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 March 31, 1999
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 May 11, 1999, 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>
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Michigan Heritage Bancorp, Inc.
Consolidated Balance Sheets
March 31, 1999 and March 31, 1998
(Unaudited)
(dollars in thousands)
March 31, 1999 March 31, 1998
-------------- ---------------
<S> <C> <C>
ASSETS
Cash & due from banks, noninterest bearing $ 514 $ 353
Interest bearing deposits with banks 4,780 2,864
Federal funds sold 9,450 3,800
--------- ---------
Cash and cash equivalents 14,744 7,017
U.S. Treasury and agency securities 4,995 5,557
Other securities and stock 294 5,237
--------- ---------
Total investments 5,289 10,794
Loans, gross 84,160 40,444
Less: allowance for loan losses 1,563 564
--------- ---------
Net loans 82,597 39,880
Leasehold improvements, net 102 33
Furniture & equipment, net 462 329
Operating lease equipment, net 2,066 0
--------- ---------
Total fixed assets 2,630 362
Accrued interest receivable 544 252
Other assets 799 183
--------- ---------
Total other assets 1,343 435
--------- ---------
Total assets $ 106,603 $ 58,488
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits $ 95,847 $ 47,741
Other liabilities 610 531
--------- ---------
Total liabilities 96,457 48,272
Stockholders' Equity
Preferred stock--no par value; 500,000 shares
authorized, none issued 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 12,482 10,815
Retained deficit (2,336) (598)
Unrealized gain/(loss) on securities available for sale 0 (1)
--------- ---------
Total stockholders' equity 10,146 10,216
--------- ---------
Total liabilities and stockholders' equity $ 106,603 $ 58,488
========= =========
Total loan loss reserve ratio 1.86% 1.39%
Total loan to deposit ratio 88% 85%
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
Three Month Periods Ended
March 31, 1999 and 1998
(Unaudited)
(dollars in thousands)
Three Months Ended March 31,
---------------------------
1999 1998
----------- ----------
<S> <C> <C>
OPERATING INCOME:
Interest income $ 2,112 $ 1,121
Interest expense 1,258 642
---------- ----------
Net interest income before provision for loan losses 854 479
Less provision for loan losses 367 97
---------- ----------
Net interest income after provision for loan losses 487 382
Operating lease income 309 0
Gain on sale of loans 215 0
Other income 20 21
---------- ----------
Total other operating income 544 21
---------- ----------
Total operating income 1,031 403
OTHER OPERATING EXPENSE:
Salaries & employee benefits 320 180
Occupancy expense 39 21
Equipment expense 304 26
Data processing expense 14 8
Insurance expense 5 4
Advertising/promotion expense 44 33
Office supplies and printing expense 9 4
Professional fees 69 22
Organization amortization expense 0 6
Other expense 54 26
---------- ----------
Total other operating expense 858 330
---------- ----------
Net operating income 173 73
Provision for federal income taxes 59 0
---------- ----------
Net income $ 114 $ 73
========== ==========
Per Common Share Data (actual):*
Average primary number of shares outstanding 1,265,000 1,265,000
Average diluted number of shares outstanding 1,265,000 1,308,008
Net income per primary share $ 0.09 $ 0.06
Net income per diluted share $ 0.09 $ 0.06
<FN>
* Common shares outstanding and per share amounts have been restated
for 1998 to reflect a 10 percent stock dividend declared on April
16, 1998.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flow
Three Month Periods Ended March 31, 1999 and 1998
(Unaudited)
(dollars in thousands)
Three Months Ended March 31,
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 114 $ 73
Adjustments to reconcile net income to net cash
provided in operating activities:
Discount accretion and premium amortization
of investment securities (10) (55)
Provision for loan losses 367 97
Depreciation 304 23
(Increase) decrease in other assets (137) 33
Decrease in other liabilities (212) (34)
-------- --------
Net cash provided in operating activities 426 137
Investing activities:
Purchase of U.S. Treasury and agency securities -- (3,940)
Proceeds from matured or called U.S. Treasury
and agency securities 3,000 7,000
Purchase of Federal Reserve Bank and other stock (56) --
Purchase of leasehold improvements, furniture
and equipment (148) (1)
Net change in gross loans (3,179) (7,839)
-------- --------
Net cash used in investing activities (383) (4,780)
Financing activities:
Increase in deposits 8,193 7,013
Decrease in borrowed funds (1,750) --
-------- --------
Net cash provided by financing activities 6,443 7,013
-------- --------
Increase in cash and cash equivalents 6,486 2,370
Cash and cash equivalents at beginning of year 8,258 4,647
-------- --------
Cash and cash equivalents at end of period $ 14,744 $ 7,017
======== ========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
December 31, 1996 to March 31, 1999
(Unaudited)
(in thousands)
Unrealized
Gain or Loss
on Securities
Common Retained Available
Shares Stock Deficit for Sale Total
-------- -------- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
December 31, 1996 1 $ -- $ (68) $ -- $ (68)
Issuance of Common Stock,
net of offering costs 1,150 10,815 -- -- 10,815
Retirement of initial share (1) -- -- -- --
Comprehensive loss--net loss -- -- (602) -- (602)
-------- -------- -------- -------- --------
Balance-December 31, 1997 1,150 10,815 (670) -- 10,145
Comprehensive loss:
Net loss -- -- (113) -- (113)
Change in net unrealized gain on securities
available for sale, net of tax effect -- -- -- 9 9
--------
Total comprehensive loss (104)
Stock dividend paid 115 1,667 (1,667) -- --
-------- -------- -------- -------- --------
Balance-December 31, 1998 1,265 12,482 (2,450) 9 10,041
Comprehensive income:
Net income -- -- 114 -- 114
Change in net unrealized gain on securities
available for sale, net of tax effect -- -- -- (9) (9)
--------
Total comprehensive income 105
-------- -------- -------- -------- --------
Balance-March 31, 1999 1,265 $ 12,482 $ (2,336) $ -- $ 10,146
======== ======== ======== ======== ========
</TABLE>
5
<PAGE>
Michigan Heritage Bancorp, Inc.
Notes to Financial Statements
March 31, 1999
(Unaudited)
Item 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization:
Michigan Heritage Bancorp, Inc. (the "Company") was incorporated in the State
of Michigan on September 22, 1989. The Company was inactive from that time
until its Articles of Incorporation were amended on November 6, 1996, into
its current form. The Company is a bank holding company whose primary purpose
is to own and operate Michigan Heritage Bank (the "Bank") as the Bank's sole
stockholder. Organizational and other start-up costs were funded with loans
from organizers. Proceeds from the Company's initial public offering were
primarily used to capitalize the Bank which is currently headquartered in
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 March 31, 1999, was the Bank's eighth full
quarter of operation. 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. Actual results
could differ from those estimates and assumptions.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
PRELIMINARY NOTE: The Company wishes to caution readers not to place undue
reliance on any "forward-looking statements" contained in the following
discussion and advises readers that various factors, including regional and
national economic conditions, substantial changes in levels of market
interest rates, credit and other risks of lending and investment activities
and competitive and regulatory factors, could affect the Company's financial
performance and could cause the Company's actual results for future periods
to differ materially from those anticipated or projected. The Company does
not undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company experienced its fourth quarter of positive earnings with net
income of $114,000 for the quarter ending March 31, 1999, which is only the
eighth full quarter of operations for the Company. Total assets at the end of
the quarter were $106,603,000, a 12 month increase of $48,115,000 from the
$58,488,000 of total assets at March 31, 1998. Total loans outstanding grew
to $84,160,000 which is a 12 month increase of $43,716,000. Loan growth was
funded primarily by a $48,106,000 increase in deposits, resulting in total
outstanding deposits of $95,847,000 at March 31, 1999.
The $114,000 net income for the quarter ending March 31, 1999 increased
$41,000 over the same quarter last year. Net interest income before
provision for loan losses increased $375,000 to $854,000, primarily due to
volume increases in earning assets. Provision for loan losses increased
$270,000 to $367,000. Other operating income went up $523,000 due mostly to
operating lease income of $309,000 resulting from a $2,775,000 operating
lease recorded during the third quarter of 1998. In addition, there was a
$215,000 gain on sale of loans during the first quarter of 1999. Other
operating expense went up $528,000. Salaries and employee benefits went up
$140,000 due to additional employees and salary increases. Occupancy expense
increased $18,000 due to increases in lease expense and leasehold improvement
amortization costs. Equipment expense increased $278,000 due mostly to
operating lease equipment depreciation expense of $266,000. Advertising and
promotion expense increased $11,000 due to increased marketing costs.
Professional fees went up $47,000 due to additional legal, independent
auditor, and operating lease broker fees. Other expense went up $28,000 which
included a $12,000 increase in telephone expense. Remaining expenses
increased a net $6,000.
The resulting income before federal income tax increased $100,000 for the
same time period. Federal income tax was $59,000 for the first quarter of
1999. There was no Federal income tax for the same quarter in 1998 as the
Company had a net operating loss carryforward.
Net income per average primary share outstanding and on a fully diluted basis
was $0.09 for the quarter ended March 31, 1999 compared to $0.06 for the same
quarter in 1998.
During the first quarter of 1999, there were $620,000 in loans charged off
against specific reserves previously taken primarily due to loans to MCA
Financial Corporation ("MCA") which filed for protection under the bankruptcy
laws. Management is working diligently to protect the Bank's rights and to
minimize net charge-offs resulting from the MCA situation. There were no
charge-offs prior to the first quarter of 1999 and there have been no
recoveries to date.
7
<PAGE>
The categories of loans outstanding at March 31, 1999, in dollars and as a
percentage of total loans outstanding are as follows:
(dollars in thousands)
Percentage
of Total
Loan Category Amount Loans
------------- ------ ---------
Commercial loans discounted $61,606 73.2%
Commercial financing leases 1,060 1.3%
Commerical loans direct 9,247 11.0%
Lines of credit 4,780 5.7%
Commercial real estate 1,112 1.3%
Mortgage, home equity and
installment loans 6,355 7.5%
------- -----
Total Loans $84,160 100.0%
======= =====
At March 31, 1999, there were $593,000 in non-accruing loans all relating to
MCA. In addition, there were $604,000 in accruing loans past due 30 days or
more. There were $282,000 past due 30 to 59 days, $246,000 past due 60 to 89
days and $76,000 past due 90 days or more. Of the $604,000 accruing loans
past due 30 days or more, $533,000 were mortgages originally serviced by MCA.
No servicing of the loans took place during the first quarter of 1999 due to
MCA filing for protection under the bankruptcy laws. Bank management
transferred the servicing of those mortgages to another mortgage servicing
company in April 1999. Management fully expects that diligent servicing of
these mortgages will minimize delinquencies. Total loan reserves of
$1,563,000 at March 31, 1999 was 1.86% of total loans which included $424,000
in specific allowances. In management's opinion, the total loan reserve
position is adequate relative to the overall quality of the loan portfolio.
Year 2000 Readiness
The Bank, being a new business, does not have major issues concerning older
systems to update. The recently acquired new systems are all now primarily
Year 2000 ("Y2K") compliant. All applicable components of both the Company
and the Bank have been identified and addressed as to being Y2K compliant.
The cost to become fully Y2K compliant for both the Company and the Bank was
not material. In addition, the Bank is communicating with both vendors and
appropriate customers concerning Y2K compliance to help ensure their smooth
transition into the next century.
8
<PAGE>
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.
9
<PAGE>
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: May 11, 1999
10
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule (EDGAR filing only)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 514
<INT-BEARING-DEPOSITS> 4,780
<FED-FUNDS-SOLD> 9,450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,289
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 84,160
<ALLOWANCE> 1,563
<TOTAL-ASSETS> 106,603
<DEPOSITS> 95,847
<SHORT-TERM> 0
<LIABILITIES-OTHER> 610
<LONG-TERM> 0
0
0
<COMMON> 12,482
<OTHER-SE> (2,336)
<TOTAL-LIABILITIES-AND-EQUITY> 106,603
<INTEREST-LOAN> 1,948
<INTEREST-INVEST> 164
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,112
<INTEREST-DEPOSIT> 1,258
<INTEREST-EXPENSE> 1,258
<INTEREST-INCOME-NET> 854
<LOAN-LOSSES> 367
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 858
<INCOME-PRETAX> 173
<INCOME-PRE-EXTRAORDINARY> 173
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<YIELD-ACTUAL> 3.52
<LOANS-NON> 593
<LOANS-PAST> 604
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,816
<CHARGE-OFFS> 620
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,563
<ALLOWANCE-DOMESTIC> 424
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,139
</TABLE>
