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, 1999
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
(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
-----------------------------------------------
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: 931,600 shares of the Company's Common
Stock (no par value) were outstanding as of
November 5, 1999.
Transitional Small Business Disclosure Format (check one): Yes___ No_X_
1
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 12-15
Part II. Other Information
Item 1.
Legal Proceedings 16
Item 2.
Changes in Securities and Use of Proceeds 16
Item 3.
Defaults Upon Senior Securities 16
Item 4.
Submission of Matters to a Vote of Securities Holders 16
Item 5.
Other Information 16
Item 6.
Exhibits and Reports on Form 8-K 16
Signatures 17
2
Part I Financial Information (unaudited)
CLARKSTON FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1999 (unaudited) and December 31, 1998
(dollars in thousands, except per share data)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
ASSETS
Cash and Cash Equivalents
Total cash and due from banks $ 574 $ 92
Federal funds sold 1,250 8,350
---------- ------------
Total Cash and Cash Equivalents 1,824 8,442
Securities Available for Sale, at fair value 14,141 --
Loans, less Loan Loss Reserve
Total loans 7,699
Allowance for loan losses 97 --
----------- ------------
Net Loans 7,602 --
Net Property and Equipment 356 291
Accrued interest receivable 185 --
Deposit premium and conversion costs,
net of amortization 178 --
Other Assets 14 --
----------- ------------
Total Assets 24,300 $ 8,733
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing 1,960 --
Interest-bearing 14,316 --
----------- ------------
Total deposits 16,276 --
Accrued Expenses and Other Liabilities 116 126
Shareholders' Equity
Common stock, par value: 10,000,000
shares authorized, 936,600 and 951,000 shares
issued and outstanding as of September 30, 1999
and December 31, 1998, respectively 4,322 4,378
Capital surplus 4,322 4,378
Accumulated deficit (648) (149)
Accumulated other comprehensive income (88) --
----------- ------------
Total Shareholder Equity 7,908 8,607
----------- ------------
Total Liabilities and Shareholders' Equity $ 24,300 $ 8,733
=========== ============
See accompanying notes to consolidated financial statements
3
CLARKSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Three months and nine months ended September 30, 1999
(dollars in thousands, except per share data)
(unaudited)
Three Months Nine Months
ended ended
September 30, 1999 September 30, 1999
------------------ ------------------
Interest Income
$ 121 $ 187
Loans, including fees 194 373
Securities 22 125
----------- -----------
Federal Funds sold 337 685
Total interest income
Interest Expense
Deposits 124 220
Other -- --
----------- -----------
Total interest expense 124 220
Net Interest Income 213 465
Provision for loan losses 27 97
----------- -----------
Net interest income after provision for loan losses 186 368
Noninterest income 21 38
Noninterest expense
Salaries and benefits 151 409
Occupancy expense of premises 33 75
Furniture and equipment expense 33 72
Computer and data processing expenses 43 118
Advertising and public relations 33 98
Professional fees 25 84
Amortization of deposit premium and conversion cost 4 4
Other expense 10 45
--------------- ----------
Total noninterest expense 332 905
--------------- ----------
Loss before federal income tax (125) (499)
Federal income tax 0 0
--------------- ----------
Net loss $ (125) (499)
=============== ==========
Basic and diluted loss per share $ (0.13) $ (.53)
=============== ==========
See accompanying notes to consolidated financial statements.
4
CLARKSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Three months and nine months ended September 30, 1999
(dollars in thousands)
(Unaudited)
Three Months Nine Months
ended ended
September 30, 1999 September 30, 1999
------------------ ------------------
Net Loss as Reported $ (125) $ (499)
Other Comprehensive Income, Net of Tax:
Change in unrealized gain on securities
available for sale
(76) (88)
----------- ----------
Comprehensive Loss $ (201) $ (587)
=========== ==========
See accompanying notes to consolidated financial statements.
5
CLARKSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended September 30, 1999
(dollars in thousands)
(Unaudited)
Accumulated
Other Total
Common Capital Accumulated Comprehensive Shareholders'
Stock Surplus Deficit Income Equity
------ ------- ----------- ------------- ------------
Balance December 31, 1998 $ 4,378 $ 4,378 $ (149) $ 0 $ 8,607
Net income (loss) for nine months
ended September 30, 1999 (unaudited) (499) (499)
Purchase and retirement of 14,400
shares (112)
of the Corporation's common stock (56) (56)
Increase (decrease) in fair market
value of securities available for sale (88) (88)
---------- -------- ---------- --------- ---------
Balance September 30, 1999 $ 4,322 $ 4,322 $ (648) $ (88) $ 7,908
========== ======== ========== ========= =========
See accompanying notes to consolidated financial statements.
6
CLARKSTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30, 1999
(dollars in thousands)
(unaudited)
Nine Months
ended
September 30, 1999
------------------
(Unaudited)
Cash Flows from Operating Activities:
Net loss $ (499)
Adjustments to reconcile net loss to net
cash used in operating activities:
Increase in interest receivable (185)
Depreciation and amortization 64
Decrease in accrued expenses (9)
Loan loss provision 97
Increase in other assets (14)
---------
Total adjustments (47)
---------
Net cash used in operating activities (546)
Cash Flows from Investing Activities:
Increase in loans (7,699)
Purchase of securities (14,228)
Equipment expenditures (126)
Deposit premium and conversion cost (182)
---------
(22,235)
Cash Flows from Financing Activities:
Increase in deposits 16,276
Repurchase of 14,400 shares of common stock (112)
---------
16,164
Net decrease in cash and cash equivalents (6,617)
Cash and cash equivalents at beginning of year 8,442
---------
Cash and cash equivalents at September 30, 1999 $ 1,825
=========
See accompanying notes to consolidated financial statements.
7
CLARKSTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 (unaudited) and December 31, 1998
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 and nine month
periods ended September 30, 1999, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Proxy Statement dated March 5, 1999 containing
audited financial statements for the period from May 18, 1998 (date of
inception), through December 31, 1998.
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.
NOTE 4 COMPARATIVE DATA
The Company was incorporated on May 18, 1998, and the Bank opened for
operations on January 4, 1999. Comparable statements of income and cash flows
for the nine months ended September 30, 1998, have not been presented since the
Company did not have operations during that period.
8
CLARKSTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 (unaudited) and December 31, 1998
NOTE 5 - SECURITIES
The amortized cost and fair values of securities were as follows (dollars in
thousands):
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
--------- ---------- ---------- ------
September 30, 1999 (Unaudited)
Taxable variable rate demand
municipal revenue bonds,
short term corporate
commercial paper, and bonds
of government agencies $ 14,228 $ 0 $ (87) $ 14,141
========= ====== ====== ========
Contractual maturities of debt securities at September 30, 1999, were as
follows. No held-to-maturity securities existed at September 30, 1999. 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 Fair
Cost Values
--------- ------
(dollars in thousands)
Due from 1999 to 2002 $ 10,760 $ 10,706
Due from 2003 to 2004 3,001 2,981
Due in 2006 467 454
--------- ---------
$ 14,228 $ 14,141
========= =========
(Continued)
9
CLARKSTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 (unaudited) and December 31, 1998
NOTE 6 - LOANS
Loans are as follows (dollars in thousands):
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
Commercial $ 4,076 $ --
Mortgage 1,857 --
Consumer 1,766 --
---------- --------
7,699 --
Allowance for loan losses 97 --
========== --------
$ 7,602 $ --
========== ========
Activity in the allowance for loan losses is as follows (dollars in thousands):
Period from
May 18
Six months (date of inception)
ended through
September 30, December 31,
1999 1998
------------- -----------------
(Unaudited)
Balance at beginning of period $ 0 $ --
Provision charged to operating expense 97 --
Loans charged off -- --
--------- --------
Balance at end of periods $ 97 $ --
========= ========
Allowance for loan losses as a percentage of
loans at end of period --
1.25%
========= ========
(Continued)
10
CLARKSTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 (unaudited) and December 31, 1998
NOTE 7 - PREMISES AND EQUIPMENT - NET
Premises and equipment are as follows (dollars in thousands):
Accumulated Carrying
Cost Depreciation Value
---- ------------ --------
September 30, 1999 (unaudited)
Building and improvements $ 87 $ 6 $ 81
Furniture and equipment 329 54 275
------- -------- --------
$ 416 $ 60 $ 356
======= ======== ========
December 31, 1998
Building and improvements $ 59 $ 0 $ 59
Furniture and equipment 232 0 232
------- -------- --------
$ 291 $ 0 $ 291
======= ======== ========
NOTE 8 - DEPOSITS
Deposits are summarized as follows (dollars in thousands):
September 30, December 31,
1999 1998
------------- ------------
Demand deposit accounts $ 4,041 $ --
Money market accounts 2,490 --
Savings accounts 3,736 --
Certificates of Deposit 6,009 --
---------- -------
$ 16,276 $ --
========== =======
(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 Company's plan of operation has been to establish its management team
within the first few months of its operations and to grow in a prudent manner,
primarily by providing prompt, quality service. Management believes that it has
been successful in establishing a management team that can administer the
Company's growth in such a manner.
On April 6, 1999, the Bank entered into an agreement with The State Bank,
Fenton, Michigan, to acquire certain assets and assume certain deposit
liabilities with respect to The State Bank's branch office located in the
Foodtown grocery store at 6555 Sashabaw Road, Clarkston, Michigan. This
transaction was consummated on July 16, 1999 and added $1.8 million in deposits
to the Bank's totals. A deposit premium of 9.24% of deposits (as finally
adjusted) was paid to The State Bank for these deposits, along with $17,000 for
various fixed assets and equipment. The Bank leases the branch space from
Foodtown, Inc. at a rental rate of $2,750 per month under a lease which runs
until July, 2002. The Chairman of the Company's Board of Directors is the
principal owner of Foodtown, Inc. The lease is an arm's length transaction on
essentially the same terms as those previously in place between Foodtown, Inc.
and The State Bank.
Financial Condition
Total assets of the Company increased by $15.6 million or 179% to $24.3
million at September 30, 1999, from $8.7 million at December 31, 1998. The
increase in assets is primarily attributable to the Bank continuing to attract
customer deposits. The first three quarters of 1999 were the Company's first
full nine months of operations, and the number of deposit accounts increased
from none at December 31, 1998, to 2,285 deposit accounts at September 30, 1999.
The Company anticipates that the Bank's assets will continue to increase during
1999, which will be the Bank's first full year of operations.
Cash and cash equivalents, which include federal funds sold and short-term
investments, decreased $6.6 million or 79% to $1.8 million at September 30,
1999, from $8.4 million at December 31, 1998. The decrease is the result of the
increase in the investment and loan portfolios since December 31, 1998.
Securities available for sale increased to $14.1 million at September 30,
1999 from $0 at December 31, 1998. The increase is the result of the investment
of customer deposits that have been obtained since December 31, 1998, and also
the purchase of securities using cash generated by a reduction in federal funds
sold.
12
The allowance for loan losses as of September 30, 1999 was $96,500,
representing approximately 1.25% of total loans outstanding, compared to no loan
loss reserves at December 31, 1998, at which time the Bank had not yet opened
for business. Clarkston Financial Corporation has not experienced any credit
losses as of September 30, 1999.
Bank premises and equipment increased by $65,000 or 22% to $356,000 at
September 30, 1999 from $291,000 at December 31, 1998. The increase included the
purchase of two ATM machines and related software, an automobile for the Bank's
courier, computer equipment for the new branch, additional printers, and other
miscellaneous items.
Results of Operations
The net loss for the three and nine month periods ended September 30, 1999,
was $125,000 and $499,000, respectively. As of December 31, 1998, the Company
had a retained deficit of $149,000, and as of September 30, 1999, the Company
had a retained deficit of $648,000. The retained deficit and net losses are
primarily the result of costs of opening the Bank's office, wages paid to
employees, and fees and expenses incurred in forming the Company and applying
for regulatory approvals. Significant ongoing additions to loan loss reserves
will also contribute to net losses in 1999 as the Bank increases its loan
portfolio. Management believes that the Company will generate a net loss for
1999 as a result of expenditures made to build its management team and open its
main office and its first branch, together with the time needed to more
effectively utilize its capital and generate loan interest and fee income by
making additional loans. Management believes that the expenditures made in 1998
and 1999 will create the infrastructure and lay the foundation for future growth
and profitability in subsequent years.
Interest income was $337,000 and $685,000 for the three and nine month
periods ended September 30, 1999, consisting primarily of interest income on
federal funds and securities and secondarily from lending activities ($121,000
and $187,000 for the three and nine month periods ended September 30, 1999).
Interest expense was $124,000 and $220,000 for the three and nine month periods
ended September 30, 1999 and relates to interest incurred on interest bearing
deposits.
The Company had an allowance for loan losses of approximately 1.25% of
total loans at September 30, 1999. The provision for loan losses for the three
and nine month periods ended September 30, 1999 was $27,000 and $97,500,
respectively. This amountis expected to increase substantially in the last
quarter of 1999 as a result of anticipated increases in the total loan
portfolio. 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 payment.
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
13
reviewing annual financial statements from its commercial loan customers, and
periodically reviews the existence and value of collateral for selected loans.
Other income of $21,000 and $38,000 for the three and nine month periods
ended September 30, 1999 consisted of income from deposit service charges and
other miscellaneous fees.
The main components of other expenses were primarily salaries and benefits.
Other expense for the three and nine month periods ended September 30, 1999 was
$181,000 and $496,000, respectively, consisting primarily of occupancy and
equipment expenses, legal and accounting fees, marketing expenses, insurance and
supplies.
Liquidity and Capital Resources
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 two or three years.
Year 2000 Compliance
Because many computerized systems use only two digits to record the year in
date fields (for example, the year 1998 is recorded as 98), such systems may not
be able to accurately process dates ending in the year 2000 and after. The
effects of the issue will vary from system to system and may adversely affect
the ability of a financial institution's operations as well as its ability to
prepare financial statements. The Company and the Bank were organized in 1998
and the Company acquired its computer equipment within the past twelve months
and has contracted with a leading supplier of information processing services.
This equipment and these services were purchased with assurances of Year 2000
compliance.
Company management has developed a comprehensive Year 2000 Compliance Plan.
The Company has procedures in place to assess Year 2000 compliance by the
Company and its vendors. In addition, the Bank asks commercial borrowers about
Year 2000 compliance as part of the loan application and review process.
To date, the Company has spent less than $15,000 on Year 2000 compliance.
Management believes that the additional costs to complete the Company's Year
2000 compliance will be minimal.
The Company has completed its Year 2000 assessment and necessary
remediation. However, the Company may be adversely affected by the inability of
other companies whose systems interact with the Company to become Year 2000
compliant.
The Bank's core processing applications are provided by a third party
vendor, Jack Henry and Associates, Inc. The Company has received correspondence
from Jack Henry and Associates, Inc. which documents the status of their Year
2000 compliance. The Company has been advised that the Jack Henry and
Associates, Inc. software has been successfully tested for Year 2000 compliance.
In addition, the Bank has repeated a number these tests internally for specific
Year 2000 critical dates, and has had the successful results of such tests
validated by an outside consultant.
14
Although the Company believes its internal systems to be Year 2000
compliant as described above, the Company has prepared a contingency plan that
specifies what it plans to do if important internal or external systems are not
Year 2000 compliant in a timely manner. Further, the Bank has successfully
tested major portions of the contingency plan by operating manually, as if no
computers were available, for several days at each location.
Management does not anticipate that the Company will incur material
operating expenses or be required to invest heavily in computer system
improvements to be Year 2000 compliant. Nevertheless, the inability of the
Company to successfully address Year 2000 issues could result in interruptions
in the Company's business and have a material adverse effect on the Company's
results of operations.
Recent Regulatory Developments
Various bills have been introduced in the Congress that would allow bank
holding companies to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. While the
scope of permissible nonbanking activities and the conditions under which the
new powers could be exercised vary among the bills, the expanded powers
generally would be available to a bank holding company only if the bank holding
company and its bank subsidiaries remain well-capitalized and well-managed. The
bills also impose various restrictions on transactions between the depository
institution subsidiaries of bank holding companies and their non-bank
affiliates. These restrictions are intended to protect the depository
institutions from the risks of the new nonbanking activities permitted to such
affiliates. At this time, the Company is unable to predict whether any of the
pending bills will be enacted and, therefore, is unable to predict the impact
such legislation may have on the operations of the Company and the Bank.
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.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
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 -
27 Financial Data Schedule
(EDGAR version only)
(b) Reports on Form 8-K - None.
16
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, 1999, to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLARKSTON FINANCIAL CORPORATION
//ss/ David T. Harrison
David T. Harrison
President and Chief Executive Officer
//ss// James L. Richardson
James L. Richardson
Treasurer
DATE: November 4, 1999
17