10QSB 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission file number: 333-63685 CLARKSTON FINANCIAL CORPORATION (Exact name of small business issuer as specified in its charter) MICHIGAN 38-3412321 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15 South Main Street, Clarkston, Michigan 48346 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (248) 625-8585 ----------------------------------------------- Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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_____ The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 931,600 shares of the Company's Common Stock (no par value) were outstanding as of June 30, 2000. Transitional Small Business Disclosure Format (check one): Yes _____ No___X___ INDEX Page Number(s) --------- Part I. Financial Information (unaudited): Item 1. Consolidated Financial Statements 3-7 Notes to Consolidated Financial Statements 8-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-14 Part II. Other Information Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Securities Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 2 Part I Financial Information (unaudited) CLARKSTON FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS June 30, 2000 (unaudited) and December 31, 1999 (dollars in thousands, except per share data) June 30, December 31, 2000 1999 ----------- ------------ (Unaudited) ASSETS Cash and Cash Equivalents Total cash and due from banks $ 342 $ 867 Federal funds sold 1,400 1,600 ----------- ----------- Total Cash and Cash Equivalents 1,742 2,467 Securities Held to Maturity 14,138 9,604 Securities Available for Sale, at fair value 7,351 9,294 Loans, less Loan Loss Reserve Total loans 17,993 11,263 Allowance for loan losses 202 140 ----------- ----------- Net Loans 17,791 11,123 Net Property and Equipment 311 337 Accrued interest receivable 297 256 Deposit premium and conversion costs, net of amortization 161 173 Other Assets 10 12 ----------- ----------- Total Assets $ 41,801 $ 33,266 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing 3,580 2,676 Interest-bearing 30,131 22,595 ----------- ----------- Total deposits 33,711 25,271 Accrued Expenses and Other Liabilities 175 158 Shareholders' Equity Common stock, no par value: 10,000,000 Shares authorized; 931,600 shares issued and outstanding as of June 30, 2000 and December 31, 1999 4,306 4,306 Capital surplus 4,306 4,306 Accumulated deficit (682) (753) Accumulated other comprehensive income (loss) (15) (22) ----------- ----------- Total Shareholder Equity 7,915 7,837 ----------- ----------- Total Liabilities and Shareholders' Equity $ 41,801 $ 33,266 =========== ===========
See accompanying notes to consolidated financial statements 3 CLARKSTON FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF INCOME Three and Six Month Periods Ended June 30, 2000 and June 30, 1999 (dollars in thousands, except per share data) (unaudited) Three Three Months Months Ended Ended Six Months Six Months June 30, June 30, Ended June 30, Ended June 30, 2000 1999 2000 1999 Interest Income Loans $ 359 $ 59 $ 628 $ 66 Securities 328 121 624 179 Federal Funds sold 24 37 51 103 ---------- ---------- ---------- --------- Total interest income 711 217 1,303 348 Interest Expense Deposits 333 72 592 97 Other 0 0 0 0 ---------- ---------- ---------- --------- Total interest expense 333 72 592 97 Net Interest Income 378 145 711 251 Provision for loan losses 29 52 62 70 ---------- ---------- ---------- --------- Net interest income after provision for loan losses 349 93 649 181 Noninterest income 56 12 92 18 Noninterest expense Salaries and benefits 157 127 320 258 Occupancy expense of premises 31 21 63 42 Furniture and equipment expense 22 19 42 39 Computer and data processing expenses 32 39 65 75 Advertising and public relations 31 29 65 65 Professional fees 19 36 48 59 Amortization of deposit premium and conversion cost 6 0 11 0 Other expense 32 21 56 36 ---------- ---------- ---------- --------- Total noninterest expense 330 292 670 574 ---------- ---------- ---------- --------- Profit (Loss) before federal income tax 75 (187) 71 (375) Federal income tax 0 0 0 0 ---------- ---------- ---------- --------- Net profit (loss) $ 75 $ (187) $ 71 $ (375) ========== ========== ========== ========= Basic and diluted profit (loss) per share $ .08 $ (0.20) $ .08 $ (0.40) ========== ========== ========== =========
See accompanying notes to consolidated financial statements. 4 CLARKSTON FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Three and Six Month Periods Ended June 30, 2000 and June 30, 1999 (dollars in thousands) (Unaudited) Three Months Three Months Six Months Ended Six Months ended Ended June 30, 2000 Ended June 30, June 30, 2000 June 30, 1999 1999 Net Profit (Loss) as Reported $ 75 $ (187) $ 71 $ (375) Other Comprehensive Income, Net of Tax: Change in unrealized gain on securities available for sale 9 0 7 (12) ------- -------- ------- --------- Comprehensive Profit (Loss) $ 84 $ (187) $ 78 $ (387) ======= ======== ======= =========
See accompanying notes to consolidated financial statements. 5 CLARKSTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Six months ended June 30, 2000 (dollars in thousands) (Unaudited) Accumulated Other Total Common Capital Accumulated Comprehensive Shareholders' Stock Surplus Deficit Income Equity ------- ------- ----------- ------------- ------------- Balance December 31, 1999 $ 4,306 $ 4,306 $ (753) $ (22) $ 7,837 Net income for six months Ended June 30, 2000 (unaudited) 71 71 Increase in fair market value of securities available for sale 0 0 0 7 7 -------- ------- -------- --------- --------- Balance June 30, 2000 $ 4,306 $ 4,306 $ (682) $ (15) $ 7,915 ======== ======= ======== ========= =========
See accompanying notes to consolidated financial statements. 6 CLARKSTON FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS Six Month Periods Ended June 30, 2000, and June 30, 1999 (dollars in thousands) (unaudited) Six Months Six Months Ended Ended June 30, 2000 June 30, 1999 ------------- ------------- Net Cash Provided by (used in) Operating Activities: Net cash provided by (used in) operating activities 177 (171) Cash Flows from Investing Activities: Net increase in loans (6,730) (4,649) Net increase in securities (2,594) (12,771) Equipment expenditures (18) (77) --------- ---------- Net cash used in investing activities (9,342) (17,497) Cash Flows from Financing Activities: Increase in deposits 8,440 10,217 Repurchase of 10,700 shares of common stock 0 (85) -------- ---------- Net cash provided by financing activities 8,440 10,132 Net decrease in cash and cash equivalents (725) (7,536) Cash and cash equivalents at beginning of year 2,467 8,442 -------- ---------- Cash and cash equivalents at June 30, 2000 and 1999 1,742 906 ======== ==========
See accompanying notes to consolidated financial statements. 7 CLARKSTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (unaudited) and December 31, 1999 NOTE 1 BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Proxy Statement dated March 20, 2000 containing audited financial statements for the period from May 18, 1998 (date of inception), through December 31, 1999. NOTE 2 COMPUTATION OF EARNINGS PER SHARE Basic earnings (loss) per share is based on net income (loss) divided by the weighted average number of shares outstanding during the period. NOTE 3 PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Clarkston Financial Corporation (the "Company"), and its wholly-owned subsidiary, Clarkston State Bank (the "Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation. 8 CLARKSTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (unaudited) and December 31, 1999 NOTE 4 - SECURITIES The amortized cost and fair values of securities were as follows (dollars in thousands): Available for Sale Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- ----------- June 30, 2000 (Unaudited) Taxable variable rate demand Municipal revenue bonds, short term corporate commercial paper, and bonds of government agencies $ 7,366 $ 0 $ (15) $ 7,351 ======== ========= ========== ======== Held to Maturity June 30, 2000 (Unaudited) Taxable variable rate demand municipal revenue bonds, short term corporate commercial paper, and bonds of government agencies $ 14,138 $ 0 $ (303) $ 13,835 ======== ========= ========== ========
Contractual maturities of debt securities at June 30, 2000, were as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Available-for-Sale Securities ----------------------------- Estimated Amortized Market Cost Value --------- ---------- (dollars in thousands) Due from 2000 to 2001 $6,381 $6,383 Due from 2001 to 2002 985 968 ------ ------ $7,366 $7,351 ====== ====== Held-To-Maturity ---------------- Estimated Amortized Market Cost Value --------- --------- Due from 2000-2003 $ 4,695 $ 4,580 Due from 2004-2006 6,746 6,563 Due from 2006-2020 2,697 2,692 ------- ------- $14,138 $13,835 ======= =======
(Continued) 9 CLARKSTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (unaudited) and December 31, 1999 NOTE 5 - LOANS Loans are as follows (dollars in thousands): June 30 December 31, 2000 1999 ---------- ------------ (Unaudited) Commercial $10,131 $ 5,936 Mortgage 3,531 2,529 Consumer 4,331 2,798 -------- -------- 17,993 11,263 Allowance for loan losses 202 140 -------- -------- $17,791 $ 11,123 ======== ========
Activity in the allowance for loan losses is as follows (dollars in thousands): Six months For the Ended Year Ended June 30 December 31, 2000 1999 ---------- ------------ (Unaudited) Balance at beginning of period $140 $ 0 Provision charged to operating expense 62 142 Net loans (charge-offs) recoveries 0 (2) ------- --------- Balance at end of periods $202 $ 140 ======= ========= Allowance for loan losses as a percentage of loans at end of period 1.12% 1.24% ======= =========
(Continued) 10 CLARKSTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (unaudited) and December 31, 1999 NOTE 6 - PREMISES AND EQUIPMENT - NET Premises and equipment are as follows (dollars in thousands): Accumulated Carrying Cost Depreciation Value ---- ------------ ------- June 30, 2000 (unaudited) Building and improvements $ 97 $ 8 $ 89 Furniture and equipment 340 118 222 ------- ------- -------- $ 437 $ 126 $ 311 ======= ======= ======== December 31, 1999 Building and improvements $ 87 $ 5 $ 82 Furniture and equipment 332 77 255 ------- ------- -------- $ 419 $ 82 $ 337 ======= ======= ========
NOTE 7 - DEPOSITS Interest-bearing deposits are summarized as follows (dollars in thousands): June 30, December 31, 2000 1999 --------- ------------ Demand deposit accounts $ 7,014 $ 5,787 Money market accounts 1,962 1,908 Savings accounts 6,624 6,170 Certificates of Deposit 18,111 11,406 -------- -------- $ 33,711 $ 25,271 ======== ========
(Continued) 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Clarkston Financial Corporation (the "Company") is a Michigan corporation incorporated on May 18, 1998. The Company is the bank holding company for Clarkston State Bank (the "Bank"). The Bank commenced operations on January 4, 1999. The Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation. The Bank provides a full range of commercial and consumer banking services, primarily in Clarkston, Michigan and the surrounding market area primarily located in north Oakland County, Michigan. The Company's plan of operation has been to establish its management team within the first few months of its operations and to grow in a prudent manner, primarily by providing prompt, quality service. Management believes that it has been successful in establishing a management team that can administer the Company's growth in such a manner. On April 6, 1999, the Bank entered into an agreement with The State Bank, Fenton, Michigan, to acquire certain assets and assume certain deposit liabilities with respect to The State Bank's branch office located in the Farmer Jack (Foodtown at the date of inception of the bank) grocery store at 6555 Sashabaw Road, Clarkston, Michigan. This transaction was consummated on July 16, 1999 and added $1.8 million in deposits to the Bank's totals. A deposit premium of 9.24% of deposits (as finally adjusted) was paid to The State Bank for these deposits, along with $17,000 for various fixed assets and equipment. The Bank leases the branch space from Borman Inc. (which owns the Farmer Jack store) at a rental rate of $2,750 per month under a lease which runs until July, 2002. The lease is an arm's length transaction on essentially the same terms as those previously in place between Foodtown, Inc. and The State Bank. Financial Condition Total assets of the Company increased by $8.5 million or 25.5% to $41.8 million at June 30, 2000, from $33.3 million at December 31, 1999. The increase in assets is primarily attributable to the Bank continuing to attract customer deposits. The Company anticipates that the Bank's assets will continue to increase during 2000, which will be the Bank's second full year of operations. Cash and cash equivalents, which include federal funds sold and short-term investments, decreased $0.7 million or 29.4% to $1.7 million at June 30, 2000, from $2.5 million at December 31, 1999. The decrease is the result of the increase in the loan portfolios since December 31, 1999. Securities increased $2.6 million or 13.8% to $21.5 million at June 30, 2000 from $18.9 million at December 31, 1999. The increase is the result of increased deposits. 12 The allowance for loan losses as of June 30, 2000 was $202,000, representing approximately 1.12% of total loans outstanding, compared to $140,000 December 31, 1999. Results of Operations The net profit for the six months ended June 30, 2000 was $71,000. As of December 31, 1999, the Company had an accumulated deficit of $753,000 and as of June 30, 2000, the accumulated deficit was $682,000. The accumulated deficit is primarily the result of opening the Bank's main office and its one branch, wages paid to employees, fees and expenses incurred in forming the Company and applying for regulator approvals. The Company expects to remain profitable for the remainder of the year. Interest income was $1,303,000 for the six months ended June 30, 2000, consisting of interest income on federal funds of $51,000, securities of $624,000 and lending activities of $628,000. Interest expense was $592,000 for the six months ended June 30, 2000 and relates to interest incurred on interest bearing deposits. The Company had an allowance for loan loss of approximately 1.12% of total loans at June 30, 2000. The provision for loan loss for the six months ended June 30, 2000 was $62,000. This amount is still expected to grow during 2000, but not at the same rate as in 1999, due to increases in the loan portfolio. Management believes the current rate of providing for the loan loss reserve is adequate. In each accounting period, management evaluates the problems and potential losses in the loan portfolio. Consideration is also given to off-balance sheet items that may involve credit risk, such as commitments to extend credit. Management's evaluation of the allowance is further based on consideration of actual loss experience, the present and prospective financial condition of borrowers, adequacy of collateral, industry concentrations within the portfolio and general economic conditions. The results of these evaluations are reflected in the allowance and periodic provision for credit losses. The primary risk element considered by management regarding each installment and residential real estate loan is the lack of timely payments. Management has a reporting system that monitors past due loans and has adopted policies to pursue its creditor's rights in order to preserve the Bank's position. The primary risk elements concerning commercial loans are the financial condition of the borrower, the sufficiency of the collateral and lack of timely payment. Management has a policy of requesting and reviewing annual financial statements from its commercial loan customers and periodically reviews the existence and value of collateral for selected loans. Other income of $92,000 for the six months ended June 30, 2000 consisted of income from deposit service charges and other miscellaneous fees. The main components of other expenses were primarily salaries and benefits. Other expenses for the six months ended June 30, 2000 was $350,000 consisting primarily of occupancy and equipment expenses, legal and accounting fees, marketing expenses, insurance and supplies. Liquidity and Capital Resources The Company obtained its initial equity capital in an initial public offering of its common stock in November, 1998. The Company's plan of operation for the next twelve months does not contemplate the need to raise additional capital during that period. Management believes that its current capital and 13 liquidity will provide the Company with adequate capital to support its expected level of deposit and loan growth and to otherwise meet its cash and capital requirements for at least the next two or three years. Recent Regulatory Developments Recently enacted federal legislation (the Gramm-Leach-Bliley Act of 1999) eliminates many Federal and state law barriers to affiliations among banks and other financial services providers. The legislation, which took effect March 11, 2000, establishes a statutory framework pursuant to which full affiliations can occur between banks and securities firms, insurance companies, and other financial companies. The legislation provides some degree of flexibility in structuring these new affiliations, although certain activities may only be conducted through a holding company structure. The legislation preserves the role of the Board of Governors of the Federal Reserve System as the umbrella supervisor for holding companies, but incorporates a system of functional regulation pursuant to which the various Federal and state financial supervisors will continue to regulate the activities traditionally within their jurisdictions. The legislation specifies that banks may not participate in the new affiliations unless they are well-capitalized, well-managed and maintain a rating under the Community Reinvestment Act of 1977 of at least "satisfactory" among all affiliates. At this time, the Company is unable to predict the impact this legislation may have on the Company. Forward Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and the subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Securities Holders (a) The annual meeting of shareholders of the Corporation was held on May 20, 2000 ("Annual Meeting") (b) The following directors were elected at the Annual Meeting for terms expiring in 2003: Charles L. Fortinberry, Bruce H. McIntyre, and Robert A. Olsen. Other directors whose terms continued after the meeting are as follows: Edwin L. Adler, David T. Harrison, and John H. Welker, whose terms expire in 2001, and Louis D. Beer and William J. Clark, whose terms expire in 2002. (c) At the Annual Meeting, three directors were elected for terms expiring in 2003. Director Nominee: For: Withheld: Abstain: Charles L. Fortinberry 824,955 14,050 0 Bruce H. McIntyre 824,955 14,050 0 Robert A. Olsen 824,955 14,050 0 Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits - 27 Financial Data Schedule (EDGAR version only) (b) Reports on Form 8-K - None. 15 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-QSB for the quarter ended June 30, 2000, to be signed on its behalf by the undersigned, thereunto duly authorized. CLARKSTON FINANCIAL CORPORATION /s/ David T. Harrison David T. Harrison President and Chief Executive Officer /s/ Terry R. Wolf Terry R. Wolf Treasurer DATE: August 14, 2000