U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the period ended March 31, 1998
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
(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
(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 May 12, 1998, there were 1,150,000 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
March 31, 1998, December 31, 1997 and March 31, 1997
(Unaudited Except for December 31, 1997)
(dollars in thousands)
March 31, 1998 December 31, 1997 March 31, 1997
-------------- ----------------- --------------
ASSETS
Cash and due from banks, noninterest bearing $ 353 $ 283 $ 886
Interest bearing deposits with banks 2,864 1,764 2,822
Federal funds sold 3,800 2,600 9,000
------ ------ ------
Cash and cash equivalents 7,017 4,647 12,708
U.S. Treasury and agency securities 5,557 8,565 0
Other securities and stock 5,237 5,236 225
------ ------ ------
Total investments 10,794 13,801 225
Loans, gross 40,444 32,605 425
Less: allowances for loan losses 564 467 5
------ ------ ------
Net loans 39,880 32,138 420
Leasehold improvements, net 33 35 41
Furniture and equipment, net 329 349 312
Total fixed assets 362 384 353
Other assets 435 468 158
Total assets $58,488 $51,438 $13,864
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits $47,741 $40,728 $3,031
Total federal funds borrowed 0 0 0
Other liabilities 531 565 167
------ ------ -----
Total liabilities 48,272 41,293 3,198
Stockholders' Equity
Preferred stock--no par value; 500,000
shares authorized, none issued 0 0 0
Common stock--no par value; 4,500,000 shares
authorized, 1,150,000 shares issued
and outstanding 10,815 10,815 10,815
Retained earnings (deficit) (598) (670) (149)
Unrealized gain/(loss) on securities
available for sale (1) 0 0
Total stockholders' equity 10,216 10,145 10,666
------ ------ ------
Total liabilities and stockholders' equity $58,488 $51,438 $13,864
====== ====== ======
Total loan loss reserve ratio 1.39% 1.43% 1.18%
Total loans to deposits ratio 85% 80% 14%
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
January 1, 1998 to March 31, 1998,
October 1, 1997 to December 31, 1997 and
January 1, 1997 to March 31, 1997
(Unaudited)
(dollars in thousands)
January 1, 1998 October 1, 1997 January 1, 1997
to to to
March 31, 1998 December 31, 1997 March 31, 1997
--------------- ----------------- --------------
OPERATING INCOME:
Interest income $ 1,121 $ 941 $ 33
Interest expense 642 534 4
Net interest income before allowances
for loan losses 479 407 29
Less allowances for loan losses 97 202 5
----- ---- ----
Net interest income after allowances
for loan losses 382 205 24
Other income 21 3 0
----- ---- ----
Total operating income 403 208 24
OTHER OPERATING EXPENSE:
Salaries and employee benefits 180 169 51
Occupancy expense 21 22 13
Equipment expense 26 29 7
Data processing expense 8 8 4
Insurance expense 4 2 1
Advertising/promotion expense 33 24 18
Office supplies and printing expense 4 3 3
Professional fees 22 29 2
Organization amortization expense 6 6 2
Other expense 26 20 4
---- ---- ----
Total other operating expense 330 312 105
---- ---- ----
Net operating income (loss) 73 (104) (81)
Provision for federal income taxes 0 0 0
---- ---- ----
Net income (loss) $ 73 $(104) $ (81)
==== ==== ====
Number of shares outstanding (actual) 1,150,000 1,150,000 1,150,000
Net income (loss) per share (actual) $0.06 $(0.09) $(0.07)
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flows
January 1, 1998 to March 31, 1998 and
January 1, 1997 to March 31, 1997
(Unaudited)
(in thousands)
January 1, 1998 January 1, 1997
to to
March 31, 1998 March 31, 1997
--------------- ---------------
OPERATING ACTIVITIES:
Net income/(loss) $ 73 $ (81)
Adjustments to reconcile net income/(loss) to net cash
provided in operating activities:
Discount accretion and premium amortization
of investment securities (55) --
Provision for loan losses 97 5
Depreciation 23 6
Amortization of organizational costs 6 2
Increase (decrease) in other assets 27 (17)
Increase (decrease) in other liabilities (34) 111
--- ---
Net cash provided in operating activities 137 26
INVESTING ACTIVITIES:
Increase in U.S. Treasury and agency securities (3,940) --
Maturity of U.S. Treasury and agency securities 7,000 --
Increase in other securities -- --
Increase in Federal Reserve Bank and other stock -- (225)
Increase in leasehold improvements, furniture
and equipment (1) (326)
Increase in gross loans (7,839) (425)
----- ---
Net cash used in investing activities (4,780) (976)
FINANCING ACTIVITIES:
Proceeds from stock offering -- 10,815
Increase in related party loans -- 10
Repayment of related party loans -- (265)
Increase in deposits 7,013 3,031
----- ------
Net cash provided by financing activities 7,013 13,591
----- ------
Increase in cash and cash equivalents 2,370 12,641
Cash and cash equivalents at beginning of year 4,647 67
----- ------
Cash and cash equivalents at end of period $7,017 $12,708
===== ======
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
December 31, 1996 to March 31, 1998
(Unaudited)
(dollars in thousands)
Common Retained
Shares Stock Deficit Total
------ ------ -------- -----
December 31, 1996 -- -- $(68) $ (68)
Issuance of Common Stock, net of offering costs 1,150 $10,815 -- 10,815
Net loss -- -- (81) (81)
----- ------ --- ------
March 31, 1997 1,150 $10,815 $(149) $10,666
Net loss -- -- (521) (521)
----- ------ ---- ------
December 31, 1997 1,150 $10,815 $(670) $10,145
Net income -- -- 73 73
Unrealized loss on securities available for sale -- -- (1) (1)
Rounding adjustment -- -- (1) (1)
----- ------ ---- ------
March 31, 1998 1,150 $10,815 $(599) $10,216
===== ====== ==== ======
Michigan Heritage Bancorp, Inc.
Notes to Financial Statements
March 31, 1998
(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 November 6, 1996. 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 located in Novi, Michigan. The Company completed an
initial public offering of common stock during the first quarter of 1997,
realizing a total of $11.5 million (before payment of underwriters'
commissions and offering expenses). The net proceeds to the Company, after
deducting for underwriting fees and offering expenses was $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 was in a development stage during most of the quarter
ending March 31, 1997. The quarter ended March 31, 1998, was the Company's
fourth full quarter of operations. The quarter ended March 31, 1998, was
also the first quarter during which the Company realized net income. All
adjustments, which, in the opinion of management, are necessary in order to
ensure the 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 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--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)
--------------
1998 45
1999 45
2000 45
2001 45
2002 22
---
Total lease payments $202
===
Note 4--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 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 originates 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 in the southeast corner of Novi, Michigan. The Bank leases and has
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 is the remaining portions of Oakland County not
included within the primary service area.
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's management 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 lines of credit,
--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;
--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. The Bank has
negotiated additional line of credit facilities with national lending
institutions to add funding capacity to its existing capital and deposit
base. Management has also established a network of banks that can be used
to sell or participate a portion of its loan portfolio. These techniques
allow the Bank to service its business relationships, build its own loan
portfolio, and generate fee and servicing revenue.
As of March 31, 1998, the Company had $7.0 million in cash and cash
equivalents. In addition, all U.S. Treasury and agency securities have an
amortized value of $5.6 million at quarter-end and mature or expect to be
called at par within five months. Of these U.S. Treasury and agency
securities, $1.6 million are held to maturity and the remaining $4.0 million
are available for sale.
Other securities held for sale are primarily Federal Reserve Stock of $0.2
million and $5.0 million principal amount of variable rate corporate debt
lower floaters of which $3.5 million is guaranteed by First Chicago NBD Bank
and $1.5 million guaranteed by Comerica Bank with market values at par. The
lower floaters can be put at par (i.e., sold) at any time.
Product Research and Development
Product development over the next 12 months may involve marketing and
generating account applications on the Internet, mutual funds, insurance,
and other innovative deposit products. During the next 12 months, the Bank
plans to open its second banking office. This branch office will be leased,
with leasehold improvements of approximately $30,000. Furniture and
equipment purchased for the new location is estimated to be approximately
$22,000. The Company is also in the early planning stages to relocate its
headquarters sometime in 1999. The Company does not anticipate selling
substantial equipment over the next 12 months.
Number of Employees
At March 31, 1998, the Company employed 12 people on a full-time basis, and
one on a part-time basis. Over the next 12 months the Bank expects to add
approximately five full-time people.
(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company experienced its first quarter of positive earnings with $73,000
net income for the quarter ended March 31, 1998, which is only the fourth
full quarter of operations for the Company. Total assets at the end of the
quarter were $58.5 million, an increase of $7.1 million from the $51.4
million at December 31, 1997. Total loans outstanding grew to $40.4
million, an increase of $7.8 million from December 31, 1997. Loan growth
was funded primarily by a $7.0 million increase in deposits, for a total
outstanding amount of deposits of $47.7 million at March 31, 1998.
Net income for the quarter ended March 31, 1998, was an increase of $177,000
over the previous quarter. Net interest income before allowances for loan
losses increased $72,000, to $479,000, primarily due to an increase in
volume. Allowances for loan losses decreased $105,000 from the previous
quarter due to lower new loan volume and an additional $50,000 in loan
provision during the previous quarter in order to provide a more
conservative position for loan reserves. Other income went up $18,000 due
mostly to additional loan participation fee income. Other operating
expenses went up only $18,000, with salaries/employee benefits and
advertising/promotion expense increasing $11,000 and $9,000, respectively.
For the first quarter of 1997, the Company experienced an $81,000 net loss,
after being operational only 22 days. The net loss was expected due to
substantial start-up costs that must be incurred by a new bank and the time
it takes to develop its deposit base and loan portfolio.
There have been no loan charge-offs or recoveries to date. The Company is
taking a conservative position in allocating 1.39% in loan loss reserves to
its total loan portfolio.
Net income per actual shares outstanding was $0.06 for the quarter ended
March 31, 1998, as compared to a net loss per share of $0.09 for the
previous quarter.
The categories of loans outstanding at March 31, 1998, in dollars and as a
percentage of total loans outstanding are as follows:
Percentage
Loan Category in thousands of Total Loans
- ------------- ------------ --------------
Commercial loans discounted $28,298 70.1%
Commercial loans direct 6,121 15.1%
Lines of credit 2,522 6.2%
Commercial real estate 1,025 2.5%
Mortgage, home equity and
installment loans 2,478 6.1%
------ ----
Total Loans $40,444 100.0%
====== =====
At March 31, 1998, there were no non-accrual loans and only three
loans totaling less than $104,000 that were 30 to 59 days past due which
represented less than 0.3% of total loans. There was one $2,000 loan 60
days past due. There is one loan totaling less than $9,000 on the loan
watch list. While the loan is current, it has been fully reserved for.
On April 16, 1998, the Board of Directors of the Company declared a 10%
stock dividend. One additional share of common stock will be distributed
June 15, 1998, for each ten shares of common stock owned on April 30, 1998,
the record date for the stock dividend. Fractional shares will be
disregarded. Following the stock dividend, the Company will have
approximately 1,265,000 shares outstanding.
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
And by: /S/ DARRYLE J. PARKER
Darryle J. Parker
Secretary, Treasurer, and Chief Financial Officer
(Duly authorized officer)
DATED: May 12, 1998
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule (EDGAR filing only)