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As filed with the Securities and Exchange Commission on July 20, 1999
Registration No. 333-78967
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0408
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AMENDMENT NO. 2
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TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MICHIGAN HERITAGE BANCORP, INC.
(Name of small business issuer as in its charter)
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Michigan 6712 38-3318018
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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21211 Haggerty Road
Novi, Michigan 48375-5306
(248) 380-6590
(Address and telephone number of principal executive
offices and principal place of business or intended principal place of business)
Anthony S. Albanese, President
Michigan Heritage Bancorp, Inc.
21211 Haggerty Road
Novi, Michigan 48375-5306
Phone: (248) 380-6590
(Name, address, and telephone number of agent for service)
Copies to:
Paul R. Rentenbach
Dykema Gossett PLLC
400 Renaissance Center
Detroit, Michigan 48243
Phone: (313) 568-6973; Fax: (313) 568-6915
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Approximate date of commencement of the proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS
[LOGO] MICHIGAN HERITAGE BANCORP, INC.
500,000 SHARES
COMMON STOCK
Michigan Heritage Bancorp, Inc., a Michigan corporation, is offering for sale up
to 500,000 shares of its common stock in order to contribute additional capital
to Michigan Heritage Bank. We are offering the shares of common stock for a
limited period of time exclusively to shareholders of Michigan Heritage,
Bancorp. We are offering the shares of common stock at $ per share, which
is a % discount from the last reported sale price.
Shareholders are entitled to purchase one share for each three shares they owned
on July 14, 1999. Shareholders must exercise their right to purchase by
, 1999. The directors and officers of Michigan Heritage Bancorp have
indicated that they plan to exercise their basic subscription right in full and
to purchase approximately of the shares of common stock at the public
offering price, if they are available.
We are a bank holding company which owns all of the common stock of Michigan
Heritage Bank, a Michigan banking corporation headquartered in Novi, Michigan.
Our common stock is traded on the OTC Bulletin Board under the symbol "MHBC."
THE COMMON STOCK OFFERED BY THIS PROSPECTUS INVOLVES A SIGNIFICANT AMOUNT OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN OUR COMMON STOCK.
OUR COMMON STOCK IS NOT A SAVINGS ACCOUNT OR SAVINGS DEPOSIT AND IS NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
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<CAPTION>
Per Share Total
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Public offering price......................................$ $
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Underwriting discount......................................$ 0 $ 0
Proceeds, before expenses, to Michigan Heritage Bancorp....$ $
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MICHIGAN HERITAGE BANCORP HAS NOT HIRED AN UNDERWRITER OR BROKER DEALER TO
CONDUCT THIS OFFERING.
The date of this prospectus is July , 1999.
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TABLE OF CONTENTS
PAGE
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SUMMARY.......................................................................2
RISK FACTORS..................................................................4
PLAN OF DISTRIBUTION..........................................................8
USE OF PROCEEDS..............................................................10
DIVIDEND POLICY..............................................................10
CAPITALIZATION...............................................................10
BUSINESS.....................................................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................................18
DIRECTORS AND EXECUTIVE OFFICERS.............................................26
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................31
DESCRIPTION OF CAPITAL STOCK.................................................32
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS......................36
WHERE YOU CAN FIND MORE INFORMATION..........................................37
EXPERTS......................................................................37
LEGAL MATTERS................................................................37
FORWARD-LOOKING STATEMENTS...................................................37
UNTIL , 1999, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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SUMMARY
THE COMPANY
Michigan Heritage Bancorp is incorporated as a Michigan corporation.
Our primary purpose is to own and operate Michigan Heritage Bank. Michigan
Heritage Bank is a Michigan banking corporation with depository accounts insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation. We
provide a focused core of banking services, primarily for small to medium-sized
businesses, as well as individuals, and our lending focus is primarily on
commercial equipment financing and, to a lesser extent, commercial real estate
loans and commercial term loans to businesses secured by the assets of the
borrower. Michigan Heritage Bank originates loans directly and through third
party referral sources such as leasing companies and mortgage brokers, many of
whom are known to management. Our retail strategy focuses on single-family
mortgage loans, home equity loans and, to a lesser extent, other forms of
consumer lending. Michigan Heritage Bank offers competitive rates on various
deposit products as well as providing attractive products and services. As of
March 31, 1999, we had total assets of $106.603 million, total deposits of
$95.847 million, 2,603 deposit accounts, and shareholders' equity of $10.146
million.
Michigan Heritage Bank's main office is located along the rapidly
developing Haggerty Road corridor in the southeast corner of Novi, Michigan, in
a renovated former bank branch building that we lease. Michigan Heritage Bank
offers its banking services primarily in Oakland and western Wayne counties,
including Novi, Farmington, Farmington Hills, Livonia, Northville and Northville
Township. We believe that these communities have an expanding and diverse
economic base, and they include a wide range of small to medium-sized businesses
engaged in manufacturing, high technology research and development, computer
services and retail. We recently opened a branch office in Troy, Michigan in
order to help serve the portion of Oakland County not included within our
primary service area. We have received regulatory approval to open, and have
signed a lease for, a new headquarters facility in Farmington Hills, Michigan,
which will include a third branch office of Michigan Heritage Bank.
Michigan Heritage Bank's main office serves as our corporate
headquarters. Our address is 21211 Haggerty Road, Novi, Michigan 48375 and our
telephone number is (248) 380-6590.
THE OFFERING
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Securities being offered by us .......... Up to 500,000 shares of common stock. See "Description of
Capital Stock."
Offering Price........................... $ per share.
Common Stock to be outstanding
after the offering................. Up to 1,765,000 shares.
How we plan to use the proceeds.......... For additional capitalization of Michigan Heritage Bank. See
"Use of Proceeds."
Plan of Distribution..................... We are offering the shares of common stock to shareholders of
record at the close of business on , 1999, the record
date. Our shareholders as of the record date may purchase one
share of common stock for each three shares owned on the record
date. No fractional shares may be purchased. For example, a
shareholder who owned 100 shares on the record date would be
entitled to purchase up to 33 shares. To the extent our
shareholders do not choose to purchase some or all of the shares
they are entitled to purchase, such shares will be offered to the
other shareholders who purchased all the shares that they were
entitled to purchase in the initial phase of the offering. To
subscribe, you must complete and return to us the subscription
agreement together with payment for the shares.
OTC Bulletin Board Symbol................ MHBC
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SUMMARY FINANCIAL DATA
The following selected consolidated financial and other data are
derived from and should be read with Michigan Heritage Bancorp's consolidated
financial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The consolidated balance
sheet as of December 31, 1998, the consolidated statement of operations for the
year ended December 31, 1998, the unaudited consolidated balance sheet as of
March 31, 1999, and the unaudited consolidated statement of earnings for the
three months ended March 31, 1999 are included elsewhere in this prospectus.
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<CAPTION>
AT OR FOR THE YEAR ENDED AT OR FOR THE THREE MONTHS
DECEMBER 31, 1998 ENDED MARCH 31, 1999
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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Financial Condition:
Total assets .............................................. $ 100,267 $ 106,603
Loans ..................................................... 79,787 82,597
Deposits .................................................. 87,654 95,847
Securities ................................................ 8,233 5,289
Shareholders' equity ...................................... 10,041 10,146
Per Share Information:
Basic gain (loss) per common share ........................ $ (0.09) $ 0.09
Book value per common share ............................... $ 7.94 $ 8.02
Weighted average shares outstanding ....................... 1,265,000 1,265,000
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Shares outstanding at end of period ....................... 1,265,000 1,265,000
Operations:
Interest income ........................................... $ 6,106 $ 2,112
Interest expense .......................................... 3,666 $ 1,258
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Interest income before provision for loan loss ............ 2,440 854
Provision for loan losses ................................. 1,349 367
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Net interest income after provision for loan losses ....... 1,091 487
Total noninterest income .................................. 587 544
Total noninterest expense ................................. (2,156) 858
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Net income (loss) ..................................... $ (113) $ 114
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RISK FACTORS
The offering involves a high degree of risk. You should carefully
consider the risks and uncertainties described below and the other information
in this prospectus before deciding whether to purchase the shares. If any of the
following risks actually occur, our business, financial condition and results of
operations could be materially adversely affected. This could cause the trading
price of the shares of our common stock to decline, and you may lose all or part
of your investment.
We have described below the material risks of investing in our common
stock. You should carefully consider them prior to purchasing any shares. These
risk factors may not be the only risk factors that relate to the our common
stock.
CUSTOMERS MAY NOT REPAY THEIR LOANS
The risk of nonpayment of loans is inherent in commercial banking, and
if loans are not repaid it would have a material adverse effect on our earnings
and overall financial condition as well as the value of our common stock.
Because we have been in existence only a relatively short time, our customers do
not have an extensive credit history with us. We focus our commercial lending
activity in the areas of equipment financing and, to a lesser extent, commercial
real estate loans and secured term loans to businesses. Our consumer lending
activity is focused on single family mortgage loans, home equity loans, and
other forms of consumer lending. Equipment financing loans typically are
dependent on the successful operations and stability of the borrower. Changes in
general economic conditions and the value of the collateral are also factors
when evaluating the potential for risk of loss. Commercial real estate loans
typically involve relatively large loan balances to single borrowers or groups
of related borrowers. The payment experience of such loans typically is
dependent on the successful operation of the real estate project. The potential
for loss may occur due to cash flows from the properties securing the loans
becoming inadequate to service the loan payments and the value of the collateral
not being sufficient to repay the loan. Consumer loan collections are dependent
to a large degree on the borrower's continuing financial stability and thus are
more likely to be adversely affected by circumstances such as job loss and
personal bankruptcy, as well as general economic conditions.
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Our management attempts to minimize our credit exposure by carefully
monitoring the concentration of our loans within specific industries and through
loan application and approval procedures, but there can be no assurance that
such monitoring and procedures will reduce such lending risks. Credit losses can
cause insolvency and failure of a financial institution, and in such event, you
could lose your entire investment. Our credit approval policies are designed to
provide an effective and timely response to loan requests and to ensure the
maintenance of a sound loan portfolio. We manage credit risk and the credit
approval process by adhering to written policies which generally specify
underwriting standards for each type of loan. All such policies are reviewed by
the Board of Directors of Michigan Heritage Bank.
WE WILL CONTINUE TO FACE SIGNIFICANT COMPETITION FOR FINANCIAL SERVICES FROM
OTHER FINANCIAL INSTITUTIONS
Many of our competitors have been in business for many years, have
established customer bases, have substantially higher lending limits than we
have, are larger and are be able to offer certain services that we neither
provide now nor expect to provide in the foreseeable future, including trust
services, and international banking services. In addition, most of these
entities have greater capital resources than we have, 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 we can. We 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 we compete are not subject to the same degree
of regulation as we are. Additionally, we may face increased competition from
larger out-of-state banks and thrift organizations. See "Business -- Market
Area" and "Business -- Competition."
UNANTICIPATED CHANGES IN INTEREST RATES COULD IMPAIR OUR PROFITABILITY
The results of operations for financial institutions, including us, may
be materially and adversely affected by changes in prevailing economic
conditions, including declines in real estate market values, rapid changes in
interest rates and the monetary and fiscal policies of the federal government.
Our profitability is in part a function of the spread between the interest rates
earned on investments and loans and the interest rates paid on deposits and
other interest-bearing liabilities. In the early 1990s, many banking
organizations experienced historically high interest rate spreads. More
recently, interest rate spreads have generally narrowed due to changing market
conditions and competitive pricing pressure, and there can be no assurance that
such factors will not continue to narrow interest rate spreads or that the
higher interest rate spreads will return. At any given time, our assets and
liabilities will be such that they are affected differently by a given change in
interest rates, principally due to the fact that we do not match the maturities
of our loans precisely with our deposits and other funding sources. As a result,
an increase or decrease in rates could have a material adverse effect on our net
income, capital and liquidity. While our management intends to take measures to
mitigate interest rate risk, there can be no assurance that such measures will
be effective in minimizing the exposure to interest rate risk. See "Business --
Supervision and Regulation."
A SLOWDOWN IN THE LOCAL ECONOMY COULD REDUCE THE QUALITY OF OUR LOAN PORTFOLIO
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Substantially all our loans are to businesses and individuals in
Southeastern Michigan and any decline in the economy of this area could have an
adverse impact on us. Although economic conditions in our market area have been
generally favorable, there can be no assurance that such conditions will
continue to prevail. Like most financial institutions, our net interest spread
and margin is affected by general economic conditions and other factors that
influence market interest rates and our ability to respond to changes to such
rates. See "Business -- Supervision and Regulation."
MAINTAINING CERTAIN IMPORTANT CUSTOMER RELATIONSHIPS DEPENDS IN PART ON OUR
RETAINING KEY EXECUTIVES
We are, and for the foreseeable future will be, dependent primarily
upon the services of Mr. Zamojski, our Chairman of the Board and Chief Executive
Officer, and Mr. Albanese, our President and Chief Operating Officer. If the
services of Mr. Zamojski or Mr. Albanese were to become unavailable to us for
any reason, or if we were unable to hire highly qualified and experienced
personnel to replace Mr. Zamojski or Mr. Albanese or any other employee, or to
adequately staff our anticipated growth, our operating results would be
adversely affected. We do not maintain "key man" life insurance on our senior
executive officers, but may elect to do so in the future. See "Business --
Employees" and "Management."
OUR FAILURE TO MANAGE FUTURE GROWTH COULD HAVE ADVERSE EFFECTS
If we are not able to continue to attract and retain capable management
and operations personnel, we may have difficulty implementing our strategy of
increasing deposits, loans and other assets, and adding additional branches as
well as managing such growth.
OUR RELATIVELY LOW LENDING LIMIT MAY LIMIT OUR ABILITY TO COMPETE FOR LOANS TO
LARGER BUSINESSES
Our legal lending limit is $2.595 million per customer relationship,
although our self-imposed lending limit currently is $1.25 million per customer
relationship. Accordingly, the size of the loans which we can offer to potential
customers is less than the size of loans which most of our competitors are able
to offer. This limit affects our ability to seek relationships with the area's
larger businesses. We attempt to accommodate loan volumes in excess of our
lending limit through the sale of participations in such loans to other banks.
However, we can offer you no assurance that we will be successful in attracting
or maintaining customers seeking larger loans or that we will be able to engage
in participations of such loans on terms favorable to us.
REGULATORY CHANGES COULD INCREASE OUR REGULATORY BURDEN AND OUR COMPETITION
The banking industry is heavily regulated by the federal government and
the states. Many of these regulations are intended to protect depositors, the
public, and the deposit insurance funds administered by the FDIC, not
shareholders. Applicable laws, regulations, interpretations and enforcement
policies have been subject to significant, and sometimes retroactively applied,
changes in recent years, and may be subject to significant future changes. There
can be no assurance that such future changes will not adversely affect our
business. In addition, the burden imposed by federal and state regulations may
place banks in general, and us specifically, at a competitive disadvantage
compared to less regulated competitors. Recently enacted legislation may
adversely affect the banking industry or our operations and may result in
increased competition in the financial services
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industry. Federal economic and monetary policy, as well as policy decisions of
bank regulatory authorities, may affect our ability to attract deposits, make
loans and achieve satisfactory interest spreads. See "Business -- Supervision
and Regulation."
THE CONTINUING NEED FOR TECHNOLOGICAL CHANGE MAY MAKE COMPETITION MORE DIFFICULT
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services, the costs
of which may be significant. There can be no assurance that we will be able to
effectively implement new technology-driven products and services or be
successful in marketing such products and services to our customers. Our future
success will depend in part on our ability to address the needs of our customers
by using technology to provide products and services that will satisfy customer
demands for convenience as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to
invest in technological improvements. Such technology may permit competitors to
perform certain functions more efficiently and at a lower cost than we can.
WE MAY NEED ADDITIONAL CAPITAL WHICH COULD RESULT IN THE DILUTION OF YOUR
INTERESTS
We may need additional capital beyond our present capital and the
capital which will be provided by this offering and any amounts likely to be
generated by our operations over the next several years if we do not sell all of
the shares in this offering or if we want to undertake any significant
acquisitions or other expansion of our operations. Funds necessary to finance
such acquisitions or expansion might not be available. If we sell additional
equity securities to finance future expansion, such sale could result in
significant dilution to your interests. Regulatory capital requirements and
borrowing restrictions that apply to us also may have the effect of constraining
future growth. If we sell all of the shares offered in this offering, we do not
anticipate the need for additional capital in the foreseeable future to conduct
our business activities.
OUR SHARE PRICE MAY BE ADVERSELY AFFECTED BECAUSE WE DO NOT CURRENTLY PAY ANY
CASH DIVIDENDS
Our future earnings may not be sufficient to permit the legal payment
of cash dividends to our shareholders at any time in the future. We have never
paid a cash dividend, and do not anticipate paying cash dividends for the
immediately foreseeable future, although we did distribute a 10% common stock
dividend during the second quarter of 1998. Even if we may legally declare cash
dividends, the amount and timing of such dividends will be at the discretion of
our Board of Directors. The Board of Directors intends to consider paying cash
dividends when legally permitted to do so.
OUR SHARE PRICE MAY BE ADVERSELY AFFECTED BY STATE AND FEDERAL LAW
Certain provisions of Michigan law may have an adverse effect on the
price of our shares of common stock by, among other things, preventing a
shareholder of our common stock from realizing a premium which might be paid as
a result of a change in control. Chapters 7A and 7B of the Michigan Business
Corporation Act provide for certain supermajority vote and other requirements on
certain business combinations with interested shareholders and limit voting
rights of certain acquirors of "control shares," as that term is defined in the
Michigan Business Corporation Act. In addition, federal law requires the
approval of the Federal Reserve
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Board prior to acquisition of "control" of a bank holding company. These
provisions may have the effect of delaying or preventing a change in control of
Michigan Heritage Bancorp without action by the shareholders. See "Description
of Capital Stock -- Certain Anti-Takeover Provisions."
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS
TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF COMMON STOCK.
PLAN OF DISTRIBUTION
We are offering to holders of shares of our common stock the right to
purchase 500,000 shares of our common stock at a price of $ per share.
You are being given a non-transferable right to purchase one (1) full
share of common stock for each three (3) shares of common stock held on ,
1999, the record date. If your holdings are not evenly divisible by three, then
the number of shares that you are entitled to subscribe for will be rounded to
the nearest full share. This right to subscribe for common stock must be
exercised before 4:30 P.M., Detroit Time, on , 1999. We must receive
properly completed and executed subscription forms and all monies prior to the
expiration date. Your right to subscribe is non-transferable and will be void if
not exercised on or before the expiration date.
If you exercise in full your basic subscription privilege, you also
will be entitled to subscribe for an unlimited number of additional shares (up
to the number of shares offered) of common stock which have not been subscribed
for by other shareholders. You must subscribe for additional shares at the time
of your original subscription in accordance with the procedures outlined below.
In the event of an over-subscription caused by subscriptions for additional
shares, the shares available for sale under the additional subscription
privilege, after allocation to each shareholder of his or her basic subscription
privilege, will be prorated among shareholders subscribing for additional shares
in proportion to the number of shares then owned by each shareholder who has
subscribed for additional shares up to the number of additional shares
subscribed for by such shareholders. We do not intend to sell more than 500,000
shares of our common stock in this offering.
A pricing committee of our Board of Directors established the offering
price based on the recent market price of the common stock, the impact of this
offering on the price of the common stock and the Board's desire that our
shareholders be permitted to buy additional shares at a price below the current
market price. The offering price is a [ % discount] from the last sale reported
in the OTC Bulletin Board.
All subscriptions will be irrevocable. The subscription monies received
will be held by Michigan Heritage Bank, as the subscription agent, in a separate
trust account for the benefit of Michigan Heritage Bancorp and will be applied
by Michigan Heritage Bank, as the subscription agent, to purchase shares on the
next business day following the expiration date. All interest earned
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on the subscription monies received will be paid to Michigan Heritage Bancorp.
After the expiration date, the Michigan Heritage Bank, as soon as practicable,
will refund without interest any excess monies resulting from an
oversubscription of the additional subscription privilege.
If not all of the shares offered for sale are subscribed for by our
current shareholders, we may elect to offer the unsubscribed for shares to
people who are not currently shareholders, at our discretion.
You may subscribe for shares by completing and signing the subscription
form accompanying this prospectus and delivering it to Michigan Heritage Bank,
as the subscription agent, accompanied by payment of the full subscription price
for both the basic subscription privilege and any additional subscription
privilege prior to the expiration date. Subscriptions must be for a full share
or a multiple thereof. You should send your subscription form to:
Michigan Heritage Bank
21211 Haggerty Road
Novi, Michigan 48375
Attention: Stock Subscription
You must pay the subscription price by check or bank draft drawn on
institutions located in the United States, or postal or express money order
payable in United States dollars, to the order of "Michigan Heritage Bank,
Subscription Agent."
Alternatively, you may subscribe by sending a facsimile message
containing the information set forth in the subscription form to Michigan
Heritage Bank and wiring the necessary funds to the Michigan Heritage Bank
pursuant to the wiring instructions below. Michigan Heritage Bank must receive
all facsimile messages and wired funds by 4:30 p.m., Detroit Time, on the
expiration date.
Facsimile number: (248) 380-7793
Wire Instructions:
Michigan Heritage Bank
ABA No.
For Credit to Account No.
In cases where a bank, trust company, securities dealer, broker or
other nominee holds stock on the record date for more than one beneficial owner,
we have supplied a sufficient number of prospectuses and the subscription forms
for the record holders to forward to the beneficial owners. Subscriptions will
only be accepted from the record owner and the beneficial owner who wishes to
subscribe should give direction to the record owner to make subscriptions for
him or her. You may obtain additional subscription forms from us.
In cases where the shareholder of record is deceased, the administrator
of the shareholder's estate may exercise the subscription rights provided he or
she provides the subscription agent appropriate documentary evidence of his or
her authority to act on behalf of the estate of the deceased shareholder.
If you have a question as to how to subscribe, please contact Mr.
Darryle Parker, our information agent, at telephone number 248-324-3730.
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USE OF PROCEEDS
The net proceeds to us if all 500,000 shares are sold are estimated to
be approximately $ . We expect to contribute substantially all of
the net proceeds of the offering to Michigan Heritage Bank to increase its
capital. Our management will use this additional capital to make loans and
invest in securities. The funds also will be available to finance possible
acquisitions of other branches or expansion into other lines of business closely
related to banking, although we presently have no plans to do so. Our
management, under the direction of our Board of Directors, has discretion to
allocate the proceeds of the offering. We are not making this offering to fund
specific anticipated material loans, but rather intend to continue to make loans
of the type and in the amounts as are in accordance with our existing loan
policies. We do not expect to spend a material amount of the proceeds in
connection with the opening of our new headquarters building or new branch
office. See "Business -- General."
DIVIDEND POLICY
We expect to retain our earnings, if any, to finance our growth and we
expect that no cash dividends will be distributed for the foreseeable future.
After we recover our operating deficit and if we maintain profitability, we may
consider distributing cash dividends. However, the declaration of dividends,
whether cash or stock, will be at the discretion of the Board of Directors and
there is no assurance that dividends will be declared at any time. If and when
we declare and distribute cash dividends, we will be dependent largely upon
dividends paid by Michigan Heritage Bank for funds to distribute cash dividends
on our common stock. It is also possible, however, that we might at some time in
the future pay cash dividends generated from income or investments and from our
other activities.
Under Michigan law, Michigan Heritage Bank will be restricted as to the
maximum amount of dividends it may pay on its common stock. A Michigan state
bank may not declare dividends except out of net profits then on hand after
deducting its losses and bad debts and then only if the bank will have a surplus
amounting to at least 20% of its capital after the payment of the dividend. A
Michigan state bank may not declare or pay any cash dividend or dividend in kind
until the cumulative dividends on its preferred stock, if any, have been paid in
full. If the surplus of a Michigan state bank is at any time less than the
amount of its capital, before the declaration of a cash dividend or dividend in
kind, it must transfer to surplus not less than 10% of its net profits for the
preceding half-year (in the case of quarterly or semi-annual dividends) or the
preceding two consecutive half-year periods (in the case of annual dividends).
Our ability to pay dividends is also affected by various regulatory requirements
and policies, such as the requirement to maintain adequate capital above
regulatory guidelines. See "Business -- Supervision and Regulation." Such
requirements and policies may limit Michigan Heritage Bancorp's ability to
obtain dividends from Michigan Heritage Bank for its cash needs, including funds
for acquisitions, payment of dividends by us and the payment of operating
expenses.
CAPITALIZATION
The following table shows the capitalization of Michigan Heritage
Bancorp as of March 31, 1999, and as the capitalization is projected to be if we
sell all of the shares of common stock being offered and use the proceeds to add
to the capital of Michigan Heritage Bank.
10
<PAGE> 13
<TABLE>
<CAPTION>
AT MARCH 31, 1999
--------------------------------
ACTUAL AS ADJUSTED(1)
------ --------------
(UNAUDITED)
<S> <C> <C>
Common Stock, no par value; 4,500,000 shares authorized; 1,265,000
shares issued and outstanding as of March 31, 1999; 1,765,000
shares issued and outstanding as adjusted.......... $12,482,000 $ ,000
Preferred Stock, no par value; 500,000 shares
authorized; no shares issued and outstanding....... -- --
Retained earnings (deficit) (2) ......................... (2,336) (2,336)
----------- ----------
Total shareholders' equity......................... $10,146,000 $ ,000
=========== ==========
</TABLE>
(1) Adjusted to reflect the estimated net proceeds if all 500,000
shares are sold. See "Use of Proceeds."
(2) The retained deficit includes pre-opening expenses related
principally to fees and expenses incurred in the regulatory
application process and salaries, office occupancy costs and
supplies, together with operating losses following the
commencement of operations by Michigan Heritage Bank and the
effect of the stock dividend distributed during the second quarter
of 1998.
BUSINESS
GENERAL
We presently are making both commercial and consumer loans. We offer
ATM cards, competitive rates on various deposit products and other attractive
products and services. Those services reflect our intended strategy of serving
small- to medium-sized businesses and individual customers in our market area.
Our main office is currently located along the rapidly developing
Haggerty Road corridor in the southeast corner of Novi, Michigan. We lease and
have renovated a former bank branch building. The communities that comprise our
primary service area are Novi, Farmington, Farmington Hills, Livonia,
Northville, Northville Township, and Troy. Our management believes these
communities have an expanding and diverse economic base, which includes a wide
range of small- to medium-sized business engaged in manufacturing, high
technology research and development, computer services and retail. Our secondary
service area is the remaining portions of Oakland County and Wayne County not
included within the primary service area. According to statistics issued by the
United States Census Bureau in 1990, median annual household incomes for the
communities that comprise our primary service area are: $47,518 (Novi); $41,040
(Farmington); $51,986 (Farmington Hills); $48,645 (Livonia); $38,629
(Northville); and $55,465 (Northville Township). Further, according to the
Southeastern Michigan Council of Government projections, the population in our
primary service area is expected to grow from approximately 265,600 in 1995 to
over 280,000 by 2000, an increase in excess of 5.4%. According to information
issued by Oakland County, the county is the third wealthiest county in the
nation among counties exceeding one million people and annual household income
more than doubled from $24,700 in 1980 to over $54,400 in 1993. According to
estimates of the Southeastern Michigan Council of
11
<PAGE> 14
Government, population in Oakland County is projected to increase from 1,151,000
in 1995 to over 1,192,000 by 2000, an increase of 3.5%. Oakland County is also a
large banking market. According to available industry data, as of June 30, 1995,
total deposits in Oakland County, including banks, thrifts and credit unions,
were approximately $18.4 billion.
In January 1999, we opened our second location in Troy, Michigan. This
branch office is leased with leasehold improvements of approximately $80,000.
The cost of the furniture and equipment purchased for the new location was
approximately $50,000. Over the next 12 months, we are planning to relocate our
headquarters to Farmington Hills, Michigan, which is approximately seven miles
from our current headquarters. The Novi location will remain as a branch and a
third branch will be located on the first floor of the new headquarters
building. We estimate that the cost of additional equipment for our new
headquarters will be approximately $400,000. We expect leasehold improvement
costs to be minimal and that the annual rent, net of expected rental income,
will be approximately $210,000. We have budgeted the expected costs related to
the opening of the headquarters and expect such costs to be met through
operating revenues generated in the ordinary course of business.
LENDING
Our lending activities include discounted commercial lease loans,
other direct commercial loans, real estate mortgage loans, installment loans to
individuals, direct lease financing and, beginning this year, real estate
construction loans. Our lending activities are focused primarily on commercial
equipment financing and commercial term loans to businesses secured by the
assets of the borrower. We currently do not make agricultural loans. Our retail
strategy focuses on single-family mortgage loans, home equity loans, and, to a
lesser extent, other forms of consumer lending.
We originate loans primarily through third party referral sources such
as leasing companies and mortgage brokers, many of whom are known to management.
We consider a loan impaired when it is probable that all interest and principal
will not be collected. As of December 31, 1998, impaired loans were $2,096,000
due to a single customer, MCA Financial Corporation and affiliated companies,
that unexpectedly ceased operations in January 1999 and subsequently filed for
protection under federal bankruptcy laws. During 1997 and 1998, Michigan
Heritage Bank made a series of equipment lease financing loans to MCA Financial
for furniture, fixtures, and computer and telecommunications equipment. We did
not charge off any of the loans in 1998 as the loans were performing until the
time MCA Financial ceased operations.
As of March 31, 1999, the impaired loan amount was reduced to $593,000
primarily due to $620,000 in loans charged off against specific reserves
previously taken for the MCA Financial situation and our taking possession of
$989,000 in second mortgage original notes originally serviced by MCA Financial.
Specific allowances for impaired loans were $820,000 as of December 31, 1998,
and have been reduced to $424,000 as of March 31, 1999. Our management believes
the total specific allowances for impaired loans will adequately provide for
expected charge-offs for the MCA Financial situation.
The only other problem loans our management is aware of is a series of
lease financing loans in the aggregate amount of approximately $1.5 million made
to a major national hospital and nursing home company. The financial condition
of the company has deteriorated primarily due to changes in government
reimbursement policies resulting from the Balanced Budget Act of 1998. At this
time, the company has made full and timely payment on the loans. We have
received
12
<PAGE> 15
assurances from the company that the collateral underlying the loans is critical
to the company's operations and that the company will continue to make full and
timely payments. In additional, under the terms of the loans, portions of the
outstanding balances will be guaranteed by the manufacturer of the collateral
after the passage of a certain amount of time. Despite these guarantees and the
fact that none of the loans are past due, we reclassified the loans as impaired
as of June 30, 1999, and have allocated appropriate reserves.
Except for the two situations described above, our 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, 1998 and 1997, by category of loan.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
TYPE OF LOAN 1998 % 1997 %
------------ ------------- - ---- -
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Discounted commercial leases.................... $63,158 77.4% $24,564 75.4%
Other commercial................................ 12,810 15.7% 5.942 18.2%
Real estate construction........................ 0 0.0% 0 0.0%
Real estate mortgage............................ 4,454 5.5% 1,981 6.1%
Installment loans to individuals................ 137 0.2% 118 0.3%
Lease financing................................. 1,042 1.2% 0 0.0%
------- ------ ------- ------
Total loans............................ $81,601 100.0% $32,605 100.0%
======= ====== ======= ======
</TABLE>
We have made domestic loans only. As reflected in the table, the
composition of our loan portfolio did not change materially from 1997 to 1998.
The 150% increase in our total loan portfolio from 1997 to 1998 reflects the
bank's growth in its first full year of operation. Lending activity increased
as the deposits to fund loans became available throughout 1997 and 1998. In
addition, the efforts made in 1997 to establish lending relationships with
potential customers led to actual loan originations in 1998. The increase in
our loan portfolio has not increased the level of credit risk in the portfolio.
Throughout this period we have maintained the caliber of our credit
underwriting and approval policies in order to minimize our exposure to credit
risk.
Certain aspects of credit risk, such as changes in general economic
conditions, apply to all types of loans. Other aspects of credit risk differ
for different types of loans. Equipment financing loans, including discounted
commercial leases and direct lease financing, typically are dependent on the
successful operations and stability of the borrower. In addition, the loan
amounts associated with discounted commercial leases tend to be a higher
percentage of the value of the collateral than is the case generally for direct
secured financing. Commercial real estate loans typically depend on the
successful operation of the real estate project. The potential for loss may
occur due to cash flows from the properties securing the loans becoming
inadequate to service the loan payments and the value of the collateral not
being sufficient to repay the loan. Residential mortgage and consumer loan
collections are dependent to a large degree on the borrower's continuing
financial stability and thus are more likely to be adversely affected by
circumstances such as job loss and personal bankruptcy. The level of credit risk
in our loan portfolio was adversely effected by the MCA Financial situation
discussed above.
As of December 31, 1998, there are no loans accounted for on a non-
accrual basis and none that were past due 90 days or more as to principal or
interest payments. The loans to MCA Financial were classified as impaired as of
December 31, 1998 based on the subsequent event of MCA Financial ceasing
operations in January 1999. None of the loans to MCA Financial were nonaccruing
as of December 31, 1998.
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, selected ratios, and the allocation of the allowance for loan losses.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average loans outstanding.......... $53,368 $11,206
Total loans at year end............ $81,601 $32,605
</TABLE>
13
<PAGE> 16
<TABLE>
<S> <C> <C>
Allowance for loan losses at beginning of period....... $ 467 $ 0
Provision charged to expense........................... 1,349 467
Loan charge-offs during the period..................... 0 0
Loan recoveries during the period...................... 0 0
------ ------
Allowance for loan losses at end of year............... $1,816 $ 467
====== ======
Specific allowance for impaired loans.................. $ 820 $ 0
Unallocated allowance.................................. 996 467
------ ------
Total allowance for loan losses........................ $1,816 $ 467
====== ======
Ratio of net charge-offs during the period to
average loans outstanding.............................. n/a n/a
Allowance for loan losses as a percentage of loans....... 2.23% 1.43%
</TABLE>
In each accounting period, our management adjusts the allowance for
loan and lease losses to the amount necessary to maintain the allowance at
adequate levels. Through our credit department, our management will attempt to
allocate specific portions of the allowance for loan losses based on
specifically identifiable problem loans. Our 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.
With respect to each installment and residential real estate loan, our
management considers the primary risk element to be lack of timely payment. Our
management has a reporting system that monitors past due loans and has adopted
policies to pursue our creditor's rights in order to preserve our 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. Our management has a policy of requesting and reviewing periodic
financial statements from our commercial loan customers. However, we cannot
assure you that we 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.
14
<PAGE> 17
DEPOSITS
The following table summarizes certain information regarding deposits
with Michigan Heritage Bank.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997
--------------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE
TYPE OF DEPOSIT AMOUNT RATE PAID AMOUNT RATE PAID
---------------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest bearing demand deposits......... $ 753 0.00% $ 291 0.00%
Interest bearing checking
and money market deposits................ 5,632 4.85% 1,236 4.94%
Savings deposits............................ 66 3.03% 157 5.73%
Time deposits............................... 57,040 5.94% 15,704 6.08%
------- -------
Total deposits........................... $63,491 5.77% $17,388 5.89%
======= =======
</TABLE>
We have no foreign banking offices.
RETURN ON EQUITY AND ASSETS
The following table contains selected ratios for Michigan Heritage
Bancorp:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Return on average total assets........... -0.15% -2.30%
Return on average equity................. -1.09% -7.01%
Dividend payout ratio.................... n/a n/a
Average equity to average assets......... 13.94% 32.77%
</TABLE>
SUPERVISION AND REGULATION
We are registered as a bank holding company and, as such, we are
subject to the supervision of and regulation by the Federal Reserve Board under
the Bank Holding Company Act of 1956. Under the Bank Holding Company Act, we are
subject to periodic examination by the Federal Reserve Board and are required to
file periodic reports of our operations and such additional information as the
Federal Reserve Board may require. We also are 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, we act as a source of
financial strength to Michigan Heritage Bank and are expected to commit
resources to support Michigan Heritage Bank in circumstances where we 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 either to restore the
bank's capital by a special assessment upon its shareholders or to initiate the
liquidation of the bank.
15
<PAGE> 18
Michigan Heritage Bank is a Michigan banking corporation and its
deposit accounts are insured up to applicable limits by the Federal Deposit
Insurance Corporation under the Bank Insurance Fund. As a FDIC-insured,
Michigan-chartered bank, and a member of the Federal Reserve System, Michigan
Heritage Bank is subject to the examination, supervision, reporting and
enforcement requirements of the Financial Institutions Bureau Commissioner, as
the chartering authority for Michigan banks, and the Federal Reserve Board, as
Michigan Heritage 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 us
establishes a comprehensive framework for our operations and is intended
primarily for the protection of the FDIC deposit insurance funds, our depositors
and the public, rather than our shareholders.
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 Michigan Heritage 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.
We agreed to a non-binding memorandum of understanding with our federal
and state regulators on April 29, 1999, regarding certain matters related to our
growth and profitability. In this non-binding agreement, we agreed to take
certain actions regarding our capitalization plans, growth and earnings
projections, personnel, overhead and expense management, loan and lease loss
allowance methodology, and customer credit criteria. We have addressed each of
the matters raised in the memorandum and already are seeing results from such
action.
Various bills have been introduced in the Congress that would allow
bank holding companies to engage in a wider range of nonbanking activities,
including greater authority to engage in securities and insurance activities.
While the scope of permissible nonbanking activities and the conditions under
which the new powers could be exercised varies among the bills, the expanded
powers generally would be available to a bank holding company only if the bank
holding company and its bank subsidiaries remain well-capitalized and
well-managed. The bills also impose various restrictions on transactions between
the depository institution subsidiaries of bank holding companies and their
non-bank affiliates. These restrictions are intended to protect the depository
institutions from the risks of the new nonbanking activities permitted to such
affiliates. At this time, we are not able to predict whether any of the pending
bills will be enacted and, therefore, we are not able to predict the impact such
legislation may have on our operations.
16
<PAGE> 19
EMPLOYEES
As of March 31, 1999, we employed 20 people on a full-time basis,
including two customer service representatives for our new Troy branch. Over the
next 12 months, we expect to add seven full-time people: one full-time bank
operations assistant, one full-time loan credit analyst, one full-time
accounting manager/analyst, one full-time loan administration assistant, one
full-time commercial loan officer, and two full-time customer service
representatives for the third branch, which will be located within our new
headquarters building.
COMPETITION
We 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 service organizations with which we compete
are not subject to the same degree of regulation as we are. Many of the
financial institutions aggressively compete for business in our market areas.
Many of these competitors have been in business for many years, have established
customer bases, have substantially higher lending limits than we have, are
larger, and are able to offer certain services that we do not expect to provide
in the foreseeable future, including trust services, and international banking
services. In addition, most of these entities have greater capital resources
than we have 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 we can. 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.
YEAR 2000 READINESS
Being a new business, we do not have major issues concerning older
systems to update. We believe that the recently acquired new systems are all now
Year 2000 compliant. All of our applicable components have been identified and
addressed as to being Year 2000 compliant. The cost to become fully Year 2000
compliant was approximately $15,000.
Each of our mission critical vendors has provided us with written
assurances that each is now Year 2000 compliant in all material respects or will
be by the end of September 1999. However, we cannot assess the value of these
assurances. Based upon verbal and written communications with all of our
significant customers, we believe that each customer is Year 2000 compliant. We
have not entered into any agreements with any vendor or customer limiting our
right to pursue legal remedies if we suffer Year 2000 related damages, but we
have no assurances that legal remedies will be available to us if we suffer such
damages.
We have developed and successfully tested a contingency plan in the
event a material vendor or customer is not Year 2000 compliant. The principal
points of this plan are to print hardcopy reports of all material accounts
several times during the last week of 1999 and to be in a position to manually
keep necessary records immediately following the end of the year, if necessary.
This plan has been submitted to our regulators.
17
<PAGE> 20
PROPERTIES
We lease a 3,000 square foot building at 21211 Haggerty Road, Novi,
Michigan 48375 for use as our main office and 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 Michigan Heritage Bank was required to provide
a letter of credit to the landlord which can be drawn on if Michigan Heritage
Bank terminates the lease prior to the expiration of the lease term.
We also lease approximately 1,500 square feet of office space for the
accounting, commercial lending, and human resource departments at Hamilton
Building, 33045 Hamilton Court, Suite 107, Farmington Hills, MI 48334. The lease
extends until August 14, 1999, at which time the lease may be extended on a
monthly basis. The annual rent is $22,000. The accounting department will be
relocating to our new headquarters space when that space is completed.
We opened our first branch in January 1999, with 1,500 square feet of
office space within a strip mall at 1917 East Big Beaver Road, Troy, MI 48083.
The lease extends until January 18, 2004, at an annual rent of $32,000. The
branch has two teller windows, two customer service desks, a mutual funds room,
and a conference room.
We have signed a lease for 12,500 square feet for a new headquarters
including 1,200 square for a new branch to be located in Farmington Hills,
Michigan. The lease extends until June 30, 2014. Additional equipment for the
new headquarters is estimated to be approximately $400,000. We expect minimal
leasehold improvement costs and expect the annual rent net of expected rental
income to be approximately $210,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion addresses material factors affecting our
financial condition and results. You should read this discussion in conjunction
with the audited and unaudited financial statements, footnotes and supplemental
financial data presented elsewhere in this report.
We were in the development stage during 1996 and the first two months
and nine days of 1997. We completed an initial public offering of shares of
common stock during February and March 1997. On March 10, 1997, Michigan
Heritage Bank opened for business. As of March 1999, Michigan Heritage Bank had
been operational almost 25 months and had completed its first full fiscal year
of operations.
RESULTS OF OPERATIONS--1998 COMPARED TO 1997
We earned our first monthly profit in January 1998, which was only our
10th full month of operation. This quick breakeven result is attributable
directly to controlled growth of both deposit and
18
<PAGE> 21
loan portfolios coupled with lower than average overhead expense. Our quarterly
profits for the first three quarters of 1998 were $73,000 for the first quarter,
$78,000 for the second quarter, and $106,000 for the third quarter. The fourth
quarter of 1998 incurred a $370,000 net loss due primarily to a pretax
adjustment of $795,000 ($525,000 net of tax) in additional provision for
possible loan losses due to a single customer, MCA Financial, that filed for
protection under bankruptcy laws, which is not indicative of the overall loan
portfolio, and a pretax charge of $100,000 ($66,000 net of tax) in
organizational costs expensed due to a change in an accounting principle.
As a result, we reported a loss of only $113,000 for 1998 compared to a
$602,000 loss for 1997, a $489,000 improvement over 1997. For 1996, we incurred
a loss of $68,000 due to being in the development stage and having no revenues
from operations.
Our quarterly losses for 1997 were $81,000 for the first quarter (only
16 business days of operation), $247,000 for the second quarter, $170,000 for
the third quarter, and $104,000 for the fourth quarter (which included a
provision for loan losses of $202,000).
For 1998, the return on average equity was -1.09% and the return for
average assets was -0.15%. While we distributed no cash dividends during 1998,
the Board of Directors declared and we distributed a 10% common stock dividend
during the second quarter of 1998.
Michigan Heritage Bank is providing loan reserves at 1.25% of loans
outstanding except for $2,096,000 classified by management at December 31, 1998,
as impaired resulting from the MCA Financial situation mentioned above. The
1.25% reserve is, in management's opinion, a conservative loan reserve position
relative to the overall quality of the loan portfolio. Specific allowances for
impaired loans were $820,000. Management believes the total specific allowances
for impaired loans will adequately provide for expected charge-offs for the MCA
Financial situation. Management is working diligently to protect our rights and
to minimize net charge-offs resulting from the MCA Financial situation. There
have been no loan charge-offs during 1998 or 1997.
Our total assets at the end of 1998 amounted to $100.3 million compared
to $51.4 million at the end of 1997, an increase of $48.9 million or over 95%.
The increase was primarily due to a $48.8 million increase in deposits and
borrowed funds. This increase was utilized primarily to make new loans, and
total loans increased $49.0 million, to $81.6 million at December 31, 1998.
Our total assets at year end 1997 increased $51.2 million over year end
1996 mostly due to $10.9 million of net proceeds from the initial public
offering in February and March 1997 and over $40.7 million in deposits being
generated during the remaining 10 months of 1997. These funds provided were
invested primarily in loans amounting to $32.6 million and other investments and
cash and due from banks totaling $18.4 million. We invested approximately
$384,000 in bank premises and equipment.
Our loan portfolio at the end of 1998 consisted of approximately 78%
discounted loans (i.e., leases originating from known independent brokers which
are discounted and booked as commercial loans on Michigan Heritage Bank's
books), 9% direct commercial loans, 2% commercial real estate, 5% lines of
credit, 5% residential mortgages and home equity loans, and 1% in direct
financing leases. The loans were funded primarily by deposits consisting mostly
of time deposits which represent over 88% of total deposits. Risks particularly
associated with discounted loans include that such loans tend to be a higher
percentage of the value of the collateral than direct secured financing.
19
<PAGE> 22
Additional loan information can be found elsewhere in this report in the Notes
to Consolidated Financial Statements.
The largest source of our revenues 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 (a) net interest spread, and (b) 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.
Table 1 presents our average balance sheets, net interest spread and
net interest margin for the three years ended December 31, 1998. Net interest
income for 1998 increased $1,544,000 or over 172% to $2,440,000 as compared to
$896,000 for 1997. Net interest income for 1996 was only $1,000.
TABLE 1
Consolidated Average Balance Sheets and Analysis of Net Interest Income
For the Years Ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ---- ------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest bearing balances
in other banks................ $ 2,743 $ 146 5.32% $1,734 $103 5.94% $ 25 $ 1 4.00%
Federal funds sold.............. 4,198 224 5.34 3,868 211 5.46 -- -- --
Taxable investment securities... 12,231 685 5.60 8,278 474 5.73 -- -- --
Loans .......................... 53,368 5,051 9.46 11,206 1,132 10.10 -- -- --
------ ----- ---- ------ ----- ----- ----- ----- ----
Total earning assets.......... 72,540 6,106 8.42 25,086 1,920 7.65 25 1 4.00
Cash and due from banks......... 558 676 9
Allowance for loan losses....... (694) (131) --
Operating lease equipment, net.. 858 -- --
Other assets.................... 1,059 589 88
----- --- --
Total assets.................. $74,321 $26,220 $122
====== ====== ===
</TABLE>
20
<PAGE> 23
TABLE 1 (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities and Stockholders' Equity
Interest on checking and money
market deposit accounts.... $ 5,632 $ 273 4.85% $ 1,236 $ 61 4.94% $ -- $ -- --%
Savings deposits............ 66 2 3.03 157 9 5.73 -- -- --
Other time deposits less
than $100,000.............. 40,253 2,393 5.94 10,134 615 6.07 -- -- --
Time deposits $100,000
and greater................ 16,787 998 5.95 5,570 339 6.09 -- -- --
Borrowed funds.............. 5 -- 5.25 -- -- -- -- -- --
Total interest bearing
liabilities.............. 62,743 3,666 5.84 17,097 1,024 5.99 -- -- --
------ ----- ---- ------ ----- ---- -- -- --
Other deposits, non-interest
bearing................ 753 291 --
Other liabilities........... 467 241 156
Stockholders' equity........ 10,358 8,591 (34)
------ ----- ----
Total liabilities and
stockholders' equity..... $74,321 $26,220 $122
======= ======= ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
SELECTED AMOUNTS AND RATIOS 1998 1997 1996
- --------------------------- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net interest income ............................. $2,440 $ 896 $ 1
Net interest rate spread......................... 2.58% 1.66% 4.00%
Cost of earning assets........................... 5.05% 4.08% --
Net interest margin ............................. 3.37% 3.57% 4.00%
Net interest-earning assets to interest-bearing
liabilities................................... 116% 147% n/a
Net income after taxes........................... $ (113) $ (602) $ (68)
Return on equity................................. (1.09)% (7.01)% n/a
Return on assets................................. (0.15)% (2.30)% n/a
Dividend payout ratio............................ -- % -- % n/a
Equity to assets ratio........................... 13.94 % 32.77 % n/a
</TABLE>
Table 2 presents an analysis of our change in net interest income. The
$1,544,000 net interest income increase in 1998 resulted from a $1,840,000
increase due to increases in average balances offset by a $296,000 decrease due
to changes in both yield/rate and mix. Net interest income for 1996 was only
$1,000 due to our being in a development stage. Consequently, the $895,000
change in net interest income for 1997 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 $189,000 and $82,000 for 1998 and 1997, respectively.
Nonaccrual loans had an insignificant effect on net interest income due to the
average amount of nonaccrual loans being insignificant for 1998. There were no
nonaccrual loans for 1997 or 1996.
21
<PAGE> 24
TABLE 2 -- Analysis of Net Interest Income Changes
<TABLE>
<CAPTION>
1998 COMPARED TO 1997
-------------------------------------------
VOLUME &
YIELD/RATE
VOLUME YIELD/RATE MIX TOTAL
-------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Increase (decrease) in interest income
Interest bearing balances in other banks...................... $ 60 $(11) $ (6) $ 43
Federal funds sold............................................ 18 (5) -- 13
Taxable investment securities................................. 226 (10) (5) 211
Loans......................................................... 4,259 (71) (269) 3,919
------ ---- ----- -----
Total interest income change................................ 4,563 (97) (280) 4,186
Increase (decrease) in interest expense
Interest on checking and money market deposit accounts........ 217 (1) (4) 212
Savings deposits.............................................. (5) (4) 2 (7)
Other time deposits less than $100,000........................ 1,828 (13) (37) 1,778
Time deposits $100,000 and greater............................ 683 (8) (16) 659
Borrowed funds................................................ -- -- -- --
------ ---- ----- ------
Total interest expense change............................... 2,723 (26) (55) 2,642
------ ---- ----- ------
Net interest income change.................................... $1,840 $(71) $(225) $1,544
====== ==== ===== ======
<CAPTION>
1997 COMPARED TO 1997
-------------------------------------------
VOLUME &
YIELD/RATE
VOLUME YIELD/RATE MIX TOTAL
-------------------------------------------
(DOLLARS IN THOUSANDS)
Increase (decrease) in interest income
Interest bearing balances in other banks...................... $ 68 $ -- $ 34 $ 102
Federal funds sold............................................ -- -- 211 211
Taxable investment securities................................. -- -- 474 474
Loans......................................................... -- -- 1,132 1,132
---- ---- ------ ------
Total interest income change................................ 68 -- 1,851 1,919
Increase (decrease) in interest expense
Interest on checking and money market deposit accounts........ -- -- 61 61
Savings deposits.............................................. -- -- 9 9
Other time deposits less than $100,000........................ -- -- 615 615
Time deposits $100,000 and greater............................ -- -- 339 339
Borrowed funds................................................ -- -- -- --
---- ---- ------ ------
Total interest expense change............................... -- -- 1,024 1,024
---- ---- ------ ------
Net interest income change....................................... $ 68 $ -- $ 827 $ 895
==== ==== ====== ======
</TABLE>
The net interest spread for 1998 of 2.58% increased 0.92% or 92 basis
points over the 1.66% spread for 1997. The 1998 average yield on earning assets
of 8.42% increased 77 basis points over 1997 primarily due to the change in mix
of earning assets. In 1998, higher yielding loans were on average over
73% of total earning assets with the remaining balance in lower yielding
investment securities (Table 3) and short term funds. In 1997, higher yielding
loans on average were less than 45% of total earning assets since Michigan
Heritage Bank had only been open since March, 1997. The 5.84% cost of
interest-bearing liabilities for 1998 decreased 15 basis points from 5.99% in
1997 due primarily to higher costing time deposits (Table 4) being repriced at
lower rates in 1998. The cost of interest-bearing liabilities for 1998 and 1997
reflect slightly higher market rates being paid on time deposits. These higher
rates were paid to attract and retain depositors since Michigan Heritage Bank
is relatively new. Michigan Heritage Bank also does not yet have an extensive
branch network, with corresponding higher operating expenses, to draw deposits
which creates additional pressure to pay higher rates to attract deposits.
22
<PAGE> 25
TABLE 3 -- Consolidated Investment Maturity Analysis as of December 31,
1998 and 1997
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
AVAILABLE FOR SALE (A)
-----------------------------------------------------------
U.S. TREASURY AND
OTHER GOVERNMENT FEDERAL RESERVE
AGENCIES AND CORPORATIONS BANK STOCK (B)
------------------------- ---------------------
AMORTIZED AMORTIZED
COST YIELD COST YIELD
---- ----- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less.................... $4,971 5.23% $ 236 6.00%
Due after one year through five years...... -- -- -- --
Due after five years through ten years..... 2,011 5.76 -- --
Due after ten years........................ 1,001 5.75 -- --
------ ---- ----- ----
Total.............................. $7,983 5.43% $ 236 6.00%
====== =====
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------------- --------------------------------------------
U.S. TREASURY AND
OTHER GOVERNMENT CORPORATE FEDERAL RESERVE
AGENCIES AND CORPORATIONS BONDS (B) BANK STOCK (C)
------------------------- --------- ---------------
AMORTIZED AMORTIZED AMORTIZED
COST YIELD COST YIELD COST YIELD
---- ----- ---- ----- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less..................... $8,565 5.83% $ -- -- $236 6.00%
Due after one year through five years....... -- -- -- -- -- --
Due after five years through ten years...... -- -- 2,000 5.99% -- --
Due after ten years......................... -- -- 3,000 5.95% -- --
------ -- ------ ----- ---- -----
Total............................... $8,565 5.83% $5,000 5.97% $236 6.00%
====== ====== ====
</TABLE>
- ---------
(a) There were no securities Held to Maturity as of December 31, 1998. Expected
maturities will differ from contractual maturities. Issuers may have the
right to call or prepay obligations.
(b) The dividend yield on Federal Reserve Bank Stock has historically been 6.00
percent.
(c) All of the corporate bonds included in 1997 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.
TABLE 4 -- Consolidated Time Certificates of Deposit Maturity Analysis As of
December 31, 1998
<TABLE>
<CAPTION>
UNDER $100,000
$100,000 AND OVER
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Due in three months or less......................... $ 9,919 $ 4,035
Due over three months through six months............ 9,033 5,874
Due over six months through twelve months........... 23,183 6,705
Due over twelve months.............................. 11,907 7,155
------- -------
Total...................................... $54,042 $23,769
======= =======
</TABLE>
23
<PAGE> 26
The 3.37% net interest margin for 1998 is a 20 basis points decrease
from the 3.57% net interest margin for 1997. While the yield on earning assets
went up 77 basis points in 1998, the cost of earning assets went up 97 basis
points, 5.05% in 1998 compared to 4.08% in 1997. The increase in this cost is
due to more interest-bearing liabilities being used to fund interest-earning
assets in 1998 than in 1997, when non-interest bearing capital supported a
greater percentage of earning assets. The ratio of net interest-bearing assets
to interest-bearing liabilities fell from 147% in 1997 to 116% in 1998, due to
the growth in both assets and liabilities and the relatively smaller portions of
total assets represented by stockholders' equity.
Other non-interest income of $587,000 for 1998 increased $581,000 over
1997, primarily due to $515,000 in rental income from an operating lease
acquired in 1998. The remaining $72,000 of non-interest income for 1998
principally consisted of loan servicing fees, service charges on deposit
accounts and float income from an outside vendor for cashiers checks sold.
Non-interest income for 1997 was only $6,000 and there was no non-interest
income for 1996 as we were in the development stage.
Non-interest expense for 1998 was $2,056,000 which represents a
$1,019,000 increase over 1997. Salaries and employee benefits increased $389,000
due to six additional paid staff members being added during 1998, accrued
bonuses, and the implementation of a 401(k) match. Depreciation on property for
Michigan Heritage Bank's operating lease was $443,000. Remaining other expenses
increased a net of $187,000 primarily due to Michigan Heritage Bank being
operational for its first full fiscal year in 1998. Total other expense for 1996
was $69,000 mostly due to the one full-time equivalent staff member being paid
for nine months in 1996.
FINANCIAL CONDITION--1998 COMPARED TO 1997
Our current cash projections indicate adequate cash balances. Michigan
Heritage Bank has additional line of credit facilities with national lending
institutions to add funding capacity. Our management also has established a
network of banks that can be used to sell or participate a portion of our loan
portfolio. These techniques allow us to service our business relationships and
generate fee and servicing revenue.
Our liquidity remained adequate throughout 1998. As of December 31,
1998, Michigan Heritage Bank had $8.3 million in cash and cash equivalents
including $4.2 million in Federal funds sold and $3.8 million in
interest-bearing balances in other banks which are immediately available assets.
In addition, investment securities with a total book value of $5.0 million
mature within the next 12 months. We also have proven our ability to attract
deposits and build a stable deposit base from which to fund loans.
Michigan Heritage Bank is subject to various regulatory capital
requirements and as a "de novo" or start-up bank, the minimum for the Tier 1
leverage ratio is 9.0%. Normally, to be considered adequately capitalized,
Michigan Heritage Bank must maintain a Tier 1 leverage ratio of 4.0%. Michigan
Heritage Bank's Tier 1 leverage ratios were 9.1% and 30.0% at December 31, 1998
and 1997, respectively. We plan to maintain at least a 9.0% Tier 1 leverage
ratio throughout Michigan Heritage Bank's de novo status and to remain
well-capitalized thereafter. Additional information concerning capital is found
in Note 16, "Regulatory Matters" in the Notes to Consolidated Financial
Statements.
24
<PAGE> 27
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
We experienced our fourth quarter of positive earnings with net income
of $114,000 for the quarter ended March 31, 1999, which is only the eighth full
quarter of our operations. 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.
Net income for the quarter ended 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 we 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 which filed for protection under the bankruptcy laws. Management is
working diligently to protect our rights and to minimize net charge-offs
resulting from the MCA Financial situation. There were no charge-offs prior to
the first quarter of 1999 and there have been no recoveries to date.
The categories of loans outstanding at March 31, 1999, in dollars and
as a percentage of total loans outstanding are as follows:
<TABLE>
<CAPTION>
PERCENTAGE
LOAN CATEGORY AMOUNT OF TOTAL LOANS
------------- ------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial loans discounted........................ $61,606 73.2%
Commercial financing leases........................ 1,060 1.3%
Commercial 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%
======= ======
</TABLE>
25
<PAGE> 28
At March 31, 1999, there were $593,000 in non-accruing loans all
relating to MCA Financial. 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 Financial. No servicing of the loans took place during the first
quarter of 1999 due to MCA Financial filing for protection under the bankruptcy
laws. Our management transferred the servicing of those mortgages to another
mortgage servicing company in April 1999. We fully expect 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.
MEMORANDUM OF UNDERSTANDING
We agreed to a non-binding memorandum of understanding with our federal
and state regulators on April 29, 1999. Our regulators required only a
non-binding memorandum of understanding, rather than going through the
regulatory process necessary for a binding agreement. In the memorandum, among
other things, we agreed to submit plans to our regulators regarding maintaining
our capital position, increasing our earnings, assessing the adequacy of our
loan loss reserves, receiving financial information from customers, our loan
grading system, and our lending and operational staffing needs. We have
fulfilled the requirements of the memorandum, except to the extent that the
plans call for ongoing reporting. Our regulators have responded positively to
the actions we have taken in response to the memorandum and have indicated that
no further responses are required at this time.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and officers of Michigan Heritage Bancorp and Michigan
Heritage Bank as of the date of this prospectus are as follows:
<TABLE>
<CAPTION>
POSITION WITH DIRECTOR TERM POSITION(S)
NAME AND AGE THE COMPANY EXPIRES WITH THE BANK
- ------------ ----------- ------------------ --------------------
<S> <C> <C> <C>
Richard Zamojski, 48 Chairman of the Board, 2002 Chairman of the Board,
Chief Executive Officer, Chief Executive Officer,
and Director and Director
Anthony S. Albanese, 51 President, Chief Operating 2001 President, Chief Operating
Officer and Director Officer and Director
H. Perry Driggs, Jr., 62 Director 2002 Director
Lewis N. George, 61 Director 2001 Director
Phillip R. Harrison, 44 Director 2000 Director
Frank A. Scerbo, 49 Director 2002 Director
Philip Sotiroff, 60 Director 2000 Director
Darryle J. Parker, 49 Secretary, Treasurer and n/a Secretary, Treasurer, Cashier,
</TABLE>
26
<PAGE> 29
<TABLE>
<S> <C> <C>
Chief Financial Officer and Vice President/Chief
Financial Officer
</TABLE>
Under Federal law and regulations and subject to certain exceptions,
the addition or replacement of any director, or the employment, dismissal or
reassignment of a senior executive officer of Michigan Heritage Bank occurring
within two years of the chartering of Michigan Heritage Bank, its acquisition by
Michigan Heritage Bancorp, or any change in control of Michigan Heritage Bancorp
or Michigan Heritage Bank (or at any time that Michigan Heritage Bank is not in
compliance with applicable minimum capital requirements or is otherwise in a
troubled condition) is subject to prior notice to and disapproval by the FDIC.
Our Articles of Incorporation provide that the number of directors, as
determined from time to time by the Board of Directors, shall be no less than
five and no more than twelve. Michigan Heritage Bancorp's Board of Directors has
presently fixed the number of directors at seven. The Articles of Incorporation
further provide that the directors shall be divided into three classes, Class I,
Class II, and Class III, with each class serving a staggered three-year term and
with the number of directors in each class being as nearly equal as possible.
The term of each class of director is three years.
The entire Board of Directors of Michigan Heritage Bank will be elected
annually by its shareholder, Michigan Heritage Bancorp. Officers of Michigan
Heritage Bancorp and Michigan Heritage Bank will be appointed annually by their
respective Boards of Directors and perform such duties as are prescribed in the
bylaws or by the Board of Directors. There are no family relationships among any
of our directors, officers or key personnel.
None of the executive officers or staff are subject to any agreements
with former employers that restrict their right to fully perform their duties
with Michigan Heritage Bancorp or Michigan Heritage Bank.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
We have no standing Audit, Compensation or Nominating Committees of our
Board of Directors. The Board is responsible for reviewing and making
recommendations as to its size and composition, nominating candidates for
election as directors, and filling any vacancies that may occur between annual
meetings. During 1998, the Board met 12 times. Each of the Directors attended
either all or all but one of the of the meetings of the Board during 1998.
Original members of the Board who are not our employees or employees of
any of our affiliates each received an option to purchase 13,200 shares of our
common stock of Michigan Heritage Bancorp at the public offering price of $9.09
per share, pursuant to our 1997 Stock Option Plan for Nonemployee Directors
which was approved on January 15, 1997 (the number of shares and exercise price
have been adjusted to reflect the 1998 stock dividend). Under this Plan, each
option was immediately exercisable for 6,600 shares when granted. As of the date
of the 1999 Annual Meeting of Shareholders, each option becomes exercisable in
full. Each option expires ten years after its date of grant. Nonemployee
directors who are appointed or elected after March 1, 1997, will receive an
option for a lesser number of shares, the number of which will depend on which
annual meeting is the first annual meeting occurring concurrently with, or
after, he or she becomes a nonemployee director.
27
<PAGE> 30
EXPERIENCE OF DIRECTORS AND OFFICERS
The experience and backgrounds of our directors and officers, and their
positions with us, are summarized below.
RICHARD ZAMOJSKI has been the Chairman of the Board and Chief Executive Officer,
and a Director, of both Michigan Heritage Bancorp and Michigan Heritage Bank
since we began operations. Mr. Zamojski is responsible for our strategic
direction and is a member of the Executive Committee, the Senior Loan Committee,
and the Asset and Liability Committee. Prior to joining us, he was employed by
Sterling Bank & Trust, F.S.B. from 1990 to August 1996 where he attained the
position of Chairman of the Board and Chief Executive Officer. He also is a
member of the Equipment Leasing Association, the Mortgage Banker's Association
of Michigan, the Builders Association of Southeastern Michigan and the Michigan
Mortgage Brokers Association, where he also served as a past director. Mr.
Zamojski received his Bachelor of Science degree in Accounting from Central
Michigan University in 1973 and a Masters in Business Administration with a
concentration in Finance from the University of Michigan in 1975. He is a
resident of Brighton, Michigan.
ANTHONY S. ALBANESE has been President and Chief Operating Officer and a
Director of both Michigan Heritage Bancorp and Michigan Heritage Bank since we
began operations. Mr. Albanese is responsible for our day-to-day operations. He
also is a member of the Executive Committee, the Senior Loan Committee, the
Asset and Liability Committee, is Chairman of the Operations Committee, and is
the Year 2000 Co-ordinator and CRA Officer. Prior to joining us, he was employed
by Sterling from 1990 to May 1996 where he attained the position of President
and Chief Operating Officer and was a member of the Board of Directors. He also
served on the IBM Community Bank Advisory Council, was a member of the Equipment
Leasing Association, the Mortgage Bankers Association and the Builders
Association of Southeastern Michigan. Mr. Albanese received an Associate in
Science degree in General Business in 1973 and a Bachelor of Science degree in
Accounting in 1977 from Detroit College of Business. He served in the U.S. Army
Security Agency (Military Intelligence) from 1965 to 1969 with service in Viet
Nam during 1966-67. He is a resident of Northville, Michigan.
DARRYLE J. PARKER has been Secretary, Treasurer, and Chief Financial Officer of
both Michigan Heritage Bancorp and Michigan Heritage Bank since we began
operations and currently our Vice President, Cashier, Secretary, Treasurer, and
Chief Financial Officer. His major areas of responsibility include investment,
funds, and asset/liability management, financial accounting and reporting,
payroll, and bank operations. Mr. Parker has been in the banking industry in
excess of 25 years, including serving as Treasurer of Sterling from 1993 to
1995. During the past 19 years has served as chief financial officer and/or
controller involving all phases of financial planning, analysis, and accounting.
Mr. Parker has an Associate of Science, Monroe County Community College (1976),
a Bachelor of Business Administration in Accounting from Ohio University (1986),
a Masters in Business Administration from Michigan State University (1988), and
is a graduate from the School of Banking Administration, Controllership,
University of Wisconsin (1981). Mr. Parker was in the United States Marine Corps
(1967-1969) serving in Viet Nam. Mr. Parker is a resident of Monroe, Michigan.
H. PERRY DRIGGS, JR. is the President of Great Lakes Capital Corporation, a
privately-owned investment banking and corporate finance firm (1987 to present).
Prior to that, he served as an executive of Michigan National Bank and served in
various capacities, including Treasurer and a director, of Michigan National
Corporation (1962-1987). Mr. Driggs is a director of Detroit Mortgage and Realty
Company. He received his undergraduate degree from Harvard College (1958), a
Masters degree in
28
<PAGE> 31
Industrial Engineering from Northwestern University (1959) and returned to
Harvard Business School for his Masters in Business Administration (1961). Mr.
Driggs is a resident of Bloomfield Hills, Michigan.
LEWIS N. GEORGE is currently the President of The George Group, a real estate
development and management company. In 1960 Mr. George began his career with
Nicholas George Theatres, a family owned business that operated a chain of movie
theatres throughout the Detroit Metropolitan Area. He served as President from
1974 through the eventual sale of the theatres in 1988. Mr. George served as an
officer of the Detroit branch of the National Association of Theatre Owners and
was a past director and officer of the Detroit Variety Club. Mr. George received
his undergraduate degree from the University of Michigan (1961) and received his
Juris Doctor from Wayne State Law School (1964). Mr. George is a resident of
Orchard Lake, Michigan.
PHILLIP R. HARRISON is the President of Harrison Capital Corporation, a private
investment banking firm which he founded in 1992. His company concentrates in
equity and debt placements for equipment leases and loans. Mr. Harrison was a
managing director of Kendall Capital Partners L.P. (1991-1992), a private
investment banking firm offering specialized advisory services in the areas of
secured asset financing, equipment leasing and project finance. He was a Vice
President and manager of U.S. Leasing International, Inc., a subsidiary of Ford
Motor Company (1986-1992), where he was responsible for the company's investment
in leveraged leases of equipment, facilities and real estate. He received a
Bachelor of Business Administration from Western Michigan University (1977) and
is a Certified Public Accountant (1979). Mr. Harrison is a resident of Brighton,
Michigan.
FRANK A. SCERBO is Vice President and General Counsel of, and a member of the
Board of Directors of, the McPhail Corporation, a company engaged in the sale of
original equipment parts to the automotive and light truck industry. Mr. Scerbo
has been with the McPhail Corporation since 1977. Mr. Scerbo also is Vice
President and General Counsel of, and a member of the Board of Directors of,
Fair Weather Properties, Inc., a real estate development company; General
Counsel of Fair Weather Properties, L.L.C., a real estate development company;
Vice President and General Counsel of, and a member of the Board of Directors
of, Hi Flite, Inc., an aircraft charter and leasing company; Vice President and
General Counsel of, and a member of the Board of Directors of, Fair Weather
Aviation, Inc., an aircraft charter and leasing company; and General Counsel of
the Lectron Products Division of Eaton Corporation, an automotive and light
truck parts supplier. Mr. Scerbo received his undergraduate degree from the St.
Peter's College (1971) with honors, and received his Juris Doctor from the
University of Detroit (1980), with honors. Mr. Scerbo is a resident of
Birmingham, Michigan.
PHILIP SOTIROFF is the President of Sotiroff & Abramczyk, P.C., a law firm
established in 1988, which is engaged in a general business practice with
concentrations in banking and financial institutions, equipment financing,
commercial lending and real estate transactions. Mr. Sotiroff has practiced
commercial law for over 35 years and has specialized in equipment finance since
1974. Mr. Sotiroff received his undergraduate degree from the University of
Michigan (1960) with honors, is a member of the Phi Beta Kappa honorary
fraternity, and received his Juris Doctor with distinction from the University
of Michigan (1963). Mr. Sotiroff is a resident of Bloomfield Hills, Michigan.
COMPENSATION OF EXECUTIVE OFFICERS
Compensation information is provided only for Richard Zamojski and
Anthony S. Albanese because no other executive officer had total annual salary
and bonus in excess of $100,000.
29
<PAGE> 32
Summary Compensation Table
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#)(1) COMPENSATION
- --------------------------- ---- -------- ----- ------------- ------------
<S> <C> <C> <C> <C> <C>
Richard Zamojski, Chairman 1998 $105,000 $ 0 13,200 $ 4,939
1997 100,000(2) 1,000 13,200 0
Anthony S. Albanese, President 1998 $105,000 $ 0 13,200 $10,481
1997 100,000(2) 1,000 13,200 0
</TABLE>
- --------
(1) After adjusting for the stock dividend paid in 1998.
(2) Annual rate
Individual Option/SAR Grants in 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS OPTIONS/SARS GRANTED TO EXERCISE OR EXPIRATION
NAME GRANTED (#)(1) ALL EMPLOYEES IN FISCAL YEAR BASE PRICE(1) DATE
- ---- ------------------------- ---------------------------- ------------- -------------
<S> <C> <C> <C> <C>
Richard Zamojski 1,650 shs. 35% $9.09/sh. 2007
Anthony Albanese 1,650 shs. 35% $9.09/sh. 2007
</TABLE>
- ------
(1) Adjusted to reflect the stock dividend paid in 1998.
Option/SAR Exercises in Last Fiscal Year and
Year End Option/SAR Values
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT YEAR END (#) AT YEAR END (1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- -------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Richard Zamojski 0 shs. $0 9,900/3,300 $0/$0
Anthony Albanese 0 shs. $0 9,900/3,300 $0/$0
</TABLE>
- ------
(1) Based on the last trade on May 14, 1999.
We made no awards to any executive officer or other employee in the
last completed fiscal year under any Long-Term Incentive Plan. Executive
officers' compensation in subsequent years will be determined by the
Compensation Committee, a committee of our Board of Directors comprised of a
majority of outside (non-employee) directors. Our officers may participate in
our 1997 Employee Stock Option Plan. Our officers may also participate in any
benefit plans adopted for bank employees. We have adopted a 401(k) plan for our
employees, including the executive officers. Neither Michigan Heritage Bancorp
nor Michigan Heritage Bank has an employment agreement with any officer.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information regarding the beneficial
ownership of our common stock as of March 31, 1999, by our directors, the
executive officers named in the Summary Compensation Table, and our directors
and executive officers as a group.
30
<PAGE> 33
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP(1) CLASS
---------------- -------------------------- -----
<S> <C> <C>
Anthony S. Albanese......................... 23,540 shs.(2) 1.9%
330 Eaton Drive
Northville, MI 48167
H. Perry Driggs, Jr......................... 24,200 shs.(3)(4) 1.9%
230 Orange Lake Drive
Bloomfield Hills, MI 48302
Lewis N. George .......................... 29,700 shs.(3) 2.3%
5241 North Bay Drive
Orchard Lake, MI 48324
Phillip R. Harrison......................... 19,200 shs.(3) 1.5%
4792 Split Rail Lane
Brighton, MI 48116
Darryle J. Parker .......................... 6,600 shs.(5) *
5750 Parkside Drive
Monroe, MI 48161
Frank A. Scerbo .......................... 58,400 shs.(6)(7) 4.6%
1144 Brookwood Lane
Birmingham, MI 48009
Philip Sotiroff .......................... 61,710 shs.(3)(4) 4.9%
770 E. Glengarry Circle
Bloomfield Hills, MI 48301
Richard Zamojski............................ 18,810 shs.(2)(4) 1.5%
11790 Pine Mountain Drive
Brighton, MI 48116
All directors and executive officers as a... 242,160 shs. 19.1%
as a group (8 persons)
</TABLE>
-----------
* Less than 1.0%
(1) Unless otherwise noted, all shares are owned solely by the person
named or jointly with the person's spouse. Percentages are based
on issued and outstanding shares plus the number of shares that
the named person or group has the right to acquire within 60 days.
(2) Includes 9,900 shares that such person has the right to acquire
within 60 days pursuant to the 1997 Employee Stock Option Plan.
(3) Includes 13,200 shares that such person has the right to
acquire within 60 days pursuant to the 1997 Stock Option Plan for
Nonemployee Directors.
(4) Includes 2,750 shares held by Mr. Driggs' spouse, 5,500 shares
held by Mr. Sotiroff's spouse, and 110 shares held by Mr.
Zamojski's minor daughter.
(5) Includes 4,950 shares that such person has the right to acquire
within 60 days pursuant to the 1997 Employee Stock Option Plan.
(6) Includes 52,100 shares held by trusts of which Mr. Scerbo is
co-trustee and 3,300 shares that Mr. Scerbo has the right to
acquire within 60 days pursuant to the 1997 Stock Option Plan for
Nonemployee Directors.
(7) Does not include 5,500 and 500 shares held by Mr. Scerbo's spouse
as trustee and individually, respectively, as to which Mr. Scerbo
disclaims voting and investment power.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997, certain of our directors and officers made loans to us to
cover organizational expenses. We paid no interest on the loans and we repaid
all of the loans from the net proceeds of our
31
<PAGE> 34
initial public offering of common stock. We anticipate that our directors and
officers and the companies with which they are associated may have banking and
other transactions with us in the ordinary course of our business. Applicable
law and our policy require that any loans and commitments to lend to such
affiliated persons or entities included in such transactions or other
transactions with such affiliates be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unaffiliated parties of similar creditworthiness,
do not involve more than normal risk or present other unfavorable features to
us, and be on terms no less favorable to us than could be obtained on an
arms-length basis from unaffiliated independent third parties. During 1998,
Michigan Heritage Bank funded a term loan of $190,000 to a corporation of which
Mr. Scerbo is a shareholder, director, and officer.
Our Articles of Incorporation and bylaws provide for the
indemnification of our directors and officers, including reasonable legal fees,
incurred by such directors and officers while acting for or on our behalf as a
director or officer, subject to certain limitations. See "Description of Capital
Stock -- Indemnification of Directors and Officers." The scope of such
indemnification otherwise permitted by Michigan law may be limited in certain
circumstances by Federal law and regulations. We have purchased directors' and
officers' liability insurance for our directors and officers.
DESCRIPTION OF CAPITAL STOCK
Michigan Heritage Bancorp's authorized capital stock consists of
4,500,000 shares of common stock and 500,000 shares of preferred stock. On March
31, 1999, an aggregate of 1,265,000 shares of common stock were issued and
outstanding. We have not issued any shares of preferred stock. Michigan law
allows our Board of Directors to issue additional shares of stock up to the
total amount of common stock and preferred stock authorized without obtaining
the prior approval of the shareholders.
PREFERRED STOCK
Our Board of Directors is authorized to issue preferred stock, in one
or more series, from time to time, with such voting powers, full or limited but
not to exceed one vote per share, or without voting powers, and with such
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, as may be
provided in the resolution or resolutions adopted by the Board of Directors. The
authority of the Board of Directors includes, but is not limited to, the
determination or fixing of the following with respect to shares of such class or
any series thereof: (a) the number of shares and designation of such series; (b)
the dividend rate, the relation which such dividends shall bear to dividends
paid on any other class of stock or any other series of preferred stock, and
whether dividends are to be cumulative; (c) the amount per share, if any, which
holders shall be entitled to receive upon redemption of shares or upon voluntary
or involuntary liquidation, dissolution or winding up of Michigan Heritage
Bancorp; (d) the conversion or exchange rights, if any, of shares of such
series; (e) whether shares are to be redeemable, and, if so, whether redeemable
for cash, property or rights; (f) whether the shares shall be subject to the
operation of a purchase, retirement or sinking fund, and, if so, upon what
conditions; (g) the voting powers, full or limited, if any, of the shares; (h)
whether the issuance of any additional shares, or of any shares of any other
series, shall be subject to restrictions as to issuance, or as to the powers,
preferences or rights of any such other series; and (i) any other preferences,
privileges and powers and relative, participating, optional or other special
rights and qualifications, limitations or restrictions.
32
<PAGE> 35
COMMON STOCK
Dividend Rights. Subject to any prior rights of any holders of
preferred stock then outstanding, the holders of the common stock will be
entitled to dividends when, as and if declared by our Board of Directors out of
funds legally available therefor. Under Michigan law, dividends may be legally
declared or paid only if after the distribution the corporation can pay its
debts as they come due in the usual course of business and the corporation's
total assets equal or exceed the sum of its liabilities plus the amount that
would be needed to satisfy the preferential rights upon dissolution of any
holders of preferred stock then outstanding whose preferential rights are
superior to those receiving the distribution. Funds for the payment of dividends
by Michigan Heritage Bancorp are expected to be obtained primarily from
dividends of Michigan Heritage Bank. There can be no assurance that we will have
funds available for dividends, or that if funds are available, that dividends
will be declared by our Board of Directors.
Voting Rights. Subject to the rights, if any, of holders of shares of
preferred stock then outstanding, all voting rights are vested in the holders of
shares of common stock. Each share of common stock entitles the holder thereof
to one vote on all matters, including the election of directors. Shareholders of
Michigan Heritage Bancorp do not have cumulative voting rights.
Preemptive Rights. Holders of common stock do not have preemptive
rights.
Liquidation Rights. Subject to any rights of any preferred stock then
outstanding, holders of common stock are entitled to share on a pro rata basis
in the net assets of Michigan Heritage Bancorp which remain after satisfaction
of all liabilities.
Transfer Agent. Registrar and Transfer Company, Cranford, New Jersey,
serves as the transfer agent of our common stock.
DESCRIPTION OF CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
The following provisions of our Articles of Incorporation and bylaws
may delay, defer, prevent or make it more difficult for a person to acquire us
or to change control of our Board of Directors, thereby reducing our
vulnerability to an unsolicited takeover attempt.
Classification of the Board of Directors. Our Articles of Incorporation
provide for the Board of Directors to be divided into three classes of
directors, each class to be as nearly equal in number as possible, and our
bylaws provide that the number of directors shall be fixed by majority of the
Board at no fewer than five nor more than twelve. Pursuant to the Articles of
Incorporation, our directors have been divided into three classes. The term of
each class of director is three years.
Removal of Directors. Michigan law provides that, unless the Articles
of Incorporation otherwise provide, shareholders may remove a director or the
entire board of directors with or without cause. Our Articles of Incorporation
provide that a director may be removed only for cause and only by the
affirmative vote of the holders of a majority of the voting power of all our
shares entitled to vote generally in the election of directors.
33
<PAGE> 36
Filling Vacancies on the Board of Directors. Our Articles of
Incorporation provide that a new director chosen to fill a vacancy on our Board
of Directors will serve for the remainder of the full term of the class in which
the vacancy occurred.
Nominations of Director Candidates. Our bylaws include a provision
governing nominations of director candidates. Nominations for the election of
directors may be made by the Board of Directors, a nominating committee
appointed by the Board of Directors or any shareholder entitled to vote for
directors. In the case of a shareholder nomination, the bylaws provide certain
procedures that must be followed. The shareholder intending to nominate
candidates for election must deliver written notice containing certain specified
information to the Secretary of Michigan Heritage Bancorp at least ninety (90)
days prior to the anniversary date of the immediately preceding annual meeting
of shareholders.
Certain Shareholder Action. Our Articles of Incorporation do not permit
shareholder action to be taken by written consent by less than 100% of the total
shares entitled to vote. In addition, our bylaws do not permit our shareholders
to call a special meeting of shareholders or require that the Board call such a
special meeting. Michigan law permits shareholders holding 10% or more of
all of the shares entitled to vote at a meeting to request the Circuit Court of
the County in which our principal place of business or registered office is
located to order a special meeting of shareholders for good cause shown.
Increased Shareholder Vote for Certain Matters. Our Articles of
Incorporation provide that the affirmative vote or consent of holders not less
than seventy-five percent (75%) of the outstanding shares of common stock shall
be required: (a) to approve the merger or consolidation of us or any subsidiary;
(b) to authorize the sale or other disposition of all or substantially all of
our assets or any subsidiary; (c) to authorize the issuance or transfer by us or
any subsidiary of any of their respective voting securities to a beneficial
owner of five percent (5%) or more of our voting securities; (d) to approve our
dissolution; or (e) to amend our bylaws. Notwithstanding the foregoing, such 75%
voting requirement shall not be required if the proposal has been approved and
recommended by our Board of Directors. In addition, the affirmative vote of at
least 75% of the outstanding shares of common stock is required to amend the
sections of our Articles of Incorporation that provide for these supermajority
voting requirements.
CERTAIN ANTI-TAKEOVER PROVISIONS
Michigan Fair Price Act. Michigan's Fair Price Act establishes a
statutory scheme similar to the supermajority and fair price provisions found in
many corporate charters. The Fair Price Act provides that a supermajority vote
of 90% of the shareholders and no less than two-thirds of the votes of
noninterested shareholders must approve a "business combination." The Fair Price
Act defines a "business combination" to encompass any merger, consolidation,
share exchange, sale of assets, stock issue, liquidation or reclassification of
securities involving an "interested shareholder" or certain "affiliates." An
"interested shareholder" is generally any person who owns 10 percent or more of
the outstanding voting shares of the corporation. An "affiliate" is a person who
directly or indirectly controls, is controlled by, or is under common control
with a specified person.
The supermajority vote required by the Fair Price Act does not apply to
business combinations that satisfy certain conditions. These conditions include,
among others: (a) the purchase price to be paid for the shares of the
corporation in the business combination must be at least equal to the highest of
either (i) the market value of the shares, or (ii) the highest per share price
paid by the interested
34
<PAGE> 37
shareholder within the preceding two-year period or in the transaction in which
the shareholder became an interested shareholder, whichever is higher; and (b)
once becoming an interested shareholder, the person may not become the
beneficial owner of any additional shares of the corporation except as part of
the transaction which resulted in the interested shareholder becoming an
interested shareholder or by virtue of proportionate stock splits or stock
dividends. The requirements of the Fair Price Act do not apply to business
combinations with an interested shareholder that the board of directors has
approved or exempted from the requirements of the Fair Price Act by resolution
prior to the time that the interested shareholder first became an interested
shareholder.
Control Share Acquisitions. Michigan law regulates the acquisition of
"control shares" of large public Michigan corporations, including us. A control
share acquisition is defined as an acquisition of shares by an acquiror which,
when combined with other shares held by that person or entity, would give the
acquiror voting power, alone or as part of a group, at or above any of the
following thresholds: 20 percent, 33-1/3 percent or 50 percent. Under Michigan
law, an acquiror may not vote "control shares" unless the corporation's
disinterested shareholders (defined to exclude the acquiring person, officers of
the target corporation, and directors of the target corporation who are also
employees of the corporation) vote to confer voting rights on the control
shares. Michigan law does not affect the voting rights of shares owned by an
acquiring person prior to the control share acquisition. Michigan law entitles
corporations to redeem control shares from the acquiring person under certain
circumstances. In other cases, Michigan law confers dissenters' right upon all
of the corporation's shareholders except the acquiring person.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our bylaws provide that we shall indemnify our present and past
directors, executive officers, and such other persons as the Board of Directors
may authorize, to the fullest extent permitted by law. The bylaws contain
indemnification provisions concerning third party actions as well as actions in
our right. The bylaws provide that we shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in our right) by reason of the fact
that he or she (a) is or was a director or officer of us, or (b) while serving
as such a director or officer, is or was serving at our request as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise, whether for
profit or not, against expenses (including attorney's fees), judgments,
penalties, fees and amounts paid in settlement actually and reasonably incurred
by him or her in connection with such action, suit or proceeding if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to our best interests or the best interests of our shareholders,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his or her conduct was unlawful.
With respect to derivative actions, the bylaws provide that we shall
indemnify any person who was or is a party to or is threatened to be made a
party to any threatened, pending or completed action or suit by or in our right
to procure a judgment in its favor by reason of the fact that he or she (a) is
or was a director or officer of us, or (b) while serving as such a director or
officer, is or was serving at our request as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, whether for profit or
not, against expenses (including attorney's fees) and amounts paid in settlement
actually and reasonably incurred by him or her in connection with the action or
suit if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to our best interests or the best interests of
our shareholders. No
35
<PAGE> 38
indemnification is provided in our bylaws in respect of any claim, issue or
matter in which such person has been found liable to us except to the extent
that a court of competent jurisdiction determines upon application that, despite
the adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
LIMITATION OF DIRECTOR LIABILITY
Michigan law permits corporations to limit the personal liability of
their directors in certain circumstances. Our Articles of Incorporation provide
that our directors shall not be personally liable to us or to our shareholders
for monetary damages for breach of the director's fiduciary duty. However, they
do not eliminate or limit the liability of a director for any breach of a duty,
act or omission for which the elimination or limitation of liability is not
permitted by Michigan law, currently including, without limitation, the
following: (i) breach of the director's duty of loyalty to us or to our
shareholders; (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iii) illegal loans,
distributions of dividends or assets, or stock purchases as described in Section
551(1) of the Michigan Business Corporation Act; and (iv) transactions from
which the director derived an improper personal benefit.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market and
quotations are reported on the OTC Bulletin Board under the symbol "MHBC." There
were approximately 70 holders of record as of December 31, 1998. Included among
the 70 holders of record are investment firms with an undetermined number of
clients owning our common stock. We distributed a 10% common stock dividend on
June 15, 1998. We have not distributed cash dividends.
The following table sets forth the quarterly high and low bid
quotations per share during each of the four quarters in 1998 and 1997 (since
the date of our public offering). These quotations reflect historical
inter-dealer prices without retail mark-up, mark-down or commission, may not
represent actual transactions, and are not adjusted to reflect the 10% stock
dividend paid in the second quarter of 1998.
<TABLE>
<CAPTION>
HIGH/LOW
--------
<S> <C> <C> <C>
1999 3rd Quarter* $ /$
2nd Quarter $7.75/$5.75(1)
1st Quarter $ 9.88/$ 6.75(1)
1998 4th Quarter $10.50/$ 8.00(1)
3rd Quarter $12.00/$ 9.00(1)
2nd Quarter $14.50/$12.00(2)
1st Quarter $14.50/$10.75(2)
1997 4th Quarter $13.00/$10.00(2)
3rd Quarter $13.25/$ 9.25(2)
2nd Quarter $10.75/$ 9.25(2)
1st Quarter $10.75/$ 9.75(2)
* Through July , 1999
</TABLE>
36
<PAGE> 39
(1) As adjusted to reflect the 10% stock dividend paid in
the second quarter of 1998.
(2) Not adjusted to reflect the 10% stock dividend paid
in the second quarter of 1998.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and file reports and other information with the Securities
and Exchange Commission as required by the Exchange Act. This prospectus
constitutes a part of a Registration Statement filed by Michigan Heritage
Bancorp with SEC under the Securities Act of 1933. This prospectus omits certain
of the information contained in the Registration Statement, and we refer you to
the Registration Statement and related exhibits for further information with
respect to Michigan Heritage Bancorp and the securities offered hereby. Any
statements contained in this prospectus concerning the provisions of any
document are not necessarily complete, and in such instance we refer you to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the SEC. Each such statement is qualified in its entirety
by such reference.
You can obtain and copy the Registration Statement, including the
Exhibits filed as a part thereof, at the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and Room 1400, 75 Park Place, New York New York
10007. You also can obtain copies of such materials at prescribed rates by
writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the SEC maintains a World Wide Web site
that contains reports, proxy and information statements that are filed
electronically with the SEC. The address of the site is http://www.sec.gov.
EXPERTS
Our consolidated financial statements included in this Registration
Statement have been audited by Plante & Moran LLP, independent accountants, for
the periods indicated in their report thereon appearing in this Registration
Statement. The consolidated financial statements audited by Plante & Moran LLP
have been included in this Registration Statement in reliance on their report
given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the common stock offered hereby is being passed upon
for us by our legal counsel, Dykema Gossett PLLC, 400 Renaissance Center,
Detroit, Michigan 48243.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. We intend such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Reform Act of 1995, and are including this statement for purposes of these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. Our ability to
predict results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on our operations
and future prospects include, but are not limited to, changes in: interest
rates, general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, the quality or composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in our market area and accounting principles,
policies and guidelines. You should consider these risks and uncertainties in
evaluating forward-looking statements and you should not place undue reliance on
such statements. Further information concerning us and our business, including
additional factors that could materially affect our financial results, are
included in our filings with the Securities and Exchange Commission.
37
<PAGE> 40
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998
Independent Auditors' Report....................................................................................F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997....................................................F-2
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996......................F-3
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996......................F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998,
1997 and 1996..........................................................................................F-5
Notes to Consolidated Financial Statements......................................................................F-6
FINANCIAL STATEMENTS FOR THE THREE-MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
Consolidated Balance Sheets as of March 31, 1999 and 1998......................................................F-22
Consolidated Statements of Earnings for the three-months ended March 31, 1999 and 1998.........................F-23
Consolidated Statements of Cash Flows for the three-months ended March 31, 1999 and 1998.......................F-24
Consolidated Statements of Changes in Stockholders' Equity for the three-months ended
March 31, 1999 and 1998................................................................................F-25
Notes to Consolidated Financial Statements.....................................................................F-26
</TABLE>
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
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, 1998 and 1997 and the related
consolidated statements of changes in stockholders' equity, operations and cash
flows for each year in the three-year period ended December 31, 1998. 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 audits 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, 1998 and 1997
and the consolidated results of their operations and their cash flows for each
year in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/S/ PLANTE & MORAN LLP
Plante & Moran LLP
Birmingham, Michigan
January 20, 1999
F-1
<PAGE> 42
MICHIGAN HERITAGE BANCORP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(000S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and Cash Equivalents
Cash and due from banks........................................................ $ 277 $ 283
Interest-bearing deposits with other banks .................................... 3,781 2,600
Federal funds sold............................................................. 4,200 1,764
-------- -------
Total cash and cash equivalents............................................ 8,258 4,647
Investment Securities Held to Maturity (Note 2)..................................... -- 8,565
Securities Available for Sale (Note 2).............................................. 8,233 5,236
Loans (Note 3)
Commercial..................................................................... 75,968 30,506
Direct financing leases (Note 5)............................................... 1,042 --
Real estate .................................................................. 3,444 1,703
Installment .................................................................. 137 118
Home equity.................................................................... 1,010 278
-------- -------
Total loans................................................................ 81,601 32,605
Less allowance for loan losses (Note 4)........................................ (1,816) (467)
-------- -----
Net loans.................................................................. 79,785 32,138
Bank Premises and Equipment (Note 6)................................................ 453 384
Property on Operating Lease (Note 7)................................................ 2,332 --
Deferred Income Taxes (Note 9)...................................................... 590 --
Interest Receivable and Other Assets................................................ 616 468
-------- -------
Total assets............................................................... $100,267 $51,438
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 8):
Interest-bearing........................................................... $ 86,612 $40,403
Noninterest-bearing ...................................................... 1,042 325
-------- -------
Total deposits............................................................. 87,654 40,728
Short-term borrowings.......................................................... 1,750 --
Interest payable and other liabilities......................................... 822 565
-------- -------
Total liabilities.......................................................... 90,226 41,293
Stockholders' Equity
Preferred stock - No par value: Authorized - 500,000 shares;
Issued and outstanding - None.............................................. -- --
Common stock - No par value (Note 13):
Authorized - 4,500,000 shares; Issued and outstanding - 1,265,000
shares in 1998 and 1,150,000 shares in 1997................................ 12,482 10,815
Accumulated deficit............................................................ (2,450) (670)
Accumulated other comprehensive income (Note 1)................................ 9 --
-------- -------
Total stockholders' equity................................................. 10,041 10,145
-------- -------
Total liabilities and stockholders' equity................................. $100,267 $51,438
======== =======
</TABLE>
F-2
<PAGE> 43
MICHIGAN HERITAGE BANCORP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(000S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest Income
Interest and fees on loans............................ $ 5,051 $ 1,132 $ --
Interest and dividends on investments - Taxable....... 685 474 --
Interest on federal funds sold........................ 224 211 --
Interest on deposits with other banks................. 146 103 1
Total interest income............................. 6,106 1,920 1
Interest Expense - Interest on deposits.................... 3,666 1,024 --
------- ------- --
Interest Income - Before provision for loan losses......... 2,440 896 1
Provision for Loan Losses (Note 4)......................... 1,349 467 --
------- ------- --
Net Interest Income................................... 1,091 429 1
Other Income
Service charges on deposit accounts................... 72 6 --
Operating lease rental income (Note 7)................ 515 ------- --
------- -- --
Total other income................................ 587 6 --
Other Expenses
Salaries and employee benefits (Note 12).............. 901 512 43
Occupancy of bank premises (Note 10).................. 125 73 14
Processing............................................ 45 26 --
Supplies.............................................. 44 23 --
Marketing............................................. 115 112 --
Equipment expense..................................... 118 86 --
Depreciation on property for operating lease.......... 443 -- --
Professional fees..................................... 162 72 --
Amortization.......................................... 4 78 --
Other expenses........................................ 99 55 12
------- ------- -----
Total other expenses.............................. 2,056 1,037 69
------- ------- -----
Loss - Before income taxes and cumulative effect of change
in accounting principle............................... (378) (602) (68)
Income Tax Benefit (Note 9)................................ (331) -- --
------- ------- -----
Net Loss - Before cumulative effect of change in
accounting principle.................................. (47) (602) (68)
Cumulative Effect of Expensing Organizational Costs -
Net of tax benefit of $34............................... (66) -- --
------- ------- -----
Net Loss................................................... $ (113) $ (602) $ (68)
======= ======= =====
Loss Per Share (Note 18)
Before cumulative effect of change in
accounting principal................................. $ (0.04) $ (0.57) $ --
Net loss................................................ $ (0.09) $ (0.57) $ --
Diluted Loss Per Share (Note 18)
Before cumulative effect of change in
accounting principal................................. $ (0.04) $ (0.57) $ --
Net loss................................................ $ (0.09) $ (0.57) $ --
</TABLE>
F-3
<PAGE> 44
MICHIGAN HERITAGE BANCORP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss ............................................................. $ (113) $ (602) $ (68)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization .................................... 545 73 --
Provision for loan losses ........................................ 1,349 467 --
Deferred income taxes ............................................ (580) -- --
Cumulative effect of change in accounting principle .............. 66 -- --
Amortization and accretion of securities ......................... (83) (253) --
Changes in assets and liabilities:
Increase in accrued interest receivable and other assets ......... (229) (324) (144)
Increase in accrued interest payable and other liabilities ....... 257 508 57
-------- -------- --------
Net cash provided by (used in) operating activities ...... 1,212 (131) (155)
Cash Flows from Investing Activities
Proceeds from maturities of available-for-sale securities .............. 16,000 -- --
Purchase of available-for-sale securities .............................. (18,935) (5,236) --
Proceeds from maturities of held-to-maturity securities ................ 8,600 7,600 --
Purchase of held-to-maturity securities ................................ -- (15,912) --
Increase in loans ...................................................... (48,996) (32,605) --
Operating lease equipment .............................................. (2,775) -- --
Premises and equipment expenditures .................................... (171) (424) (33)
-------- -------- --------
Net cash used in investing activities .................... (46,277) (46,577) (33)
Cash Flows from Financing Activities
Net increase in interest-bearing and noninterest-bearing
demand accounts .................................................. 7,448 2,395 --
Net increase in time certificates .................................... 39,478 38,333 --
Proceeds from short-term borrowings .................................. 1,750 -- --
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 ................ 48,676 51,288 255
-------- -------- --------
Net Increase in Cash and Cash Equivalents ................................. 3,611 4,580 67
Cash and Cash Equivalents - Beginning of year ............................. 4,647 67 --
-------- -------- --------
Cash and Cash Equivalents - End of year ................................... $ 8,258 $ 4,647 $ 67
======== ======== ========
Supplemental Cash Flow and Noncash Information
Cash paid for:
Interest ......................................................... $ 3,656 $ 642 $ --
Income taxes ..................................................... 230 -- --
Stock dividend (Note 14) ............................................. 1,667 -- --
</TABLE>
F-4
<PAGE> 45
MICHIGAN HERITAGE BANCORP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(000S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON OTHER
SHARES CAPITAL ACCUMULATED COMPREHENSIVE
OUTSTANDING STOCK DEFICIT INCOME TOTAL
----------- ------- ----------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balance - Inception................... -- $ -- $ -- $ -- $ --
Issuance of common stock.............. 1 -- -- -- --
Comprehensive loss - 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)
Comprehensive loss - Net loss......... -- -- (602) -- (602)
-- -- -------- -- -------
Balance - December 31, 1997........... 1,150,000 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 of
$5 (Note 1)...................... -- -- -- 9 9
-
Total comprehensive loss.............. (104)
Stock dividend (Note 13).............. 115,000 1,667 (1,667) -- --
------- ------- -------- ----------- -------
Balance - December 31, 1998........... 1,265,000 $12,482 $ (2,450) $ 9 $10,041
========= ======= ======== =========== =======
</TABLE>
F-5
<PAGE> 46
MICHIGAN HERITAGE BANCORP, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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 consolidated financial statements and accompanying notes. Actual results
could differ from those 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 18 percent and 16 percent of total loans at December 31,
1998 and 1997, respectively. 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. 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 is 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 in the process of
collection.
Lease Financing - The Bank uses the finance method of accounting for
direct lease contracts. Under this method of accounting, a receivable is
recorded for the present value of lease payments due and estimated residual
values. Lease income, represented by the excess of the total contract receivable
plus estimated equipment residual value over the cost of the equipment, is
recorded over the terms of the lease at a level rate of return on the
unrecovered net investment. Operating Lease - Certain equipment is leased under
an operating lease that expires in two years. There is a renewal option that may
extend the operating lease an additional 12 months. Lease income is recognized
straight-line over the term of the lease as payments are due. Depreciation on
leased assets is computed using the straight-line method over the lease term to
the Bank's estimate of the residual value of the property at the end of the
lease.
F-6
<PAGE> 47
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 commitments, and current and anticipated economic conditions that may
affect the borrower's ability to pay. SUBJECT TO THE EXCEPTIONS SET FORTH IN THE
NEXT SENTENCE, A LOAN IS CHARGED-OFF IF IT BECOMES 90 DAYS OR MORE PAST DUE. A
LOAN 90 DAYS OR MORE PAST DUE MAY NOT BE CHARGED-OFF IF (A) A SALE OF THE
UNDERLYING COLLATERAL IS PENDING, (B) THE OBLIGATION BECOMES GUARANTEED BY A
THIRD PARTY, (C) ADDITIONAL COLLATERAL IS ADDED TO SECURE THE LOAN, OR (D) THE
LOAN HAS BECOME PAST DUE BECAUSE OF AN INTERRUPTION IN THE SERVICING OF A LOAN
BY A THIRD PARTY.
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.
Short-term Borrowings - The Bank includes federal funds purchased in
short-term borrowings. Federal funds purchased generally mature in one to four
days.
Earnings Per Share - Earnings per share is based on the weighted
average number of shares outstanding in each period and is retroactively
adjusted for stock dividends. Fully diluted earnings per share are based on
weighted average shares outstanding assuming the exercise of the dilutive stock
options. The effects of unexercised stock options in 1998 and 1997 are not
dilutive and have not been considered.
Stock Options - The Corporation has two stock option plans (see Note
11). 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. Other Comprehensive Income - The Corporation adopted
SFAS No. 130, Reporting Comprehensive Income, as of January 1, 1998. Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain changes in assets and liabilities, however,
such as unrealized gains and losses on available-for-sale securities, along with
net income, are components of comprehensive income.
The adoption of SFAS No. 130 had no effect on the Corporation's net
income or stockholders' equity. Accumulated other comprehensive income at
December 31, 1998 is comprised solely of unrealized gains on available-for-sale
securities, net of tax of $5,000.
Accounting Change - In the fourth quarter of the year ended December
31, 1998, the Corporation adopted Statement of Position (SOP) 98-5, Reporting on
the Costs of Start-up Activities. This SOP requires that the costs of start-up
activities, including organization costs, should be expensed as incurred. The
adoption of this SOP resulted in the Corporation recording a pretax charge of
$100,000 and is reflected as a reduction in other assets.
Reclassifications - Certain prior year amounts have been reclassified
to conform to the current year presentation.
F-7
<PAGE> 48
NOTE 2 - SECURITIES
The amortized cost and estimated market value of investment securities
are as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available-for-sale securities -
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies........................... $8,219 $ 22 $ 8 $8,233
1997
--------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Held-to-maturity securities -
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies........................... $8,565 $ 2 $ -- $8,567
Available-for-sale securities -
Corporate bonds............................. $5,236 $ -- $ -- $5,236
</TABLE>
The amortized cost and estimated market value of securities at December
31, 1998, 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.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
--------------------------------------
AMORTIZED ESTIMATED
COST MARKET VALUE
--------- ------------
<S> <C> <C>
Due in one year or less.................................. $5,207 $ 5,199
Due after one year through five years.................... -- --
Due after five years through ten years................... 2,011 2,014
Due after ten years...................................... 1,001 1,020
------ -------
Total................................................. $8,219 $ 8,233
====== =======
</TABLE>
Securities having a carrying and market value of $2,392,000 and
$2,390,000, respectively, were pledged at December 31, 1998 for purposes
required by law.
F-8
<PAGE> 49
NOTE 3 - LOANS
No directors or executive officers of the Corporation were loan
customers of the subsidiary bank during 1998. Final loan maturities and rate
sensitivity of the loan portfolio at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
WITHIN ONE ONE TO FIVE AFTER FIVE
YEAR YEARS YEARS TOTAL
---- ----- ----- -----
<S> <C> <C> <C> <C>
Commercial........................................ $28,262 $47,344 $ 362 $75,968
Direct financing lease............................ 114 565 363 1,042
Real estate....................................... 607 2,120 717 3,444
Installment....................................... 58 79 -- 137
Home equity....................................... 373 539 98 1,010
------- ------- ------- -------
Total........................................ $29,414 $50,647 $ 1,540 $81,601
======= ======= ======= =======
Loans at fixed interest rates..................... $25,427 $50,143 $ 1,392 $76,962
Loans at variable interest rates.................. 3,987 504 148 4,639
------- ------- ------- -------
Total........................................ $29,414 $50,647 $ 1,540 $81,601
======= ======= ======= =======
</TABLE>
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the activity in the allowance for possible loan losses
(ALL) is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance - Beginning of year...................... $ 467 $ --
Provision charged to operations.................. 1,349 467
Loan losses...................................... -- --
Loan loss recoveries............................. -- --
------ ------
Balance - End of year............................ $1,816 $ 467
====== ======
As a percent of total loans...................... 2.23% 1.43%
</TABLE>
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 recorded investment in impaired loans was $2,096,000 and $0 at
December 31, 1998 and 1997, respectively. The average recorded investment in
impaired loans during 1998 was insignificant. Included in the impaired loan
total were $2,096,000 of impaired loans for which the specific allowance for
possible loan losses was $820,000 at December 31, 1998.
F-9
<PAGE> 50
NOTE 5 - DIRECT FINANCING LEASES
The following lists the components of the net investment in direct
financing leases as of December 31, 1998:
<TABLE>
<S> <C>
Minimum lease payments receivable................................. $ 1,164
Estimated residual values of leased property (unguaranteed)....... 211
Less unearned income.............................................. (333)
-------
Net investment in direct financing leases......................... $ 1,042
=======
</TABLE>
The following is a schedule by years of minimum future rentals on
direct financing leases as of December 31, 1998:
<TABLE>
<S> <C>
1999......................... $ 166
2000......................... 166
2001......................... 166
2002......................... 166
2003......................... 166
Thereafter................... 334
-------
Total........................ $ 1,164
=======
</TABLE>
NOTE 6 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1998 and 1997 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Buildings and improvements................ $ 42 $ 42
Furniture and equipment ................. 586 415
---- ----
Total................................ 628 457
Less accumulated depreciation ............ 175 73
---- ----
Net carrying amount....................... $453 $384
====
</TABLE>
NOTE 7 - PROPERTY FOR OPERATING LEASES
The Bank leased equipment to a customer under an operating lease in
1998. The lease expires in 2000 and minimum future rentals on the noncancelable
lease at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........... $1,236
2000........... 721
------
Total...... $1,957
======
</TABLE>
F-10
<PAGE> 51
NOTE 8 - DEPOSITS
The following is a summary of the distribution of deposits at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Noninterest-bearing - Demand............. $ 1,042 $ 325
======= =======
Interest-bearing:
NOW accounts......................... $ 6,022 $ 981
Savings.............................. 10 111
Money market demand.................. 2,769 978
Time:
$100,000 and over............... 23,769 11,256
Under $100,000.................. 54,042 27,077
------- -------
Total interest-bearing................... $86,612 $40,403
======= =======
</TABLE>
The remaining maturities of time deposits at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
UNDER $100,000 AND
$100,000 AND OVER
-------- ------------
<S> <C> <C>
1999.................... $ 42,135 $ 16,614
2000.................... 8,487 2,497
2001.................... 3,105 2,578
2002.................... 198 --
2003.................... 117 2,080
-------- --------
Total............... $54,042 $ 23,769
======== ========
</TABLE>
NOTE 9 - INCOME TAXES
Michigan Heritage Bancorp, Inc. and its subsidiary file a consolidated
federal income tax return. The following is a summary of the provision for
income taxes for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $ 230 $ -- $ --
Deferred credit (595) -- --
------ ---- -----
Total income tax benefit (365) -- --
Less amount allocated to
cumulative effect 34 -- --
------ ----- -----
Net income tax benefit $ (331) $ -- $ --
====== ===== =====
</TABLE>
F-11
<PAGE> 52
The following is a reconciliation of the statutory federal income tax
benefit to the Corporation's effective tax benefit for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax at statutory rate............. $ (129) $(204) $ (21)
Change in the valuation allowance........ (225) 204 21
Other.................................... 23 -- --
------ ----- -----
Net income tax benefit................... $(331) $ -- $ --
====== ===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net operating loss carry forward........... $ 62 $ (62) $ --
Provision for loan loss.................... (444) (145) --
Start-up costs............................. 8 (13) (21)
Organization costs......................... (27) -- --
Accretion.................................. (3) 14 --
Original issue discount.................... (1) 5 --
Lease financing............................ 50 -- --
Other...................................... (15) (3) --
Increase (decrease) in valuation allowance (225) 204 21
------ ----- --
Total deferred income tax benefit...... $ (595) $ -- $ --
====== ===== =====
</TABLE>
The temporary differences that comprise deferred tax assets and
liabilities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward...................... $ -- $ 62
Provision for loan loss.............................. 589 145
Start-up costs....................................... 26 34
Organizational costs................................. 27 --
Other................................................ 18 3
----- -----
Total deferred tax assets............................ 660 244
Valuation allowance for deferred tax assets............... -- (225)
Deferred tax liabilities:
Accretion............................................ (11) (14)
Lease financing...................................... (50) --
Unrealized gain on securities........................ (5) --
Original issue discount.............................. (4) (5)
----- -----
Total deferred tax liabilities................... (70) (19)
----- -----
Net deferred tax asset.................................... $ 590 $ --
===== =====
</TABLE>
A valuation allowance for deferred tax assets is required when it is more
likely than not that some or all of the deferred tax assets will not be
realized. From its inception through 1997, a valuation allowance for the full
amount of the deferred tax asset had been recognized because of the losses the
Bank had incurred and uncertainty as to the amount of taxable income that
could be generated in future years. Due in large part to the growth in the
Bank's deposit base and its loan portfolio, management concluded that it could
generate future taxable income sufficient to enable the Bank to realize
all of its deferred tax assets within the carryforward period. Accordingly, no
valuation allowance was recorded at December 31, 1998.
F-12
<PAGE> 53
NOTE 10 - OPERATING LEASE
The Corporation has entered into a lease commitment for an office
building. Rental expense charged to operations was $45,000 and $35,000 for the
years ended December 31, 1998 and 1997, respectively. In 1998, the Corporation
entered into two additional lease commitments for office buildings, which begin
in 1999. The future minimum lease payments are as follows:
<TABLE>
<S> <C>
1999.......... $ 204
2000.......... 326
2001.......... 326
2002.......... 304
2003.......... 281
------
Total..... $1,441
======
</TABLE>
NOTE 11 - STOCK OPTION PLANS
The Corporation has two stock option plans. Options may be granted to
certain directors and employees at not less than the market price of the
Corporation's stock on the date of the grant. The options granted are
exercisable immediately, or vest over one to three years. Under the director
plan, a maximum of 66,000 options to purchase shares may be granted that expire
in seven years, subject to certain cancellation provisions related to service.
Under the employee plan, a maximum of 44,000 options to purchase shares may be
granted that expire in 10 years, subject to certain cancellation provisions
related to employment. At December 31, 1998, 9,900 shares under the director and
3,400 shares under the employee plan were available for future option grants.
The following table summarizes stock option transactions and the related average
exercise prices for the last two years.
<TABLE>
<CAPTION>
1998 1997
---------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year.............. 93,500 $ 9.10 -- $ --
Options granted....................................... 3,200 10.24 93,500 9.10
Options exercised..................................... -- -- -- --
Options forfeited..................................... -- -- -- --
Options outstanding at end of year.................... 96,700 9.14 93,500 9.10
Exercisable at end of year............................ 69,025 9.10 55,075 9.10
Weighted average estimated fair value of options
granted during the year........................ $ 4.35 $ 4.29
</TABLE>
F-13
<PAGE> 54
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model. The following weighted average
assumptions were used to estimate the fair value of the options granted for the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Dividend yield -- --
Expected average life (years) 10.0 7.9
Volatility 30% 28%
Risk-free interest rate 5.8% 6.0%
</TABLE>
At December 31, 1998, options outstanding have exercise prices between
$10.00 and $11.38 per share and a weighted average remaining contractual life of
6.4 years.
The Corporation accounts for its option plans using the intrinsic value
method. The table below displays pro forma amounts for net loss and net loss per
common share assuming the fair value method of accounting had been used, which
reflects additional compensation cost for option grants based on the value of
the options granted:
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
NET BASIC DILUTED NET BASIC DILUTED
LOSS EPS EPS LOSS EPS EPS
---- ---- ------- ---- ----- -------
<S> <C> <C> <C> <C> <C> <C>
As reported............. $(113) $(0.09) $(0.09) $(602) $(0.57) $(0.57)
Pro forma............... $(153) $(0.12) $(0.12) $(839) $(0.80) $(0.80)
</TABLE>
The effect of unexercised stock options is antidilutive and has not
been considered in the diluted EPS calculation.
NOTE 12 - 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. Employer contributions were accrued for the
year ended December 31, 1998 in the amount of $12,000. There were no employer
contributions during the year ended December 31, 1997.
NOTE 13 - COMMON STOCK
In April 1998, the Corporation declared a 10 percent stock dividend.
Accordingly, all applicable per share amounts for periods presented have been
retroactively adjusted to reflect the transaction.
NOTE 14 - FINANCIAL INSTRUMENTS
Fair Values of Financial Instruments - The carrying amounts and
estimated fair values 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 of the Corporation. Many of the assets and liabilities subject
to disclosure requirements are not actively traded, requiring fair value to be
estimated by management.
F-14
<PAGE> 55
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.
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Assets:
Cash and equivalents........................... $ 8,258 $ 8,258 4,647 $ 4,647
Securities..................................... 8,233 8,233 13,801 13,801
Loans ...................................... 79,785 80,302 32,138 32,323
Other ...................................... 476 476 304 304
Liabilities:
Deposits....................................... 87,654 87,994 40,728 40,830
Short-term borrowings.......................... 1,750 1,750 -- --
Other ...................................... 393 393 382 382
</TABLE>
The terms 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, federal
funds purchased and accrued interest receivable and payable. The following
methods and assumptions were used by Michigan Heritage Bancorp, Inc. to estimate
the fair values 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 values
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 values 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 values 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, are 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 payment
of a fee. Fees from issuing these commitments to extend credit are recognized
over the period to
F-15
<PAGE> 56
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 commitments 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 $49,200,000 and $12,425,000 at December 31, 1998 and 1997,
respectively, on which $22,700,000 and $3,901,000, respectively, were
outstanding at year end and were included in the consolidated balance sheet.
NOTE 15 - 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 16 - 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 1998 and 1997, since the Bank is considered a de novo or start-up
bank, the minimum Tier 1 leverage ratio is 9.0 percent. Normally, to be
considered adequately capitalized, the Bank must maintain a Tier 1 leverage
ratio of 4.0 percent. As of December 31, 1998, the most recent notification from
the Bank's regulators 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 percent, 6.0 percent and 5.0
percent, respectively. There are no conditions or events since that notification
that management believes have changed the Bank's capital category.
F-16
<PAGE> 57
Capital and risk-based capital and leverage ratios for the Bank are
shown below:
<TABLE>
<CAPTION>
AMOUNTS RATIO
------- -----
<S> <C> <C>
December 31, 1998:
Total Capital (to Risk-weighted Assets) $9,400 10.9%
Tier 1 Capital (to Risk-weighted Assets) $8,321 9.6%
Tier 1 Capital (to Average Assets) $8,321 9.1%
December 31, 1997:
Total Capital (to Risk-weighted Assets) $7,614 21.0%
Tier 1 Capital (to Risk-weighted Assets) $7,162 19.8%
Tier 1 Capital (to Average Assets) $7,162 30.0%
</TABLE>
NOTE 17 - 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
noninterest income (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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets:
Cash and cash equivalents
Cash and deposits at subsidiary bank.......................... $ 1 $ 4
Interest-bearing deposits with other banks.................... 1,073 286
-------- -------
Total cash and equivalents................................ 1,074 290
-------- -------
Investment securities held to maturity............................. -- 2,579
Investment in Subsidiary........................................... 8,701 7,162
Interest receivable and other assets............................... 266 114
-------- -------
Total assets.............................................. $ 10,041 $10,145
======== =======
Liabilities and Stockholders' Equity:
Liabilities - interest payable and other liabilities............... $ -- --
Stockholders' equity............................................... 10,041 10,145
-------- -------
Total liabilities and stockholders' equity................ $ 10,041 $10,145
======== =======
</TABLE>
F-17
<PAGE> 58
The condensed statement of operations for the years ended December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating income:
Interest and dividends on investments - taxable........................ $ 106 $ 95
Interest on deposits with other banks.................................. 25 26
Total operating income............................................ 131 121
Operating expenses:.................................................... 39 35
------ ------
Income before income taxes, equity in loss of subsidiary
and cumulative effect of change in accounting principle........... 92 86
Income tax expense..................................................... 14 --
-- --
Income before equity in loss of subsidiary and cumulative
effect of change in accounting principle.......................... 78 86
Equity in loss of subsidiary........................................... (125) (688)
------ ------
Loss before cumulative effect of change in accounting principle........ (47) (602)
Cumulative effect of expensing organization costs, net of tax
effect of $34..................................................... (66) --
------ --
Net Loss............................................................... $(113) $ (602)
====== ======
</TABLE>
F-18
<PAGE> 59
The condensed statement of cash flows for the years ended December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss.......................................................... $ (113) $ (602)
Adjustments to reconcile net loss to net cash from operating
activities:
Equity in loss of subsidiary.................................. 125 688
Change in accounting principle................................ 66 --
Amortization and accretion of securities...................... (21) (90)
Amortization of organizational costs.......................... 20 19
Net change in other assets.................................... (243) 44
Net change in other liabilities .............................. -- (57)
Net cash provided by (used in) operating activities............... (166) 2
------ -------
Cash Flows from Investing Activities
Investment in bank subsidiary..................................... (1,650) (7,850)
Proceeds from maturities of held-to-maturity securities........... 2,600 600
Purchase of held-to-maturity securities........................... -- (3,089)
Net cash provided by (used in) investing activities.................... 950 (10,339)
------ -------
Cash Flows from Financing Activities
Proceeds from related party notes payable......................... -- 10
Payments on related party notes payable........................... -- (265)
Proceeds from public stock offering............................... -- 10,815
Net cash provided by financing activities.............................. -- 10,560
------ ------
Net Increase in Cash and Cash Equivalents.............................. 784 223
Cash and Cash Equivalents - Beginning of year.......................... 290 67
------ -------
Cash and Cash Equivalents - End of year................................ $1,074 $ 290
====== =======
</TABLE>
F-19
<PAGE> 60
NOTE 18 - EARNINGS PER SHARE
Basic earnings per share data is the amount of earnings for the period
available to each share of common stock outstanding during the reporting period.
Diluted earnings per share reflects the earnings available to each share of
common stock outstanding during the reporting period adjusted for dilutive
potential common shares for stock options outstanding. In 1998 and 1997,
outstanding stock options have not been included in the calculation of diluted
weighted average shares outstanding because they would be antidilutive.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss before cumulative effect of change in
accounting principle................................. $ (47) $ (602) $ (68)
Cumulative effect of expensing organizational
costs, net of tax benefit of $34..................... (66) -- --
---------- ---------- -------
Net loss.................................................. $ (113) $ (602) $ (68)
========== ========== =======
Average common shares outstanding...................... 1,265,000 1,051,329 1
Loss per share before cumulative effect of change
in accounting
principle:
Basic............................................... $ (0.04) $ (0.57) $ --
Diluted............................................. $ (0.04) $ (0.57) $ --
Cumulative effect per share of expensing organizational
costs, net of tax benefit of $34:
Basic............................................... $ (0.05) $ -- $ --
Diluted............................................. $ (0.05) $ -- $ --
Loss per share:
Basic............................................... $ (0.09) $ (0.57) $ --
Diluted............................................. $ (0.09) $ (0.57) $ --
</TABLE>
F-20
<PAGE> 61
FINANCIAL STATEMENTS FOR THE THREE-MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
F-21
<PAGE> 62
MICHIGAN HERITAGE BANCORP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31
----------------------
ASSETS 1999 1998
--------- --------
<S> <C> <C>
Cash and 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>
F-22
<PAGE> 63
MICHIGAN HERITAGE BANCORP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(000S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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
</TABLE>
- ------------------
* Common shares outstanding and per share amounts have been restated for 1998 to
reflect a 10 percent stock dividend declared on April 16, 1998.
F-23
<PAGE> 64
MICHIGAN HERITAGE BANCORP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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>
F-24
<PAGE> 65
MICHIGAN HERITAGE BANCORP, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(000S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 TO MARCH 31, 1999
UNREALIZED
GAIN OR LOSS
ON SECURITIES
COMMON CAPITAL 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 -- -- 0,815
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>
F-25
<PAGE> 66
MICHIGAN HERITAGE BANCORP, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(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 shares 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.
F-26
<PAGE> 67
500,000 SHARES
COMMON STOCK
[LOGO]
MICHIGAN HERITAGE
BANCORP, INC.
Prospectus
July __, 1999
<PAGE> 68
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant's bylaws provide that the registrant shall indemnify its
present and past directors, executive officers, and such other persons as the
Board of Directors may authorize, to the full extent permitted by law.
The registrant's bylaws contain indemnification provisions concerning
third party actions as well as actions in the right of the registrant. The
bylaws provide that the registrant shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the registrant) by
reason of the fact that he or she is or was a director or officer of the
registrant or is, or while serving as such a director or officer was, serving at
the request of the registrant as a director, officer, partner, trustee, employee
or agent of another foreign or domestic corporation, partnership, joint venture,
trust or other enterprise, whether for profit or not, against expenses
(including attorney's fees), judgments, penalties, fees and amounts paid in
settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the registrant or its shareholders, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
With respect to derivative actions, the bylaws provide that the
registrant shall indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the registrant to procure a judgment in its favor by reason of
the fact that he or she is or was a director or officer of the registrant, or is
or was serving at the request of the registrant as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorney's fees) actually and reasonably incurred by him or her in
connection with the defense or settlement of such judgment or suit if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the registrant or its shareholders and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person has been found liable to the registrant unless
and only to the extent that the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
The registrant's Articles of Incorporation provide that a director of
the registrant shall not be personally liable to the registrant or its
shareholders for monetary damages for breach of the director's fiduciary duty.
However, it does not eliminate or limit the liability of a director for any
breach of a duty, act or omission for which the elimination or limitation of
liability is not permitted by Michigan law, currently including, without
limitation, the following: (1) breach of the director's duty of loyalty to the
registrant or its shareholders; (2) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law; (3) illegal loans,
distributions of dividends or assets, or stock purchases as described in Section
551(1) of the Michigan Business Corporation Act; and (4) transactions from which
the director derived an improper personal benefit.
II-1
<PAGE> 69
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the sale and distribution of the shares of common stock being registered, other
than underwriting discounts and commissions. All amounts shown are estimates,
except the SEC registration fee and assume sale of 500,000 shares in the
offering.
<TABLE>
<S> <C>
SEC registration fee.............................................................$ 973
Printing and mailing expenses.................................................... 10,000
Fees and expenses of counsel..................................................... 30,000
Accounting and related expenses.................................................. 10,000
Blue Sky fees and expenses (including counsel fees).............................. 3,000
Miscellaneous.................................................................... 1,027
--------
Total............................................................................$ 55,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant borrowed approximately $200,000 from its organizers
during the nine months prior to commencing operations to pay organizational and
related expenses. To the extent that such transactions would be deemed to
involve the offer or sale of a security, the registrant would claim an exemption
under Section 4(2) of the Securities Act for such transactions. In addition,
prior to the registrant's initial public offering, the registrant sold one share
of its common stock to Richard Zamojski, its Chairman and Chief Executive
Officer, for $10. The registrant also claims an exemption for such sale pursuant
to Section 4(2).
ITEM 27. EXHIBITS.
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)
4 Specimen Common Stock certificate (previously filed as Exhibit
No. 4 to the Registrant's Form SB-2 Registration Statement,
File No. 333-17317, and incorporated herein by reference)
5 Opinion of Dykema Gossett PLLC (previously filed with this
Registration Statement as Exhibit No. 5 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)
10.3 Sublease dated as of September 30, 1996, between Comerica Bank
and Michigan Heritage Bank (previously filed as Exhibit No.
10.3 to the Registrant's Form SB-2 Registration Statement,
File No. 333-17317, and incorporated herein by reference)
II-2
<PAGE> 70
10.4 Lease Agreement between Troy Sports Center, L.L.C. and
Michigan Heritage Bank (previously filed with this
Registration Statement as Exhibit No. 10.4 and incorporated
herein by reference)
10.5 Office Building Lease between Rental Investment Company and
Michigan Heritage Bank dated August 31, 1998 (previously filed
with this Registration Statement as Exhibit No. 10.5 and
incorporated herein by reference)
10.6 Standstill Agreement between Michigan Heritage Bancorp, Inc.
and certain shareholders dated March 18, 1997, as amended by
the First Amendment to Standstill Agreement (previously filed
with this Registration Statement as Exhibit 10.6 and
incorporated herein by reference)
11 Computation of Per Share Earnings (previously filed with this
Registration Statement as Exhibit No. 11 and incorporated
herein by reference)
21 Subsidiaries of Michigan Heritage Bancorp, Inc. (previously
filed as Exhibit No. 21 to the Registrant's Form SB-2
Registration Statement, File No. 333-17317, and incorporated
herein by reference)
23.1 Consent of Dykema Gossett PLLC (included in opinion filed as
Exhibit 5) (previously filed with this Registration Statement
as Exhibit No. 5 and incorporated herein by reference)
23.2 Consent of Plante & Moran, LLP (filed herewith)
24 Power of Attorney (previously included with this Registration
Statement on page II-5 and incorporated herein by reference)
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(2) The registrant will supplement the prospectus, after the end of the
subscription period, to include the results of the subscription offer, the
transactions by the underwriters during the subscription period, the amount of
unsubscribed securities that the underwriters will purchase and the terms of any
later reoffering. If the underwriters make any public offering of the securities
on terms different from those on the cover page of the prospectus, the
registrant will file a post-effective amendment to the state the terms of such
offering.
(3) The registrant will:
(i) For determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant under Rule 424(b)(1),
or
(4) or 497(h) under the Securities Act as part of this registration
statement as of the time the SEC declared it effective; and
(ii) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
II-3
<PAGE> 71
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement be signed on its behalf by the undersigned, in the City of Novi, State
of Michigan, on July 20, 1999.
MICHIGAN HERITAGE BANCORP, INC.
By: /s/ Anthony S. Albanese
-------------------------------
Anthony S. Albanese, President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
indicated on July 20, 1999.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ---------- -----
<S> <C>
/s/ Richard Zamojski
- --------------------- Chairman of the Board, Chief Executive Officer and Director
Richard Zamojski (principal executive officer)
/s/ Anthony S. Albanese President, Chief Operating Officer and Director
- ---------------------
Anthony S. Albanese
/s/ Darryle J. Parker
- --------------------- Secretary, Treasurer, and Chief Financial Officer
Darryle J. Parker (principal financial and accounting officer)
* Director
- ---------------------
H. Perry Driggs, Jr.
* Director
- ---------------------
Lewis N. George
* Director
- ---------------------
Phillip R. Harrison
* Director
- ---------------------
Frank A. Scerbo
* Director
- ---------------------
Philip Sotiroff
</TABLE>
* By: Anthony S. Albanese
-----------------------------------------
Anthony S. Albanese, Attorney-in-fact.
II-4
<PAGE> 72
EXHIBIT INDEX
Exhibit No. Description
23.2 Consent of Plante & Moran, LLP
<PAGE> 1
EXHIBIT 23.2
[PLANTE & MORAN, LLP LETTERHEAD]
CONSENT TO INDEPENDENT AUDITORS
We consent to the use of our report dated January 20, 1999 on the financial
statements of Michigan Heritage Bancorp, Inc. for the years ended December 31,
1998, 1997 and 1996 in this Amendment No. 2 to Form SB-2 Registration Statement
(File No. 333-78967) for the registration of 500,000 shares of its common
stock. We also consent to the reference to us under the heading "Experts" in
the registration statement.
/s/ Plante & Moran, LLP
Bloomfield Hills, MI
July 20, 1999
