U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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, 1999
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
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
21211 Haggerty Road, Novi, MI 48375-5306
----------------------------------------
(Address of principal executive offices)
248-380-6590
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(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, 1999, there were 1,265,000 shares of Common Stock of the issuer
issued and outstanding.
Traditional 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, 1999 and June 30, 1998
(000s omitted)
(Unaudited)
June 30, 1999 June 30, 1998
------------- -------------
ASSETS
Cash and due from banks, noninterest bearing $ 800 $ 931
Interest bearing deposits with banks 3,181 2,451
Federal funds sold 9,400 4,250
--------- ---------
Cash and cash equivalents 13,381 7,632
U.S. Treasury and agency securities 5,941 5,557
Other securities and stock 288 5,236
--------- ---------
Total investments 6,229 10,793
Loans, gross 80,478 54,698
Less: allowance for loan losses 1,558 692
--------- ---------
Net loans 78,920 54,006
Leasehold improvements, net 95 31
Furniture & equipment, net 552 344
Operating lease equipment, net 1,801 0
--------- ---------
Total fixed assets 2,448 375
Accrued interest receivable 485 326
Other assets 1,054 267
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Total other assets 1,539 593
--------- ---------
Total assets $ 102,517 $ 73,399
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits $ 91,558 $ 62,589
Other liabilities 718 522
--------- ---------
Total liabilities 92,276 63,111
Stockholders' Equity
Preferred stock -- no par value;
500,000 shares authorized,
none issued 0 0
Common stock -- no par value;
4,500,000 shares authorized,
shares issued and outstanding --
1,265,000 shares 12,482 10,815
Retained deficit (2,216) (520)
Accumulated other comprehensive loss (25) (7)
--------- ---------
Total stockholders' equity 10,241 10,288
--------- ---------
Total liabilities and
stockholders' equity $ 102,517 $ 73,399
========= =========
Total loan loss reserve ratio 1.94% 1.27%
Total loan to deposit ratio 88% 87%
2
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
Three and Six Month Periods Ended
June 30, 1999 and 1998
(000s omitted except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
OPERATING INCOME:
Interest income $2,098 $1,353 $4,210 $2,474
Interest expense 1,241 772 2,499 1,414
------ ------ ------ ------
Net interest income before
provision for loan losses 857 581 1,711 1,060
Less: provision for loan losses 242 128 609 225
------ ------ ------ ------
Net interest income after
provision for loan losses 615 453 1,102 835
Operating lease income 309 0 618 0
Gain on sale of loans 1 0 216 0
Other income 31 9 51 30
------ ------ ------ ------
Total other operating income 341 9 885 30
------ ------ ------ ------
Total operating income 956 462 1,987 865
OTHER OPERATING EXPENSES:
Salaries and employee benefits 287 210 607 390
Occupancy expense 23 11 62 32
Equipment expense 312 26 616 52
Data processing expense 14 10 28 18
Insurance expense 6 4 11 8
Advertising/promotion expense 12 36 56 69
Office supplies and printing expense 8 5 17 9
Professional fees 67 36 136 58
Organization amortization expense 0 7 0 13
Other expense 45 39 99 65
------ ------ ------ ------
Total other operating expense 774 384 1,632 714
------ ------ ------ ------
Net operating income 182 78 355 151
Provision for federal income taxes 62 0 121 0
------ ------ ------ ------
Net income $ 120 $ 78 $ 234 $ 151
====== ====== ====== ======
Per Common Share Data:*
Net income per primary share $ 0.09 $ 0.06 $ 0.18 $ 0.12
Net income per fully diluted share $ 0.09 $ 0.05 $ 0.18 $ 0.11
* Per share amounts have been restated for 1998 to reflect a 10% stock
dividend declared on April 16, 1998.
3
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flow
Six Month Periods Ended June 30, 1999 and 1998
(000s omitted)
(Unaudited)
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
Operating activities:
Net income $ 234 $ 151
Adjustments to reconcile net income to net
cash provided in operating activities:
Discount accretion and premium
amortization of investment securities 21 (105)
Provision for loan losses 609 225
Depreciation 609 47
Increase in other assets (333) (125)
Decrease in other liabilities (104) (43)
-------- --------
Net cash provided by operating activities 1,036 150
Investing activities:
Purchase of U.S. Treasury and agency securities (4,000) (6,895)
Proceeds from matured or called U.S. Treasury
and agency securities 6,000 10,000
Purchase of Federal Reserve Bank and other stock (51) --
Purchase of leasehold improvements, furniture
and equipment (272) (38)
Net change in gross loans 256 (22,093)
-------- --------
Net cash provided (used) by investing activities 1,933 (19,026)
Financing activities:
Increase in deposits 3,904 21,861
Decrease in borrowed funds (1,750) --
-------- --------
Net cash provided by financing activities 2,154 21,861
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Increase in cash and cash equivalents 5,123 2,985
Cash and cash equivalents at beginning of year 8,258 4,647
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Cash and cash equivalents at end of period $ 13,381 $ 7,632
======== ========
4
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
December 31, 1996
to June 30, 1999
(000s omitted)
(Unaudited)
Accumulated
Other
Comprehensive
Common Retained Income
Shares Stock Deficit (Loss) Total
------ ------ -------- ------------ -----
December 31, 1996 1 $ -- $ (68) $ -- $ (68)
Issuance of common stock,
net of offering costs 1,150 10,815 -- -- 10,815
Retirement of initial share (1) -- -- -- --
Comprehensive loss -- net loss -- -- (602) -- (602)
------ -------- -------- -------- --------
Balance-December 31, 1997 1,150 10,815 (670) -- 10,145
Comprehensive loss:
Net loss -- -- (113) -- (113)
Change in net unrealized gain
on securities available for
sale, net of tax effect -- -- -- 9 9
--------
Total comprehensive loss (104)
Stock dividend paid 115 1,667 (1,667) -- --
------ -------- -------- -------- --------
Balance-December 31, 1998 1,265 12,482 (2,450) 9 10,041
Comprehensive income:
Net income -- -- 234 -- 234
Change in net unrealized gain
on securities available for
sale, net of tax effect -- -- -- (34) (34)
--------
Total comprehensive income 200
------ -------- -------- -------- --------
Balance-June 30, 1999 1,265 $ 12,482 $ (2,216) $ (25) $ 10,241
====== ======== ======== ======== ========
5
Michigan Heritage Bancorp, Inc.
Notes to Financial Statements
June 30, 1999
(Unaudited)
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
Novi, 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). The
consolidated financial statements of the Company include its only subsidiary,
the Bank. The quarter ended June 30, 1999 was the Bank's ninth full quarter
of operation. All adjustments, which in the opinion of management are
necessary in order to ensure that the interim unaudited financial statements
are not misleading, have been included.
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.
6
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.
The Company experienced its fifth quarter of positive earnings with net
income of $120,000 for the quarter ending June 30, 1999 which is only the
ninth full quarter of operations for the Company. Total assets at the end of
the quarter were $102,517,000, a 12-month increase of $29,118,000 from the
$73,399,000 of total assets at June 30, 1998. Total loans outstanding grew to
$80,478,000 which is a 12-month increase of $25,780,000. Loan growth was
funded primarily by a $28,969,000 increase in deposits, resulting in total
outstanding deposits of $91,558,000 at June 30, 1999.
Results for the Quarters Ended June 30, 1999 and 1998
The $120,000 net income for the quarter ended June 30, 1999 increased $42,000
over the same quarter last year. Net interest income before allowances for
loan losses increased $276,000 to $857,000, primarily due to volume increases
in earning assets. Provision for loan losses increased $114,000 to $242,000
which included $295,000 in specific allocations and approximately $50,000
reduction due to loan sales and reductions in new loan volume compared to the
same quarter last year. Other operating income increased by $332,000 due
mostly to operating lease income of $309,000 resulting from a $2,775,000
operating lease recorded during the third quarter of 1998. In addition, loan
participation fees and servicing income increased by $16,000 due to volume.
Other miscellaneous income increased by $7,000 over the quarter ended June
30, 1998. Other operating expense increased by $390,000. Salaries and
employee benefits increased by $77,000 due to additional employees and salary
increases. Occupancy expense increased by $12,000 primarily due to the
opening of a bank branch in January 1999 and temporary additional office
space acquired during the third quarter of 1998. Equipment expense increased
by $286,000 due mostly to operating lease equipment depreciation expense of
$266,000. Advertising and promotion expense decreased $24,000 due to
reductions in both radio and newspaper advertising. Professional fees
increased by $31,000 due mostly to additional legal fees of $19,000
addressing primarily loan issues relating to MCA Financial Corporation
("MCA"), and operating lease broker fees of $10,000 relating to the
$2,775,000 operating lease recorded during the third quarter of 1998.
Remaining expenses increased a net $8,000.
The resulting income before federal income tax increased by $104,000 for the
same time period. Federal income tax was $62,000 for the second quarter of
1999. There was no Federal income tax for the same quarter in 1998 as the
Company had a net operating loss carryforward.
Net income per average primary share outstanding was $0.09 for the quarter
ended June 30, 1999 compared to $0.06 for the same quarter in 1998. On a
fully diluted basis, net income per share was $0.09 for the quarter ended
June 30, 1999 compared to $0.05 for the quarter ended June 30, 1998.
Results for the Six Months Ended June 30, 1999 and 1998
The $234,000 net income for the six-month period ended June 30, 1999
increased by $83,000 over the same period last year. Net interest income
before allowances for loan losses increased by $651,000 to $1,711,000
primarily due to volume increases in earning assets. Provision for loan
losses increased by $384,000 to $609,000 primarily due to additional reserves
for specific allocations. Other operating income increased by $855,000 due
mostly to operating lease income of $618,000 resulting from a $2,775,000
operating lease recorded during the third quarter of 1998. In addition, there
was a $216,000 gain on loans sold in 1999--there were no loan sales in 1998.
Other income increased by $21,000
7
primarily due to loan participation fees and servicing income. Other
operating expense increased by $918,000. Salaries and employee benefits
increased by $217,000 due to additional employees and salary increases.
Occupancy expense increased by $30,000 primarily due to the opening of a bank
branch in January 1999 and temporary additional office space acquired during
the third quarter of 1998. Equipment expense increased by $564,000 due mostly
to operating lease equipment depreciation expense of $531,000. Advertising
and promotion expense decreased by $13,000 due to reductions in both radio
and newspaper advertising in 1999. Professional fees increased by $78,000 due
mostly to additional legal fees of $45,000 addressing primarily loan issues
relating to MCA and operating lease broker fees of $20,000 relating to the
$2,775,000 operating lease recorded during the third quarter of 1998.
Remaining expenses increased by a net $42,000, which includes a $20,000
increase in telephone expense primarily due to additional locations.
The resulting income before federal income tax increased by $204,000 for the
same time period. Federal income tax was $121,000 for the first six months of
1999. There was no Federal income tax for the same period in 1998 as the
Company had a net operating loss carryforward.
Net income per average primary share outstanding was $0.18 for the six months
ended June 30, 1999 compared to $0.12 for the same period in 1998. On a fully
diluted basis, net income per share was $0.18 for the six months ended
June 30, 1999 compared to $0.11 for the six months ended June 30, 1998.
Loans and Allowances for Loan Losses
The categories of loans outstanding at June 30, 1999, in dollars and as a
percentage of total loans outstanding, are as follows:
(000s omitted for dollars)
Percentage
of Total
Loan Category Amount Loans
------ ----------
Commercial loans discounted $57,231 71.1%
Commercial financing leases 995 1.2%
Commercial loans direct 8,525 10.6%
Lines of credit 4,928 6.1%
Commercial real estate 1,495 1.9%
Real estate construction 937 1.2%
Mortgage, home equity and installment loans 6,367 7.9%
------- -----
Total loans $80,478 100.0%
======= =====
There were $620,000 in loans charged off during the first quarter of 1999
against specific reserves previously allocated in 1998 and an additional
$247,000 charged off during the second quarter of 1999. These charged off
loans are primarily related to MCA, which filed for protection under the
bankruptcy laws during the first quarter of 1999. Management is continually
working diligently to protect the Bank's rights and to minimize net
charge-offs resulting from the MCA situation. Remaining MCA related loans of
$356,000 have been transferred to other assets and will be primarily netted
out of proceeds received from the sale of collateral controlled by Michigan
Heritage Bank. There were no charge-offs prior to 1999 and there have been no
recoveries to date.
During the second quarter of 1999, management provided an additional reserve
of $295,000 for a series of lease financing loans in the aggregate amount of
approximately $1,575,000 made to a major national hospital and nursing home
company. The financial condition of this nursing home company has
deteriorated primarily due to changes in government reimbursement policies
resulting from the Balanced Budget Act of 1998. At this time, the nursing
home company has made full and timely payment on the loans. Michigan Heritage
Bank has received assurances from the nursing home company that the
collateral underlying the loans is critical to its operations and that it
will continue to make full and timely payments. In addition, under the terms
of the loans, portions of the outstanding balances will be guaranteed by the
manufacturer of the collateral after the passage of a certain amount of time.
Despite these guarantees
8
and the fact that none of the loans are past due, management reclassified
these loans as impaired as of June 30, 1999 and allocated appropriate
reserves.
The overall 12-month increase from June 30, 1998, to June 30, 1999, in the
loan portfolio of $25,780,000, or 47%, has not increased the proportionate
level of credit risk in the loan portfolio, although more funds are at risk
given that the aggregate size of the loan portfolio has increased. Throughout
this period, management has maintained the standards of Michigan Heritage
Bank's credit underwriting and approval policies in order to minimize
exposure to risk. Management believes that the level of risk in the current
loan portfolio is, on a relative basis, no greater than in the past.
At June 30, 1999, there were no non-accruing loans. There were $1,015,000 in
accruing loans past due 30 days or more: $591,000 past due 30 to 59 days,
$196,000 past due 60 to 89 days and $228,000 past due 90 days or more. Of
these loans, $695,000 were mortgages originally serviced by MCA. No servicing
of the loans took place during the first quarter of 1999 due to MCA filing
for protection under the bankruptcy laws. Bank management transferred the
servicing of those mortgages to another mortgage servicing company in April
1999. Management fully expects that diligent servicing of these mortgages
will minimize delinquencies. Total loan reserves of $1,558,000 at June 30,
1999, were 1.94% of total loans, which included $493,000 in specific
allowances. In management's opinion, the total loan reserve position is
adequate relative to the overall quality of the loan portfolio.
Financial Condition
Michigan Heritage Bank's current cash projections as of June 30, 1999
indicate adequate cash balances. The Bank has additional line of credit
facilities with national lending institutions to add funding capacity. Bank
management also has 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 12-month period ended
June 30, 1999. Michigan Heritage Bancorp, Inc. had $13,381,000 in cash and
cash equivalents as of June 30, 1999 including $3,181,000 in interest bearing
deposits in other banks and $9,400,000 in Federal funds sold. The investment
securities portfolio, with a total book value of $6,229,000, has $4,971,000
in securities maturing during the third quarter of 1999. In addition, the
Bank has proven its ability to attract deposits and build a stable deposit
base from which to fund loans.
Michigan Heritage Bank is subject to various regulatory capital requirements
and as a "de novo" or start-up bank, the minimum for the Tier 1 leverage
ratio is 9.0%. Normally, to be considered adequately capitalized, Michigan
Heritage Bank must maintain a Tier 1 leverage ratio of 4.0%. The Bank's
Tier 1 leverage ratios were 9.4% and 10.3% at June 30, 1999 and 1998,
respectively. Michigan Heritage Bank plans to maintain at least a 9.0% Tier 1
leverage ratio throughout its de novo status and to remain well-capitalized
thereafter.
Year 2000 Readiness
The Bank, being a new business, does not have major issues concerning older
systems to update. All applicable components of both the Company and the Bank
have been identified and addressed as to being Y2K compliant. In addition,
the Company has completed its Business Resumption Contingency Plan (the
"BRCP") and has successfully completed one phase of testing the BRCP.
Additional BRCP testing is scheduled to be completed by November 1999 to
ensure that all areas have been addressed.
The cost to become fully Y2K compliant for both the Company and the Bank was
not material. In addition, the Bank is communicating with both vendors and
appropriate customers concerning Y2K compliance to help ensure their smooth
transition into the next century.
Common Stock Offering
The Company is currently offering for sale up to 500,000 shares of its common
stock in order to contribute additional capital to Michigan Heritage Bank.
The shares are being offered for a limited period of time exclusively to
shareholders of Michigan Heritage Bancorp, Inc. at $6.00 per share.
Shareholders are entitled to purchase one share for each three shares they
owned on July 14, 1999. The common stock offering to existing shareholders
began on July 30, 1999, and ends on September 3, 1999. Thereafter, the
Company may sell any unpurchased shares to other persons at this same price,
if it chooses to do so.
9
PART II--OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
- ------- -----------
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
10
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: August 10, 1999
11
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule (EDGAR filing only)
12