accounting Standards No. 5, Accounting for Contingencies, relating to the guarantor’s accounting for and disclosure of certain types of guarantees. The disclosure provisions of the Interpretation are effective for financial statements ending after December 15, 2002. The provisions of Statement No. 45 did not have a material impact on the financial position or results of operations of the Corporation.
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PART I—FINANCIAL INFORMATION
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTE: This Report contains certain statements, including statements regarding the Company’s capital needs and ability to continue to build the deposit base and statements regarding the Company’s financial position, expected results, improved operations, and balance sheet strength, that could be construed to be forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These statements reflect the Company’s views with respect to future plans, events and financial performance. The Company does not undertake any obligation to update the information contained in this Report, which speaks only as of the date of this Report. The Company has identified certain risk factors which could cause actual results and plans to differ substantially from those included in the forward-looking statements. These factors are discussed in the Company’s most recently filed Form 10-K under the section entitled “Disclosure Regarding Forward Looking Statements, and those discussions regarding risk factors are incorporated in this Report by reference.
Comparative Results for the Three Months Ended June 30, 2004 and June 30, 2003
The Company had net income of $299,000 for the quarter ending June 30, 2004. Net income for the same quarter last year was $247,000. Net interest income before provision for credit losses increased by $173,000 or 12.45% to $1,563,000 primarily due to a reduction in interest expense; resulting in an increase in net interest margin to 4.23% for the second quarter of 2004 compared to 3.91% for the second quarter of 2003. The provision for credit losses increased for the quarter by $15,000. As a combined result, net interest income after provision for credit losses increased $158,000 or 11.37% to $1,548,000.
Other operating income decreased by $34,000 or 8.56% to $363,000 due primarily to a decrease of $19,000 in net gains on sale of mortgage loans and other assets compared to the prior year, reflecting a decrease in residential mortgage refinancing caused by an increase in interest rates.
Other operating expenses increased by $45,000 to $1,471,000. Salaries and employee benefits increased $60,000 to $807,000 due primarily to a $46,000 increase in salaries and hiring costs for new employees and a $20,000 increase in medical insurance premiums. Occupancy expense decreased $9,000 over the second quarter of 2003 due to a decrease in pro-rata operating expenses assessed on the Company’s headquarters and branch facilities in Farmington Hills, Michigan. Lien recording and other loan fees decreased $73,000 to $23,000 due to a decrease in the volume of residential mortgage closings compared to the same quarter last year.
Miscellaneous other expense increased by $60,000 for the second quarter of 2004 compared to the same quarter for 2003. This increase is due to a $25,000 Real Estate Owned write-down to reflect market; a $22,000 minority interest expense related to the Bank’s new joint venture, MHB HELP, LLC; and $11,000 other insurance expense, which reflects higher in the current second quarter due to a refund received in the prior second quarter 2003 in the amount of $6,000.
The resulting income before federal income tax increased by $79,000 to $440,000 compared to the same quarter last year. Federal income tax was $141,000 for the second quarter 2004 compared to $114,000 for the same period last year and reflects an anticipated annual effective tax rate of 32.0%. Net Income after tax increased $52,000 to $299,000 or 21.05% compared to $247,000 for the quarter ended June 30, 2003.
Net income per weighted average share outstanding was $0.20 for the quarter ended June 30, 2004 compared to $0.17 per share for the same period last year. On a diluted basis, net income per share was $0.19 for the quarter ended June 30, 2004 compared to $0.16 per share for the same quarter last year.
Comparative Results for the Six Months Ended June 30, 2004 and June 30, 2003.
Net income for the six months ended June 30, 2004 was $568,000 compared to $606,000 for the same time period last year. Net interest income before provision for credit losses increased by $90,000 or 3% to $3,086,000, primarily due to a decrease in interest expense for the first six months of 2004, compared to the first six months of 2003. The provision for credit losses increased by $20,000 for the first six months of 2004 compared to 2003. As a combined result, net interest income after provision for loan losses increased $70,000 or 2.35% to $3,048,000.
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Other operating income decreased by $241,000 or 30.82% primarily due to a reduction in the gain on sale of loans and leases of $228,000 and a reduction of $11,000 on the gain on sale of securities.
Other operating expenses decreased by $116,000 or 4.04% to $2,755,000. Salaries and employee benefits decreased $38,000 or 2.47%. Occupancy expense decreased by $16,000 for the first six months due a decrease in pro rata operating expenses assessed on the company’s headquarters and branch facilities in Farmington Hills, Michigan. Advertising expense was down $16,000 from the same period last year due to a cable television campaign in the second quarter of 2003 that was not continued in the second quarter of 2004.
Lien recording and other fees declined $77,000 over the first six months of 2004 due primarily to a decrease in the volume of residential mortgage refinancing. Director’s fees increased $59,000 over the same period last year primarily due to additional fees paid in the first quarter of 2004. Miscellaneous other expense decreased by $28,000 over the same period last year.
Net operating income for the six months ended June 30, 2004 declined $55,000 to $834,000 a decrease of 6.19% resulting in a net income after tax for the six months of 2004 of $568,000 compared to $606,000 for the six months ended June 30, 2003, a 6.27% decrease year over year. Federal income tax was $266,000 for the six months ended compared to $283,000 for the same period last year and reflects an annual effective tax rate of 32.0%.
Net income per weighted average share outstanding was $0.38 for the six months ended June 30, 2004 compared to $0.41 per share for the same period last year. On a diluted basis, net income per share was also $0.37 for the six months ended June 30, 2004 compared to $0.39 per share for the same period last year.
Balance Sheet Change – June 30, 2004 from December 31, 2003
Total assets from December 31, 2003 to June 30, 2004 increased by $12,180,000. Gross loans for the same six month period increased $8,486,000 to $125,834,000. Borrowed funds decreased from $14,500,000 to $6,500,000. Cash and cash equivalents increased by $1,780,000 or 68.41% to $4,382,000 due primarily to an increase in Federal Funds sold. Deposits increased $19,769,000 or 17.34% to $133,762,000 due to an increase in core deposits.
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Loans and Leases and Allowances for Credit Losses
The categories of loans and leases outstanding at June 30, 2004 and December 31, 2003 in dollars and as a percentage of total loans are as follows:
| (000s omitted for dollars) | ||||||||||||||||
| June 30, 2004 | December 31, 2003 | |||||||||||||||
| Pct of total | Pct of total | |||||||||||||||
| Loan & Leases Category | Amount | Loans & Leases | Amount | Loans & Leases | ||||||||||||
| Commercial | $ | 81,468 | 64.7 | % | $ | 81,747 | 69.7 | % | ||||||||
| Real estate-construction | 7,013 | 5.6 | % | 7,135 | 6.1 | % | ||||||||||
| Real estate-mortgage | 13,544 | 10.8 | % | 10,504 | 9.0 | % | ||||||||||
| Installment loans to individuals | 5,001 | 4.0 | % | 217 | 0.2 | % | ||||||||||
| Lease financing | 18,808 | 14.9 | % | 17,745 | 15.1 | % | ||||||||||
| Total loans | $ | 125,834 | 100.0 | % | $ | 117,348 | 100.0 | % | ||||||||
Management believes that the change in mix and size of the loan portfolio from December 31, 2003 to June 30, 2004 has not increased the proportionate level of credit risk in the loan portfolio.
At June 30, 2004 there were approximately $1,748,000 in non-accruing loans. There were 8 loans totaling approximately $90,000 charged off against reserves during the first six months of 2004. There were $31,000 in accruing loans past due 30 to 59 days, $187,000 past due 60 to 89 days and $383,000 past due 90 days or more. Management fully expects that diligent servicing of these loans will minimize losses.
A total credit loss reserve of $1,760,000 at June 30, 2004 was 1.40% of total loans, which included $435,000 in specific allowances. The following highlights the allocations of the credit loss allowance as of June 30, 2004.
| (000s omitted for dollars) | ||||||||||||
| Credit loss | Loan & Lease | Percent of credit | ||||||||||
| allowance | amounts | loss allowance | ||||||||||
| amount | outstanding | to loan & lease amounts | ||||||||||
| Domestic: | ||||||||||||
| Commercial and financial | $ | 1,014 | $ | 81,468 | 1.24 | % | ||||||
| Real estate-construction | 70 | 7,013 | 1.00 | % | ||||||||
| Real estate-mortgage | 206 | 13,544 | 1.52 | % | ||||||||
| Installment loans to individuals | 20 | 5,001 | 0.40 | % | ||||||||
| Lease financing | 130 | 18,808 | 0.69 | % | ||||||||
| Foreign | — | — | — | |||||||||
| Off-balance sheet items and unallocated | 320 | — | n/a | |||||||||
| Total | $ | 1,760 | $ | 125,834 | 1.40 | % | ||||||
In management’s opinion, the total loan loss reserve position is adequate relative to the overall quality of the loan portfolio.
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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 periods ended June 30:
| ($ in 000s) | ||||||||
| 2004 | 2003 | |||||||
| Average loans and leases outstanding | $ | 119,422 | $ | 111,515 | ||||
| Total loans and leases at period end | $ | 124,086 | $ | 109,946 | ||||
| Allowance for credit losses at beginning of period | $ | 1,775 | $ | 2,013 | ||||
| Loan and lease charge-offs during the period | ||||||||
| Commercial & Financial | 66 | 186 | ||||||
| Real Estate — Mortgages | 24 | 17 | ||||||
| Installment Loans to Individuals | — | — | ||||||
| Total charge-offs | 90 | 203 | ||||||
| Loan and lease recoveries during the period | ||||||||
| Commercial & Financial | 37 | 20 | ||||||
| Real Estate — Mortgages | — | 2 | ||||||
| Installment Loans to Individuals | — | — | ||||||
| Total recoveries | 37 | 22 | ||||||
| Net charge-offs | 53 | 181 | ||||||
| Provision charged to expense | 38 | 18 | ||||||
| Allowance for credit losses at end of period | $ | 1,760 | $ | 1,850 | ||||
| Ratio of net charge-offs during the period to average loans and leases outstanding | 0.04 | % | 0.16 | % | ||||
Nonaccrual and Past Due Loans and Leases
The following table summarizes the Banks non-performing loans and leases as of June 30:
| ($ in 000s) | ||||||||
| 2004 | 2003 | |||||||
| Nonaccrual and Past Due Loans and Leases | ||||||||
| Loans accounted for on a nonaccrual basis | $ | 1,748 | $ | 2,131 | ||||
| Accruing loans that are contractually past due 90 days or more as to interest or principal payments | 383 | 113 | ||||||
| Total | $ | 2,131 | $ | 2,244 | ||||
The decrease in non-accrual loans resulted from two individual loans transferred to other real-estate and assets owned. When these impaired loans are analyzed on an individual basis, the Company believes the collateral is sufficient to cover the recorded loan amount.
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Liquidity and Capital Resources
Michigan Heritage Bancorp’s current cash position as of June 30, 2004 indicates 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, 2004. Michigan Heritage Bancorp had $4,382,000 in cash and cash equivalents as of June 30, 2004 including $87,000 in interest bearing deposits in other banks and $2,852,000 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, 2004 had $6,500,000 in notes payable to the Federal Home Loan Bank at a weighted average rate of 3.55%.
During the first quarter of 2004, 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 shareholder value. As of June 30, 2004 Michigan Heritage Bancorp had no borrowing outstanding on the Credit Note and $3,000,000 is 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% and 5.0%, respectively. The Bank’s Tier 1 leverage capital ratios were 10.00% and 10.50% at June 30, 2004 and December 31, 2003, 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.
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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 22, 2004, 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 | |||||||||
| Anthony S. Albanese | 1,414,414 | 0 | 8,200 | |||||||||
| Lewis N. George | 1,407,248 | 0 | 15,366 | |||||||||
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
| EX-31.1 | Certification of Chief Financial Officer pursuant to Section 302 | |||
| EX-31.2 | Certification of Chief Executive Officer pursuant to Section 302 | |||
| EX-32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
| EX-32.2 | 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 10, 2004
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EXHIBIT INDEX
| EXHIBIT NO. | DESCRIPTION | |||
| EX-31.1 | Certification of Chief Financial Officer pursuant to Section 302 | |||
| EX-31.2 | Certification of Chief Executive Officer pursuant to Section 302 | |||
| EX-32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
| EX-32.2 | 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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