U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-QSB
[X] Quarterly report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the period ended March 31, 2000
or
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ________ to ________
Commission file number: 333-17317
MICHIGAN HERITAGE BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
Michigan 38-3318018
-------- ----------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
28300 Orchard Lake Road, Suite 200, Farmington Hills, MI 48334
--------------------------------------------------------------
(Address of principal executive offices)
248-538-2525
------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes: /X/ No: / /
At May 9, 2000 there were 1,488,764 shares of Common Stock of the issuer
issued and outstanding.
Traditional Small Business Disclosure Format (check one): Yes: / / No: /X/
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Michigan Heritage Bancorp, Inc.
Consolidated Balance Sheets
March 31, 2000 and March 31, 1999
(Unaudited)
(000s omitted)
March 31, March 31,
2000 1999
-------- ---------
ASSETS
Cash and due from banks, noninterest bearing $ 737 $ 514
Interest bearing deposits with banks 4,064 4,780
Federal funds sold 7,100 9,450
--------- ---------
Cash and cash equivalents 11,901 14,744
Securities available for sale 10,957 4,995
Federal Reserve Bank Stock at cost 319 294
--------- ---------
Total investments 11,276 5,289
Loans, gross 83,717 84,160
Less: allowance for loan losses 1,989 1,563
--------- ---------
Net loans 81,728 82,597
Total earning assets 104,168 102,116
Leasehold improvements, net 144 102
Furniture & equipment, net 653 462
Operating lease equipment, net 0 2,066
--------- ---------
Total fixed assets 797 2,630
Deferred income taxes 485 445
Other assets 799 898
--------- ---------
Total other assets 1,284 1,343
--------- ---------
Total assets $ 106,986 $ 106,603
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits $ 94,387 $ 95,847
Other liabilities 792 610
--------- ---------
Total liabilities 95,179 96,457
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 13,730 12,482
Accumulated deficit (1,845) (2,337)
Accumulated other comprehensive income (loss) (78) 1
--------- ---------
Total stockholders' equity 11,807 10,146
--------- ---------
Total liabilities and stockholders' equity $ 106,986 $ 106,603
========= =========
Total loan loss reserve ratio 2.38% 1.86%
Total loan to deposit ratio 89% 88%
-2-
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Earnings
Three Month Periods Ended
March 31, 2000 and March 31, 1999
(Unaudited)
(000s omitted except per share data)
Three Months Ended March 31,
------------------------------------
2000 1999
---------- ----------
OPERATING INCOME:
Interest income $ 2,260 $ 2,112
Interest expense 1,280 1,258
---------- ----------
Net interest income before
provision for loan losses 980 854
Less: provision for loan losses 15 367
---------- ----------
Net interest income after
provision for loan losses 965 487
Operating lease income 0 309
Gain on sale of loans 10 215
Other income 31 20
---------- ----------
Total other operating income 41 544
---------- ----------
Total operating income 1,006 1,031
OTHER OPERATING EXPENSES:
Salaries and employee benefits 461 320
Occupancy expense 93 39
Equipment expense 61 38
Depreciation of property on
operating lease 0 266
Data processing expense 23 14
Insurance expense 10 5
Advertising/promotion expense 40 44
Office supplies and printing expense 13 9
Professional fees 56 69
Other expense 56 54
---------- ----------
Total other operating expense 813 858
---------- ----------
Net operating income 193 173
Provision for federal income taxes 63 59
---------- ----------
Net income $ 130 $ 114
========== ==========
Per Common Share Data
Net income per primary share $ 0.09 $ 0.08
Net income per fully diluted share $ 0.09 $ 0.08
-3-
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Cash Flow
Three Month Periods Ended
March 31, 2000 and March 31, 1999
(Unaudited)
(000s omitted)
Three Months
Ended March 31,
---------------------
2000 1999
-------- --------
Operating activities:
Net income $ 130 $ 114
Adjustments to reconcile net income to net cash
provided in operating activities:
Discount accretion and premium
amortization of investment
securities 13 (10)
Provision for loan losses 15 367
Depreciation 57 304
Increase in other assets (211) (137)
Decrease in other liabilities (423) (212)
-------- --------
Net cash provided (used ) by operating activities (419) 426
Investing activities:
Purchase of U.S. Treasury and agency securities (2,000) --
Proceeds from matured or called U.S. Treasury
and agency securities 500 3,000
Purchase of other securities (1,625) --
Proceeds from matured or called other securities 800 --
Purchase of Federal Reserve Bank and other stock (25) (56)
Purchase of leasehold improvements, furniture
and equipment (91) (148)
Net change in gross loans (1,860) (3,179)
-------- --------
Net cash used by investing activities (4,301) (383)
Financing activities:
Increase (decrease) in deposits (1,567) 8,193
Decrease in borrowed funds -- (1,750)
-------- --------
Net cash provided (used) by financing activities (1,567) 6,443
-------- --------
Increase (decrease) in cash and cash equivalents (6,287) 6,486
Cash and cash equivalents at beginning of year 18,188 8,258
-------- --------
Cash and cash equivalents at end of period $ 11,901 $ 14,744
======== ========
-4-
Michigan Heritage Bancorp, Inc.
Consolidated Statement of Changes in Stockholders' Equity
December 31, 1996 to March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
(000s omitted except per share data)
Accumulated
Other
Comprehensive
Common Retained Income
Shares Stock Deficit (Loss) Total
------ ------ -------- ------------- -----
<S> <C> <C> <C> <C> <C>
December 31, 1996 1 $ -- $ (68) $ -- $ (68)
Issuance of common stock,
net of offering costs 1,150,000 10,815 -- -- 10,815
Retirement of initial share (1) -- -- -- --
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 -- -- -- 9 9
--------
Total comprehensive loss (104)
Stock dividend paid 114,999 1,667 (1,667) -- --
---------- -------- -------- ---------- --------
Balance-December 31, 1998 1,264,999 12,482 (2,450) 9 10,041
Comprehensive income:
Net income -- -- 475 -- 475
Change in net unrealized
loss on securities available
for sale, net of tax effect -- -- -- (46) (46)
--------
Total comprehensive income 429
Issuance of common stock 223,765 1,248 -- -- 1,248
---------- -------- -------- ---------- --------
Balance-December 31, 1999 1,488,764 $ 13,730 $ (1,975) $ (37) $ 11,718
Comprehensive income:
Net income -- -- 130 -- 130
Change in net unrealized loss
on securities available for
sale, net of tax effect -- -- -- (41) (41)
--------
Total comprehensive income 89
---------- -------- -------- ---------- --------
Balance-March 31, 2000 1,488,764 $ 13,730 $ (1,845) $ (78) $ 11,807
========== ======== ======== ========== ========
</TABLE>
-5-
Michigan Heritage Bancorp, Inc.
Notes to Financial Statements
March 31, 2000
Item 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization:
Michigan Heritage Bancorp, Inc. (the "Company") was incorporated in the State
of Michigan on September 22, 1989. The Company was inactive from that time
until its Articles of Incorporation were amended on November 6, 1996 into its
current form. The Company is a bank holding company whose primary purpose is
to own and operate Michigan Heritage Bank (the "Bank") as the Bank's sole
stockholder. Organizational and other start-up costs were funded with loans
from organizers. Proceeds from the Company's initial public offering were
primarily used to capitalize the Bank which is currently headquartered in
Farmington Hills, Michigan. The Company completed an initial public offering
of common stock during the first quarter of 1997, realizing a total of $10.9
million (after payment of underwriters' commissions and offering expenses).
During the fourth quarter of 1999, the Company competed a rights offering to
existing shareholders raising $1.3 million in additional capital after
payment of offering expenses. The consolidated financial statements of the
Company include its only subsidiary, the Bank. The quarter ended March 31,
2000 was the Bank's 12th full quarter of operation. All adjustments, which in
the opinion of management are necessary in order to ensure that the interim
financial statements are not misleading, have been included.
Basis of Presentation:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements. Actual results
could differ from those estimates and assumptions.
-6-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRELIMINARY NOTE: The Company wishes to caution readers not to place undue
reliance on any "forward-looking statements" contained in the following
discussion and advises readers that various factors, including regional and
national economic conditions, substantial changes in levels of market
interest rates, credit and other risks of lending and investment activities
and competitive and regulatory factors, could affect the Company's financial
performance and could cause the Company's actual results for future periods
to differ materially from those anticipated or projected. The Company does
not undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
The Company had net income of $130,000 for the quarter ending March 31, 2000
which is only the 12th full quarter of operations for the Company. Total
assets at the end of the quarter were $106,986,000 as compared to
$106,603,000 at March 31, 1999. Total loans outstanding were $83,717,000
compared to $84,160,000 at March 31, 1999.
Results for the Quarters Ended March 31, 2000 and 1999
The $130,000 net income for the quarter ended March 31, 2000 increased by
$16,000 or 14.0% over the same quarter last year. Net interest income before
allowances for loan losses increased by $126,000 or 14.8% to $980,000
primarily due to volume increases in earning assets and increases in the net
interest margin--3.86% for the first quarter of 2000 compared to 3.52% for
the same quarter last year. Provision for loan losses decreased by $352,000
to $15,000. The loan loss reserves were increased during the first and second
quarter of 1999 to address increases in specific loan classifications.
Other operating income decreased by $503,000 to $41,000 due mostly to a
$309,000 decrease in operating lease income resulting from a $2,775,000
operating lease recorded during the third quarter of 1998 and disposed of in
the fourth quarter of 1999. There was also only a $10,000 gain on sale of
loans in the first quarter of 2000 compared to a $215,000 gain on sale of
loans during the first quarter of 1999. Other miscellaneous income increased
by $11,000 over the quarter ended March 31, 1999 due primarily to increases
in loan servicing fee income and other fee income.
Other operating expense decreased by $45,000 to $813,000. Salaries and
employee benefits increased by $141,000 to $461,000 due to additional
employees and salary increases. Occupancy expense increased by $54,000 to
$93,000 primarily due to the opening of the new corporate headquarters in
December 1999 and a new branch office in January 2000. Equipment expense
increased by $23,000 to $61,000 due mostly to additional furniture and
equipment for the new corporate headquarters and branch office. Depreciation
of property on operating lease decreased by $266,000 due to the disposal of
the operating lease in December 1999. Data processing fees increased by
$9,000 to $23,000 due primarily to additional volume. Professional fees
decreased by $13,000 to $56,000 due mostly to a reduction in legal fees
addressing primarily loan related issues. Remaining expenses increased a net
$7,000.
The resulting income before federal income tax increased by $20,000 to
$193,000 for the same time period. Federal income tax was $63,000 for the
first quarter of 2000 compared to $59,000 for the same quarter last year.
Net income per average primary share outstanding was $0.09 for the quarter
ended March 31, 2000 compared to $0.08 for the same quarter in 1999. On a
fully diluted basis, net income per share was also $0.09 for the quarter
ended March 31, 2000 compared to $0.08 for the same quarter in 1999.
-7-
Loans and Allowances for Loan Losses
The categories of loans outstanding at March 31, 2000 in dollars and as a
percentage of total loans outstanding are as follows:
(000s omitted for dollars)
Percentage
of total
Loan Category Amount loans
------- ----------
Commercial, financial and agricultural $74,940 89.6%
Real estate-construction 613 0.7%
Real estate-mortgage 7,060 8.4%
Installment loans to individuals 182 0.2%
Lease financing 922 1.1%
------- -----
Total loans $83,717 100.0%
======= =====
Note: There were no agricultural loans as of March 31, 2000
The change in mix and size of the loan portfolio from March 31, 1999 to
March 31, 2000 has not increased the proportionate level of credit risk in
the loan portfolio. Management continues to strengthen the credit
underwriting and approval processes in anticipation of a future economic
downturn. Management believes that the level of risk in the current loan
portfolio is, on a relative basis, no greater than in the past.
At March 31, 2000 there were no non-accruing loans. There was a $13,000 loan
charged off during the first quarter of 2000 against specific reserves
previously allocated in 1999. There were $460,000 in accruing loans past due
30 days or more: $264,000 past due 30 to 59 days, $34,000 past due 60 to 89
days and $162,000 past due 90 days or more. Management fully expects that
diligent servicing of these loans will minimize delinquencies.
Total loan reserves of $1,989,000 at March 31, 2000 were 2.38% of total
loans, which included $669,000 in specific allowances. The following
highlights the allocations of allowances for loan losses as of March 31,
2000.
(000s omitted for dollars)
Loan loss Percent of loan
allowance Loan amounts loss allowance
amount outstanding to loan amounts
--------- ------------ ---------------
Domestic:
Commercial, financial and
agricultural $ 1,376 $74,940 1.84%
Real estate-construction 8 613 1.31%
Real estate-mortgage 265 7,060 3.75%
Installment loans to individuals 2 182 1.25%
Lease financing 12 922 1.30%
Foreign -- -- 0.00%
Off-balance sheet items, Y2K
issues, and unallocated 326 -- n/a
------- ------- ----
Total $ 1,989 $83,717 2.38%
======= ======= ====
In management's opinion, the total loan reserve position is adequate relative
to the overall quality of the loan portfolio.
Financial Condition
Michigan Heritage Bank's current cash projections as of March 31, 2000
indicate adequate cash balances. The Bank has additional line of credit
facilities with national lending institutions to add funding capacity. Bank
management also has established a network of banks that can be used to sell
or participate a portion of the Bank's loan portfolio. These techniques allow
the Bank to service its business relationships and generate fee and servicing
revenue.
-8-
The Company's liquidity remained adequate during the 12-month period ended
March 31, 2000. Michigan Heritage Bancorp had $11,901,000 in cash and cash
equivalents as of March 31, 2000 including $4,064,000 in interest bearing
deposits in other banks and $7,100,000 in Federal funds sold. In addition,
the Bank has proven its 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--the current minimum for the Tier 1 leverage capital ratio is
9.0%. Normally, to be considered adequately-capitalized or well-capitalized,
Michigan Heritage Bank must maintain a Tier 1 leverage capital ratio of 4.0%
and 5.0%, respectively. The Bank's Tier 1 leverage capital ratios were 10.3%
and 9.1% at March 31, 2000 and March 31, 1999, respectively. Michigan
Heritage Bank plans to maintain at least a 9.0% Tier 1 leverage capital ratio
while under the current minimum regulatory requirement and to remain
well-capitalized thereafter.
Year 2000 Disclosures
The Bank, being a new business, did not have major issues concerning older
systems to update. The recently acquired new systems were already primarily
Year 2000 ("Y2K") compliant. All applicable components of both the Company
and the Bank have been identified and addressed as to being Y2K compliant.
The Company, which has not experienced any Y2K issues to date, has been
operating normally with expected deposit levels.
The cost to become fully Y2K compliant for both the Company and the Bank was
not material. In addition, prior to the year 2000, the Bank communicated at
various times with both vendors and appropriate customers concerning Y2K
compliance to help ensure their smooth transition into the next century. As
of March 31, 2000, the Bank had accrued $250,000 in loan loss reserves to
address Y2K issues. To date, no Y2K issues with either vendors or customers
have become apparent. The Bank is not aware of any future Y2K significant
contingencies involving either vendors or customers.
There were no capital expenditures postponed in preparing for Y2K.
-9-
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
- ------- -----------
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
-10-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MICHIGAN HERITAGE BANCORP, INC.
By: /s/ Anthony S. Albanese
-------------------------------------
Anthony S. Albanese
President and Chief Operating Officer
And: /s/ Darryle J. Parker
-------------------------------------
Darryle J. Parker
Secretary, Treasurer, and
Chief Financial Officer
(Duly authorized officer)
DATED: May 9, 2000
-11-
EXHIBIT INDEX
Exhibit Description
27 Financial Data Schedule (EDGAR filing only)
-12-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 737
<INT-BEARING-DEPOSITS> 4,064
<FED-FUNDS-SOLD> 7,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,276
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 83,717
<ALLOWANCE> 1,989
<TOTAL-ASSETS> 106,986
<DEPOSITS> 94,387
<SHORT-TERM> 0
<LIABILITIES-OTHER> 792
<LONG-TERM> 0
0
0
<COMMON> 13,730
<OTHER-SE> (1,923)
<TOTAL-LIABILITIES-AND-EQUITY> 106,986
<INTEREST-LOAN> 1,923
<INTEREST-INVEST> 337
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,260
<INTEREST-DEPOSIT> 1,280
<INTEREST-EXPENSE> 1,280
<INTEREST-INCOME-NET> 980
<LOAN-LOSSES> 15
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 813
<INCOME-PRETAX> 193
<INCOME-PRE-EXTRAORDINARY> 193
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 130
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
<YIELD-ACTUAL> 3.86
<LOANS-NON> 0
<LOANS-PAST> 162
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,987
<CHARGE-OFFS> 13
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,989
<ALLOWANCE-DOMESTIC> 669
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,320
</TABLE>
