FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
{x} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
{ } QUARTERLY REPORT PURSUANT TO SECTION 14 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ______________________
Commission File No. 0-25079
MICHIGAN COMMUNITY BANCORP LIMITED
(Exact name of small business registrant as specified in its charter)
MICHIGAN 38-3390193
(State of incorporation) (I.R.S. Employer Identification No.)
43850 SCHOENHERR ROAD
STERLING HEIGHTS, MI 48313
(Address of principal executive offices and zip code)
(586) 532-8000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such report (s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of November 13, 2002, the Registrant had 1,159,389 shares of Common Stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
----- -----
MICHIGAN COMMUNITY BANCORP LIMITED
TABLE OF CONTENTS
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements...........................................
Consolidated statements of financial condition at September 30, 2002
(unaudited) and December 31, 2001....................................................... 3
Consolidated statements of operations (unaudited) for the nine
and three month periods ended September 30, 2002 and 2001............................... 4
Consolidated statements of changes in shareholders' equity (unaudited) at
September 30, 2002...................................................................... 5
Consolidated statements of cash flows (unaudited) for the nine month periods
ended September 20, 2002 and 2001....................................................... 6
Notes to financial statements.................................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................... 8
Item 4. Controls and Procedures.......................................................................... 17
Part II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 18
Item 4. Submission of Matters to a Vote of Security-Holders.............................................. 18
Item 6. Exhibits and Reports on Form 8-K................................................................. 19
Signatures................................................................................................ 20
Certifications............................................................................................ 21
2
MICHIGAN COMMUNITY BANCORP LIMITED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
($ in thousands) 2002 2001
----------------------------
(unaudited)
ASSETS
Cash and due from banks $ 7,183 $ 2,338
Federal funds sold 3,300 3,100
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 10,483 5,438
Securities available for sale, at fair value (amortized cost of $4,394 in 2002
and $4,973 in 2001) 4,439 5,031
Federal Home Loan Bank stock, at cost 143 108
Residential mortgage loans held for sale 643 2,946
Loans 66,638 63,283
Allowance for loan losses 1,274 1,398
- -------------------------------------------------------------------------------------------------------------------------
Net loans 65,364 61,885
Premises and equipment, net 989 1,189
Other real estate owned 161 --
Accrued interest receivable and other assets 626 700
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 82,848 $ 77,297
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits $ 8,770 $ 3,739
Interest-bearing deposits 66,701 65,799
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 75,471 69,538
Interest payable and other liabilities 975 762
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 76,446 70,300
Stockholders' equity:
Preferred stock- stated value $12; authorized 1,000,000 shares, 20,834 shares 250 -
issued and outstanding at September 30, 2002
Common stock - stated value $5; authorized 9,000,000 shares, 1,159,389 shares
issued and outstanding at September 30, 2002 and December 31, 2001 5,797 5,797
Additional paid-in capital 6,195 6,250
Accumulated deficit (5,885) (5,108)
Accumulated other comprehensive income 45 58
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,402 6,997
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 82,848 $ 77,297
=========================================================================================================================
See notes to consolidated financial statements.
3
MICHIGAN COMMUNITY BANCORP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
($ in thousands, except per share data) 2002 2001 2002 2001
------------------------------------------------------------
INTEREST INCOME
Interest on loans, including fees $ 3,895 $ 4,269 $ 1,262 $ 1,405
Interest on securities 148 247 46 78
Interest on federal funds sold 34 259 13 55
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 4,077 4,775 1,321 1,538
INTEREST EXPENSE
Interest expense on deposits 1,562 2,628 524 773
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 2,515 2,147 797 765
Provision for loan losses 239 498 143 23
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,276 1,649 654 742
NONINTEREST INCOME
Deposit account service charges 117 97 28 35
Other service charges and fees 67 76 41 27
Other 48 23 13 4
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest income 232 196 82 66
NONINTEREST EXPENSE
Compensation and benefits 1,321 1,438 427 478
Occupancy and equipment 532 555 184 187
Marketing and business development 64 117 22 27
Legal and professional 298 304 181 81
Outside processing 180 194 55 86
Write off of foreclosed assets 191 - 191 -
Defaulted loan expense 63 7 23 -
Accrued operating lease cost 180 - 169 -
Other 191 407 80 67
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,020 3,022 1,332 926
- -------------------------------------------------------------------------------------------------------------------------
Net loss (777) (1,177) (861) (118)
=========================================================================================================================
Average common shares outstanding 1,159,389 832,360 1,159,389 839,957
LOSS PER COMMON SHARE:
Basic $ (0.67) $ (1.42) $ (0.74) $ (0.14)
Fully diluted $ (0.67) $ (1.42) $ (0.74) $ (0.14)
See notes to consolidated financial statements.
4
MICHIGAN COMMUNITY BANCORP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
Accumulated
Additional Other Total
($ in thousands) Preferred Common Paid-In Accumulated Comprehensive Shareholders'
Stock Stock Capital Deficit (Loss) Income Equity
---------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2000 $ - $ 3,780 $ 6,410 $ (2,392) $ (10) $ 7,788
Private placement of stock (59,043 shares) 295 155 450
Comprehensive loss:
Net loss (840) (840)
Change in unrealized gain on
securities available for sale 32 32
------------
Total comprehensive loss (808)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 - 4,075 6,565 (3,232) 22 7,430
Private placement of stock (34,228 shares) 171 31 202
Public Rights Offering 1,551 (155) 1,396
Cost of rights offering (191) (191)
Comprehensive loss:
Net loss (1,876) (1,876)
Change in unrealized gain on
securities available for sale 36 36
------------
Total comprehensive loss (1,840)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 - 5,797 6,250 (5,108) 58 6,997
Cost of rights offering from prior year (55) (55)
Private placement of stock (20,834 shares) 250 250
Comprehensive loss:
Net loss (777) (777)
Change in unrealized loss on
securities available for sale (13) (13)
------------
Total comprehensive loss (356)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2002 $ 250 $ 5,797 $ 6,195 $ (5,885) $ 45 $ 6,836
================================================================================================================================
See notes to consolidated financial statements.
5
MICHIGAN COMMUNITY BANCORP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
-------------------------------------
($ in thousands) SEPTEMBER 30,
2002 2001
-------------------------------------
OPERATING ACTIVITIES
Net loss $ (777) $ (1,177)
Adjustments to reconcile net loss to net cash provided
by(used in) operating activities:
Depreciation and amortization 209 213
Provision for loan losses 504 498
Accretion of securities (51) (76)
Decrease in loans held for sale 2,303 -
Increase in interest receivable and other assets (87) (16)
Increase in interest payable and other liabilities 44 94
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,314 (464)
INVESTING ACTIVITIES
Purchases of securities available for sale (2,270) (3,506)
Proceeds from maturities of securities available for sale 2,900 3,000
Net increase in loans (3,983) (183)
Purchase of Federal Home Loan Bank stock (35) (5)
Purchases of premises and equipment (9) (17)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,397) (711)
FINANCING ACTIVITIES
Net change in deposits 5,933 (2,451)
Proceeds from sale of preferred stock 250 -
Proceeds from (cost of) common stock offering (55) 358
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,128 (2,093)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,045 (3,268)
Cash and cash equivalents, beginning of period 5,438 14,218
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 10,483 $ 10,950
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid for:
Interest $ 1,434 $ 2,265
Federal taxes - -
Non-cash investing and financing activities
Transfer from loans to real estate owned (net) 352
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICHIGAN COMMUNITY BANCORP LIMITED AND ITS SUBSIDIARIES
PERIOD ENDED SEPTEMBER 30, 2002
NOTE A - BASIS OF PRESENTATION
The financial statements of Michigan Community Bancorp Limited (the
"Corporation") include the consolidation of its subsidiaries, Lakeside Community
Bank and North Oakland Community Bank, collectively, (the "Banks").
The unaudited financial statements as noted in the table of contents are
for interim periods, and do not include all disclosures normally provided with
annual financial statements. The interim statements should be read in
conjunction with the consolidated financial statements and footnotes contained
in the Corporation's Annual Report on Form 10KSB for the year ended December 31,
2001.
In the opinion of management, the interim statements referred to above
contain all adjustments (consisting only of normal recurring items) necessary
for a fair presentation of the financial statements. The results of operations
for interim periods are not necessarily indicative of the results to be expected
for the full year.
NOTE B - EARNING PER SHARE
Earnings per share are calculated on the basis of the weighted average
number of shares outstanding. The weighted average shares outstanding were
1,159,389 for three and nine month periods ended September 30, 2002 and
839,957 and 832,360 for the three and nine month periods ended September 30,
2001, respectively.
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Corporation adopted the Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets." Statement No. 142 addresses the
reporting and other intangibles assets subsequent to their acquisition. This
Statement requires that goodwill be separately disclosed from other intangible
assets on the balance sheet and the goodwill and intangible assets with
indefinite useful lives no longer be amortized, but, instead, tested for
impairment at least annually. As required by the Statement, intangible assets
that do not meet the criteria for recognition from goodwill must be
reclassified. As a result of the Corporation's analysis, no reclassifications
were required as of September 30, 2002.
In October of 2002, the FASB issued Statement of Financial Accounting
Standard No. 147, "Acquisitions of Certain Financial Institutions."
Implementation of Statement of Financial Accounting Standard No. 147 is not
expected to impact the Corporation.
NOTE D - OTHER MATTERS
North Oakland Community Bank formally entered into an agreement with its
primary regulatory examiners, which provided for the following requirements,
among others:
- Formulate and implement earnings and strategic plans.
7
- Formulate, adopt, and submit a written action plan to lessen the
Bank's risk position in each asset classified "Substandard" or
"Doubtful".
- Maintain Tier 1 capital level equal to or exceeding 8 %.
- Limit total asset growth to not more than 3% during any
consecutive three-month period without first providing at least 30
days advance written notice.
- The Bank shall not declare or pay any dividends without prior
written consent.
North Oakland Community Bank has addressed these concerns with the regulators
and is corresponding with them to maintain compliance with these requirements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY OF CORPORATION
Michigan Community Bancorp Limited (the "Corporation") was incorporated in
January 28, 1998 under Michigan law and is a bank holding company, owning all of
the outstanding common stock of Lakeside Community Bank ("Lakeside") and North
Oakland Community Bank ("North Oakland"), (collectively, the "Banks"). The Banks
were organized as Michigan chartered banks with depository accounts insured by
the Federal Deposit Insurance Corporation (the "FDIC"). The Banks opened for
business on January 5, 1999.
Lakeside Community Bank offers its banking services throughout Macomb
County, Michigan, but primarily in Clinton Township, Macomb Township, Ray
Township, Shelby Township, Washington Township, Mt. Clemens, Sterling Heights
and Utica. North Oakland Community Bank offers its banking services throughout
Oakland County, Michigan, but primarily in Rochester, Rochester Hills, Pontiac,
Troy, Auburn Hills, Oakland Township, Orion Township and Lake Orion Village.
The Corporation's office and the office of Lakeside are located at 43850
Schoenherr Road, Sterling Heights, Michigan 48313. The main office of North
Oakland is located at 1467 North Rochester Road, Rochester Hills, Michigan
48307.
The following discussion compares the financial condition of the
Corporation and its subsidiaries at September 30, 2002 and December 31, 2001,
and the results of operations for the nine and three month periods ended
September 30, 2002 and 2001. This discussion should be read in conjunction with
the financial statements and statistical data presented elsewhere in this
report. This report contains forward-looking statements that can be identified
by the use of the words "anticipate", "believe", "expect", "plan", and similar
expressions. These forward-looking statements are not guarantees of future
performance and involve substantial risks, uncertainties and assumptions that
are difficult to predict with regard to timing, extent, likeliness and degree of
occurrence. 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 Corporation's actual results for future periods to
differ materially from those anticipated or projected. A list of the material
risks of the Corporation may be found under the caption "Risk Factors That May
Effect Future Results" in the Corporation's Annual Report on Form 10-KSB for the
year ended December 31, 2001.
8
FINANCIAL CONDITION
ASSETS
The Corporation's total assets have increased by $5.6 million, to $82.8
million at September 30, 2002, compared with $77.3 million at December 31, 2001.
Cash and cash equivalents, which include federal funds sold and
short-term investments, increased $5.0 million, or 92.8% to $10.5 million at
September 30, 2002, from $5.4 million at December 31, 2001. The increase was a
result of the net increase in deposits and proceeds from securities, which were
either called or matured offset by net loan production.
The following table shows the amortized cost and estimated fair value
of the Corporation's security portfolio as of the dates indicated. Securities
available for sale are shown on the balance sheet at estimated fair value.
SEPTEMBER 30, 2002
--------------------------------------------------------
($ in thousands) GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 4,127 $ 43 $ $ 4,170
Corporate Bonds 267 2 269
--------------------------------------------------------
Total $ 4,394 $ 45 $ - $ 4,439
========================================================
DECEMBER 31, 2001
--------------------------------------------------------
($ in thousands) GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 4,973 $ 60 $ (2) $ 5,031
========================================================
The amortized cost and estimated market of available-for-sale
securities at September 30, 2002, by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
($ in thousands) AMORTIZED FAIR
COST VALUE
-------------------------------------
Due in one year or less $ 1,016 $ 1,024
Due after one year through five years 3,378 3,415
- --------------------------------------------------------------------------------------------------------------
Total $ 4,394 $ 4,439
==============================================================================================================
Investment securities with an amortized cost and market value of $1.5
million were pledged to secure the right to participate in the overnight federal
funds market at Bank One.
9
At September 30, 2002, the Banks had $643,000 classified as loans held
for sale, compared to $2.9 million at December 31, 2001. The fair value of the
loans held for sale is based on commitments on hand from investors or prevailing
market prices. The loans held for sale are subject to interest rate risk. If
rates increase before the loans are sold a loss may be recognized.
At September 30, 2002 and December 31, 2001, respectively, the
Corporation had $65.4 million and $61.9 million in net loans. The following
table shows the breakdown into the various loan products as of September 30,
2002 and December 31, 2001.
($ in thousands) SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------------------------------
Mortgage loans on real estate:
Residential 1-4 family $ 5,497 $ 5,200
Commercial 35,971 31,486
Construction 4,106 4,575
Equity lines of credit 2,568 3,100
- --------------------------------------------------------------------------------------
Total mortgage loans 48,142 44,361
Commercial loans 15,612 15,261
Consumer installment loans 2,884 3,661
- --------------------------------------------------------------------------------------
Total loans 66,638 63,283
Less allowance for loan losses 1,274 1,398
- --------------------------------------------------------------------------------------
Net loans $ 65,364 $ 61,885
======================================================================================
The Banks maintain an allowance for loan losses believed to be
sufficient to absorb credit losses inherent in their loan portfolio. The
allowance for loan losses represents management's estimate of probable losses in
the portfolio at each balance sheet date and is supported by all the relevant
information available to management. The allowance contains provisions for
probable losses that have been identified relating to specific borrowing
relationships as well as probable losses believed to be inherent in our loan
portfolio and credit undertakings that are not specifically identified. We
believe that the allowance for loan losses will be adequate to provide for
estimated probable credit losses inherent in our existing loan portfolio.
At September 30, 2002 the allowance for loan losses was $1.3 million
compared to $1.4 million at December 31, 2001. Allowance for loan losses as a
percentage of total loans was 1.91% at September 30, 2002 and 2.21% as of
December 31, 2001. During the nine months ended September 30, 2002, provisions
for loan losses decreased $504,000 when compared to provisions made during the
same period in 2001. Based on the analysis of the portfolio and the increase in
nonperforming assets, management increased the loan loss provision for the
quarter ended September 30, 2002. Net charge offs for the nine months ended
September 30, 2002 and 2001 were $628,000 and $135,000, respectively. Based on
the analysis of the September 30, 2002 loan portfolio, management believes the
loan loss provision for the nine months ended September 30, 2002 is adequate.
The following table shows an analysis of the allowance for possible loan losses.
10
NINE MONTHS ENDED THREE MONTHS ENDED
-------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
($ in thousands) 2002 2001 2002 2001
-------------------------------------------------------------------
Balance beginning of period $ 1,398 $ 835 $ 1,461 $ 1,269
Provision for loan losses 504 498 143 23
Charge-offs (683) (135) (649) (94)
Recoveries 55 - 54 -
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs (628) (135) (595) (94)
- ---------------------------------------------------------------------------------------------------------------
Balance end of period $ 1,274 $ 1,198 $ 1,274 $ 1,198
===============================================================================================================
ALLOWANCE AS A PERCENTAGE OF:
Loans 1.91% 1.93% - -
Net charge-offs 202.87% 887.41% 214.12% 1274.47%
Nonperforming assets consist of impaired loans on nonaccrual status,
loans past due 90 days or more and other repossessed assets. A loan is
considered impaired when, based on current information and events, it is
probable the Banks will be unable to collect the scheduled payment of principal
and interest when due according to the contractual terms of the loan agreement.
As of September 30, 2002, there was one commercial loan totaling
$520,000 classified as nonaccrual. At December 31, 2001 there were eight
commercial loans totalling $1.2 million in a nonaccrual status. Management
actively manages the loan portfolio, seeking to identify and resolve problem
assets at an early stage.
If the nonaccrual loan discussed above had been paying in accordance
with contractual term, an additional $22,674 would have been recorded in
interest income during the nine-month period ended September 30, 2002. To
management's knowledge, there are no additional loans which cause management to
have doubts about the ability of such borrowers to comply with the contractual
loan terms or which may have a material affect on the Corporation's balance
sheet or results of operations.
NONPERFORMING ASSETS
($ in thousands) SEPTEMBER 30, DECEMBER 31,
2002 2001
------------------------------------
NONACCRUAL LOANS
Commercial loans $ 520 $ 1,215
Consumer loans - 77
- ----------------------------------------------------------------------------------------------------
Total nonaccrual loans 520 1,292
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Commercial loans 444 248
Commercial mortgages 655 -
Residential mortgages 680 -
Consumer loans - 18
- ----------------------------------------------------------------------------------------------------
Total accruing loans past due 90 days or more 1,779 266
- ----------------------------------------------------------------------------------------------------
Total nonperforming loans 2,299 1,558
REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS
Residential real estate owned 161 -
Other repossessed assets 17 176
- ----------------------------------------------------------------------------------------------------
Total nonperforming assets $ 2,477 $ 1,734
====================================================================================================
11
The Banks' policies regarding non-accrual loans reflect the importance
of identifying troubled loans early. Consumer loans are normally charged off no
later than 120 days past due, or earlier if deemed uncollectible. Loans other
than consumer are generally placed on non-accrual status when management
determines that principal or interest may not be fully collectible, unless it is
fully collateralized and in the process of collection. Interest previously
accrued but not collected on non-accrual loans is charged against current
income. Income on such loans is then recognized only to the extent that cash is
received and where the future collection of principal is probable.
Loan quality is continually monitored and is reviewed by management on
a monthly basis. Additions to the allowance for loan losses, which are charged
to earnings through the provision for loan losses, is determined based on a
variety of factors, including assessment of the credit risk of the portfolio,
analysis of individual loans via a loan review process, delinquent loans,
evaluation of current economic conditions in the market area, actual charge-offs
during the year and historical loss experience.
LIABILITIES
During the nine months ended September 30, 2002, total deposits increased by
$5.9 million, to $75.5 million compared to $69.5 at December 31, 2001. An
increase occurred in core deposits of demand deposits, NOW accounts, savings and
money markets in the amount of $3.2 million and an increase of $3.3 million in
certificates of deposits under $100,000 offset by a decrease in certificates of
deposit over $100,000 of $500,000. The following table shows the breakdown into
the various deposits products as of September 30, 2002 and December 31, 2001.
($ in thousands) SEPTEMBER 30, DECEMBER 31,
2002 2001
---------------------------------
NOW accounts 2,281 2,951
Money market deposits 16,978 17,598
Savings deposits 1,776 2,359
Certificates of deposit under $100,000 28,943 25,660
Certificates of deposit $100,000 and over 16,723 17,231
- -----------------------------------------------------------------------------------
Total interest bearing deposits 66,701 65,799
Demand deposits $ 8,770 $ 3,739
- -----------------------------------------------------------------------------------
Total deposits $ 75,471 $ 69,538
===================================================================================
CAPITAL
The Corporation was originally capitalized through an initial public
offering of common stock in December 1998. The Corporation does not contemplate
the need to raise additional capital during the next twelve months. Management
believes that its current capital and liquidity will provide the Corporation
with adequate capital to support expected level of deposit and loan growth and
to otherwise meet cash and capital requirements.
During the first quarter of 2002 there was approximately $55,000 of
costs that were identified subsequent to December 31, 2001 related to the Rights
Offering of common stock that occurred in the fourth quarter of 2001.
On May 3, 2002, the Corporation sold 20,834 shares of Series A
Preferred Stock, in a private offering, at a price of $12.00 per share. There
are 62,502 shares of common stock reserved for issuance upon the conversion of
the Series A Preferred Stock.
12
Following are selected capital ratios for the Corporation as of the
dates indicated, along with the minimum regulatory requirement for each item. To
be considered "well-capitalized" by the FDIC, the Corporation must have a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of
at least 6%, leverage ratio of at least 5% and must not be subject to any
written agreement from any regulatory agency requiring it to meet or maintain
any specific capital levels. As of September 30, 2002, Lakeside Community Bank's
total risk-based capital ratio was 10.9%, Tier 1 risk-based capital ratio was
9.9% and leverage capital ratio was 8.3%. As of September 30, 2002, North
Oakland Community Bank's total risk-based capital ratio was 11.6%, Tier 1
risk-based capital ratio was 10.3% and leverage capital ratio was 8.6%. At
September 30, 2002 both banks were considered to be "well-capitalized" by the
FDIC. The following table represents a consolidated capital calculation for the
Corporation.
To be adequately To be well
Actual Capitalized Capitalized
---------------------- --------------------- ---------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
--------------------- --------------------- ---------------------
Total capital to risk weighted assets $ 7,209 10.5 % $ 5,508 8.0 % $ 6,885 10.00 %
Tier I capital to risk weighted assets 6,347 9.2 1,542 4.0 2,312 6.00
Tier I capital to average assets (leverage) 6,347 9.2 1,211 4.0 1,514 5.00
LIQUIDITY
Liquidity management involves the ability to meet the cash flow
requirements of the Banks' customers. These customers may be either borrowers
with credit needs or depositors wanting to withdraw funds. The Corporation's
sources of liquidity include loan payments by borrowers, maturity and sales of
securities available for sale, growth of deposits, federal funds sold, and the
issuance of common stock. An additional source of liquidity, as the need arises,
is out-of-market or Internet certificates of deposits. The out-of-market and
Internet certificates of deposits usually require a higher interest rate and are
a more volatile source of liquidity. As of September 30, 2002 the Banks have
$11.9 million in out-of-market certificates of deposits compared to $14.5
million at December 31, 2001. Management is working to minimize the use of
out-of-market certificates of deposits in 2002. The Banks had borrowing
capability on an unused line of credit with Bank One at September 30, 2002 of
approximately $1.3 million.
The liquidity of a bank allows it to provide funds to meet loan
requests, to accommodate possible outflows in deposits, and to take advantage of
other investment opportunities. Funding of loan requests, providing for
liability outflows, and managing interest rate margins require continuous
analysis to match the maturities of specific categories of loans and investments
with specific types of deposits and borrowings. Bank liquidity depends upon the
mix of the banking institution's potential sources and uses of funds. The major
sources of liquidity have been deposits, federal funds sold, and loans, which
mature within one year. Our larger deposit balances, which might be more likely
to fluctuate in response to rate changes, are closely monitored. These deposits
consist mainly of certificates of deposit over $100,000. Management of the
Corporations considers liquidity to adequate to meet its future commitments
ASSET/LIABILITY MANAGEMENT
The Banks' Asset Liability Management Committee ("ALCO"), which meets
at least quarterly, is responsible for reviewing the interest rate sensitivity
position of the Banks and establishing policies to monitor and limit exposure to
interest rate risk.
13
The following table shows the maturity and repricing distribution of
the Banks' interest earning assets and interest bearing liabilities as of
September 30, 2002. This table displays the interest rate sensitivity gap
(interest rate sensitive assets less interest rate sensitive liabilities),
cumulative interest rate sensitivity gap, the interest rate sensitivity gap
ratio (interest rate sensitive assets divided by interest rate sensitive
liabilities), and the cumulative interest rate sensitivity gap ratio. Loans are
presented gross of the allowance, while securities are shown at amortized cost.
Assumptions incorporated into this time table include estimates of partial
redemptions on NOW, Money Market and savings accounts. Prepayment of loans and
securities are also included at current levels as of September 30, 2002.
AFTER THREE AFTER ONE
($ in thousands) WITHIN MONTHS BUT YEAR BUT AFTER
THREE WITHIN ONE WITHIN FIVE FIVE
INTEREST EARNING ASSETS MONTHS YEAR YEARS YEARS TOTAL
-------------------------------------------------------------------------
Federal funds sold $ 3,300 $ - $ - $ - $ 3,300
Securities, at amortized cost 1,006 514 2,874 4,394
Federal Home Loan Bank stock 143 143
Portfolio loans and held for sale 43,927 3,403 16,750 3,201 67,281
-------------------------------------------------------------------------
Total $ 48,376 $ 3,917 $ 19,624 $ 3,201 $ 75,118
-------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
NOW and money market accounts $ 19,259 $ - $ - $ - $ 19,259
Savings deposits 1,776 1,776
Time deposits less than $100,000 1,819 13,672 13,452 28,943
Time deposits of $100,000 or more 7,318 7,102 2,303 16,723
-------------------------------------------------------------------------
Total $ 30,172 $ 20,774 $ 15,755 $ - $ 66,701
-------------------------------------------------------------------------
Rate sensitivity gap $ 18,204 $ (16,857) $ 3,869 $ 3,201 $ 8,417
-------------------------------------------------------------------------
Cumulative rate sensitivity gap $ 18,204 $ 1,347 $ 5,216 $ 8,417
=========================================================================
Rate sensitivity gap ratio 24.5% -22.6% 5.2% 4.3%
------------------------------------------------------------
Cumulative rate sensitivity gap 1.8% 7.0% 11.3%
==========================================
The table above indicates the time periods in which interest earning
assets and interest bearing liabilities will mature or may be repriced,
generally according to their contractual terms. However, this table does not
necessarily indicate the impact that general interest rate movements would have
on the Corporation's net interest margin, because the repricing of certain
assets and liabilities is discretionary, and is subject to competitive and other
pressures. As a result, various assets and liabilities indicated as repricing
within the same period may, in fact, reprice at different times and at different
rate levels.
At September 30, 2002, the Corporation is considered "asset sensitive"
in the time interval of the first three months, according to the preceding
table. In a downward rate environment, the Corporation might not be able to
decrease prices on interest bearing liabilities as quickly as decreases on rates
on interest earning assets. The Corporation is considered to be somewhat evenly
matched at the one year accumulated gap position.
14
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002 TO NINE MONTH PERIOD
ENDED SEPTEMBER 30, 2001:
The Corporation reported a net loss of $777,000 ($(0.67) per share) for
the months ended September 30, 2002 compared to a net loss of $1.2 million
($(1.42) per share) for the nine months ended September 30, 2001, representing
an improvement of 34.0% in year to date comparisons.
Net interest income increased by 17.1% to $2.5 million for the nine
months ended September 30, 2002 compared to $2.1 million for the same period
ended September 30, 2001, despite negative margin pressure arising from
reductions in the prime lending rate during 2001. The net interest margin
increased to 4.35% at September 30, 2002, compared to 3.73% at September 30,
2001. The rate earned on interest earning assets decreased by 1.25% from
September 30, 2001 to 7.05% at September 30, 2002. The rate paid on interest
bearing liabilities decreased by 2.17% from September 30, 2001 to 3.21% at
September 30, 2002. The decreases in both interest rates earned and interest
rates paid are primarily the result of the decreases in rates enacted by the
Federal Reserve throughout the year 2001. Emphasis on balance sheet management
should enable the Corporation to keep net interest income stable.
The following table shows the Corporation's consolidated average
balances of assets, liabilities, and stockholders' equity; the amount of
interest income or interest expense and the average yield or rate for each major
category of interest earning assets and interest bearing liabilities, and the
net interest margin, for the nine month periods ended September 30, 2002 and
2001. All interest income is reported on a fully taxable equivalent ("FTE")
basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following
computations, are included in the average loan amounts outstanding. Federal Home
Loan Bank equity holdings are included in securities.
15
Net Interest Income
Average Balances, Interest Income/Expense, Average Rates
Nine months ended September 30,
2002 2001
---------------------------------------- --------------------------------------
($ in thousands) Average Average Average Average
Balance Interest Rate Balance Interest Rate
----------- -------------------------- ----------- -------------------------
Assets
Interest bearing balances with banks $ 218 $ 3 1.83% $ 303 $ 8 3.52%
Federal funds sold 2,469 34 1.84% 7,589 259 4.55%
Securities 4,770 145 4.05% 5,495 239 5.80%
Loans, including fees 69,658 3,895 7.46% 63,288 4,269 8.99%
----------- -------------------------- ----------- -------------------------
Total earning assets/interest income 77,115 4,077 7.05% 76,675 4,775 8.30%
Cash and due from banks 3,419 3,536
Allowance for loan losses (1,379) (1,015)
Other assets 1,893 2,019
----------- -----------
Total assets $ 81,048 $ 81,215
=========== ===========
Liabilities and Equity
Interest bearing demand and money markets $ 17,412 $ 217 1.66% $ 16,261 $ 472 3.87%
Savings accounts 2,115 24 1.51% 1,269 27 2.84%
Time deposits less than $100,000 27,079 824 4.06% 28,806 1,322 6.12%
Time deposits $100,000 and over 18,245 497 3.63% 18,748 807 5.74%
----------- -------------------------- ----------- -------------------------
Total interest bearing liabilities interest
expense 64,851 1,562 3.21% 65,084 2,628 5.38%
----------- -------------------------- ----------- -------------------------
Noninterest bearing demand deposits 8,419 8,496
Other liabilities 685 629
Shareholders' equity 7,093 7,006
----------- -----------
Total liabilities and shareholders' equity $ 81,048 $ 81,215
=========== ===========
Net interest income $ 2,515 $ 2,147
=========== ===========
Net interest spread 3.84% 2.92%
=========== ===========
Net interest margin 4.35% 3.73%
=========== ===========
The Corporation had an allowance for loan losses of 1.91% and 1.98% of
total loans as of September 30, 2002 and 2001, respectively. The provision for
possible loan losses for the nine months ended September 30, 2002 and 2001 was
$504,000 and $498,000, respectively.
Noninterest income was $232,000 for the nine months ended September 30,
2002 compared to $196,000 for the same period in 2001. The largest component of
noninterest income in 2002 is deposit account service charges, which comprised
50.4% of the nine month total.
Noninterest expense for the first nine months of 2002 decreased by
$171,000 or 5.7%. The largest component of noninterest expense was compensation
and benefits, which totaled $1.3 million and $1.4 million for the nine months
ended September 30, 2002 and 2001, respectively. Compensation and benefits
decreased by 8.1% when comparing the nine months ended September 30, 2002 and
September 30, 2001. During the nine months ended September 30, 2002, the
Corporation incurred a loss on property held in real estate owned. The Bank
maintained a second mortgage and it was determined that the cost to purchase the
first mortgage out-weighed the cost to write down the property. The category of
defaulted loan expense increased during the nine months ended September 30, 2002
by $56,000 to $63,000 due to the write down of repossessed assets to market
value. The component making up the next largest decrease in non-interest expense
is the other expense category. The category decreased by 52.8%, to $192,000 in
the nine months ended
16
September 30, 2002 from $407,000 for the same period of 2001. The primary item
that contributed to the decrease was the decision to exit the St Clair County
project in 2001. During the nine months ended September 30, 2001, the
Corporation determined that a planned expansion into Algonac, Michigan was not
economically feasible. In order to account for the development costs associated
with this abandoned project, the Corporation took a one-time charge of $270,000.
Currently the Corporation remains liable for lease payments on a building at the
proposed project. Management has included an accrual of rent related to
obligations it expects to pay as it pursues options to termination the lease or
sublease the building. The monthly rent on the building is $3,750 per month
during the first five-year period and $4,125 for the last five-year period. The
lease terminates on November 30, 2009. The Corporation is currently exploring
various options with the landlord including an active campaign for subleasing
the building.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THREE MONTHS ENDED
SEPTEMBER 30, 2001:
The Corporation reported a third quarter 2002 net loss of $861,000
($(0.74) per share) compared to a net loss of $118,000 ($(0.14) per share) for
the third quarter ended September 30, 2001.
Net interest income increased by 4.2% to $797,000 for the three months
ended September 30, 2002 compared to $765,000 for the three months ended
September 30, 2001, despite negative margin pressure arising from reductions in
the prime lending rate during 2001. Continued emphasis on balance sheet
management should enable the Corporation to maintain stable net interest income.
The Corporation had an allowance for possible loan losses of 1.91% and
1.98% of total loans as of September 30, 2002 and 2001, respectively. The
provision for loan losses for the three months ended September 30, 2002 and 2001
was $408,000 and $23,000, respectively. Based on the analysis of the portfolio
and the increase in nonperforming assets, management increased the loan loss
provision for the quarter ended September 30, 2002.
Non-interest income was $82,000 for the three months ended September
30, 2002 compared to $66,000 for the same period in 2001. The largest component
of non-interest income in 2002 is other service charges, which comprised 50.0%
of the three month total.
Non-interest expense for the three months ended September 30, 2002
increased by $237,000 or 25.6%. The largest component of non-interest expense
was compensation and benefits, which totaled $427,000 and $478,000 for the three
months ended September 30, 2002 and 2001, respectively. Compensation and
benefits decrease by 10.7% when comparing the three months ended September 30,
2002 and September 30, 2001. The largest component of the increase in
non-interest expense is the write off of real estate owned. The category
increased to $191,000 in the three months ended September 30, 2002 from zero in
the same period of 2001. During the three months ended September 30, 2002, the
Corporation incurred a loss on property held in real estate owned. The Bank
maintained a second mortgage and it was determined that the cost to purchase the
first mortgage out-weighed the cost to write down the property. The category of
defaulted loan expense increase during the three months ended September 30, 2002
to $23,000 due to the write down of a repossessed asset to market value.
Currently the Corporation remains liable for lease payments on a building at the
proposed St. Clair County project. Management has included an accrual of rent
related to obligations it expects to pay as it pursues options to termination
the lease or sublease the building. The monthly rent on the building is $3,750
per month during the first five-year period and $4,125 for the last five-year
period. The lease terminates on November 30, 2009. The Corporation is currently
exploring various options with the landlord including an active campaign for
subleasing the building.
ITEM 4. CONTROLS AND PROCEDURES
In response to recent legislation and additional requirements,
management has reviewed the Corporation's internal control structure and
disclosure controls and procedures. As a result of such review, enhancements to
formalize and document procedures in place will be implemented prior to the end
of 2002. As required, the effectiveness of our internal control structure and
financial reporting disclosure controls will be evaluated quarterly. Based on
their evaluation as of a date within 90 days of filing this form 10-QSB, J.
William Sumner, Chief Executive Officer and Janet C. Smith, Chief Financial
Officer, have concluded that our disclosure controls and procedures (as defined
in Rules 13a-14 and
17
15d-14 under the Securities and Exchange Act of 1934) are effective to ensure
that material information relating to the Corporation would be made known to
them by others within the Corporation, particularly during the period this Form
10-QSB was being prepared.
No significant changes were made to the internal controls or in the
other factors that could significantly affect these controls subsequent to the
date of their evaluation and there were no corrective actions with regard to
significant deficiencies or material weaknesses of these controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a depository of funds, the Banks may be named as a defendant in a
lawsuit (such as garnishment proceedings) involving claims to the ownership of
funds in particular accounts. All such litigation is incidental to the business
of the Banks. The following is a description of settlements of previously
disclosed litigation.
Roy W. Klecha, Jr. and Christine J. Klecha v Michigan Community Bancorp, Ltd
This was a conversion, unjust enrichment, promissory estoppel, breach
of express and implied warranty, and intentional and innocent misrepresentation
case brought by Roy and Christine Klecha against Michigan Community Bancorp
filed on August 28, 2001 in the Circuit Court of St. Clair County Michigan (Case
No. D 01002373-CZ). Michigan Community Bancorp filed a counterclaim against Roy
W. Klecha, Jr. for breach of fiduciary duty, breach of duties under Michigan's
Uniform Trade Secrets Act, tortuous interference with business expectancy,
misappropriation, and breach of contract. In their complaint, the Klechas
demanded $60,000, plus interest, costs and attorney fees.
This legal proceeding was dismissed through a Stipulated Order of
Dismissal dated July 3, 2002 without any impact to the Corporation.
Daniel J. DuVernay, Joseph C. Fournier and Dennis Guiser v Michigan Community
Bancorp, Ltd
This was an intentional misrepresentation, innocent misrepresentation,
statutory violations and unjust enrichment case brought by Daniel J. DuVernay,
Joseph C. Fournier and Dennis Guiser against Michigan Community Bancorp Limited
filed on August 6, 2001 in the Circuit Court of St. Clair County Michigan (Case
No. D 1002114). In their complaint, the Plaintiffs demanded $140,000, plus
interest, costs and attorney fees.
This legal proceeding was dismissed through a Stipulated Order of
Dismissal dated July 3, 2002. Michigan Community Bancorp Limited has agreed to
convey 25,454 shares of MCB common stock to the plaintiffs. MCB remains liable
to repurchase the shares at a price of $5.50 per share one year from the date of
settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1
99.2
(b) Reports on Form 8-K
On October 9, 2002 Michigan Community Bancorp Limited filed a Form 8-K
with the Securities and Exchange Commission regarding the resignation
of Plante & Moran LLP as its independent public accountants.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
organized.
November 13, 2002 Michigan Community Bancorp Limited
By: /s/ J. William Sumner
---------------------
J. William Sumner
Chief Executive Officer
By: /s/ Janet C. Smith
------------------
Janet C. Smith
Chief Financial Officer
20
I, J. William Sumner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of September 30,
2002;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly reports;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
21
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ J. William Sumner
- ---------------------------------
J. William Sumner
Chief Executive Officer
November 13, 2002
22
I, Janet C. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of September 30,
2002;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly reports;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
23
6. The registrant's other certifying officer and I have included in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Janet C. Smith
- ---------------------------------
Janet C. Smith
Chief Financial Officer
November 13, 2002
24
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
99.1 906 Certification of Chief Executive Officer
99.2 906 Certification of Chief Financial Officer
25