SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ------ to -------
Commission File No. 0-22381
MICHIGAN HERITAGE BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
Michigan 38-3318018
(State or other jurisdiction of (IRS Employer
organization or incorporation) Identification No.)
21211 Haggerty Road, Novi, Michigan 48375-5306
(Address of principal executive offices)
248-380-6590
(Issuer's telephone number,
including area code)
N/A
(Former name, former address and
former fiscal year, if changed since last report)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 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 June 30, 1997, there were 1,150,000 shares of Common Stock of the Issuer
issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Part I
FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
Michigan Heritage Bancorp, Inc. (the "Company") completed an initial public
offering of $11.5 million, consisting of $10.0 million on February 27, 1997,
and an additional $1.5 million on March 27, 1997. The offering consisted of
1.15 million shares at $10.00 per share. The net proceeds to the Company,
after deducting underwriting fees, were $10.9 million. The consolidated
financial statements of the Company include its only subsidiary, Michigan
Heritage Bank (the "Bank"). In February 1997, the Bank received regulatory
approval to open and began operations on March 10, 1997. The Company has
been a development stage during most of the quarter ended March 31, 1997.
The quarter ended June 30, 1997 was the Company's first full quarter of
operation. All adjustments which, in the opinion of management, are
necessary in order to ensure that the financial statements are not
misleading, have been included.
Michigan Heritage Bancorp, Inc.
Consolidated Balance Sheet
June 30, 1997
(Unaudited)
(in thousands)
Assets
Cash and due from banks, noninterest bearing $ 367
Interest bearing deposits with banks 255
Federal funds sold 0
-----
Cash and cash equivalents 622
U.S. Treasury and agency securities 12,429
Federal Reserve Bank stock 236
Total investments 12,665
Loans, gross 9,892
Less: allowances for loan losses 133
-----
Net loans 9,759
Leasehold improvements, net 39
Furniture and equipment, net 356
-----
Total fixed assets 395
Other assets 285
-----
Total assets $23,726
======
Liabilities and Stockholders' Equity
Total deposits $ 12,850
Total federal funds borrowed 300
Other liabilities 158
------
Total liabilities 13,308
Stockholders' Equity:
Preferred stock -- no par value; 500,000
shares authorized, none issued 0
Common stock -- no par value; 4,500,000
shares authorized, 1,150,000 shares
issued and outstanding 10,815
Retained earnings (deficit) (397)
-----
Total stockholders' equity 10,418
------
Total liabilities and stockholders' equity $23,726
======
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
January 1, 1997 to June 30, 1997 and
April 1, 1997 to June 30, 1997
(Unaudited)
(in thousands)
January 1, 1997 April 1, 1997
to to
June 30, 1997 June 30, 1997
------------- -------------
Operating Income:
Interest income $ 353 $ 320
Interest expense 138 134
--- ---
Net interest income before allowances
for loan losses 215 186
Less: allowances for loan losses 133 128
--- ---
Net interest income 82 58
Other income 1 1
--- ---
Total operating income 83 59
Other operating expenses:
Salaries and employee benefits 204 153
Occupancy expense 32 19
Equipment expense 31 24
Data processing expense 12 8
Insurance expense 5 4
Advertising/promotion expense 59 41
Office supplies and printing expense 12 9
Professional fees 22 19
Organization amortization expense 7 5
Other expense 27 24
--- ---
Total other operating expense 411 306
Net operating income (loss) (328) (247)
Provision for federal income taxes 0 0
--- ---
Net income (loss) ($328) ($247)
=== ===
Number of shares outstanding 1,150,000 1,150,000
Net income (loss) per share ($0.29) ($0.21)
==== ====
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flow
January 1, 1997, to March 31, 1997
(Unaudited)
(in thousands)
Operating activities:
Net loss ($328)
Adjustments to reconcile net loss to net cash
provided in operating activities:
Discount accretion and premium
amortization of investment securities (79)
Provision for loan lossess 133
Depreciation 27
Amortization of organizational costs 7
Increase in other assets (149)
Increase in other liabilities 101
----
Net cash provided in operating activities 40
Investing activities:
Increase in U.S. Treasury and
agency securities (12,350)
Increase in Federal Reserve Bank stock (236)
Increase in leasehold improvements, furniture
and equipment (389)
Increase in gross loans (9,892)
----
Net cash used in investing activities (22,867)
Financing activities:
Proceeds from stock offering 10,815
Increase in related party loans 10
Repayment of related party loans (265)
Increase in deposits 12,850
Increase in federal funds borrowed 300
------
Net cash provided by financing activities 23,710
------
Increase in cash and cash equivalents 555
Cash and cash equivalents at December 31, 1996 67
------
Cash and cash equivalents at June 30, 1997 $622
======
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
January 1, 1997, to March 31, 1997
(Unaudited)
Common Retained
Shares Stock Deficit Total
------ ----- -------- -----
(in thousands)
December 31, 1996 --- --- $ (69) $ (69)
Issuance of Common Stock,
net of offering costs 1,150 10,815 --- 10,815
Net loss --- --- (328) (328)
----- ------ ----- ------
March 31, 1997 1,150 $10,815 $(397) $10,418
===== ====== ==== ======
Michigan Heritage Bancorp, Inc.
Notes to Financial Statements
March 31, 1997
(Unaudited)
Note 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 shareholder. 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 located in Novi, Michigan.
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 and accompanying notes. Actual results
could differ from those estimates and assumptions.
Note 2 ORGANIZATION COSTS
Organization costs were capitalized. Such costs include
incorporation costs, legal and accounting fees, and other costs relating to
the organization of the Company.
Note 3 NOTES PAYABLE -- RELATED PARTIES
Non-interest bearing demand loans were made to the Company by its
organizers. The loans were repaid from the proceeds of the common stock
offering.
Note 4 LEASE COMMITMENT
The Bank entered into a 69 month triple net lease commitment for
its current location. Total building improvement costs were $40,000. The
monthly lease payment of $3,750 was abated for the first 10 months with the
first payment due for August, 1997. Future minimum lease payments are as
follows.
Lease Payments
(in thousands)
1997 $19
1998 45
1999 45
2000 45
2001 45
2002 22
---
Total lease payments $221
===
Note 5 DEFERRED OFFERING COSTS
Costs related to the Company's initial public stock offering, which
included underwriting, legal, accounting, and other fees, were netted
against stockholders' equity. The following is a summary of the costs
associated with the initial public stock offering.
(in thousands)
Proceeds from stock offering $11,500
Underwriting fees (595)
Legal, accounting and other fees (90)
------
Initial capital $10,815
======
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(a) PLAN OF OPERATION
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 peiods
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 of
circumstances after the date of such statements.
ORGANIZATION
The Company was incorporated in 1989 as a Michigan corporation. The Company
was inactive from the time of its formation until November 1996. The Bank
is organized as a Michigan banking corporation with depository accounts
insured by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation. The Bank provides a range of commercial and consumer banking
services primarily in Oakland and western Wayne Counties, including Novi,
Farmington, Farmington Hills, Livonia, Northville, and Northville Township.
Those services reflect the Bank's intended strategy of serving small to
medium size businesses and individual customers in its market area. The
Bank's lending activities are focused initially on commercial equipment
financing, and, to a lesser extent, commercial term loans to businesses
secured by the assets of the borrower. The Bank intends to originate a
number of loans primarily through third party referral sources such as
leasing companies and mortgage brokers, many of whom are known to
management. The Bank's retail strategy initially focuses on single-family
mortgage loans, home equity loans, and, to a lesser extent, other forms of
consumer lending. The Bank is offering ATM cards, competitive rates on
various deposit products and plans to offer telebanking in the near future.
MARKET AREA
The Bank's main office is located along the rapidly developing Haggerty Road
corridor on the southeast corner of Novi, Michigan. The Bank has leased and
renovated a former bank branch building. The communities that comprise the
Bank's primary service area are Novi, Farmington, Farmington Hills, Livonia,
Northville, and Northville Township. Management believes these communities
have an expanding and diverse economic base, which includes a wide range of
small to medium-sized businesses engaged in manufacturing, high technology
research and development, computer services and retail. The Bank's secondary
service area will be the remaining portion of Oakland County not included
within the primary service area. According to information issued by Oakland
County, the county is the third wealthiest county in the nation among
counties exceeding one million people and annual household income more than
doubled from $24,700 in 1980 to over $54,400 in 1993. According to
estimates of SEMCOG, population in Oakland County is projected to increase
from 1,151,000 in 1995 to over 1,192,000 by 2000, an increase of over 3.5
percent.
REASON FOR STARTING THE BANK
The liberalization in recent years of Michigan's branch banking laws,
together with the expansion of interstate banking, has led to substantial
consolidation of the banking industry in Michigan, particularly in the
Bank's market area. According to Sheshunoff Information Services, Inc.,
since 1990 over 70 bank branches have closed within the Bank's primary and
secondary service areas. In many cases, when these consolidations occurred,
local boards of directors were dissolved and local management relocated or
in some cases terminated. In the opinion of the Company's management, this
situation has created a favorable opportunity for a new bank with local
management and directors. Management of the Company believes that Michigan
Heritage Bank can attract those customers who wish to conduct business with
a locally managed institution that demonstrates an active interest in their
business and personal affairs. The Company believes that the Bank will be
able to deliver more timely responses to customer requests, provide
customized financial products and services, and offer the personal attention
of the Bank's senior officers.
BANK LINES OF BUSINESS
The Bank's core business activities include attracting deposits from the
general public and using such deposits, together with borrowings and equity
capital, to originate and purchase:
- -- commercial equipment leases,
- -- commercial real estate loans,
- -- residential mortgage loans,
- -- consumer installment loans, and
- -- home equity loans.
The Bank's results of operations are dependent primarily upon net interest
income, which is the difference between interest income from interest
earning assets and interest expense on interest bearing liabilities.
Results of operations will also be positively influenced by non-interest
income such as fees related to loan sales and loan servicing and service
charges associated with customer deposit accounts.
The Bank's primary financial goals are to:
- -- Increase assets at a rate consistent with growth in equity
capital;
- -- Augment earnings through generation of fee income;
- -- Establish and maintain a reputation for customer service;
- -- Achieve a superior rate of return on capital; and
- -- Maintain a "well-capitalized" institution providing services
to its local community.
The Bank is focusing its operations on the following activities:
Commercial Equipment Leasing. The Bank is engaged in the acquisition of
third party originated lease financing paper through its network of leasing
companies. Management expects that the majority of this business will be
generated by relationships established with leasing companies located in
southeastern Michigan. Transactions are discounted on a non-recourse basis
with financing terms typically on a fixed rate basis ranging from 36 to 60
months. Transaction size will range between $25,000 and $500,000 with
possible exceptions to these amounts. Equipment location will be
geographically diverse with a broad range of industry and equipment type.
The following is a list of equipment anticipated to be financed by the bank:
- -- Computer;
- -- Medical;
- -- Transportation;
- -- Machine tools;
- -- Office equipment; and
- -- Graphics/printing.
Commercial Real Estate Lending. The Bank is offering commercial real estate
lending services to customers in its primary service area, secondary service
area, and in southeastern Michigan in general. The Bank will generate
business through its affiliation with commercial real estate brokers and on
a direct basis with owners of commercial properties. These loans will
generally be secured by apartment buildings or owner occupied properties.
The Bank recognizes that commercial real estate lending generally involves a
higher degree of risk than residential real estate lending. In order to
manage and reduce these risks, management will use strict underwriting
standards in its commercial real estate lending business. Bank policy will
govern adherence to loan to value ratios, income ratios, and insurance and
escrow requirements. Personal guarantees and bank depository relationships
will be requirements for most commercial real estate borrowers.
Residential Mortgage Lending. The Bank intends to originate residential
mortgage loans in its primary service area in particular, its secondary
service area in general, and also in other areas of southeastern Michigan.
Executive management intends to penetrate this market by capitalizing on
management's collective knowledge of these markets and its relationships
with correspondent brokers and other sources of residential mortgage loans.
To a lesser degree, the Bank will originate mortgage loans through its main
office that will offer the Bank's loan products directly to the general
public. The majority of loans acquired or originated will be conventional
mortgage loans secured by residential properties and comply with
requirements for sale to Federal National Mortgage Corporation or the
Federal Home Loan Mortgage Corporation. While some variable rate
residential loans will be retained by the Bank, the majority of all
conforming residential loans will be held for a short period of time
(generally less than 60 days) and then sold to secondary market investors.
These loans are sold on a non-recourse basis with the Bank generally
obtaining purchase commitments from investors prior to funding the loans.
As a result of efforts in this area, the Bank will retain a portion of the
loan origination fee paid by the borrower and receive fees as compensation
for selling the loans to secondary market investors. Through its mortgage
lending activity, the Bank will also acquire non-conforming residential
mortgage loans. These loans do not meet government agency standards for a
variety of reasons. The structure of these loans is typically on a variable
rate basis. Although a private secondary market exists for these loans, the
Bank will portfolio the majority of these loans due to their interest rate
sensitivity and attractive rates of return.
Land Contract Lending. The Bank's executive management has an established
relationship with a mortgage banking company actively engaged in the
business of acquiring land contract loans. A land contract is a private
lending arrangement between a buyer and seller of residential real estate.
These loans are acquired on a discounted non-recourse basis with financing
terms on a fixed rate basis and amortization period generally ranging from 5
to 15 years. These loans typically come from rural outstate environments as
well as inner city urban locations where conventional methods of financing
are not available in many cases. This type of lending offers a higher rate
of return on investment as well as a higher degree of lending risk. To
compensate for this lending risk, reserves will be set aside at the time of
acquisition and held by the Bank during the term of the loan. These funds
will act as additional security for this portfolio. Lending programs of
this type help provide financing to disadvantaged borrowers and at the same
time, help the bank to fulfill its responsibilities as mandated by the
Community Reinvestment Act.
Retail Banking
The Bank is offering its retail customers a variety of attractively priced
deposit accounts and loan products. The Bank plans on taking advantage of
increasing population and rising income levels in the growing areas of its
primary, secondary, and other southeastern Michigan areas, including Wayne,
and Macomb counties. Bank personnel offer a variety of deposit options
including, demand deposit accounts, regular savings accounts, NOW accounts,
money market demand accounts, individual retirement accounts, and
certificates of deposit. On the lending side, Bank representatives provide
products including home equity loans and lines of credit, bridge loans and
residential mortgage loans. The Bank's deposit funding strategy combines
low overhead bank operations with consistent local print media advertising
its current rate offerings. The Bank generally offers a rate structure
slightly higher than the competition because of its low overhead. One of
the elements of the Bank's strategy is to increase deposits at a rate that
is consistent with its growth in earning assets and to maintain a stable
ratio of core deposits to time deposits so that the Bank can obtain a lower
cost and more stable source of funds.
Cash Requirements
The Company's plan of operation for the next 12 months does not contemplate
the need to raise additional capital funds. The Company's current cash
projections indicate more than adequate cash balances. The Bank will
negotiate additional line of credit facilities with national lending
institutions to add funding capacity. Management is also establishing a
network of banks that can be used to sell or participate a portion of its
loan portfolio. These techniques will allow the Bank to service its
business relationships, build its own loan portfolio, and generate fee and
servicing revenue.
Product Research and Development
Product development over the next 12 months will involve telebanking and
possibly other home banking services, ATM cards, marketing and generating
account applications on the Internet, mutual funds, insurance, and other
innovative deposit products.
Purchase or Sale of Plant and Equipment
The Company has already purchased during the development stage most of the
equipment required and does not anticipate requiring substantial additional
equipment over the next 12 months.
Number of Employees
At June 30, 1997, the Company employed ten people on a full-time, and one on
a part-time, basis. The only significant change expected in the number of
employees over the next 12 months may be the addition of one loan officer.
(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Neither the Company nor the Bank has any operating history before March 10,
1997. Since that time period, total assets reached $23.7 million, gross
loans amounted to $9.9 million, and over $12.8 million in deposits were
generated. Total net loss year-to-date at June 30, 1997, was $328 thousand
of which $133 thousand or over 40 percent is directly attributable to loan
reserve provisions. There has been no loan charge-offs or recoveries to
date. The Company is taking a very conservative position in allocating 1.34
percent in loan loss reserves to its total loan portfolio.
Total loans outstanding and percentage of total loans are as follows:
Loan Category $ in thousands Percentage of Total Loans
------------- -------------- -------------------------
Commercial loans discounted 8,233 83.2%
Commercial loans direct 1,057 10.7%
Lines of credit 259 2.6%
Mortgage, home equity and
Installment loans 343 3.5%
----- ----
Total Loans 9,882 100.0%
===== =====
As a result of substantial start-up expenditures that must be incurred by a
new bank and the time it will take to develop its deposit base and loan
portfolio, it is expected that the Bank and thus the Company, will operate
at a loss during the start-up of the Bank. Accordingly, neither the Company
nor the Bank are expected to be profitable in the first year of operation.
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.
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
By: /S/ DARRYLE J. PARKER
Darryle J. Parker
Secretary, Treasurer, and Chief Financial Officer
(Duly authorized officer)
DATED: August 13, 1997
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule (EDGAR filing only)