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, 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 August 12, 1998, there were 1,265,000 shares of Common Stock of
the Issuer issued and outstanding.
Traditional Small Business Disclosure Format (check one): Yes: [ ]
No: [X]
<PAGE> 1
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
Michigan Heritage Bancorp, Inc.
Consolidated Balance Sheets
June 30, 1998, December 31, 1997 and June 30, 1997
(Unaudited, except for December 31, 1997)
<TABLE>
<CAPTION>
(dollars in thousands)
June 30, 1998 December 31, 1997 June 30, 1997
------------- ----------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks, noninterest bearing $ 931 $ 283 $ 367
Interest bearing deposits with banks 2,451 1,764 255
Federal funds sold 4,250 2,600 0
------- ------- -------
Cash and cash equivalents 7,632 4,647 622
U.S. Treasury and agency securities 5,557 8,565 12,429
Other securities and stock 5,236 5,236 236
------- ------- -------
Total investments 10,793 13,801 12,665
Loans, gross 54,698 32,605 9,892
Less: allowances for loan losses 692 467 133
------- ------- -------
Net loans 54,006 32,138 9,759
Leasehold improvements, net 31 35 39
Furniture and equipment, net 344 349 356
------- ------- -------
Total fixed assets 375 384 395
Other assets 593 468 285
------- ------- -------
Total assets $73,399 $51,438 $23,726
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits $62,589 $40,728 $12,850
Total federal funds borrowed 0 0 300
Other liabilities 522 565 158
------- ------- -------
Total liabilities 63,111 41,293 13,308
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, shares issued and
outstanding--1,265,000 shares effective
June 15, 1998, and 1,150,000 shares
prior to June 15, 1998 12,483 10,815 10,815
Retained earnings (deficit) (2,188) (670) (397)
Unrealized gain (loss) on securities
available for sale (7) 0 0
------- ------- -------
Total stockholders' equity 10,288 10,145 10,418
------- ------- -------
Total liabilities and stockholders' equity 73,399 $51,438 $23,726
====== ====== ======
Total loan loss reserve ratio 1.27% 1.43% 1.34%
Total loans to deposits ratio 87% 80% 77%
</TABLE>
<PAGE> 2
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
Three and Six Month Periods Ended
June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
(dollars in thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING INCOME:
Interest income $1,353 $ 320 $2,474 $ 353
Interest expense 772 134 1,414 138
------ ----- ------ ------
Net interest income before
allowances for loan losses 581 186 1,060 215
Less allowances for loan losses 128 128 225 133
------ ----- ------ ------
Net interest income after
allowances for loan losses 453 58 835 82
Other income 9 1 30 1
------ ----- ------ ------
Total operating income 462 59 865 83
OTHER OPERATING EXPENSE:
Salaries and employee benefits 210 153 390 204
Occupancy expense 11 19 32 32
Equipment expense 26 24 52 31
Data processing expense 10 8 18 12
Insurance expense 4 4 8 5
Advertising/promotion expense 36 41 69 59
Office supplies and printing expense 5 9 9 12
Professional fees 36 19 58 22
Organization amortization expense 7 5 13 7
Other expenses 39 24 65 27
------ ----- ------ ------
Total other operating expense 384 306 714 411
------ ----- ------ ------
Net operating income (loss) 78 (247) 151 (328)
Provision for federal income taxes 0 0 0 0
------ ----- ------ ------
Net income (loss) $ 78 $247) $ 151 $(328)
====== ===== ====== ======
Number of shares outstanding
(actual) 1,265,000 1,265,000 1,265,000 1,265,000
Net income (loss) per share
(actual) $ 0.06 $ (0.20) $ 0.12 $ (0.26)
</TABLE>
<PAGE> 3
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flows
Six Month Periods Ended June 30, 1998
and 1997
(Unaudited)
(in thousands)
Six Months Ended June 30,
1998 1997
---- ----
OPERATING ACTIVITIES:
Net income/(loss) $ 151 $ (328)
Adjustments to reconcile net income/(loss)
to net cash provided in operating
activities:
Discount accretion and premium amortization
of investment securities (105) (79)
Provision for loan losses 225 133
Depreciation 47 27
Amortization of organizational costs 13 7
(Increase) decrease in other assets (138) (149)
Increase (decrease) in other liabilities (43) 101
------ ------
Net cash provided in (used by)
operating activities (1) 40
INVESTING ACTIVITIES:
Increase in U.S. Treasury and agency securities (6,895) (12,350)
Matured or called U.S. Treasury and agency
securities 10,000 --
Increase in other securities -- --
Increase in Federal Reserve Bank and other stock -- (236)
Increase in leasehold improvements, furniture
and equipment (38) (389)
Increase in gross loans (22,093) (9,892)
-------- --------
Net cash used in investing activities (19,026) (22,867)
FINANCING ACTIVITIES:
Proceeds from stock offering -- 10,815
Increase in related party loans -- 10
Repayment of related party loans -- (265)
Increase in deposits 21,861 12,850
Increase in federal funds borrowed -- 300
------- -------
Net cash provided by financing activities 21,861 23,710
------- -------
Increase in cash and cash equivalents 2,985 555
Cash and cash equivalents at beginning of year 4,647 67
------- -------
Cash and cash equivalents at end of period $ 7,632 $ 622
======= =======
<PAGE> 4
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
December 31, 1996 to June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
(in thousands)
Unrealized
Loss on
Securities
Common Retained Available
Shares Stock Deficit for Sale Total
------ ------ -------- ---------- -----
<S> <C> <C> <C> <C> <C>
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 -- -- 151 -- 151
Unrealized loss on securities available for sale -- -- -- (7) (7)
Stock dividend paid (Note 6) 115 1,668 (1,668) -- --
Rounding adjustment -- -- (1) -- (1)
----- ------- ------ ---- -------
June 30, 1998 1,265 $12,483 $(2,188) $(7) $10,288
===== ====== ==== === ======
</TABLE>
<PAGE> 5
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Comprehensive Income
Three and Six Month Periods Ended
June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
(dollars in thousands)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 78 $ (247) $ 151 $ (328)
Other comprehensive income (loss):
Unrealized holding loss for
period, net of tax (6) -- (7) --
--- --- --- ---
Comprehensive income (loss) $ 72 $ (247) $ 144 $ (328)
</TABLE>
<PAGE> 6
Michigan Heritage Bancorp, Inc.
Notes to Financial Statements
June 30, 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 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 located in Novi, 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). The consolidated financial
statements of the Company include its only subsidiary, the Bank. The
quarter ended June 30, 1998, was the Bank's fifth full quarter of
operations and the second consecutive quarter in which the Bank
realized net income. All adjustments, which in the opinion of
management are necessary in order to ensure that the interim
unaudited 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 NOTES PAYABLE--RELATED PARTIES
Non-interest bearing demand loans were made to the Company by its
organizers. The loans were repaid from the proceeds of the common
stock offering.
Note 4 LEASE COMMITMENT
The Bank entered into a 69-month triple net lease commitment for its
current location. Total building improvement costs were $40,000.
The monthly lease payment of $3,750 was abated for the first 10
months with the first payment due for August, 1997. Future
<PAGE> 7
minimum lease payments are as follows:
Lease Payments
(in thousands)
1998 $ 23
1999 45
2000 45
2001 45
2002 22
----
Total lease payments $180
====
Note 5 DEFERRED OFFERING COSTS
Costs related to the Company's initial public stock offering which
included underwriting, legal, accounting, and other fees were netted
against stockholders' equity. The following is a summary of the
costs associated with the initial public stock offering:
(in thousands)
Proceeds from stock offering $11,500
Underwriting fees (595)
Legal, accounting and other fees ( 90)
-------
Initial capital $10,815
=======
Note 6 STOCK DIVIDEND
On April 16, 1998, the Board of Directors of the Company declared a
10% stock dividend on the common stock of the Company. One
additional share of common stock was 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 were disregarded.
The number of shares issued and outstanding following the stock
dividend is now 1,265,000. Accordingly, $1,668,000 was transferred from
Accumulated Deficit to Common Stock.
<PAGE> 8
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 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.
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 Wayne and Oakland
Counties not included within the primary service area.
<PAGE> 9
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 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 current cash projections indicate more than adequate
cash balances over the next
<PAGE> 10
12 months. 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 is being 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 June 30, 1998, the Company had $7.6 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, $0.6 million are held to maturity and
the remaining $5.0 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.
The Company is considering the desirability and feasibility of
raising additional capital through a second public offering of Common
Stock. The proceeds from such an offering would be contributed to
the Bank to support the capital ratios required as a result of
anticipated continued growth of the Bank's loan portfolio and
deposits. Since beginning operations, the Bank has experienced
higher than expected growth of both loans and deposits, which has
reduced the Bank's leverage capital ratio (i.e., total capital
divided by total assets) to 10.3%. While banks in general are
considered "adequately capitalized" with a 3.0% leverage capital
ratio, the Federal banking regulators have required that the Bank
maintain a leverage capital ratio of at least 9.0% during its "de
novo" status. The Company has not yet decided whether or when to
proceed with this capital raising effort, and discussions with
outside advisors are in the preliminary stages.
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
three 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 and
open a third branch sometime in 1999. The Company does not
anticipate selling substantial equipment over the next 12 months.
Number of Employees
At June 30, 1998, the Company employed 13 people on a full-time
basis. Over the next 12 months the Bank expects to add approximately
five full-time people.
<PAGE> 11
(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company experienced its second quarter of positive earnings, with
net income of $78,000 for the quarter ending June 30, 1998, which is
only the fifth full quarter of operations for the Company. Total
assets at the end of the quarter were $73.4 million, which is a year-
to-date increase of $22.0 million from the $51.4 million of total
assets at December 31, 1997. Total loans outstanding grew to $54.7
million, which is a year-to-date increase of $22.1 million. Loan
growth was funded primarily by a $21.9 million increase in deposits,
resulting in total outstanding deposits of $62.6 million at June 30,
1998.
The $78,000 net income for the quarter ending June 30, 1998 was an
increase of $325,000 over the same quarter last year. Net interest
income before allowances for loan losses increased $395,000, to
$581,000, primarily due to an increase in volume in earning assets.
The provision for loan losses of $128,000 remained the same as for
the comparable quarter last year. Other income went up $8,000 due
mostly to additional loan participation fees and other service charge
income. Other expense went up only $78,000, primarily due to a
$57,000 increase in salaries and employee benefits and an increase of
$17,000 in other professional fees.
On a year-to-date basis, net income was $151,000, an increase of
$479,000 from the loss last year of $328,000 for the comparable six-
month period. Net interest income before allowances for loan losses
increased $845,000 due primarily to increased loan volume. Last year
at this time, the Company had only been operational for about four
months and had only $23.7 million in assets, compared to the $73.4
million in assets at June 30, 1998. Allowances for loan losses
increased $92,000 to $225,000, also due to increased loan volume.
Other income went up $29,000, primarily due to additional loan
participation fees and other service charge income. Other expense
increased $303,000, to $714,000. Salaries and employee benefits went
up $186,000, due to additional employees, and equipment expense
increased $21,000, due primarily to increased depreciation and
maintenance expense. Professional fees went up $36,000 due mostly to
increases in independent auditor and mortgage consulting fees.
There have been no loan charge-offs to date. The Company is taking a
conservative position in allocating 1.27% 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, and $0.12 per actual shares outstanding on a
year-to-date basis.
The categories of loans outstanding at June 30, 1998, in dollars and
as a percentage of total loans outstanding are as follows:
<PAGE> 12
Amount Percentage of
Loan Category (in 000s) Total Loans
- ------------- --------- -------------
Commercial loans discounted $ 38,931 71.3%
Commercial loans direct 7,673 14.0%
Lines of credit 2,977 5.4%
Commercial real estate 1,333 2.4%
Mortgage, home equity and
Installment loans 3,784 6.9%
------ -----
Total Loans $ 54,698 100.0%
======== ======
At June 30, 1998, there were currently no non-accrual loans and only
eight loans totaling less than $231,000 that were 30 to 59 days past
due, which represented only 0.4% of total loans. There was only
$10,000 in loans 60 to 89 days past due and there were no loans past
due 90 days or more. There is one $8,000 loan on the loan watch
list. While the loan is current, it has been fully reserved for.
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.
<PAGE> 13
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 12, 1998
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule (EDGAR filing only)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 931
<INT-BEARING-DEPOSITS> 2,451
<FED-FUNDS-SOLD> 4,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,193
<INVESTMENTS-CARRYING> 600
<INVESTMENTS-MARKET> 600
<LOANS> 54,698
<ALLOWANCE> 692
<TOTAL-ASSETS> 73,399
<DEPOSITS> 47,741
<SHORT-TERM> 0
<LIABILITIES-OTHER> 522
<LONG-TERM> 0
0
0
<COMMON> 10,815
<OTHER-SE> (527)
<TOTAL-LIABILITIES-AND-EQUITY> 73,399
<INTEREST-LOAN> 2,005
<INTEREST-INVEST> 469
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,474
<INTEREST-DEPOSIT> 1,414
<INTEREST-EXPENSE> 1,414
<INTEREST-INCOME-NET> 1,060
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 714
<INCOME-PRETAX> 151
<INCOME-PRE-EXTRAORDINARY> 151
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
<YIELD-ACTUAL> 3.67
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8
<ALLOWANCE-OPEN> 467
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 692
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 692
</TABLE>
