SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number: 333-63685
CLARKSTON FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
MICHIGAN 38-3412321
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 South Main Street, Clarkston, Michigan 48346
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 625-8585
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Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
------- -------
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 1,026,012 shares of the Company's
Common Stock (no par value) were outstanding as of September 30, 2001.
Transitional Small Business Disclosure Format (check one): Yes No X
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INDEX
Page
Number(s)
Part I. Financial Information (unaudited):
Item 1.
------
Consolidated Financial Statements 3-7
Notes to Consolidated Financial Statements 8-11
Item 2.
------
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-14
Part II. Other Information
Item 1.
------
Legal Proceedings 15
Item 2.
------
Changes in Securities and Use of Proceeds 15
Item 3.
------
Defaults Upon Senior Securities 15
Item 4.
------
Submission of Matters to a Vote of Securities Holders 15
Item 5.
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Other Information 15
Item 6.
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Exhibits and Reports on Form 8-K 15
Signatures 16
2
Part I Financial Information (unaudited)
CLARKSTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2001 (unaudited) and December 31, 2000
(dollars in thousands, except per share data)
September 30, December 31,
2001 2000
---------- ----------
(Unaudited)
ASSETS
Cash and Cash Equivalents
Total cash and due from banks $ 2,560 $ 862
Federal funds sold 2,500 2,550
----------- -----------
Total Cash and Cash Equivalents 5,060 3,412
Securities Held to Maturity 7,821 21,342
Securities Available for Sale, at fair value 31,052 8,989
Loans, less Loan Loss Reserve
Total loans 32,993 25,762
Allowance for loan losses 450 379
----------- -----------
Net Loans 32,543 25,383
Net Property and Equipment 780 282
Accrued interest receivable 359 457
Deposit premium and conversion costs,
net of amortization 133 150
Other Assets 160 205
----------- -----------
Total Assets $ 77,908 $ 60,220
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing 7,827 6,598
Interest-bearing 60,659 44,810
----------- -----------
Total deposits 68,486 51,408
Accrued Expenses and Other Liabilities 480 534
Shareholders' Equity
Common stock, no par value: 10,000,000
Shares authorized; 1,026,012 shares
issued and outstanding as of September 30,
2001 and December 31, 2000 4,306 4,306
Capital surplus 4,306 4,306
Accumulated profit (deficit) 15 (335)
Accumulated other comprehensive income (loss) 315 1
----------- -----------
Total Shareholder Equity 8,942 8,278
----------- -----------
Total Liabilities and Shareholders' Equity $ 77,908 $ 60,220
=========== ===========
See accompanying notes to consolidated financial statements
3
CLARKSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Three and Nine Month Periods Ended September 30, 2001, and September 30, 2000
(dollars in thousands, except per share data)
(unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Interest Income
Loans, including fees $ 680 $ 438 $ 1,847 $ 1,066
Securities 569 417 1,502 1,041
Federal Funds sold 31 35 131 86
-------- -------- --------- --------
Total interest income 1,280 890 3,480 2,193
Interest Expense
Deposits 700 475 1909 1,066
Other 0 0 0 0
-------- -------- --------- --------
Total interest expense 700 475 1,909 1,066
Net Interest Income 580 415 1,571 1,127
Provision for loan losses 32 36 73 98
-------- -------- --------- --------
Net interest income
After provision for loan losses 548 379 1,498 1,029
Noninterest income
Gains (losses) on sale of securities 89 1 127 (9)
Other income 38 83 193 185
-------- -------- --------- --------
Total noninterest income 127 84 320 176
-------- -------- --------- --------
Noninterest expense
Salaries and benefits 202 159 606 479
Occupancy expense of premises 41 31 115 94
Furniture and equipment expense 40 22 110 65
Computer and data processing expenses 71 61 168 126
Advertising and public relations 34 30 86 95
Professional fees 24 24 81 72
Amortization of deposit premium
and conversion cost 5 6 17 17
Other expense 50 19 118 74
-------- -------- --------- --------
Total noninterest expense 467 352 1,301 1,022
-------- --------- --------- --------
Profit before federal income tax 208 111 517 183
Federal income tax 70 0 167 0
-------- -------- --------- --------
Net profit $ 138 $ 111 $ 350 $ 183
======== ======== ========= ========
Basic and diluted profit per share $ .13 $ .12 $ .34 $ .20
======== ======== ========= ========
See accompanying notes to consolidated financial statements.
4
CLARKSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Three and Nine Month Periods Ended September 30, 2001 and September 30, 2000
(dollars in thousands)
(Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net Profit as Reported $ 138 $ 111 $ 350 $ 183
Other Comprehensive Income, Net of Tax:
Change in unrealized gain on securities
available for sale 297 (5) 314 17
--------- --------- --------- ---------
Comprehensive Profit $ 435 $ 106 $ 664 $ 200
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
5
CLARKSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Months ended September 30, 2001
(dollars in thousands)
(Unaudited)
Accumulated
Other Total
Common Capital Accumulated Comprehensive Shareholders'
Stock Surplus Deficit Income Equity
--------- ------- ----------- ------------- ------------
Balance December 31, 2000 $ 4,306 $ 4,306 $ (335) $ 1 $ 8,278
Net income for nine months
Ended September 30, 2001 (unaudited) 350 350
Increase in fair market value of securities
available for sale 0 0 0 314 314
------- ------- ------- ------- -------
Balance September 30, 2001 $ 4,306 $ 4,306 $ 15 $ 315 $ 8,942
======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
6
CLARKSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months ended September 30, 2001, and September 30, 2000
(dollars in thousands)
(unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2001 2000
---------- ----------
Net Cash Provided by Operating Activities:
Net cash provided by operating activities $ 901 $ 441
Cash Flows from Investing Activities:
Net increase in loans (7,231) (10,191)
Purchase of held-to-maturity securities (2,906) (10,420)
Proceeds from maturities of held-to-maturity securities 12,059 995
Proceeds from sales of held-to-maturity securities 4,368 0
Purchase of available-for-sale securities (46,719) (3,190)
Proceeds from sales of available-for-sale securities 24,656 4,093
Property and equipment expenditures (558) (33)
---------- -----------
Net cash used in investing activities (16,331) (18,246)
Cash Flows from Financing Activities:
Increase on deposits 17,078 18,116
---------- ----------
Net increase in cash and cash equivalents 1,648 311
Cash and cash equivalents at beginning of year 3,412 2,467
---------- ----------
Cash and cash equivalents at September 30, 2001 and 2000 $ 5,060 $ 2,778
========== ==========
See accompanying notes to consolidated financial statements.
7
CLARKSTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (unaudited) and December 31, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
September 30, 2001, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Proxy Statement dated April 2, 2001 containing audited financial
statements as of December 31, 2000 and 1999.
NOTE 2 - COMPUTATION OF EARNINGS PER SHARE
Basic earnings (loss) per share is based on net income (loss) divided by
the weighted average number of shares outstanding during the period.
NOTE 3 - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Clarkston Financial Corporation (the "Company"), and its wholly-owned
subsidiary, Clarkston State Bank (the "Bank"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
4
CLARKSTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (unaudited) and December 31, 2000
NOTE 4 - SECURITIES
The amortized cost and fair values of securities were as follows (dollars in
thousands):
Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
September 30, 2001 (Unaudited)
Taxable variable rate demand
Municipal revenue bonds,
Short term corporate
Commercial paper, and bonds
of government agencies $ 30,737 $ 315 $ 0 $ 31,052
======== ======== ======== ========
Held to Maturity
September 30, 2001 (Unaudited)
Taxable variable rate demand
Municipal revenue bonds,
Short term corporate
Commercial paper, and bonds
of government agencies $ 7,821 $ 291 $ 0 $ 8,112
======== ======== ======== ========
During the nine month period ended September 30, 2001, the bank sold
approximately $4,400,000 of securities, classified as held-to-maturity, due to
concerns about the issuer's creditworthiness and in some cases, adverse
prepayment risks.
Contractual maturities of debt securities at September 30, 2001, were as
follows. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Available-for-Sale Securities
----------------------------------
Amortized Estimated
Cost Market Value
--------- ------------
(dollars in thousands)
Due from 2001 to 2002 $ 290 $ 292
Due from 2002 to 2004 0 0
Due from 2004 to 2006 1,000 1,001
Due from 2006 to 2034 29,447 29,759
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$30,737 $31,052
------ ------
Held-To-Maturity
----------------------------------
Amortized Estimated
Cost Market Value
--------- ------------
Due from 2001-2002 $ 0 $ 0
Due from 2002-2004 853 871
Due from 2004-2006 1,322 1,373
Due from 2006-2031 5,646 5,868
------ ------
$ 7,821 $ 8,112
====== ======
(Continued)
9
CLARKSTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (unaudited) and December 31, 2000
NOTE 5 - LOANS
Loans are as follows (dollars in thousands):
September 30, December 31,
2001 2000
------------ -----------
(Unaudited)
Commercial $ 22,577 $ 16,100
Mortgage 3,654 3,955
Consumer 6,762 5,707
-------- --------
32,993 25,762
Allowance for loan losses 450 379
-------- --------
$ 32,543 $ 25,383
======== ========
Activity in the allowance for loan losses is as follows (dollars in thousands):
Nine months For the
Ended Year Ended
September 30, December 31,
2001 2000
------------ -----------
(Unaudited)
Balance at beginning of period $ 379 $ 140
Provision charged to operating expense 73 243
Net loans (charge-offs) recoveries (2) (4)
-------- --------
Balance at end of periods $ 450 $ 379
======== ========
Allowance for loan losses as a percentage of
loans at end of period 1.36% 1.47%
======== ========
(Continued)
10
CLARKSTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (unaudited) and December 31, 2000
NOTE 6 - PREMISES AND EQUIPMENT - NET
Premises and equipment are as follows (dollars in thousands):
Accumulated Carrying
Cost Depreciation Value
---- ------------ --------
September 30, 2001 (unaudited)
Building and improvements $ 567 $ 24 $ 543
Furniture and equipment 449 212 237
--------- --------- ---------
$ 1,016 $ 236 $ 780
========= ========= =========
December 31, 2000
Building and improvements $ 86 $ 8 $ 78
Furniture and equipment 372 168 204
--------- --------- ---------
$ 458 $ 176 $ 282
========= ========= =========
NOTE 7 - DEPOSITS
Interest-bearing deposits are summarized as follows (dollars in thousands):
September 30, December 31,
2001 2000
------------ -----------
Demand deposit accounts $ 2,094 $ 1,635
Money market accounts 4,411 3,524
Savings accounts 5,971 5,796
Certificates of Deposit 48,183 33,855
-------- --------
$ 60,659 $ 44,810
======== ========
(Continued)
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Clarkston Financial Corporation (the "Company") is a Michigan corporation
incorporated on May 18, 1998. The Company is the bank holding company for
Clarkston State Bank (the "Bank"). The Bank commenced operations on January 4,
1999. The Bank is a Michigan chartered bank with depository accounts insured by
the Federal Deposit Insurance Corporation. The Bank provides a full range of
commercial and consumer banking services, primarily in Clarkston, Michigan and
the surrounding market area primarily located in north Oakland County, Michigan.
The Bank operates five customer service locations including two full service
branches.
Financial Condition
Total assets of the Company increased by $17.7 million or 29.4% to $77.9
million at September 30, 2001, from $60.2 million at December 31, 2000. The
increase in assets is primarily attributable to the Bank continuing to attract
customer deposits. The Company anticipates that the Bank's assets will continue
to increase during 2001, which is the Bank's third full year of operations.
Cash and cash equivalents, which include federal funds sold and short-term
investments, increased $1.7 million or 50% to $5.1 million at September 30,
2001, from $3.4 million at December 31, 2000. The increase is primarily the
result of prepayments and maturities of securities occurring in September 2001.
Securities increased $8.6 million or 28.4% to $38.9 million at September
30, 2001 from $30.3 million at December 31, 2000. The increase is the result of
slower than expected loan growth.
The Company's portfolio of held-to-maturity securities declined to $7.8
million at September 30, 2001 from $21.3 million at December 31, 2000. The
decrease is primarily a result of call options being exercised by the issuers of
the securities, and, in some cases, management's decision to sell certain
securities as a result of concerns over the issuer's creditworthiness. New
securities purchased by the Bank with proceeds from those maturities and from
new deposits have been classified as available-for-sale.
Total loans increased by $7.2 million or 27.9% to $33.0 million at
September 30, 2001, from $25.8 million at December 31, 2000. Management believes
that the total loans will continue to increase over time, although potentially
at a lower rate of increase.
The allowance for loan losses as of September 30, 2001 was $450,000,
representing approximately 1.36% of total loans outstanding, compared to
$379,000 as of December 31, 2000.
As of December 31, 2000, the Company had an accumulated deficit of $335,000
and as of September 30, 2001, the accumulated profit was $15,000. The
accumulated deficit was the result of opening the Bank's main office and its
branches, wages paid to employees, fees and expenses incurred in forming the
Company and applying for regulator approvals. The operating profits the bank has
earned in 2000 and 2001 has eliminated the accumulated deficit.
12
Results of Operations
The Company's net profit was $138,000 for the third quarter of 2001
compared to net profit of $111,000 for the third quarter of 2000. Net profit was
$350,000 for the nine months ended September 30, 2001, compared to $183,000 for
the nine months ended September 30, 2000. The Bank began operations in 1999 and
has earned a profit every month since January, 2000. Net profit for the three
and nine month periods ended September 30, 2001 included federal income tax
provision of $70,000 and $167,000, respectively. The comparable periods in 2000
did not include any federal income tax provision due to the Company's operating
loss carryforward for federal tax purposes.
Interest income for the third quarter of 2001 was $1.3 million, an increase
of 46.1% from interest income of $890,000 for the third quarter of 2000. This
increase resulted primarily from the increase in loans and securities. Interest
income was $3.5 million for the nine months ended September 30, 2001, an
increase of 59.1% from interest income of $2.2 million for the nine months ended
September 30, 2000.
Interest expense was $1.9 million for the nine months ended September 30,
2001, an increase of 72.7% from interest expense of $1.1 million for the nine
months ended September 30, 2000. This consisted of interest paid on interest
bearing deposits.
The Company had an allowance for loan losses of approximately 1.36% of
total loans at September , 2001. The provision for loan loss for the three and
nine month periods ended September 30 , 2001, was $32,000 and $73,000,
respectively. Management believes the current rate of providing for the loan
loss reserve is adequate.
In each accounting period, management evaluates the problems and potential
losses in the loan portfolio. Consideration is also given to off-balance sheet
items that may involve credit risk, such as commitments to extend credit.
Management's evaluation of the allowance is further based on consideration of
actual loss experience, the present and prospective financial condition of
borrowers, adequacy of collateral, industry concentrations within the portfolio
and general economic conditions. The results of these evaluations are reflected
in the allowance and periodic provision for credit losses.
The primary risk element considered by management regarding each
installment and residential real estate loan is the lack of timely payments.
Management has a reporting system that monitors past due loans and has adopted
policies to pursue its creditor's rights in order to preserve the Bank's
position. The primary risk elements concerning commercial loans are the
financial condition of the borrower, the sufficiency of the collateral and lack
of timely payment. Management has a policy of requesting and reviewing annual
financial statements from its commercial loan customers and periodically reviews
the existence and value of collateral for selected loans.
Noninterest expense was $467,000 for the third quarter of 2001, an $115,000
(or 32.7%) increase over the third quarter of 2000, with the increase primarily
attributable to increases in salaries and benefits due to the increase of full
time equivalents and normal raises given to employees. There were also increases
in computer and data processing expenses due to growth in the number of accounts
processed.
13
Liquidity and Capital Resources
Liquidity is measured by our ability to raise funds through deposits,
borrowed funds, capital or cash flow from the repayment of loans and investment
securities. These funds are used to meet deposit withdrawals, maintain reserve
requirements, fund loans and support our operations. Liquidity is primarily
achieved through the growth of deposits and liquid assets such as securities
available for sale, matured securities, and federal funds sold. Asset and
liability management is the process of managing our balance sheet to achieve a
mix of earning assets and liabilities that maximizes profitability, while
providing adequate liquidity.
Our liquidity strategy is to fund loan growth with deposits and to maintain
an adequate level of short- and medium-term investments to meet typical daily
loan and deposit activity. Although deposits from depositors located in our
market area have consistently increased, there is no assurance that deposit
growth alone will be sufficient to fund our loan growth and provide monies for
additional investing activities.
Shareholders' equity is a non-interest bearing source of funds that
provides support for asset growth. The Company obtained its initial equity
capital in an initial public offering of its common stock in November, 1998. The
Company's plan of operation for the next twelve months does not contemplate the
need to raise additional capital during that period. Management believes that
its current capital and liquidity will provide the Company with adequate capital
to support its expected level of deposit and loan growth and to otherwise meet
its cash and capital requirements for at least the next year.
Forward Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be involved in various legal proceedings
that are incidental to our business. In our opinion, we are not a party to any
current legal proceedings that are material to our financial condition, either
individually or in the aggregate.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
(b) Reports on Form 8-K - None.
15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2001, to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLARKSTON FINANCIAL CORPORATION
/s/ David T. Harrison
---------------------------------
David T. Harrison
President and Chief Executive Officer
/s/ Terry R. Wolf
---------------------------------
Terry R. Wolf
Principal Financial and Account Officer
DATE: November 10, 2001