<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-17317
MICHIGAN HERITAGE BANCORP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Michigan 38-3318018
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
</TABLE>
21211 Haggerty Road, Novi, Michigan 48375-5306
(Address of principal executive offices with zip code)
(248) 380-6590
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recently completed fiscal year:
$1,926,000
The aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of March
16, 1998, was $14,950,000.
As of March 16, 1998, there were 1,150,000 shares of the registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Portions of the registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders to be held April 16, 1998, to the extent expressly so stated
herein, are incorporated by reference into Part III of this Report.
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TABLE OF CONTENTS
PART I Page
Item 1 Description of Business.......................................... 2
Item 2 Description of Properties........................................ 6
Item 3 Legal Proceedings................................................ 6
Item 4 Submission of Matters to a Vote of Security Holders.............. 6
PART II
Item 5 Market for Common Equity and Related Stockholder Matters......... 7
Item 6 Management's Discussion and Analysis or Plan of Operation........ 7
Item 7 Financial Statements............................................. 12
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 12
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a).................................... 13
Item 10 Executive Compensation........................................... 13
Item 11 Security Ownership of Certain Beneficial Owners and Management... 13
Item 12 Certain Relationships and Related Transactions................... 13
Item 13 Exhibits, List and Reports on Form 8-K........................... 13
Signatures................................................................. 31
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.
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PART I
Item 1. Description of Business.
General
Michigan Heritage Bancorp, Inc. (the "Company") was incorporated in 1989 as
a Michigan corporation and was inactive from the time of its formation until
November 1996. Michigan Heritage Bank, the Company's wholly-owned subsidiary
(the "Bank"), is 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.
The Bank's present lending activities are primarily focused 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 offers ATM cards,
competitive rates on various deposit products and other attractive products and
services. Those services reflect the Bank's intended strategy of serving small-
to medium-sized businesses and individual customers in its market area.
The Bank's main office is located along the rapidly developing Haggerty
Road corridor in the southeast corner of Novi, Michigan. The Bank leases and has
renovated a former bank branch building. The communities that comprise the
Bank's primary service area are Novi, Farmington, Farmington Hills, Livonia,
Northville and Northville Township. Management believes these communities have
an expanding and diverse economic base, which includes a wide range of small-to
medium-sized businesses engaged in manufacturing, high technology research and
development, computer services and retail. The Bank's secondary service area is
the remaining portions of Oakland County and Wayne County not included within
the primary service area.
Lending
The Bank's lending activities include commercial equipment leases,
commercial loans, commercial real estate loans, residential mortgage loans,
consumer installment loans, and home equity loans. Loans are placed in a
nonaccrual status when, in the opinion of management, uncertainty exists as to
the ultimate collection of principal and interest. For the period ended
December 31, 1997, no loans were placed in nonaccrual status. At December 31,
1997, there were no significant loans where known information about possible
credit problems of borrowers causes management to have serious doubts as to the
ability of the borrower to comply with present loan repayment terms and which,
in management's judgment, may result in disclosure of such loans. Furthermore,
management is not aware of any potential problem loans which could have a
material effect on the Corporation's operating results, liquidity, or capital
resources. Management is not aware of any other factors that would cause future
net loan charge-offs, in total and by loan category, to significantly differ
from those experienced by institutions of similar size. The following table
sets forth outstanding loan balances at December 31, 1997, by category of loan.
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Amount
Type of Loan As of December 31, 1997
- ------------ -----------------------
(in thousands)
Commercial, financial and agricultural........ $ 30,506
Real estate - construction.................... $ 0
Real estate - mortgage........................ $ 1,981
Installment loans to individuals.............. $ 118
Lease financing............................... $ 0
----------
Total loans............................. $ 32,605
The Bank has made only domestic loans.
Allowance for Loan Losses. The following table summarizes changes in the
allowance for loan and lease losses arising from additions to the allowance
which have been charged to expense and selected ratios.
For the Year Ended
December 31, 1997
------------------
(in thousands)
Average loans outstanding.......................... $ 11,206
Total loans at year end............................ $ 32,605
Allowance for loan losses at beginning of period... $ 0
Provision charged to expense....................... $ 467
Allowance for loan losses at end of year........... $ 467
Ratio of net charge-offs during the period to
average loans outstanding................. N/A
Allowance for loan losses as a percentage of
loans at period end...................... 1.43%
In each accounting period, the allowance for loan and lease losses is
adjusted by management to the amount necessary to maintain the allowance at
adequate levels. Through its credit department, management will attempt to
allocate specific portions of the allowance for loan losses based on
specifically identifiable problem loans. Management's evaluation of the
allowance is further based on consideration of actual loss experience, the
present and prospective financial condition of borrowers, industry
concentrations within the portfolio and general economic conditions. Management
believes that the present allowance is adequate, based on the broad range of
considerations listed above.
The primary risk element considered by management with respect to each
installment and residential real estate loan is 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 with respect to commercial loans are the
financial condition of the borrower, the sufficiency of collateral, and lack of
timely payment. Management has a policy of requesting and reviewing periodic
financial statements from its commercial loan customers.
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Although management believes that the allowance for loan and lease losses
is adequate to absorb losses as they arise, there can be no assurance that the
Bank will not sustain losses in any given period which could be substantial in
relation to the size of the allowance for loan and lease losses.
Deposits
The following table summarizes certain information regarding deposits with
the Bank.
March 10, 1997
through December 31, 1997
--------------------------
Average
Type of Deposit Average Amount Rate Paid
--------------- -------------- ----------
(in thousands)
Noninterest bearing demand deposits.... $ 318 0.00%
Interest bearing demand deposits....... $ 1,236 3.94%
Savings deposits....................... $ 157 5.73%
Time deposits.......................... $15,704 6.08%
The Bank has no foreign banking offices.
Return on Equity and Assets
The following table contains selected ratios for the Company:
December 31, 1997
--------------------------
Return on average total assets......... (2.30)%
Return on average equity............... (7.01)%
Dividend payout ratio.................. N/A
Average equity to average assets....... 32.77%
Supervision and Regulation
The Company is registered as a bank holding company and, as such, is
subject to the supervision of and regulation by the Federal Reserve Board under
the Bank Holding Company Act of 1956, as amended ("BHCA"). Under the BHCA, the
Company is subject to periodic examination by the Federal Reserve Board and is
required to file periodic reports of its operations and such additional
information as the Federal Reserve Board may require. The Company is also
required to file periodic reports with, and otherwise comply with the rules and
regulations of, the Securities and Exchange Commission under the federal
securities laws.
In accordance with Federal Reserve Board policy, the Company acts as a
source of financial strength to the Bank and is expected to commit resources to
support the Bank in circumstances where the Company might not do so absent such
policy. In addition, in certain circumstances a Michigan state bank having
impaired capital may be required by the Commissioner of the Financial
Institutions Bureau of the State of Michigan (the "Commissioner")
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either to restore the bank's capital by a special assessment upon its
shareholders or to initiate the liquidation of the bank.
The Bank is a Michigan banking corporation, and its deposit accounts are
insured up to applicable limits by the Federal Deposit Insurance Corporation
(the "FDIC") under the Bank Insurance Fund. As an FDIC-insured, Michigan-
chartered bank, and a member of the Federal Reserve System, the Bank is subject
to the examination, supervision, reporting and enforcement requirements of the
Commissioner, as the chartering authority for Michigan banks, and the Federal
Reserve Board, as the Bank's primary federal regulator. These agencies and
federal and state law extensively regulate various aspects of the banking
business including, among other things, permissible types and amounts of loans,
investments and other activities, capital adequacy, branching, interest rates on
loans and on deposits, the maintenance of non-interest bearing reserves on
deposit accounts and the safety and soundness of banking practices.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, lending activities and practices, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and the Bank establishes a comprehensive framework for their respective
operations and is intended primarily for the protection of the FDIC deposit
insurance funds, the depositors of the Bank and the public, rather than
shareholders of the Bank or the Company.
Federal law and regulations, including provisions added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 and regulations
promulgated thereunder, establish supervisory standards applicable to the
operation, management and lending activities of the Bank, including internal
controls, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation and loan-to-value ratios for loans secured by real
property.
Employees
At December 31, 1997, the Company employed 11 people on a full-time basis.
Over the next 12 months the Bank expects to add at least five full-time
employees.
Competition
The Company and the Bank face strong competition for deposits, loans and
other financial services from numerous Michigan and out-of-state banks, thrifts,
credit unions and other financial institutions as well as other entities which
provide financial services, including consumer finance companies, securities
brokerage firms, mortgage brokers, equipment leasing companies, insurance
companies, mutual funds, and other lending sources and investment alternatives.
Some of the financial institutions and financial services organizations with
which the Bank will compete are not subject to the same degree of regulation as
the Bank. Many of the financial institutions aggressively compete for business
in the Bank's market areas. Many of these competitors have been in business for
many years, have established customer bases, have substantially higher lending
limits than the Bank, are larger and will be able to offer certain services that
the Bank does not expect to provide in the foreseeable future, including trust
services, and international banking
5
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services. In addition, most of these entities have greater capital resources
than the Bank, which, among other things, may allow them to price their services
at levels more favorable to the customer and to provide larger credit facilities
than could the Bank. Additionally, recently passed federal legislation regarding
interstate branching and banking and legislation affecting the cost of deposit
insurance premiums may act to increase competition in the future from larger
out-of-state banks and thrift institutions.
Item 2. Description of Property.
The Company leases a 3,000 square foot building at 21211 Haggerty Road,
Novi, Michigan, for use as the Bank's main office and the Company's
headquarters. The lease term extends until June 30, 2002, at an annual rent of
$45,000. The building was originally built in 1988 to be a bank branch and has
one drive-up window and three drive-up bays. The building has substantial on-
site parking. There is one entrance/exit on Haggerty Road as well as a rear exit
to Orchard Hill Place. Access to the main office is available to Oakland and
Wayne County residents by using I-275, I-96, I-696 and Grand River Avenue. As a
condition to entering into the lease, the President of the Bank was required to
provide a letter of credit to the landlord which can be drawn on if the Bank
terminates the lease prior to the expiration of the lease term.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
6
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PART II
Item 5. Market For Common Stock And Related Stockholder Matters.
The Company's common stock, which trades under the symbol "MHBC", is
principally traded in the over-the-counter market and transactions are reported
in the National Association of Securities Dealers reporting system known as the
"OTC Bulletin Board". As of March 16, 1998, there were approximately 60 record
holders of the Company's Common Stock according to the records maintained by the
Company's stock transfer agent. The following table sets forth, for the periods
indicated, the range of sales prices as reported on the OTC Bulletin Board for
each quarter since the completion of the Company's initial public offering in
March 1997:
High Low
------ ------
Fiscal Year Ended December 31, 1997:
First Quarter ended March 31........ $10.75 $ 9.75
Second Quarter ended June 30........ $10.75 $ 9.25
Third Quarter ended September 30.... $13.25 $ 9.25
Fourth Quarter ended December 31.... $13.00 $10.00
Since the completion of its public offering, the Company has not paid or
declared cash dividends in respect of its Common Stock, and does not expect to
pay any cash dividends in the foreseeable future. The Company's ability to pay
cash dividends in the future will depend upon its future earnings, results of
operations, capital requirements and financial condition and such other factors
as the Company's Board of Directors deems relevant.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Plan of Operation
The Company's plan of operation for the next 12 months does not contemplate
the need to raise additional capital funds. The Company's current cash
projections indicate more than adequate cash balances. The Bank has additional
line of credit facilities with national lending institutions to add funding
capacity to its existing capital and deposit base. Management has also
established a network of banks that can be used to sell or participate a portion
of its loan portfolio. These techniques allow the Bank to service its business
relationships, build its own loan portfolio, and generate fee and servicing
revenue.
As of December 31, 1997, the Company had $4.6 million in cash and cash
equivalents. All U.S. Treasury and agency securities with an amortized value of
$8.6 million at year-end are due within the first three-quarters of 1998. These
securities are held to maturity with a year-end market value of $8.6 million.
Securities available for sale are primarily $5.0 million principal amount of
variable rate corporate debt lower floaters guaranteed by First Chicago NBD Bank
($3.5 million) and Comerica Bank ($1.5 million) with a market value at par. The
lower floaters can be put (i.e., sold) at any time at par.
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Product development over the next 12 months may involve marketing and
generating account applications on the Internet, mutual funds, insurance, and
other innovative deposit products. During the next 12 months, the Bank plans to
open its second banking office. This branch office will be leased, with
leasehold improvements of approximately $30,000. Furniture and equipment
purchased for the new location is estimated to be approximately $22,000. The
Company is also in the early planning stages to relocate its headquarters
sometime in 1999.
Financial Condition and Results of Operations
The following discussion addresses material factors affecting the financial
condition and operating results of the Company. This discussion should be read
in conjunction with the audited financial statements, footnotes and supplemental
financial data presented elsewhere in this report.
The Company was a development stage company during 1996 and until March 10,
1997, when it completed an initial public offering of common stock and received
$11.5 million in capital (before deducting offering expenses). On March 10,
1997, the Bank opened for business. The Company reported a loss of $602,000 for
1997 as compared to a loss of $68,000 in 1996. During 1996, the Company earned
$1,000 in interest income and incurred $69,000 in operating expenses due to
being in the development stage. In 1997, the Bank was in operation for less than
10 months. During this time period, the expense incurred to establish the Bank's
loan loss reserve amounted to $467,000, which represented over 77% of the net
loss for 1997.
Quarterly net losses for 1997 were: $81,000 for the first quarter, which
represented 16 business days of Bank operation, $247,000 for the second quarter,
$170,000 for the third quarter, and $104,000 for the fourth quarter (which
included $202,000 expense for the loan loss provision). Historically, de novo
banks break even from between 18 to 24 months after commencing operations. If
the current trend continues, management expects that the Bank will break even
during the first quarter of 1998, which will be its fourth full quarter of
operations. This is attributable directly to controlled growth of both deposit
and loan portfolios coupled with lower than average overhead expense.
The Bank is maintaining its loan loss reserve at not less than 1.25% of
loans outstanding. In addition, during the fourth quarter of 1997, the Bank
provided an additional $50,000 to the loan loss reserve in order to provide a
more conservative position for loan reserves. There were no loan charge-offs
during 1997. The year-end allowance for loan losses of $467,000 is 1.43% of
total loans, which management believes to be more than adequate relative to the
overall quality of the loan portfolio. There are no non-accrual loans or loans
classified as substandard or below, except for one consumer loan less than
$9,000 classified as doubtful, which has been fully reserved for.
The Company's total assets at December 31, 1997, amounted to $51.4 million,
compared to $0.2 million at December 31, 1996. This increase was due to the
receipt of the net proceeds from the Company's initial public offering in
February and March 1997 and over $40 million in deposits. These funds were
invested primarily in loans, which totaled $32.6 million at year end, and other
investments and cash and due from banks, which totaled $18.4 million at year
end. Approximately $384,000 was invested in bank premises and equipment.
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The Bank's loan portfolio at the end of 1997 consisted of approximately 76%
discounted loans (i.e., leases originating from known third party sources which
are discounted and booked as commercial loans on the Bank's books), 12% direct
commercial loans, 3% commercial real estate loans, 3% lines of credit loans and
6% residential mortgages and home equity loans. The loans were funded primarily
by deposits consisting mostly of certificates of deposit, which represented over
92% of total deposits at year end. Additional loan information can be found
elsewhere in this report in Note 3 of the Notes to Consolidated Financial
Statements.
The largest source of the Company's revenue is net interest income. Net
interest income is the spread between interest income on loans and investments
and interest expense on deposits and borrowed funds. Two statistics used to
measure net interest income are (1) net interest spread and (2) net interest
margin. Net interest spread is the difference between the average yield on
interest-earning assets and the average rate incurred on interest-bearing
liabilities. Net interest margin is expressed as net interest income divided by
average interest-earning assets. Net interest margin is greater than net
interest spread due to the interest income earned on interest-earning assets
funded by non-interest-bearing liabilities such as non-interest bearing demand
deposits, escrow accounts and stockholders' equity.
An analysis of the Company's change in net interest income is presented in
Table 1. Net interest income for 1996 was $1,000 due to the Company being in a
development stage. Consequently, the change in net interest income came
primarily from a mix of both volume and yield/rate changes as indicated in Table
2. Loan fee income included in loan interest income was $82 thousand for 1997.
Table 1
Consolidated Average Balance Sheets and Analysis of Net Interest Income
(Taxable Equivalent Basis)
<TABLE>
<CAPTION>
For the Years Ended December 31
1997 1996
------------------------------ ------------------------------
Interest Average Interest Average
Average Paid or Yield/ Average Paid or Yield/
Balance Earned Rate Balance Earned Rate
------------------------------ ------------------------------
(in thousands)
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Assets
Interest bearing balance in other banks.... $ 1,734 $ 103 5.94% $ 25 $1 4.00%
Federal funds sold......................... 3,868 211 5.46% -- -- --
Taxable investment securities.............. 8,278 474 5.73% -- -- --
Loans...................................... 16,206 1,132 10.10% -- --
------- ------ ----- ---- ----
Total earning assets...................... 25,086 1,920 7.65% 25 1 4.00%
Cash and due from banks.................... 676 9
Allowance for loan losses.................. (131) --
Other assets............................... 589 38
------- ---
Total assets.............................. $26,220 $122
======= ====
Liabilities and Stockholders' Equity
Interest on checking and money
market deposit accounts................... $ 1,236 $ 61 4.94% $ -- $-- --
Savings deposits........................... 157 9 5.73% -- -- --
Other time deposits less than $100,000..... 10,134 615 6.07% -- -- --
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Time deposits $100,000 and greater..................... 5,570 339 6.09% - - -
------ ----- ----
Total interest bearing liabilities..................... 17,097 1,024 5.99% - - -
Other deposits, non-interest bearing................... 291 - - - - -
Other liabilities...................................... 241 - - 156 - -
Stockholders' equity................................... 8,591 - - (34) - -
------- ------
Total liabilities and
stockholders' equity................................ $26,220 $ 122
======= ======
Net interest income..................................... $ 896 $ 1
======= ======
Net interest rate spread................................ 1.66% 4.00%
Net interest rate margin................................ 3.57% 4.00%
Interest-bearing assets as a percentage
of interest-bearing liabilities........................ 147% n/a
Net income after taxes.................................. $ (602) $ (68)
</TABLE>
Table 2
Analysis of Net Interest Income Changes (Taxable Equivalent Basis)
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<CAPTION>
1997 Compared to 1996
------------------------------------------------
Volume and
Volume Yield/Rate Yield/Rate Mix Total
------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Increase (decrease) in interest income
Interest bearing balances in other banks............... $ -- $ -- $ 102 $ 102
Federal funds sold..................................... -- -- 211 211
Taxable investment securities.......................... -- -- 474 474
Loans.................................................. -- -- 1,132 1,132
------- ------ ------ ------
Change in total interest income.................... -- -- 1,919 1,919
Increase (decrease) in interest expense
Interest on checking and money
market accounts....................................... -- -- 61 61
Savings deposits....................................... -- -- 9 9
Other time deposits less than $100,000................. -- -- 615 615
Time deposits $100,000 and greater..................... -- -- 339 339
------- ------ ------ ------
Change in total interest expense...................... -- -- 1,024 1,024
------- ------ ------ ------
Change in net interest income......................... $ -- $ -- $ 895 $ 895
======= ====== ====== ======
</TABLE>
The average yield on interest-earning assets of 7.65% was affected by the
average mix of more short-term investments (Table 3) with lower yields as
compared to higher yielding loans since commencing Bank operations in March
1997. The 5.99% average rate incurred on interest-bearing liabilities reflects
slightly higher market rates being paid on certificates of deposit (Table 4).
These higher rates were paid to attract new depositors since the Bank was new.
The Bank currently does not have an extensive branch network to draw deposits,
which creates additional pressure to pay higher rates to attract customers.
Table 3
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Consolidated Investment Maturity Analysis (Taxable Equivalent Basis)
<TABLE>
<CAPTION>
As of December 31, 1997
Held to Maturity Available for Sale
----------------------------------------------------------------------
U.S. Treasury and
other government
agencies and Federal Reserve
corporations Corporate bonds (a) Bank Stock(b)
------------ ------------------- ----------------
Book Value Yield Book Value Yield Book Value
----------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Due in one year or less.... $8,565 5.83% $ -- -- $ --
Due after one year
through five years....... -- -- -- --% --
Due after five years
through ten years........ -- -- 2,000 5.99% 236
Due after ten years........ -- -- 3,000 5.95% --
------ ----- ------ ----- ----
Total................... $8,565 5.83% $5,000 5.97% $236
====== ===== ====== ===== ====
- -------------
</TABLE>
(a) All of the corporate bonds included above are variable rate "lower floater"
securities priced weekly. First Chicago NBD is an additional obligor for
$3,500 of the above corporate bonds and Comerica Bank is an additional
obligor for the remaining $1,500 corporate bonds.
(b) The dividend yield on Federal Reserve Bank Stock has historically been
6.00%.
Table 4
Consolidated Time Certificates of Deposit Maturity Analysis
As of December 31, 1997
Under $100,000
$100,000 and over
-------- ---------
(in thousands)
Due in three months or less................ $ 5,974 $ 3,246
Due over three months through six months... 6,791 3,859
Due over six months through twelve months.. 9,633 3,349
Due over twelve months..................... 4,679 802
-------- --------
Total................................. $ 27,077 $ 11,256
======== ========
Non-interest income for 1997 of $6,000 was primarily service charges on
deposit accounts and float income from an outside vendor for cashiers checks
sold. There was no non-interest income for 1996.
Non-interest expense for 1997 of $1.04 million was an increase of $968,000
from 1996. Salaries and employee benefits increased $468,000 due to 10
additional paid staff members being added during 1997 for a total of 11 full-
time equivalent employees at the end of 1997. There was one full-time
equivalent staff member paid in 1996. Marketing, public relations and other
promotional expense was $112,000 in total for 1997 due to the Bank opening for
business in 1997.
The Company remained very liquid throughout 1997. As of December 31, 1997,
there were $2.6 million in Federal funds sold, $1.8 million in interest-bearing
balances in other banks, which
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is immediately accessible, and $5.0 million in other corporate notes (lower
floaters) held for sale, which can be redeemed at par at any time. In addition,
$7.0 million book value of U.S. Treasuries and other U.S. government agencies
and corporations mature in February, 1998. The Bank has also proven its ability
to attract deposits, building a stable deposit base from which to fund loans.
Total capital for the Company at the end of 1997, which consists primarily
of stockholders' equity and the allowance for loan losses, was $10.6 million,
which represents a total capital-to risk-weighted assets ratio of 29.1%.
Applicable regulations define well-capitalized levels for total capital as 10.0%
or more. Additional information concerning capital is found in Note 14 of the
Notes to Consolidated Financial Statements.
The Bank, being a new business, is not burdened with older computer systems
to update. The recently acquired systems are primarily Year 2000 ("Y2K")
compliant. One "Mission Critical" component not yet Y2K compliant involves a
service provider who has been making progress towards becoming Y2K compliant.
The Bank fully expects the service provider to be Y2K compliant sometime during
1998. However, in the unlikely event the service provider is not Y2K compliant
by October 31, 1998, the Bank will pursue other similar service providers who
are already Y2K compliant. The cost to become fully Y2K compliant for both the
Company and the Bank is not material. In addition, the Bank is communicating
with both vendors and appropriate customers concerning the Y2K compliance issue
to help ensure their smooth transition into the next century.
Item 7. Financial Statements.
The consolidated financial statements of the Company and its subsidiary,
together with the report thereon of Plante & Moran, LLP, included in this report
under this Item are listed under Item 13 of this report, and can be found
beginning on page 15. No supplementary financial statement schedules are
required to be filed with this report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
12
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The information required by this Item is included in the Proxy Statement
under the captions "Information About Directors and Nominees as Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" and is hereby
incorporated herein by reference.
Item 10. Executive Compensation.
The information required by this Item is included in the Proxy Statement
under the caption "Compensation of Executive Officers" and is hereby
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners And Management.
The information required by this Item is included in the Proxy Statement
under the caption "Stock Ownership of Certain Beneficial Owners and Management"
and is hereby incorporated herein by reference.
Item 12. Certain Relationships And Related Transactions.
The information required by this Item is included in the Proxy Statement
under the caption "Related Party Transactions" and is hereby incorporated herein
by reference.
Item 13. Exhibits, List and Reports on Form 8-K.
(a) The following financial statements and financial statement schedules are
filed with this report:
Page
1. Financial Statements: Number
------
Report of Independent Auditors..................................... 15
Consolidated Balance Sheets at December 31, 1997 and 1996.......... 16
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997 and 1996................... 17
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996....................................... 18
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996....................................... 19
Notes to Consolidated Financial Statements......................... 20
2. Financial Statement Schedules: None
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the quarter ended December
31, 1997.
13
<PAGE>
(c) The Exhibits required to be filed as part of this Form 10-K are the
following:
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation, as amended to date
(previously filed as Exhibit No. 3.1 to the Registrant's Form
SB-2 Registration Statement, File No. 333-17317, and incorporated
herein by reference)
3.2 Bylaws, as amended to date (previously filed as Exhibit No. 3.2
to the Registrant's Form SB-2 Registration Statement, File No.
333-17317, and incorporated herein by reference)
10.1* Michigan Heritage Bancorp, Inc. 1997 Non-Employee Director Stock
Option Plan (previously filed as Exhibit No. 10.1 to the
Registrant's Form SB-2 Registration Statement, File No. 333-
17317, and incorporated herein by reference)
10.2* Michigan Heritage Bancorp, Inc. 1997 Employee Stock Option Plan
(previously filed as Exhibit No. 10.2 to the Registrant's Form
SB-2 Registration Statement, File No. 333-17317, and incorporated
herein by reference )
11 Computation of Per Share Earnings (filed herewith)
27 Financial Data Schedule (EDGAR filing only)(filed herewith)
- -------------
* Management contract or compensatory plan or arrangement.
14
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders
Michigan Heritage Bancorp, Inc.
We have audited the consolidated balance sheet of Michigan Heritage Bancorp,
Inc., and subsidiary as of December 31, 1997 and 1996 and the related
consolidated statements of changes in stockholders' equity, operations and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Michigan Heritage Bancorp, Inc., and subsidiary as of December 31, 1997 and 1996
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/S/ PLANTE & MORAN, LLP
Plante & Moran, LLP
Bloomfield Hills, Michigan
January 20, 1998
15
<PAGE>
Michigan Heritage Bancorp, Inc.
Consolidated Balance Sheet
December 31
1997 1996
---- ----
(in thousands)
ASSETS
Cash and Cash Equivalents
Cash and due from banks................................. $ 283 $ 67
Federal funds sold...................................... 2,600 --
Interest-bearing deposits with other banks.............. 1,764 --
------- ----
Total cash and cash equivalents........................ 4,647 67
Investment Securities to be Held to Maturity (Note 2).... 8,565 --
Securities Available for Sale (Note 2)................... 5,236 --
Loans (Note 3)
Commercial.............................................. 30,506 --
Real estate............................................. 1,703 --
Installment............................................. 118 --
Home equity............................................. 278 --
------- ----
Total loans............................................ 32,605 --
Less allowance for loan losses........................... (467) --
------- ----
Net loans.............................................. 32,138 --
Bank Premises and Equipment (Note 5)..................... 384 33
Interest Receivable and Other Assets..................... 468 144
------- ----
Total Assets........................................... $51,438 $244
======= ====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Deposits (Note 6)
Interest-bearing....................................... $40,403 $ --
Non-interest bearing................................... 325 --
------- ----
Total deposits........................................ 40,728 --
Related party notes payable (Note 7)..................... -- 255
Interest payable and other liabilities................... 565 57
------- ----
Total liabilities..................................... 41,293 312
Stockholders' Equity (Deficit)
Preferred stock - No par value:
Authorized - 500,000 shares
Issued and outstanding - None
Common stock - No par value
Authorized - 4,500,000 shares
Issued and outstanding - 1,150,000
in 1997 and 1 share in 1996............................ 10,815 --
Accumulated deficit..................................... (670) (68)
------- ----
Total stockholders' equity (deficit).................. 10,145 (68)
------- ----
Total liabilities and stockholders' equity (deficit).. $51,438 $244
======= ====
16
<PAGE>
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
Common Shares Capital Accumulated
Outstanding Stock Deficit Total
----------- ----- ------- -----
(dollars in thousands)
Balance - Inception.......... -- $ -- $ -- $ --
Issuance of common stock..... 1 -- -- --
Net loss................... -- -- (68) (68)
--------- -------- ----- -------
Balance - December 31, 1996.. 1 -- (68) (68)
Public stock offering........ 1,150,000 11,500 -- 11,500
Retirement of initial share.. (1) -- -- --
Stock offering costs......... -- (685) -- (685)
Net loss................... -- -- (602) (602)
--------- -------- ----- -------
Balance - December 31, 1997.. 1,150,000 $10,815 $(670) $10,145
========= ======== ===== =======
17
<PAGE>
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Operations
December 31
1997 1996
---- ----
(in thousands)
Interest Income
Interest and fees on loans.......................... $1,132 $ --
Interest and dividends on investments-taxable....... 474 --
Interest on federal funds sold...................... 211 --
Interest on deposits with other banks............... 103 1
------ -----
Total interest income.......................... 1,920 1
Interest Expense - Interest on deposits............. 1,024 --
------ -----
Total interest expense......................... 1,024 --
------ -----
Interest Income - Before provision for loan losses.. 896 1
Provision for Loan Losses (Note 4).................. 467 --
------ -----
Net Interest Income After Provision................. 429 1
Other Income - Service charges on deposit accounts.. 6 --
------ -----
Total other income............................. 6 --
Other Expenses
Salaries and employee benefits (Note 11)............ 511 43
Occupancy of bank premises.......................... 73 14
Processing.......................................... 26 --
Supplies............................................ 23 --
Marketing........................................... 112 --
Equipment expense................................... 86 --
Professional fees................................... 72 --
Amortization........................................ 78 --
Other expenses...................................... 56 12
------ -----
Total other expenses........................... 1,037 69
------ -----
Income (Loss) - Before federal income taxes......... (602) (68)
Federal Income Taxes (Note 8)....................... -- --
------ -----
Net Loss............................................ $ (602) $ (68)
====== =====
Net Loss Per Share (Note 15)........................ $(0.63)
======
Supplemental Per Share Information - Net loss
per share (Note 15)............................... $(0.52)
======
18
<PAGE>
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flows
December 31
1997 1996
---- ----
(in thousands)
Cash Flows from Operating Activities
Net loss............................................. $ (602) $ (68)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization...................... 73 --
Provision for loan losses.......................... 467 --
Amortization and accretion of securities........... (253) --
Changes in assets and liabilities:
Accrued interest receivable and other assets.... (324) (144)
Accrued interest payable and other liabilities.. 508 57
-------- -----
Net cash used in operating activities......... (131) (155)
Cash Flows from Investing Activities
Purchase of available-for-sale securities............ (5,236) --
Proceeds from maturities of held-to-maturity
securities......................................... 7,600 --
Purchase of held-to-maturity securities.............. (15,912) --
Increase in loans.................................... (32,605) --
Premises and equipment expenditures.................. (424) (33)
-------- -----
Net cash used in investing activities......... (46,577) (33)
Cash Flows from Financing Activities
Net increase in interest-bearing and non-interest-
bearing demand accounts............................ 2,395 --
Net increase in time certificates.................... 38,333 --
Proceeds from related party notes payable............ 10 255
Payments on related party notes payable.............. (265) --
Proceeds from public stock offering.................. 10,815 --
-------- -----
Net cash provided by financing activities..... 51,288 255
-------- -----
Net Increase in Cash and Cash Equivalents............ 4,580 67
-------- -----
Cash and Cash Equivalents - Beginning of year........ 67 --
-------- -----
Cash and Cash Equivalents - End of year.............. $ 4,647 $ 67
======== =====
Supplemental Cash Flow Information -
Cash paid for interest............................. $ 642 $ --
19
<PAGE>
Michigan Heritage Bancorp, Inc.
Notes to Consolidated Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Michigan Heritage Bancorp, Inc. (the "Corporation") was
incorporated in 1989, but remained dormant until 1996. The Corporation became
active to operate a new bank, Michigan Heritage Bank (the "Bank") in Novi,
Michigan. The Corporation raised funds through a public stock offering in
February 1997 and began operations in March 1997.
Basis of Presentation - The accounting and reporting policies of Michigan
Heritage Bancorp, Inc. and its subsidiary conform to generally accepted
accounting principles. Management is required to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from these estimates and assumptions. The
000s have been omitted in tabular presentations.
Principles of Consolidation - The consolidated financial statements include
the accounts of Michigan Heritage Bancorp, Inc. and its wholly owned subsidiary
Michigan Heritage Bank. All significant intercompany accounts and transactions
have been eliminated upon consolidation.
Nature of Operations - Michigan Heritage Bank conducts full-service commercial
and consumer banking and provides other financial products and services through
its main office to communities in Wayne and Oakland counties. The Bank has a
lending concentration to companies who operate hospitals. Loans to these
companies were 16% of total loans at December 31, 1997.
Cash Equivalents - Cash equivalents include cash on hand and amounts due from
banks.
Securities - Securities are classified as held to maturity when management has
the intent and ability to hold to maturity. Held-to-maturity securities are
reported at amortized cost. All other securities are classified as available-
for-sale securities and are reported at fair value with unrealized gains and
losses, net of related deferred income taxes, included in stockholders' equity.
Loan Interest and Fee Income - Loans are generally reported at the principal
amount outstanding. Nonrefundable loan origination fees and certain direct loan
origination costs are immaterial and are included in the consolidated statement
of operations in the period the loan is recorded. Interest on loans is accrued
and credited to income based on the principal amount outstanding. The accrual of
interest on loans is discontinued when, in the opinion of management, there is
an indication that the borrower may be unable to meet payments as they become
due. Upon such discontinuance, all unpaid interest accrued in reversed.
Interest accruals are generally resumed when all delinquent principal and/or
interest has been brought current or the loan becomes both well-secured and int
he process of collection.
Allowance for Possible Loan Losses - The allowance for possible loan losses is
maintained at a level considered by management to be adequate to absorb losses
inherent in existing loans and loan commitments. The adequacy of the allowance
is based on evaluations that take into consideration such factors as prior loss
experience, changes in the nature and volume of the portfolio, overall portfolio
quality, loan concentrations, specific impaired or problem loans and
20
<PAGE>
commitments, and current and anticipated economic conditions that may affect the
borrower's ability to pay.
Premises and Equipment - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation, computed on the
straight-line method, is charged to operations over the useful lives of the
properties. Leasehold improvements are amortized over the terms of their
respective leases or the estimated useful lives of the improvements, whichever
is shorter.
Earnings Per Share - Earnings per share, computed using SFAS 128, Earnings Per
Share, is based on the weighted average number of shares outstanding in each
period. The effects of unexercised stock options are not dilutive and have not
been considered.
Stock Options - The Corporation has two stock option plans (see Note 10).
Options granted are accounted for using the intrinsic value method, under which
compensation expense is recorded at the amount by which the market price of the
underlying stock at the grant date exceeds the exercise price of an option.
Under the Corporation's plans, the exercise price on all of the options granted
equals or exceeds the fair value of the stock at the grant date. Accordingly,
no compensation cost is recorded as a result of stock options awarded under the
plans.
NOTE 2 -- SECURITIES
The amortized cost and estimated market value of investment securities are as
follows at December 31, 1997:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Gains Value
--------------------------------------------
Held-to-maturity securities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies....... $8,565 $ 2 $ 2 $8,565
Available-for-sale securities:
Corporate bonds................. $5,236 $ -- $ -- $5,236
The amortized cost and estimated market value of securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities. Issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
21
<PAGE>
Held-to-Maturity Available-for-Sale
---------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------------------------------------
Due in one year or less:........... $8,565 $8,565 $ 236 $ 236
Due after one year through
five years........................ -- -- -- --
Due after five years
through ten years................. -- -- 2,000 2,000
Due after ten years................ -- -- 3,000 3,000
--------- --------- ------ ------
Total......................... $8,565 $8,565 $5,236 $5,236
========= ========= ====== ======
Securities having a carrying and market value of $3,008 and $3,007,
respectively, were pledged at December 31, 1997 for purposes required by law.
NOTE 3 -- LOANS
No directors or executive officers of the Corporation were loan customers of
the subsidiary bank during 1997.
Final loan maturities and rate sensitivity of the loan portfolio at December
31, 1997 are as follows:
Within One One to After Five
Year Five Years Years Total
---------------------------------------------
Commercial...................... $ 9,994 $20,176 $336 $30,506
Real estate..................... 23 1,302 378 1,703
Installment..................... 37 81 -- 118
Home equity..................... 25 128 125 278
-------- ------- ---------- -------
Total.......................... $ 10,079 $21,687 $839 $32,605
======== ======= ========== =======
Loans at fixed interest rates... $ 9,314 $21,183 $714 $31,211
Loans at variable interest
rates.......................... 765 504 125 1,394
-------- ------- ---------- -------
Total.......................... $ 10,079 $21,687 $839 $32,605
======== ======= ========== =======
NOTE 4 -- ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the activity in the allowance for possible loan losses is as
follows:
1997 1996
---- ----
Balance - Beginning of year............ $ -- $ --
Provision charged to operations........ 487 --
Loan losses............................ -- --
Loan loss recoveries................... -- --
------ -----
Balance - End of year.................. $ 487 $ --
====== =====
As a percentage of total loans......... 1.43% --%
The Corporation considers a loan impaired when it is probable that all interest
and principal will not be collected in accordance with the contractual terms of
the loan agreement. Consistent with this definition, all nonaccrual and reduced
rate loans (with the exception of residential mortgages and consumer loans) are
considered impaired. The Corporation had no loans classified as impaired during
the year ended December 31, 1997.
22
<PAGE>
NOTE 5 -- BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1997 and 1996 consisted of the
following:
1997 1996
---- ----
Buildings and improvements...................... $ 42 $ --
Furniture and equipment......................... 415 33
-------- --------
Total.......................................... 457 33
Less accumulated depreciation................... 73 --
-------- --------
Net carrying amount............................ $ 384 $ 33
======== ========
NOTE 6 -- DEPOSITS
The following is a summary of the distribution of deposits at December 31, 1997
and 1996:
1997 1996
---- ----
Noninterest-bearing:
Demand......................................... $ 325 $ --
======== ========
Interest-bearing:
NOW accounts................................... $ 981 $ --
Savings........................................ 111 --
Money market demand............................ 978 --
Time:
$100,000 and over............................. 11,256 --
Under $100,000................................ 27,077 --
-------- --------
Total interest-bearing....................... $ 40,403 $ --
======== ========
The remaining maturities of time deposits at December 31, 1997 were as follows:
Under $100,000
$100,000 and Over
-------- --------
1998......................................... $ 22,398 $ 10,454
1999......................................... 3,178 600
2000......................................... 1,402 202
2001......................................... 99 --
-------- --------
Total........................ $ 27,077 $ 11,256
======== ========
NOTE 7 -- NOTES PAYABLE - RELATED PARTIES
Noninterest-bearing demand notes payable in the amount of $255,000 were
outstanding to the Corporation's organizers at December 31, 1996. These notes
were paid in 1997.
NOTE 8 -- INCOME TAXES
Michigan Heritage Bancorp, Inc. and its subsidiary file a consolidated
federal income tax return. The Corporation has net operating loss carryforward
of approximately $183,000
23
<PAGE>
generated during the period from January 1, 1996 (and since inception) to
December 31, 1997 that are available to reduce future taxable income through the
years ending 2012. The deferred tax asset generated by that loss carryforward
has been offset with a valuation allowance since the Corporation does not have a
history of earnings.
Deferred income taxes are provided for the temporary differences between
the financial reporting bases and the tax bases of the Corporation's assets and
liabilities. The source of such temporary differences and the resulting net tax
expense are as follows:
1997 1996
---- ----
Net operating loss carryforward............. $ (62) $ --
Provisions for loan loss.................... (145) --
Start-up costs.............................. (13) (21)
Accretion................................... 14 --
Original issue discount..................... 5 --
Other....................................... (3) --
Increase in valuation allowance............. 204 21
----- ----
Total deferred income tax expense......... $ -- $ --
===== ====
The temporary differences that comprise deferred tax assets and liabilities
at December 31, 1997 are as follows:
1997 1996
----- ----
Deferred tax assets:
Net operating loss carryforward........ $ 62 $ --
Provision for loan loss................ 145 --
Start-up costs......................... 34 21
Other.................................. 3 --
----- ----
Total deferred tax assets....... 244 21
----- ----
Valuation allowance for
deferred tax assets.................... (225) (21)
Deferred tax liability:
Accretion.............................. (14) --
Original issue discount................ (5) --
----- -----
Total deferred tax liabilities...... (19) --
----- -----
Net deferred tax asset.............. $ -- $ --
===== =====
NOTE 9 -- OPERATING LEASE
In September 1996, the Corporation entered into a lease commitment for an
office building through June 30, 2002. The future minimum lease payments are as
follows:
1998................................ $ 45,000
1999................................ 45,000
2000................................ 45,000
2001................................ 45,000
2002................................ 22,500
--------
Total................. $202,500
========
24
<PAGE>
NOTE 10 -- STOCK OPTION PLANS
The Corporation has two stock option plans. Under the nonemployee plan, a
maximum of 60,000 options to purchase share may be granted at prices not less
than 100% of the fair market value at the grant date of the option. Under the
employee plan, a maximum of 40,000 options to purchase shares may be granted at
prices not less than 100% of the fair market value at the grant date of the
option. The options are exercisable at the date they are granted.
In 1997, options to purchase a total of 51,000 shares were granted under
the non-employee plan. They have a price of $10 per share and expire in March
2004. Also in 1997, options to purchase a total of 34,000 shares were granted
under the employee plan. They have a price of $10 per share and expire in March
2007. All options under both option plans were outstanding at December 31, 1997.
The Corporation has estimated the fair value of the options issued in 1997
at $3-4 per share using the Black Scholes Option Value method. If the Bank had
elected to use the fair value method of accounting for options, which recognizes
compensation costs based on the fair value of the options at the grant date, the
net loss and loss per share on a pro forma basis would have been as follows for
the year ended December 31, 1997:
Net loss As reported $(602)
Pro forma (874)
Net loss per share (Note 15) As reported (0.63)
Pro forma (0.91)
NOTE 11 -- EMPLOYEE BENEFIT PLANS
The Bank has a 401(k) plan that is a defined contribution savings plan for
employees. Employer contributions are discretionary and are determined annually
by the Board of Directors. There were no employer contributions during the year
ended December 31, 1997.
NOTE 12 -- FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments - The carrying amount and estimated
fair value of financial instruments are presented below. Certain assets, the
most significant being premises and equipment, do not meet the definition of a
financial instrument and are excluded from this disclosure. Similarly, deposit
base and other customer relationship intangibles are not considered financial
instruments and are not discussed below. Accordingly, this fair value
information is not intended to, and does not, represent the underlying value.
Many of the assets and liabilities subject to disclosure requirement are not
actively traded, requiring fair value to be estimated by management. These
estimates necessarily involve the use of judgment about a wide variety of
factors, including but not limited to, relevancy of market prices of comparable
instruments, expected future cash flows and appropriate discount rates.
25
<PAGE>
1997 1996
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------
(in thousands)
Assets:
Cash and equivalents........... $ 4,647 $ 4,647 $ 67 $ 67
Securities..................... 13,801 13,801 -- --
Loans.......................... 32,605 32,790 -- --
Other.......................... 304 304 -- --
Liabilities:
Deposits....................... 40,728 40,830 -- --
Other.......................... 382 382 312 312
The term and short-term nature of certain assets and liabilities result in
their carrying value approximating fair value. These include cash and due from
banks, interest-bearing deposits in banks, federal funds sold and accrued
interest receivable and payable. The following methods and assumptions were
used by Michigan Heritage Bancorp, Inc. to estimate the fair value of the
remaining classes of financial instruments:
Securities are valued based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
For variable rate loans that reprice frequently, fair values are based on
carrying amounts, as adjusted for estimated credit losses. The fair value for
other loans are estimated using discounted cash flow analyses and employ
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
The fair value of demand deposits, savings accounts and money market
deposits are, by definition, equal to the amount payable on demand. The fair
values of fixed rate time deposits are estimated by discounting cash flows using
interest rates currently being offered on certificates with similar maturities.
The fair value of loan commitments and standby letters of credit, valued on
the basis of fees currently charged for commitments for similar loan terms to
new borrowers with similar credit profiles, is not considered material.
Off-balance-sheet items - The Bank is party to financial instruments in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and financial guarantees.
These instruments involve, to varying degrees, elements of credit and interest
rate risk that are not recognized in the consolidated balance sheet.
Commitments to extend credit are agreements to lend to a customer as long
as there are no violations of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require a payment of a fee. Fees from
26
<PAGE>
issuing these commitments to extend credit are recognized over the period to
maturity. Since a portion of the commitments is expected to expire without being
drawn upon, the total commitments do not necessarily represent future cash
requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained upon extension of credit is based on
management's credit evaluation of the customer.
Exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitment to extend credit and financial
guarantees written is represented by the contractual notional amount of those
items. The Bank generally requires collateral to support such financial
instruments in excess of the contractual notional amount of those instruments.
The Bank had outstanding loan origination commitments and guarantees
written aggregating $12,425,000 at December 31, 1997, on which $3,901,000 in
loans was outstanding at year end and was included in the balance sheet.
NOTE 13 -- RESTRICTIONS ON DIVIDENDS
Dividends paid by the Corporation would be provided by dividends from its
subsidiary bank. However, certain restrictions exist regarding the ability of
the Bank to transfer funds to the Corporation in the form of cash dividends,
loans or advances. The approval of the Bank's respective primary regulator is
required for the Corporation's subsidiary bank to pay dividends in excess of
regulatory limitations.
NOTE 14 -- REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and discretionary actions by regulators that could
have a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain off-balance-
sheet items as calculated under regulatory accounting practices.
For 1997, since the Bank is considered a de novo or start-up bank, the
minimum total capital ratio is 9.0%. Normally, to be considered adequately
capitalized, the total capital ratio is 8.0%. As of December 31, 1997, the most
recent notification from the Federal Reserve Bank categorized the Bank as well-
capitalized under the regulatory framework. The regulations define well-
capitalized levels of total capital, Tier 1 and Tier 1 leverage as 10.0%, 6.0%
and 5.0%, respectively. There are no conditions or events since that
notification that management believes have changed the Michigan Heritage
Bancorp, Inc. capital category.
27
<PAGE>
Capital and risk-based capital and leverage ratios for the Corporation and
its subsidiary at December 31, 1997 are shown below:
Amounts Ratio
------- ------
Total Capital (to Risk-weighted Assets):
Michigan Heritage Bancorp, Inc. (consolidated).. $10,601 29.1%
Michigan Heritage Bank.......................... $ 7,614 21.0%
Tier 1 Capital (to Risk-weighted Assets):
Michigan Heritage Bancorp, Inc. (consolidated).. $10,145 27.8%
Michigan Heritage Bank.......................... $ 7,162 19.8%
Tier 1 Capital (to Average Assets):
Michigan Heritage Bancorp, Inc. (consolidated).. $10,145 39.6%
Michigan Heritage Bank.......................... $ 7,162 30.0%
NOTE 15 -- EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated using as the denominator the
average number of shares outstanding during the period. From the period of
inception through the Corporation's initial public stock offering on February
27, 1997, there was only one share of stock outstanding. The calculation of the
weighted average shares includes that nonpublic time period when only one share
was outstanding. The supplemental disclosure of the loss per share assumes that
the shares outstanding since the initial public stock offering were outstanding
for the entire period.
NOTE 16 -- PARENT-ONLY FINANCIAL STATEMENTS
The following condensed financial information presents the financial
condition of Michigan Heritage Bancorp, Inc. (the Parent) only, along with the
results of its operations and its cash flows. The Parent has recorded its
investment in the Bank at cost, less the undistributed loss of the Bank since it
was formed. The Parent recognizes undistributed losses of the Bank as a non-
interest expense. The Parent-only financial information should be read in
conjunction with the Corporation's consolidated financial statements.
The condensed balance sheet at December 31 is as follows:
1997 1996
------ ------
Assets:
Cash and cash equivalents
Cash and deposits at subsidiary bank............... $ 4 $ 67
Interest-bearing deposits with other banks......... 286 --
-------- -----
Total cash and equivalents........................ 290 67
Investment securities to be held to maturity........ 2,579 --
Investment in subsidiary............................ 7,162 --
Interest receivable and other assets................ 114 177
-------- -----
Total assets...................................... $ 10,145 $ 244
======== =====
28
<PAGE>
Liabilities and Stockholders' Equity
Liabilities
Related party notes payable........................ $ -- $ 255
Interest payable and other liabilities............. $ -- $ 57
-------- -----
Total liabilities................................. -- 312
Stockholders' equity................................ 10,145 (68)
-------- -----
Total liabilities and stockholders' equity........ $ 10,145 $ 244
======== =====
The condensed statement of operations for the years ended December 31, 1997
and 1996 is as follows:
1997 1996
-------- -----
Operating Income
Interest and dividends on
investments - Taxable............................. $ 95 $ --
Interest on deposits with other banks.............. 26 1
-------- -----
Total operating income............................ 121 1
Operating Expense................................... 35 69
-------- -----
Income (Loss)-Before income tax benefit
and equity in loss of subsidiary................. 86 (68)
Income Tax Benefit................................ -- --
1997 1996
-------- -----
Income (Loss)-Before equity in loss of subsidiary... 86 (68)
Equity in Loss of Subsidiary........................ (688) --
-------- -----
Net Loss............................................ $ (602) $ (68)
======== =====
The condensed statement of cash flows for the years ended December 31, 1997
and 1996 is as follows:
1997 1996
-------- -----
Cash Flows from Operating Activities
Net loss............................................ $ (602) $ (68)
Adjustments to reconcile net loss to net
cash from operating activities:
Equity in loss of subsidiary....................... 688 --
Amortization and accretion of securities........... (90) --
Amortization of organizational costs............... 19 --
Net change in other assets......................... 44 (177)
Net change in other liabilities.................... (57) 57
-------- -----
Net cash provided by (used in)
operating activities.............................. 2 (188)
Cash Flows from Investing Activities
Investment in bank subsidiary....................... (7,850) --
Proceeds from maturities of held-to-
maturity securities................................ 600 --
Purchase of held-to-maturity securities............. (3,089) --
-------- -----
Net cash used in investing activities............. (10,339) --
29
<PAGE>
Cash Flows from Financing Activities
Proceeds from related party notes payable........... 10 255
Payments on related party notes payable............. (265) --
Proceeds from public stock offering................. 10,815 --
-------- -----
Net cash provided by financing activities......... 10,560 255
-------- -----
Net increase in Cash and Cash Equivalents........... 223 67
Cash and Cash Equivalents-Beginning of year......... 67 --
-------- -----
Cash and Cash Equivalents-End of year............... $ 290 $ 67
======== =====
30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 30, 1998.
MICHIGAN HERITAGE BANCORP, INC.
By: /S/ ANTHONY S. ALBANESE
---------------------------------
Anthony S. Albanese, President
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities indicated on March 30, 1998.
Signature Capacity
- --------- --------
/S/ RICHARD ZAMOJSKI Chairman and Director (principal
- ---------------------------- executive officer)
Richard Zamojski
/S/ ANTHONY S. ALBANESE President and Director (principal
- ---------------------------- operating officer)
Anthony S. Albanese
/S/ DARRYLE J. PARKER Treasurer and Secretary (principal
- ---------------------------- financial officer)
Darryle J. Parker
/S/ H. PERRY DRIGGS Director
- ----------------------------
H. Perry Driggs
/S/ LEWIS N. GEORGE Director
- ----------------------------
Lewis N. George
/S/ PHILLIP R. HARRISON
- ---------------------------- Director
Phillip R. Harrison
/S/ PHILIP SOTIROFF Director
- ----------------------------
Philip Sotiroff
/S/ FRANK A. SCERBO Director
- ----------------------------
Frank A. Scerbo
31
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Computation of Per Share Earnings
27 Financial Data Schedule (EDGAR filing only)
<PAGE>
Exhibit 11 -- Computation of Earnings Per Share
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
1997 1996
---- ----
<C> <S> <S>
BASIC
Average shares outstanding ........... 955,754 --
Net loss per share amount ............ (0.63) --
FULLY-DILUTED
Average shares outstanding /(a)/ ..... n/a n/a
</TABLE>
_______
(a) Based on the net loss for the period, there was no dilutive effect.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 283
<INT-BEARING-DEPOSITS> 1,764
<FED-FUNDS-SOLD> 2,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,236
<INVESTMENTS-CARRYING> 8,565
<INVESTMENTS-MARKET> 8,565
<LOANS> 32,605
<ALLOWANCE> 467
<TOTAL-ASSETS> 51,438
<DEPOSITS> 40,728
<SHORT-TERM> 0
<LIABILITIES-OTHER> 565
<LONG-TERM> 0
0
0
<COMMON> 10,815
<OTHER-SE> (670)
<TOTAL-LIABILITIES-AND-EQUITY> 51,438
<INTEREST-LOAN> 1,132
<INTEREST-INVEST> 474
<INTEREST-OTHER> 314
<INTEREST-TOTAL> 1,920
<INTEREST-DEPOSIT> 1,024
<INTEREST-EXPENSE> 1,024
<INTEREST-INCOME-NET> 896
<LOAN-LOSSES> 467
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,037
<INCOME-PRETAX> (602)
<INCOME-PRE-EXTRAORDINARY> (602)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (602)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
<YIELD-ACTUAL> 3.57
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 9
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 467
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 467
</TABLE>
