1
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
JUNE 30, 2001
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.)
28300 Orchard Lake Road, Suite 200, Farmington Hills, MI 48334
(Address of principal executive offices)
248-538-2525
(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 August 8, 2001 there were 1,488,764 shares of Common Stock of the issuer
issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes: [ ] No: [X]
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICHIGAN HERITAGE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
(000S OMITTED FOR DOLLARS)
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
ASSETS
Cash and due from banks, noninterest bearing $ 1,080 $ 1,271
Interest bearing deposits with banks 3,272 3,981
Federal funds sold 3,850 7,400
--------- ---------
Cash and cash equivalents 8,202 12,652
Securities available for sale 12,134 12,078
Federal Reserve Bank stock and other stock 534 419
--------- ---------
Total investments 12,668 12,497
Loans, gross 106,232 95,137
Less: allowance for loan losses 1,526 1,887
--------- ---------
Net loans 104,706 93,250
Total earning assets 124,496 117,128
Leasehold improvements, net 264 288
Furniture & equipment, net 498 554
--------- ---------
Total fixed assets 762 842
Interest receivable 689 704
Deferred income taxes 412 412
Other assets 286 211
--------- ---------
Total other assets 1,387 1,327
--------- ---------
Total assets $ 127,725 $ 120,568
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits $ 105,215 $ 106,660
Other borrowed funds 9,000 500
Other liabilities 888 1,085
--------- ---------
Total liabilities 115,103 108,245
Stockholders' Equity
Preferred stock--no par value; 500,000 shares
authorized, none issued and outstanding 0 0
Common stock--no par value; 4,500,000 shares
authorized, issued and outstanding--
1,488,764 shares 13,730 13,730
Accumulated deficit (1,238) (1,471)
Accumulated other comprehensive income 130 64
--------- ---------
Total stockholders' equity 12,622 12,323
--------- ---------
Total liabilities and stockholders' equity $ 127,725 $ 120,568
========= =========
Total loan loss reserve ratio 1.44% 1.98%
Total loan to asset ratio 83% 79%
Page 2
3
MICHIGAN HERITAGE BANCORP, INC.
CONSOLIDATED STATEMENT OF EARNINGS
THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 2001 AND JUNE 30, 2000
(UNAUDITED)
(000S OMITTED EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
OPERATING INCOME:
Interest income $2,641 $ 2,385 $5,270 $ 4,645
Interest expense 1,574 1,346 3,170 2,626
------ ------- ------ -------
Net interest income before provision for loan losses 1,067 1,039 2,100 2,019
Less: provision for loan losses 32 15 62 30
------ ------- ------ -------
Net interest income after provision for loan losses 1,035 1,024 2,038 1,989
Gain on sale of securities held available for sale 0 0 44 0
Gain on sale of loans and other assets 194 4 311 14
Other income 24 24 50 55
------ ------- ------ -------
Total other operating income 218 28 405 69
------ ------- ------ -------
Total operating income 1,253 1,052 2,443 2,058
OTHER OPERATING EXPENSES:
Salaries and employee benefits 634 489 1,212 950
Occupancy expense 106 89 209 182
Equipment expense 58 58 113 119
Data processing expense 22 22 45 45
Insurance expense 12 11 20 21
Advertising/promotion expense 41 44 87 84
Office supplies and printing expense 15 8 20 21
Professional fees 70 62 150 118
FDIC assessment 13 18 25 24
Lien, recording, and other loan fees, net 67 (1) 67 (5)
Michigan single business tax 15 12 30 21
Other expense 51 57 131 102
------ ------- ------ -------
Total other operating expense 1,104 869 2,109 1,682
------ ------- ------ -------
Net operating income 149 183 334 376
Provision for federal income taxes 46 60 101 123
------ ------- ------ -------
Net income $ 103 $ 123 $ 233 $ 253
====== ======= ====== =======
PER COMMON SHARE DATA
Basic earnings per share $ 0.07 $ 0.08 $ 0.16 $ 0.17
Diluted earnings per share $ 0.07 $ 0.08 $ 0.16 $ 0.17
Page 3
4
MICHIGAN HERITAGE BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
SIX MONTH PERIODS ENDED
JUNE 30, 2001 AND JUNE 30, 2000
(UNAUDITED)
(000S OMITTED)
SIX MONTHS ENDED JUNE 30,
--------------------------------
2001 2000
-------- --------
Operating activities:
Net income $ 233 $ 253
Adjustments to reconcile net income to net cash
provided in operating activities (598) (551)
-------- -------
Net cash used by operating activities (365) (298)
Investing activities:
Purchase of U.S. Treasury and agency securities - (6,000)
Proceeds from matured or called U.S. Treasury
and agency securities 1,500 1,000
Purchase of other securities (4,107) (2,775)
Proceeds from matured or called other securities 2,800 1,040
Purchase of Federal Reserve Bank and other stock (105) (27)
Purchase of leasehold improvements, furniture
and equipment (20) (128)
Net change in gross loans (11,208) (916)
-------- -------
Net cash used by investing activities (11,140) (7,806)
Financing activities:
Decrease in deposits (1,445) (4,468)
Payments of federal funds purchased (500) -
Proceeds from federal funds purchased 5,000 -
Proceeds from Federal Home Loan Bank advances 4,000 -
Proceeds from other borrowed funds - 370
-------- -------
Net cash provided (used) by financing activities 7,055 (4,098)
-------- -------
Decrease in cash and cash equivalents (4,450) (12,202)
Cash and cash equivalents at beginning of year 12,652 18,188
-------- -------
Cash and cash equivalents at end of period $ 8,202 $ 5,986
======== ========
Page 4
5
MICHIGAN HERITAGE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
ITEM 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 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 currently headquartered in Farmington Hills,
Michigan. The Company completed an initial public offering of common stock
during the first quarter of 1997, realizing a total of $10.9 million (after
payment of underwriters' commissions and offering expenses). During the fourth
quarter of 1999, the Company completed a rights offering to existing
shareholders raising $1.3 million in additional capital after payment of
offering expenses. The consolidated financial statements of the Company include
its only subsidiary, the Bank. All adjustments, which in the opinion of
management are necessary in order to ensure that the interim financial
statements are not misleading, have been included.
The Bank provides a focused core of banking services primarily for small- to
medium-size businesses, as well as to individuals. The Bank's lending services
include commercial loans, commercial real estate, equipment leasing, and
residential mortgages. The new mortgage division which began operations in
January 2001 offers a wide range of products including variable and fixed rate
mortgage loans, home equity lines of credit and other forms of consumer lending.
The Bank also formed a new, wholly-owned leasing subsidiary, MHB Leasing, Inc.,
which began actively booking new business in June 2001. The new entity will
expand the Bank's capabilities in equipment leasing by providing tax-oriented
true leases and other structured lease products.
For commercial customers who seek additional deposit services, the Bank offers
the convenience of a "Rapid Courier Service." This service offers prearranged
pick-up times for all business banking transactions. The Bank's commercial
checking accounts also offer "Sweep" capabilities with low or no fees.
Michigan Heritage Bank's primary goal is to provide personal service with an
experienced staff using state-of-the-art technology. The Bank recently
introduced convenient account access through a new telephone banking service and
plans to offer internet banking sometime in the future.
Michigan Heritage Bank is a state chartered, full-service, commercial bank, a
member of both the Federal Reserve System and the Federal Home Loan Bank and its
deposits are FDIC insured.
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. Actual results could
differ from those estimates and assumptions.
Page 5
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 or
circumstances after the date of such statements.
COMPARATIVE RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
The Company had net income of $103,000 for the quarter ending June 30, 2001. Net
income for the same quarter last year was $123,000. Net interest income before
allowances for loan losses increased by $28,000 or 3% to $1,067,000 primarily
due to a $12,536,000 or 12% increase in average earning assets offset partially
by a reduction in net interest margin--3.65% for the second quarter 2001
compared to 4.00% for the second quarter 2000. Provision for loan losses
increased by $17,000 to $32,000. As a combined result, net interest income after
provision for loan losses increased $11,000 or 1% to $1,035,000.
Other operating income increased by $190,000 or 679% to $218,000 due primarily
to an increase of $190,000 in net gains on sale of loans due to the addition of
the new mortgage division.
Other operating expenses increased by $235,000 or 27% to $1,104,000. Salaries
and employee benefits increased by $145,000 to $634,000 due to additional
mortgage salaries and commissions expense. Occupancy expense increased by
$17,000 to $106,000 due primarily to the new mortgage center in Farmington,
Michigan. Loan fees increased by $68,000 mostly due to the new mortgage
division. All other remaining expenses increased by a net $5,000.
The resulting income before federal income tax decreased by $34,000 to $149,000
compared to the same quarter last year. Federal income tax was $46,000 for the
second quarter of 2001 compared to $60,000 for the same time period last year.
Net income per weighted average share outstanding was $0.07 for the quarter
ended June 30, 2001 compared to $0.08 per share for the same quarter last year.
On a diluted basis, net income per share was also $0.07 for the quarter ended
June 30, 2001 compared to $0.08 per share for the same quarter last year.
COMPARATIVE RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
Net income for the six months ended June 30, 2001 was $233,000 compared to
$253,000 for the same time period last year. Net interest income before
allowances for loan losses increased by $81,000 or 4% to $2,100,000 primarily
due to a $12,608,000 or 12% increase in average earning assets offset partially
by a reduction in net interest margin--3.65% for the first six months of 2001
compared to 3.93% for the first six months of 2000. Provision for loan losses
increased by $32,000 to $62,000. As a combined result, net interest income after
provision for loan losses increased $49,000 or 2% to $2,038,000.
Other operating income increased by $336,000 or 487% to $405,000 due primarily
to an increase of $297,000 in net gains on sale of loans due to the addition of
the new mortgage division this year and a $44,000 net gain on sale of securities
held available for sale. Other miscellaneous income decreased by $5,000.
Other operating expenses increased by $427,000 or 25% to $2,109,000. Salaries
and employee benefits increased by $262,000 to $1,212,000 due to additional
mortgage salaries and commissions expense. Occupancy expense increased by
$27,000 to $209,000 due primarily to the new mortgage center in Farmington,
Michigan. Professional fees increased by $32,000 mostly due to loan related
legal fees. Other loan fees increased by $72,000 mostly due to the new mortgage
division this year. All other remaining expenses increased by a net $34,000
primarily due to increases in advertising, Michigan single business tax,
correspondent bank service charges and ATM related fees.
Page 6
7
The resulting income before federal income tax decreased by $42,000 to $334,000
compared to the same period last year. Federal income tax was $101,000 for the
first six months of 2001 compared to $123,000 for the same time period last
year. The reduction in federal income tax due to tax exempt income was greater
in 2001 than in 2000 due to an increase in tax exempt income in 2001.
Net income per weighted average share outstanding was $0.16 for the six months
ended June 30, 2001 compared to $0.17 per share for the same period last year.
On a diluted basis, net income per share was also $0.16 for the six months ended
June 30, 2001 compared to $0.17 per share for the same period last year.
BALANCE SHEET CHANGE--JUNE 30, 2001 FROM DECEMBER 31, 2000
Total assets increased by $7,157,000 or 6% to $127,725,000 from December 31,
2000 to June 30, 2001. Gross loans for the same 6-month time period increased by
$11,095,000 or 12% to $106,232,000. The growth in loans was funded primarily
from borrowed funds and cash and cash equivalents offset partially by a
reduction in deposits. Borrowed funds increased by $8,500,000 to $9,000,000 in
the form of $4,000,000 in notes payable to the Federal Home Loan Bank and
$5,000,000 in federal funds purchased at June 30, 2001--there were only $500,000
in federal funds purchased at December 31, 2000. Cash and cash equivalents
decreased by $4,450,000 or 35% to $8,202,000 primarily due to a $3,550,000
reduction in federal funds sold. Deposits decreased by $1,445,000 or 1% to
$105,215,000 due to the runoff of high yielding certificates of deposit offset
partially by core deposit growth.
LOANS AND ALLOWANCES FOR LOAN LOSSES
The categories of loans outstanding at June 30, 2001 in dollars and as a
percentage of total loans are as follows:
(000S OMITTED FOR DOLLARS)
PCT OF TOTAL
LOAN CATEGORY AMOUNT LOANS
------------ -------------
Commercial, financial and agricultural $ 76,076 71.5%
Real estate-construction 6,326 6.0%
Real estate-mortgage 19,671 18.5%
Installment loans to individuals 372 0.4%
Lease financing 3,787 3.6%
------------ -------------
Total loans $ 106,232 100.0%
============ =============
Note: There were no agricultural loans as of June 30, 2001
The change in mix and size of the loan portfolio from December 31, 2000 to June
30, 2001 has not increased the proportionate level of credit risk in the loan
portfolio. Due to current and forecasted economic downturns, the level of risk
in the loan portfolio has increased. However, management believes that this
increased level of risk is not material relative to the level of risk in the
past.
At June 30, 2001 there were $838,000 in non-accruing loans. There were 11 loans
totaling $423,000 charged off against reserves during the first six months of
2001. There were $2,025,000 in accruing loans past due 30 days or more:
$1,020,000 past due 30 to 59 days, $181,000 past due 60 to 89 days and $824,000
past due 90 days or more. Management fully expects that diligent servicing of
these loans will minimize delinquencies.
Total loan loss reserves of $1,526,000 at June 30, 2001 were 1.44% of total
loans, which included $370,000 in specific allowances. The following highlights
the allocations of allowances for loan losses as of June 30, 2001.
Page 7
8
(000S OMITTED FOR DOLLARS)
LOAN LOSS PERCENT OF LOAN
ALLOWANCE LOAN AMOUNTS LOSS ALLOWANCE
AMOUNT OUTSTANDING TO LOAN AMOUNTS
----------------- ----------------- ----------------------
Domestic:
Commercial, financial and agricultural $ 964 $ 76,076 1.27%
Real estate-construction 63 6,326 1.00%
Real estate-mortgage 302 19,671 1.54%
Installment loans to individuals 5 372 1.25%
Lease financing 30 3,787 0.80%
Foreign - - 0.00%
Off-balance sheet items and unallocated 162 - n/a
----------------- ----------------- ----------------------
Total $ 1,526 $ 106,232 1.44%
================= ================= ======================
Note: There were no agricultural loans as of June 30, 2001
In management's opinion, the total loan reserve position is adequate relative to
the overall quality of the loan portfolio.
LIQUIDITY AND CAPITAL RESOURCES
Michigan Heritage Bank's current cash projections as of June 30, 2001 indicate
adequate cash balances. The Bank has additional line of credit facilities with
national lending institutions to add funding capacity. Bank management has also
established a network of banks that can be used to sell or participate a portion
of the Bank's loan portfolio. These techniques allow the Bank to service its
business relationships and generate fee and servicing revenue.
The Company's liquidity remained adequate during the 6-month period ended June
30, 2001. Michigan Heritage Bancorp had $8,202,000 in cash and cash equivalents
as of June 30, 2001 including $3,272,000 in interest bearing deposits in other
banks and $3,850,000 in federal funds sold. The Bank has proven its ability to
attract deposits and build a stable deposit base from which to fund loans. In
addition, the Bank is now a member of the Federal Home Loan Bank of
Indianapolis, Indiana and as of June 30, 2001 had $4,000,000 in notes payable to
the Federal Home Loan Bank at a weighted average rate of 4.81%.
Michigan Heritage Bank is subject to various regulatory capital requirements. To
be considered adequately-capitalized or well-capitalized, Michigan Heritage Bank
must maintain a Tier 1 leverage capital ratio of 4.0% and 5.0%, respectively.
The Bank's Tier 1 leverage capital ratios were 9.6% and 9.5% at June 30, 2001
and December 31, 2000, respectively. Michigan Heritage Bank plans to remain
well-capitalized on an ongoing basis.
Page 8
9
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No exhibits have been filed for this report.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
Page 9
10
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: /s/ Darryle J. Parker
-------------------------------------
Darryle J. Parker
Secretary, Treasurer, and
Chief Financial Officer
(Duly authorized officer)
DATED: August 8, 2001
Page 10