10QSB 1 clarkston10q.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 September 30, 2001 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: 1,026,012 shares of the Company's Common Stock (no par value) were outstanding as of September 30, 2001. 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 September 30, 2001 (unaudited) and December 31, 2000 (dollars in thousands, except per share data) September 30, December 31, 2001 2000 ---------- ---------- (Unaudited) ASSETS Cash and Cash Equivalents Total cash and due from banks $ 2,560 $ 862 Federal funds sold 2,500 2,550 ----------- ----------- Total Cash and Cash Equivalents 5,060 3,412 Securities Held to Maturity 7,821 21,342 Securities Available for Sale, at fair value 31,052 8,989 Loans, less Loan Loss Reserve Total loans 32,993 25,762 Allowance for loan losses 450 379 ----------- ----------- Net Loans 32,543 25,383 Net Property and Equipment 780 282 Accrued interest receivable 359 457 Deposit premium and conversion costs, net of amortization 133 150 Other Assets 160 205 ----------- ----------- Total Assets $ 77,908 $ 60,220 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing 7,827 6,598 Interest-bearing 60,659 44,810 ----------- ----------- Total deposits 68,486 51,408 Accrued Expenses and Other Liabilities 480 534 Shareholders' Equity Common stock, no par value: 10,000,000 Shares authorized; 1,026,012 shares issued and outstanding as of September 30, 2001 and December 31, 2000 4,306 4,306 Capital surplus 4,306 4,306 Accumulated profit (deficit) 15 (335) Accumulated other comprehensive income (loss) 315 1 ----------- ----------- Total Shareholder Equity 8,942 8,278 ----------- ----------- Total Liabilities and Shareholders' Equity $ 77,908 $ 60,220 =========== ===========
See accompanying notes to consolidated financial statements 3 CLARKSTON FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF INCOME Three and Nine Month Periods Ended September 30, 2001, and September 30, 2000 (dollars in thousands, except per share data) (unaudited) Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Interest Income Loans, including fees $ 680 $ 438 $ 1,847 $ 1,066 Securities 569 417 1,502 1,041 Federal Funds sold 31 35 131 86 -------- -------- --------- -------- Total interest income 1,280 890 3,480 2,193 Interest Expense Deposits 700 475 1909 1,066 Other 0 0 0 0 -------- -------- --------- -------- Total interest expense 700 475 1,909 1,066 Net Interest Income 580 415 1,571 1,127 Provision for loan losses 32 36 73 98 -------- -------- --------- -------- Net interest income After provision for loan losses 548 379 1,498 1,029 Noninterest income Gains (losses) on sale of securities 89 1 127 (9) Other income 38 83 193 185 -------- -------- --------- -------- Total noninterest income 127 84 320 176 -------- -------- --------- -------- Noninterest expense Salaries and benefits 202 159 606 479 Occupancy expense of premises 41 31 115 94 Furniture and equipment expense 40 22 110 65 Computer and data processing expenses 71 61 168 126 Advertising and public relations 34 30 86 95 Professional fees 24 24 81 72 Amortization of deposit premium and conversion cost 5 6 17 17 Other expense 50 19 118 74 -------- -------- --------- -------- Total noninterest expense 467 352 1,301 1,022 -------- --------- --------- -------- Profit before federal income tax 208 111 517 183 Federal income tax 70 0 167 0 -------- -------- --------- -------- Net profit $ 138 $ 111 $ 350 $ 183 ======== ======== ========= ======== Basic and diluted profit per share $ .13 $ .12 $ .34 $ .20 ======== ======== ========= ========
See accompanying notes to consolidated financial statements. 4 CLARKSTON FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Three and Nine Month Periods Ended September 30, 2001 and September 30, 2000 (dollars in thousands) (Unaudited) Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net Profit as Reported $ 138 $ 111 $ 350 $ 183 Other Comprehensive Income, Net of Tax: Change in unrealized gain on securities available for sale 297 (5) 314 17 --------- --------- --------- --------- Comprehensive Profit $ 435 $ 106 $ 664 $ 200 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 5 CLARKSTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Nine Months ended September 30, 2001 (dollars in thousands) (Unaudited) Accumulated Other Total Common Capital Accumulated Comprehensive Shareholders' Stock Surplus Deficit Income Equity --------- ------- ----------- ------------- ------------ Balance December 31, 2000 $ 4,306 $ 4,306 $ (335) $ 1 $ 8,278 Net income for nine months Ended September 30, 2001 (unaudited) 350 350 Increase in fair market value of securities available for sale 0 0 0 314 314 ------- ------- ------- ------- ------- Balance September 30, 2001 $ 4,306 $ 4,306 $ 15 $ 315 $ 8,942 ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 6 CLARKSTON FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months ended September 30, 2001, and September 30, 2000 (dollars in thousands) (unaudited) Nine Months Nine Months Ended Ended September 30, September 30, 2001 2000 ---------- ---------- Net Cash Provided by Operating Activities: Net cash provided by operating activities $ 901 $ 441 Cash Flows from Investing Activities: Net increase in loans (7,231) (10,191) Purchase of held-to-maturity securities (2,906) (10,420) Proceeds from maturities of held-to-maturity securities 12,059 995 Proceeds from sales of held-to-maturity securities 4,368 0 Purchase of available-for-sale securities (46,719) (3,190) Proceeds from sales of available-for-sale securities 24,656 4,093 Property and equipment expenditures (558) (33) ---------- ----------- Net cash used in investing activities (16,331) (18,246) Cash Flows from Financing Activities: Increase on deposits 17,078 18,116 ---------- ---------- Net increase in cash and cash equivalents 1,648 311 Cash and cash equivalents at beginning of year 3,412 2,467 ---------- ---------- Cash and cash equivalents at September 30, 2001 and 2000 $ 5,060 $ 2,778 ========== ==========
See accompanying notes to consolidated financial statements. 7 CLARKSTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (unaudited) and December 31, 2000 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 September 30, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Proxy Statement dated April 2, 2001 containing audited financial statements as of December 31, 2000 and 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. 4 CLARKSTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (unaudited) and December 31, 2000 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 --------- ---------- ---------- --------- September 30, 2001 (Unaudited) Taxable variable rate demand Municipal revenue bonds, Short term corporate Commercial paper, and bonds of government agencies $ 30,737 $ 315 $ 0 $ 31,052 ======== ======== ======== ======== Held to Maturity September 30, 2001 (Unaudited) Taxable variable rate demand Municipal revenue bonds, Short term corporate Commercial paper, and bonds of government agencies $ 7,821 $ 291 $ 0 $ 8,112 ======== ======== ======== ========
During the nine month period ended September 30, 2001, the bank sold approximately $4,400,000 of securities, classified as held-to-maturity, due to concerns about the issuer's creditworthiness and in some cases, adverse prepayment risks. Contractual maturities of debt securities at September 30, 2001, 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 ---------------------------------- Amortized Estimated Cost Market Value --------- ------------ (dollars in thousands) Due from 2001 to 2002 $ 290 $ 292 Due from 2002 to 2004 0 0 Due from 2004 to 2006 1,000 1,001 Due from 2006 to 2034 29,447 29,759 ------ ------ $30,737 $31,052 ------ ------ Held-To-Maturity ---------------------------------- Amortized Estimated Cost Market Value --------- ------------ Due from 2001-2002 $ 0 $ 0 Due from 2002-2004 853 871 Due from 2004-2006 1,322 1,373 Due from 2006-2031 5,646 5,868 ------ ------ $ 7,821 $ 8,112 ====== ======
(Continued) 9 CLARKSTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (unaudited) and December 31, 2000 NOTE 5 - LOANS Loans are as follows (dollars in thousands): September 30, December 31, 2001 2000 ------------ ----------- (Unaudited) Commercial $ 22,577 $ 16,100 Mortgage 3,654 3,955 Consumer 6,762 5,707 -------- -------- 32,993 25,762 Allowance for loan losses 450 379 -------- -------- $ 32,543 $ 25,383 ======== ========
Activity in the allowance for loan losses is as follows (dollars in thousands): Nine months For the Ended Year Ended September 30, December 31, 2001 2000 ------------ ----------- (Unaudited) Balance at beginning of period $ 379 $ 140 Provision charged to operating expense 73 243 Net loans (charge-offs) recoveries (2) (4) -------- -------- Balance at end of periods $ 450 $ 379 ======== ======== Allowance for loan losses as a percentage of loans at end of period 1.36% 1.47% ======== ========
(Continued) 10 CLARKSTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (unaudited) and December 31, 2000 NOTE 6 - PREMISES AND EQUIPMENT - NET Premises and equipment are as follows (dollars in thousands): Accumulated Carrying Cost Depreciation Value ---- ------------ -------- September 30, 2001 (unaudited) Building and improvements $ 567 $ 24 $ 543 Furniture and equipment 449 212 237 --------- --------- --------- $ 1,016 $ 236 $ 780 ========= ========= ========= December 31, 2000 Building and improvements $ 86 $ 8 $ 78 Furniture and equipment 372 168 204 --------- --------- --------- $ 458 $ 176 $ 282 ========= ========= =========
NOTE 7 - DEPOSITS Interest-bearing deposits are summarized as follows (dollars in thousands): September 30, December 31, 2001 2000 ------------ ----------- Demand deposit accounts $ 2,094 $ 1,635 Money market accounts 4,411 3,524 Savings accounts 5,971 5,796 Certificates of Deposit 48,183 33,855 -------- -------- $ 60,659 $ 44,810 ======== ========
(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 Bank operates five customer service locations including two full service branches. Financial Condition Total assets of the Company increased by $17.7 million or 29.4% to $77.9 million at September 30, 2001, from $60.2 million at December 31, 2000. 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 2001, which is the Bank's third full year of operations. Cash and cash equivalents, which include federal funds sold and short-term investments, increased $1.7 million or 50% to $5.1 million at September 30, 2001, from $3.4 million at December 31, 2000. The increase is primarily the result of prepayments and maturities of securities occurring in September 2001. Securities increased $8.6 million or 28.4% to $38.9 million at September 30, 2001 from $30.3 million at December 31, 2000. The increase is the result of slower than expected loan growth. The Company's portfolio of held-to-maturity securities declined to $7.8 million at September 30, 2001 from $21.3 million at December 31, 2000. The decrease is primarily a result of call options being exercised by the issuers of the securities, and, in some cases, management's decision to sell certain securities as a result of concerns over the issuer's creditworthiness. New securities purchased by the Bank with proceeds from those maturities and from new deposits have been classified as available-for-sale. Total loans increased by $7.2 million or 27.9% to $33.0 million at September 30, 2001, from $25.8 million at December 31, 2000. Management believes that the total loans will continue to increase over time, although potentially at a lower rate of increase. The allowance for loan losses as of September 30, 2001 was $450,000, representing approximately 1.36% of total loans outstanding, compared to $379,000 as of December 31, 2000. As of December 31, 2000, the Company had an accumulated deficit of $335,000 and as of September 30, 2001, the accumulated profit was $15,000. The accumulated deficit was the result of opening the Bank's main office and its branches, wages paid to employees, fees and expenses incurred in forming the Company and applying for regulator approvals. The operating profits the bank has earned in 2000 and 2001 has eliminated the accumulated deficit. 12 Results of Operations The Company's net profit was $138,000 for the third quarter of 2001 compared to net profit of $111,000 for the third quarter of 2000. Net profit was $350,000 for the nine months ended September 30, 2001, compared to $183,000 for the nine months ended September 30, 2000. The Bank began operations in 1999 and has earned a profit every month since January, 2000. Net profit for the three and nine month periods ended September 30, 2001 included federal income tax provision of $70,000 and $167,000, respectively. The comparable periods in 2000 did not include any federal income tax provision due to the Company's operating loss carryforward for federal tax purposes. Interest income for the third quarter of 2001 was $1.3 million, an increase of 46.1% from interest income of $890,000 for the third quarter of 2000. This increase resulted primarily from the increase in loans and securities. Interest income was $3.5 million for the nine months ended September 30, 2001, an increase of 59.1% from interest income of $2.2 million for the nine months ended September 30, 2000. Interest expense was $1.9 million for the nine months ended September 30, 2001, an increase of 72.7% from interest expense of $1.1 million for the nine months ended September 30, 2000. This consisted of interest paid on interest bearing deposits. The Company had an allowance for loan losses of approximately 1.36% of total loans at September , 2001. The provision for loan loss for the three and nine month periods ended September 30 , 2001, was $32,000 and $73,000, respectively. 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. Noninterest expense was $467,000 for the third quarter of 2001, an $115,000 (or 32.7%) increase over the third quarter of 2000, with the increase primarily attributable to increases in salaries and benefits due to the increase of full time equivalents and normal raises given to employees. There were also increases in computer and data processing expenses due to growth in the number of accounts processed. 13 Liquidity and Capital Resources Liquidity is measured by our ability to raise funds through deposits, borrowed funds, capital or cash flow from the repayment of loans and investment securities. These funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans and support our operations. Liquidity is primarily achieved through the growth of deposits and liquid assets such as securities available for sale, matured securities, and federal funds sold. Asset and liability management is the process of managing our balance sheet to achieve a mix of earning assets and liabilities that maximizes profitability, while providing adequate liquidity. Our liquidity strategy is to fund loan growth with deposits and to maintain an adequate level of short- and medium-term investments to meet typical daily loan and deposit activity. Although deposits from depositors located in our market area have consistently increased, there is no assurance that deposit growth alone will be sufficient to fund our loan growth and provide monies for additional investing activities. Shareholders' equity is a non-interest bearing source of funds that provides support for asset growth. 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 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 year. 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. From time to time, we may be involved in various legal proceedings that are incidental to our business. In our opinion, we are not a party to any current legal proceedings that are material to our financial condition, either individually or in the aggregate. 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 None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits - (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 September 30, 2001, 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 Principal Financial and Account Officer DATE: November 10, 2001