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 September 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 September 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]
1 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 had
been in a development stage during most of the quarter ended March 31, 1997.
The quarter ended September 30, 1997, is the Company's second 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
September 30, 1997
(Unaudited)
(in thousands)
Assets
Cash and due from banks, noninterest bearing $ 780
Interest bearing deposits with banks 1,361
Federal funds sold 5,300
-----
Cash and cash equivalents 7,441
U.S. Treasury and agency securities 11,479
Other securities and stock 737
Total investments 12,216
Loans, gross 20,296
Less: allowances for loan losses 265
-----
Net loans 20,031
Leasehold improvements, net 38
Furniture and equipment, net 355
-----
Total fixed assets 393
Other assets 290
-----
Total assets $40,317
======
Liabilities and Stockholders' Equity
Total deposits $ 29,779
Total federal funds borrowed 0
Other liabilities 343
------
Total liabilities 30,122
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) (566)
-----
Total stockholders' equity 10,249
------
Total liabilities and stockholders' equity $40,371
======
2
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
January 1, 1997 to September 30, 1997 and
July 1, 1997 to September 30, 1997
(Unaudited)
(in thousands)
January 1, 1997 July 1, 1997
to to
September 30, 1997 September 30, 1997
------------- -------------
Operating Income:
Interest income $ 979 $ 626
Interest expense 490 352
--- ---
Net interest income before allowances
for loan losses 489 274
Less: allowances for loan losses 265 132
--- ---
Net interest income after allowances
for loan losses 224 142
Other income 3 2
--- ---
Total operating income 227 144
Other operating expenses:
Salaries and employee benefits 369 165
Occupancy expense 53 21
Equipment expense 57 26
Data processing expense 18 6
Insurance expense 9 4
Advertising/promotion expense 89 30
Office supplies and printing expense 19 7
Professional fees 44 22
Organization amortization expense 13 6
Other expense 54 27
--- ---
Total other operating expense 725 314
Net operating income (loss) (498) (170)
Provision for federal income taxes 0 0
--- ---
Net income (loss) ($498) ($170)
=== ===
Number of shares outstanding 1,150,000 1,150,000
Net income (loss) per share ($0.43) ($0.14)
==== ====
3
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flow
January 1, 1997, to September 30, 1997
(Unaudited)
(in thousands)
Operating activities:
Net loss ($498)
Adjustments to reconcile net loss to net cash
provided in operating activities:
Discount accretion and premium
amortization of investment securities (111)
Provision for loan lo sses 265
Depreciation 50
Amortization of organizational costs 13
Increase in other assets (160)
Increase in other liabilities 287
----
Net cash provided in operating activities 344
Investing activities:
Increase in U.S. Treasury and
agency securities (15,312)
Maturity of U.S. Treasury and
agency securities 3,944
Increase in other securities (500)
Increase in Federal Reserve Bank and
other stock (237)
Increase in leasehold improvements, furniture
and equipment (410)
Increase in gross loans (20,296)
----
Net cash used in investing activities (32,811)
Financing activities:
Proceeds from stock offering 10,815
Increase in related party loans 10
Repayment of related party loans (265)
Increase in deposits 29,779
------
Net cash provided by financing activities 40,339
------
Increase in cash and cash equivalents 7,374
Cash and cash equivalents at December 31, 1996 67
------
Cash and cash equivalents at September 30, 1997 $7,441
======
4
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
January 1, 1997, to September 30, 1997
(Unaudited)
Common Retained
Shares Stock Deficit Total
------ ----- -------- -----
(in thousands)
December 31, 1996 --- --- $ (68) $ (68)
Issuance of Common Stock,
net of offering costs 1,150 10,815 --- 10,815
Net loss --- --- (498) (498)
----- ------ ----- ------
March 31, 1997 1,150 $10,815 $(566) $10,249
===== ====== ==== ======
5
Michigan Heritage Bancorp, Inc.
Notes to Financial Statements
September 30, 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 $11
1998 45
1999 45
2000 45
2001 45
2002 22
---
Total lease payments $213
===
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
======
6
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 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 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 originated 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
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 a
former bank branch building that has been renovated by the Bank. 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,
with average annual household income more than doubling 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
the 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 which includes a full
array of demand deposit accounts, money market demand accounts, NOW
accounts, savings accounts individual retirement accounts, certificates of
deposits, and ATM cards.
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.
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. As necessary, 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.
As of September 30, 1997, the Company had $7.4 million in cash and cash
equivalents. In addition, all U.S. Treasury and agency securities with an
amortized value of $11.479 million at quarter-end are due within the next 7
months. These securities are held to maturity with a quarter-end market
value of $11,434 million.
Securities held for sale are primarily Federal Reserve Stock of $237,000 and
$500,000 principal amount of short-term, variable rate corporate debt lower
floaters guaranteed by First Chicago NBD Bank, with a market value at par.
The lower floaters can be put (i.e., sold) at any time.
Product Research and Development
Product development over the next 12 months may 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 does not anticipate requiring substantial additional equipment
over the next 12 months.
Number of Employees
At September 30, 1997, the Company employed ten people on a full-time basis,
and one on a part-time basis. Over the next 12 months the Bank expects to
add one full-time loan officer and one full-time loan operations person.
(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Neither the Company nor the Bank had any operating history before March 10,
1997. Since then, there have only been two full quarters of operations--
April 1, 1997 to June 30, 1997 and July 1, 1997 to September 30, 1997. At
September 30, 1997, total assets reached $40.4 million, an increase of 70%
over total assets at June 30, 1997. At September 30, 1997, gross loans
amounted to $20.3 million, an increase of 105% over June 30, 1997, and
deposits grew to $29.8 million, an increase of 132% increase over June 30,
1997.
The net loss year-to-date through September 30, 1997, was $498,000, of which
$265,000, or over 53%, is attributable to loan reserve provisions. There
have been no loan charge-offs or recoveries to date. The Company is taking
a conservative position in allocating 1.31% in loan loss reserves to its
total loan portfolio.
The net loss for the quarter ended September 30, 1997, was $170,000, which
was $77,000, or 31%, less than the loss for the previous quarter ended June
30, 1997. Of the $170,000 loss, provisions for loan losses amounted to
$132,000, or over 77% of the net loss, which is in line with the Company's
conservative loan reserve policy of maintaining a minimum of 1.25% in loan
loss reserves. The loan provision for the quarter was $4,000 greater than
the previous quarter.
Net interest income for the quarter went up $88,000 from the previous
quarter, to $274,000, primarily due to volume. Other expenses for the
quarter went up only $8,000, or 3%, to $314,000, and other income went up
$1,000.
Net loss per share was $0.43 for the year-to-date period ended September 30,
1997. Net loss per share for the quarter was $0.14, as compared to a loss
of $0.21 for the previous quarter ended June 30, 1997.
The categories of loans outstanding at September 30, 1997, in dollars and as
a percentage of total loans outstanding, are as follows:
Loan Category $ in thousands Percentage of Total Loans
------------- -------------- -------------------------
Commercial loans discounted $15,681 77.2%
Commercial loans direct 1,764 8.7%
Lines of credit 409 2.0%
Commercial real estate 765 3.8%
Mortgage, home equity and
Installment loans 1,677 8.3%
----- -----
Total Loans $20,296 100.0%
===== =====
At September 30, 1997, there were no non-accrual loans and there was only
one loan (of less than $20,000) that was 30 to 59 days past due, which
represented less than 0.1% of total loans. Payment has since been received
from this past due loan prior to the filing of this report. There are no
loans 60 or more days past due. There are two loans totaling less than
$11,000 on the loan watch list. While both loans in question are current,
both have been fully reserved for.
As a result of substantial start-up expenditures incurred by the Company and
the Bank and the time the Bank will take to develop its deposit base and
loan portfolio, the Company's management expects that the Bank, and thus the
Company, will operate at a loss during the start-up period of the Bank.
Accordingly, the Company's management expects that neither the Company nor
the Bank will be profitable during the first year of operations.
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: October 16, 1997
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule (EDGAR filing only)