<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
FOR THE PERIOD ENDED JUNE 30, 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 August 7, 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]
<PAGE> 2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICHIGAN HERITAGE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND JUNE 30, 1999
<TABLE>
<CAPTION>
(UNAUDITED) (000S OMITTED)
JUNE 30, 2000 JUNE 30, 1999
------------------------------ ---------------------------
<S> <C> <C>
ASSETS
Cash and due from banks, noninterest bearing $ 246 $ 800
Interest bearing deposits with banks 1,290 3,181
Federal funds sold 4,450 9,400
---------------- -----------------
Cash and cash equivalents 5,986 13,381
Securities available for sale 15,362 5,941
Federal Reserve Bank Stock at cost 321 288
---------------- -----------------
Total investments 15,683 6,229
Loans, gross 82,767 80,478
Less: allowance for loan losses 1,998 1,558
---------------- -----------------
Net loans 80,769 78,920
Total earning assets 102,192 97,730
Leasehold improvements, net 134 95
Furniture & equipment, net 644 552
Operating lease equipment, net 0 1,801
---------------- -----------------
Total fixed assets 778 2,448
Interest receivable 631 485
Deferred income taxes 478 457
Other assets 285 597
---------------- -----------------
Total other assets 1,394 1,539
---------------- -----------------
Total assets $ 104,610 $ 102,517
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Total deposits $ 91,486 $ 91,558
Other borrowed funds 370 0
Other liabilities 813 718
---------------- -----------------
Total liabilities 92,669 92,276
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--
1,488,764 shares 13,730 12,482
Accumulated deficit (1,722) (2,216)
Accumulated other comprehensive loss (67) (25)
---------------- -----------------
Total stockholders' equity 11,941 10,241
---------------- -----------------
Total liabilities and stockholders' equity $ 104,610 $ 102,517
================ =================
Total loan loss reserve ratio 2.41% 1.94%
Total loan to deposit ratio 90% 88%
</TABLE>
<PAGE> 3
MICHIGAN HERITAGE BANCORP, INC.
CONSOLIDATED STATEMENT OF EARNINGS
THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 2000 AND JUNE 30, 1999
<TABLE>
<CAPTION>
(UNAUDITED) (000S OMITTED EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING INCOME:
Interest income $ 2,385 $ 2,098 $ 4,645 $ 4,210
Interest expense 1,346 1,241 2,626 2,499
------------ ----------- ------------ ------------
Net interest income before provision for loan losses 1,039 857 2,019 1,711
Less: provision for loan losses 15 242 30 609
------------ ----------- ------------ ------------
Net interest income after provision for loan losses 1,024 615 1,989 1,102
Operating lease income 0 309 0 618
Gain on sale of loans and other assets 4 1 14 216
Other income 24 31 55 51
------------ ----------- ------------ ------------
Total other operating income 28 341 69 885
------------ ----------- ------------ ------------
Total operating income 1,052 956 2,058 1,987
OTHER OPERATING EXPENSES:
Salaries and employee benefits 489 287 950 607
Occupancy expense 89 23 182 62
Equipment expense 58 47 119 85
Depreciation of property on operating lease 0 265 0 531
Data processing expense 22 14 45 28
Insurance expense 11 6 21 11
Advertising/promotion expense 44 12 84 56
Office supplies and printing expense 8 8 21 17
Professional fees 62 67 118 136
Other expense 86 45 142 99
------------ ----------- ------------ ------------
Total other operating expense 869 774 1,682 1,632
------------ ----------- ------------ ------------
Net operating income 183 182 376 355
Provision for federal income taxes 60 62 123 121
------------ ----------- ------------ ------------
Net income $ 123 $ 120 $ 253 $ 234
============ =========== ============ ============
PER COMMON SHARE DATA
Net income per primary share $ 0.08 $ 0.09 $ 0.17 $ 0.18
Net income per fully diluted share $ 0.08 $ 0.09 $ 0.17 $ 0.18
</TABLE>
<PAGE> 4
MICHIGAN HERITAGE BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
SIX MONTH PERIODS ENDED
JUNE 30, 2000 AND JUNE 30, 1999
<TABLE>
<CAPTION>
(UNAUDITED)
(000S OMITTED)
SIX MONTHS ENDED JUNE 30,
------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 253 $ 234
Adjustments to reconcile net income to net cash
provided in operating activities:
Discount accretion and premium amortization
of investment securities 36 21
Provision for loan losses 30 609
Depreciation 113 609
Increase in other assets (328) (333)
Decrease in other liabilities (402) (104)
----------- -----------
Net cash provided (used) by operating activities (298) 1,036
Investing activities:
Purchase of U.S. Treasury and agency securities (6,000) (4,000)
Proceeds from matured or called U.S. Treasury
and agency securities 1,000 6,000
Purchase of other securities (2,775) -
Proceeds from matured or called other securities 1,040 -
Purchase of Federal Reserve Bank and other stock (27) (51)
Purchase of leasehold improvements, furniture
and equipment (128) (272)
Net change in gross loans (916) 256
----------- -----------
Net cash provided (used) by investing activities (7,806) 1,933
Financing activities:
Increase (decrease) in deposits (4,468) 3,904
Increase (decrease) in borrowed funds 370 (1,750)
----------- -----------
Net cash provided (used) by financing activities (4,098) 2,154
----------- -----------
Increase (decrease) in cash and cash equivalents (12,202) 5,123
Cash and cash equivalents at beginning of year 18,188 8,258
----------- -----------
Cash and cash equivalents at end of period $ 5,986 $13,381
=========== ===========
</TABLE>
<PAGE> 5
MICHIGAN HERITAGE BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
DECEMBER 31, 1996 TO JUNE 30, 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 - - 253 - 253
Change in net unrealized loss on securities
available for sale, net of tax effect - - - (30) (30)
------------
Total comprehensive income 223
------------- ----------- ------------ ------------ ------------
Balance-June 30, 2000 1,488,764 $ 13,730 $ (1,722) $ (67) $ 11,941
============= =========== ============ ============ ============
</TABLE>
<PAGE> 6
MICHIGAN HERITAGE BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 2000 was the
Bank's 13th 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.
<PAGE> 7
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 $123,000 for the quarter ending June 30, 2000
which is only the 13th full quarter of operations for the Company. Total assets
at the end of the quarter were $104,610,000 as compared to $102,517,000 at June
30, 1999. Total loans outstanding were $82,767,000 compared to $80,478,000 at
June 30, 1999.
RESULTS FOR THE QUARTERS ENDED JUNE 30, 2000 AND 1999
The $123,000 net income for the quarter ended June 30, 2000 increased by $3,000
or 2% over the same quarter last year. Net interest income before allowances for
loan losses increased by $182,000 or 21% to $1,039,000 primarily due to volume
increases in earning assets and increases in the net interest margin--4.00% for
the second quarter of 2000 compared to 3.49% for the same quarter last year.
Provision for loan losses decreased by $227,000 to $15,000. The loan loss
reserves were increased during both the first and second quarters of 1999 to
address increases in specific loan classifications. As a combined result, net
interest income after provision for loan losses increased $409,000 or 66% to
$1,024,000.
Other operating income decreased by $313,000 to $28,000 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 a $4,000 gain on sale of loans and other assets in the second
quarter of 2000 compared to only a $1,000 gain on sale of loans and other assets
during the second quarter of 1999 for an increase of $3,000. Other miscellaneous
income decreased by $7,000 from the quarter ended June 30, 1999 due primarily to
a $9,000 decrease in loan servicing fee income offset partially by a net $2,000
increase in other service charges and fee income.
Other operating expense increased by $95,000 to $869,000. Salaries and employee
benefits increased by $202,000 to $489,000 due to additional employees and
salary increases. Occupancy expense increased by $66,000 to $89,000 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 $11,000 to $58,000
due mostly to additional furniture and equipment for the new corporate
headquarters and branch office. Depreciation of property on operating lease
decreased by $265,000 due to the disposal of the operating lease in December
1999. Data processing fees increased by $8,000 to $22,000 due primarily to
additional volume. Advertising and promotional expense increased by $32,000 to
$44,000 due mostly to additional marketing campaigns including a branch grand
opening. FDIC assessment expense increased by $16,000 and the Michigan single
business tax expense also increased by $16,000. Other insurance expense went up
by $6,000 and all remaining expenses increased by a net $3,000.
The resulting income before federal income tax increased by $1,000 to $183,000
for the same quarter last year. Federal income tax was $60,000 for the second
quarter of 2000 compared to $62,000 for the same time period last year.
Net income per average primary share outstanding was $0.08 for the quarter ended
June 30, 2000 compared to $0.09 for the same quarter in 1999. On a fully diluted
basis, net income per share was also $0.08 for the quarter ended June 30, 2000
compared to $0.09 for the same quarter in 1999. In 2000 and 1999, outstanding
stock options have not been included in the calculation of diluted weighted
average shares outstanding because the weighted average market values per share
were less than the option prices per share.
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
The $253,000 net income for the six months ended June 30, 2000 was an increase
of $19,000 over the six months ended June 30, 1999. Net interest income before
allowances for loan losses increased by $308,000 or 18% to $2,019,000 primarily
due to volume increases in earning assets and increases in the net interest
margin--3.93% for the first six months of 2000 compared to 3.51% for the same
period last year. Provision for loan losses decreased by $579,000 to $30,000.
The loan loss reserves were increased during the first six months of 1999 to
address increases in specific loan
<PAGE> 8
classifications. The resulting net interest income after provision for loan
losses increased $887,000 or 80% to $1,989,000.
Other operating income decreased by $816,000 to $69,000 due mostly to a $618,000
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 $14,000 gain on sale of loans and other assets
during the six months ended June 30, 2000 compared to a $216,000 gain on sale of
loans and other assets during the same time period of 1999 for a decrease of
$202,000. Other miscellaneous income increased by $4,000 from the six months
ended June 30, 1999 due primarily to net increases in deposit service charges
and fee income.
Other operating expense increased by $50,000 to $1,682,000. Salaries and
employee benefits increased by $343,000 to $950,000 due to additional employees
and salary increases. Occupancy expense increased by $120,000 to $182,000
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 $34,000
to $119,000 due mostly to additional furniture and equipment for the new
corporate headquarters and branch office. Depreciation of property on operating
lease decreased by $531,000 due to the disposal of the operating lease in
December 1999. Data processing fees increased by $17,000 to $45,000 due
primarily to additional volume. Advertising and promotional expense increased by
$28,000 to $84,000 due mostly to additional marketing campaigns including a
branch grand opening. Professional fees decreased by $18,000 due primarily to a
reduction in legal fees addressing primarily loan related issues. FDIC
assessment expense and other insurance expense increased $19,000 and $10,000,
respectively. Postage expense increased by $5,000 primarily due to additional
mailings in the first six months of 2000 for marketing purposes. The Michigan
single business tax expense increased by $19,000. All remaining expenses
increased a net $4,000 primarily due to increases in office supplies.
The resulting income before federal income tax increased by $21,000 to $376,000
for the same time period last year. Federal income tax was $123,000 for the
first six months of 2000 compared to $121,000 for the first six months last
year.
Net income per average primary share outstanding was $0.17 for the six months
ended June 30, 2000 compared to $0.18 for the same six months in 1999. On a
fully diluted basis, net income per share was also $0.17 for the six months
ended June 30, 2000 compared to $0.18 for the same six months in 1999.
LOANS AND ALLOWANCES FOR LOAN LOSSES
The categories of loans outstanding at June 30, 2000 in dollars and as a
percentage of total loans outstanding are as follows:
<TABLE>
<CAPTION>
(000S OMITTED FOR DOLLARS)
PERCENTAGE
OF TOTAL
LOAN CATEGORY AMOUNT LOANS
------------ -------------
<S> <C> <C>
Commercial, financial and agricultural $ 71,864 86.8%
Real estate-construction 2,077 2.5%
Real estate-mortgage 7,747 9.4%
Installment loans to individuals 168 0.2%
Lease financing 911 1.1%
------------ -------------
Total loans $ 82,767 100.0%
============ =============
</TABLE>
Note: There were no agricultural loans as of June 30, 2000
The change in mix and size of the loan portfolio from June 30, 1999 to June 30,
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 June 30, 2000 there was one non-accruing loan for $74,000. There were two
loans amounting to $19,000 charged off against reserves during the first six
months of 2000 of which $13,000 was previously allocated in 1999. There were
<PAGE> 9
$741,000 in accruing loans past due 30 days or more: $251,000 past due 30 to 59
days, $168,000 past due 60 to 89 days and $321,000 past due 90 days or more.
Management fully expects that diligent servicing of these loans will minimize
delinquencies.
Total loan reserves of $1,998,000 at June 30, 2000 were 2.41% of total loans,
which included $743,000 in specific allowances. The following highlights the
allocations of allowances for loan losses as of June 30, 2000.
<TABLE>
<CAPTION>
(000S OMITTED FOR DOLLARS)
LOAN LOSS PERCENT OF LOAN
ALLOWANCE LOAN AMOUNTS LOSS ALLOWANCE
AMOUNT OUTSTANDING TO LOAN AMOUNTS
----------------- ----------------- ----------------------
<S> <C> <C> <C>
Domestic:
Commercial, financial and agricultural $ 1,345 $ 71,864 1.87%
Real estate-construction 92 2,077 4.43%
Real estate-mortgage 270 7,747 3.49%
Installment loans to individuals 2 168 1.19%
Lease financing 11 911 1.21%
Foreign - - 0.00%
Off-balance sheet items,Y2K issues, and unallocated 278 - n/a
----------------- ----------------- ----------------------
Total $ 1,998 $ 82,767 2.41%
================= ================= ======================
</TABLE>
Note: There were no agricultural loans as of June 30, 2000
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 June 30, 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.
The Company's liquidity remained adequate during the 12-month period ended June
30, 2000. Michigan Heritage Bancorp had $5,986,000 in cash and cash equivalents
as of June 30, 2000 including $1,290,000 in interest bearing deposits in other
banks and $4,450,000 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 10.2% and 9.4% at
June 30, 2000 and June 30, 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 June 30, 2000,
the Bank had accrued $175,000 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.
<PAGE> 10
PART II--OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
<PAGE> 11
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MICHIGAN HERITAGE BANCORP, INC.
By: /s/ Anthony S. Albanese
-----------------------------
Anthony S. Albanese
President and Chief Operating Officer
And: /s/ Darryle J. Parker
----------------------------
Darryle J. Parker
Secretary, Treasurer, and
Chief Financial Officer
(Duly authorized officer)
DATED: August 7, 2000
<PAGE> 12
EXHIBIT INDEX
Exhibit Description
27 Financial Data Schedule (EDGAR filing only)
