SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q SB
(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, 1998
Commission File Number 0-19181
HURON NATIONAL BANCORP, INC.
(Exact name of small business issuer in its charter)
Michigan 38-2855012
(State or other jurisdiction of (IRS employer Identification No.)
incorporation or organization)
200 East Erie Street, Rogers City, Michigan 49779
(Address of principal executive offices) (Zip Code)
Telephone Number including area code: (517) 734-4734
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 shorter periods if 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[ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
$10.00 par value of common stock 62,500 shares as of November 2, 1998
(Class) (Outstanding)
<PAGE>
HURON NATIONAL BANCORP, INC.
CONTENTS
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
ITEM 1 Consolidated Balance Sheet (Unaudited)
September 30, 1998. . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income and Comprehensive Income
(Unaudited) Nine months ended September 30, 1998 and 1997. . . . 3
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1998 and 1997 . . . . . . . . . 4
Notes to the Consolidated Financial Statements (Unaudited). . . . . 5
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 6
PART II OTHER INFORMATION
Item 1 - Legal Proceedings. . . . . . . . . . . . . . . . . . . . .11
Item 2 - Changes in Securities. . . . . . . . . . . . . . . . . . .11
Item 3 - Defaults upon Senior Securities. . . . . . . . . . . . . .11
Item 4 - Submission of Matters to a Vote of Security Holders. . . .11
Item 5 - Other Information. . . . . . . . . . . . . . . . . . . . .11
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . .11
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . .12
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . .14
<PAGE>
<TABLE>
HURON NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
September 30,
ASSETS 1998
<S> <C>
Cash and due from banks $2,595,321
Federal funds sold 800,000
------------
Cash and cash equivalents 3,395,321
Securities available for sale:
U.S. Treasury 507,031
U.S. Agencies 301,219
Corporate 480,234
State and Municipals 257,768
Securities held to maturity:
U.S. Agencies 430,934
State and Municipals 3,101,246
Corporate 715,374
------------
Total investment securities 5,793,806
Loans
Commercial 3,472,518
Real Estate 12,756,655
Installment 6,736,840
------------
Total Loans 22,966,013
Allowance for loan losses (200,267)
------------
Net loans 22,765,746
Bank premises and equipment - net 486,640
Accrued interest receivable 271,110
Other real estate owned 22,948
Other assets 100,952
------------
Total Assets $32,836,523
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest-bearing transaction accounts $3,811,887
Interest-bearing transaction accounts 3,440,984
Savings 6,716,975
Time 15,594,801
------------
Total deposits 29,564,647
------------
Accrued interest payable 71,786
Other liabilities 233,394
------------
Total liabilities 29,869,827
Shareholders' Equity
Common stock, $10 par value: 100,000 shares
authorized and 62,500 outstanding 625,000
Additional paid in capital 625,000
Retained earnings 1,702,536
Net unrealized gain on securities
available for sale, net of income tax 14,160
------------
Total shareholders' equity 2,966,696
------------
Total liabilities and shareholders' equity $32,836,523
============
See notes to the interim consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HURON NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
Interest Income 1998 1997
<S> <C> <C>
Loans, including fees $1,455,553 $1,374,084
Federal funds sold 76,165 58,513
Securities available for sale:
U.S. Treasury 47,576 71,207
U.S. Agencies 12,421 12,547
Corporate 21,989 4,866
State and Municipals 3,536
Securities held to maturity:
U.S. Agencies 21,793 48,514
State and Municipals 125,349 90,484
Corporate 42,872 62,418
Other 1,688 1,688
---------------- ----------------
Total interest income 1,808,942 1,724,321
Interest Expense
Deposits 853,158 845,090
---------------- ----------------
Net Interest Income 955,784 879,231
Provision for Loan Losses 18,000 27,000
---------------- ----------------
Net Interest Income After
Provision for Loan Losses 937,784 852,231
Non-Interest Income
Service charges 64,799 66,806
Other 33,162 36,940
---------------- ----------------
Total non-interest income 97,961 103,746
---------------- ----------------
Non-Interest Expense
Salaries and benefits 325,261 290,874
Premises and equipment 98,872 94,113
Legal and accounting fees 44,734 47,034
Other operating expense 172,321 170,058
---------------- ----------------
Total non-interest expense 641,188 602,079
---------------- ----------------
Income Before Income Tax 394,557 353,898
Provision for Income Tax 115,619 99,051
---------------- ----------------
Net Income $278,938 $254,847
================ ================
Comprehensive Income $288,845 $254,819
================ ================
Basic Earnings Per Share $4.46 $4.08
================ ================
Dividends Per Share N/A N/A
================ ================
</TABLE>
See notes to the interim consolidated financial statements.
<PAGE>
<TABLE>
HURON NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
<S> <C> <C>
Net income $278,938 $254,847
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 39,546 31,838
Net premium amortization and discount accretion on securities 96,397 106,228
Provision for loan losses 18,000 27,000
Increase/(decrease) in cash from change in assets
and liabilities:
Other assets and interest receivable 29,922 (58,262)
Other liabilities and interest payable 74,837 (18,120)
----------------- -----------------
Net cash from operating activities 537,640 343,531
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-sale securities:
Purchases (555,579) (988,751)
Maturities 1,000,000 750,000
Held-to-maturity securities:
Purchases (501,852) (965,383)
Maturities 815,000 1,394,000
Net increase in loans (3,134,124) (722,588)
Purchase of property and equipment (9,413) (59,692)
----------------- -----------------
Net cash from (used in) investing activities (2,385,968) (592,414)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in deposit accounts 852,598 363,688
----------------- -----------------
Net cash from financing activities 852,598 363,688
----------------- -----------------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS (995,730) (114,805)
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF PERIOD 4,391,051 3,338,015
----------------- -----------------
END OF PERIOD $3,395,321 $3,452,820
================= =================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $843,661 $845,865
Federal income tax $79,304 $133,013
Non-cash transfer from loans to other real estate $23,448
</TABLE>
See notes to the interim consolidated financial statements.
<PAGE>
HURON NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. The consolidated financial statements include the accounts of the
Registrant and its wholly-owned subsidiary, Huron National Bank after
elimination of significant inter-company transactions and accounts. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the notes to the consolidated financial statements
contained in the Annual Report for the year ended December 31, 1997.
2. In the opinion of Management of the Registrant, the accompanying
consolidated financial statements contain all the adjustments (consisting
only of normal recurring accruals) necessary to present fairly the
consolidated financial position of the Registrant as of September 30, 1998,
and the results of operations for the nine month periods ended September
30, 1998 and 1997.
3. During the nine month period ended September 30, 1998, there were no sales
of available-for-sale securities. For this period, the change in net
unrealized holding gain or loss on available-for-sale securities was an
increase of $15,012. There were no sales or transfers of securities
classified as held to maturity. The aggregate estimated fair value of
securities held to maturity as of September 30, 1998 was $4,321,000.
4. Loans past due ninety days or more, nonaccruals and restructured loans
increased by approximately $175,275 during the nine months ended September
30, 1998 to $208,293. These loans have adequate levels of collateral and/or
are guaranteed such that the Bank does not expect significant loss. As of
September 30, 1998, the Bank had outstanding commitments to make loans
totaling $1,160,112 and outstanding letters of credit of $211,136.
5. The provision for income taxes represents federal income tax expense
calculated using annualized rates on taxable income generated during the
respective periods.
6. Under a new accounting standard, comprehensive income is now reported for
all periods. Comprehensive income includes net income and all other changes
in equity, except investments by owners and distributions to owners.
Comprehensive income as reported in the consolidated statements of income
includes net income and the change during the period in unrealized gains
and losses on securities available for sale, net of tax.
7. Basic earnings per share is computed using the weighted average number of
shares outstanding. The number of shares used in the computations of basic
earnings per share was 62,500 for 1998 and 1997.
Continued
<PAGE>
HURON NATIONAL BANCORP, INC.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion and analysis of financial condition and results of
operations provides additional information to assess the condensed consolidated
financial statements of the Registrant and its wholly- owned subsidiary. The
discussion should be read in conjunction with those statements.
Summary of Financial Position
Total assets at September 30, 1998 increased from December 31, 1997 by
3.86%, or $1,221,385. This increase primarily was the result of an increase in
deposits of $852,598 and net loans of $3,092,676 from December 31, 1997. Since
deposits and loans increased significantly the net loan to deposit ratio
increased from 68.52% at December 31,1997 to 77.00% at September 30, 1998. The
allowance for loan losses was increased by $19,636.
During the first nine months of 1998, the Bank has seen an increase in
total deposits of 2.97% or $852,598, primarily in time accounts. This increase
was normal deposit growth as depositors are committing funds for an extended
period of time impacted by changing deposit rate and service charge pricing by
financial institutions in Presque Isle County.
Results of Operations
Net income for the nine months ended September 30, 1998 totaled $278,938
compared to $254,847 for the nine months ended September 30, 1997, an increase
of $24,091. The increase is primarily the result of an increase in interest
income of $84,621 offset by an increase in noninterest expense of $39,109.
The Bank is required under a new accounting standard, to disclose
comprehensive income which is net income plus or minus the change in unrealized
gain or loss on available for sale securities, net of tax, included in
shareholders' equity. As of September 30, 1998 and 1997, total comprehensive
income was $288,845 and $254,819, respectively.
The provision for loan losses for the nine month periods ended September
30, 1998, and 1997 was $18,000 and $27,000, respectively. It is Management's
intention to provide an adequate allowance for loan losses based on an ongoing
evaluation of the loan portfolio. The consistent provision reflects Management's
assessment that the overall credit risk of the loan portfolio is generally
unchanged.
Continued
<PAGE>
HURON NATIONAL BANCORP, INC.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
Results of Operations (continued)
Non-interest income for the nine months ended September 30, 1998 totaled
$97,961 compared to $103,746 in 1997. The decrease was primarily related to a
reduction in service charges on returned checks, early redemption penalties and
coin and currency fees.
Non-interest expense for the nine months ended September 30, 1998 totaled
$641,188 compared to $602,079 at September 30, 1997. There was an increase of
$34,387 in salaries and benefits due to the hiring of additional employees.
The effective Federal income tax rate, derived by dividing Federal income
tax expense by income before taxes, was approximately 29.3% and 28.0% for the
nine month periods ended September 30, 1998 and 1997, respectively. This
increase between periods is primarily the result of a decrease in the porportion
of net income derived from tax exempt securities.
Analysis of Net Interest Income
The difference between interest generated by the Bank's earning assets and
interest paid on liabilities is referred to as net interest income, the most
significant component of the Bank's earnings.
The Bank has experienced an increase in net interest income of $76,553 for
the nine months ended September 30, 1998 over the comparable prior year period
mainly due to increased volume in interest earning assets and interest bearing
liabilities. The rate paid on interest bearing liabilities decreased 7 basis
points over the nine months ended September 30, 1997 because growth was centered
in lower yielding, short-term certificates of deposits and rates on transaction,
savings and time accounts have continued to decline. Loan rates have also
declined. However, loan volume continues to increase, accounting for the most
significant portion of growth to interest income. The rate and volume
fluctuations have resulted in a slight decreasE in the gross yield on interest
earning assets of 1 basis point. Consequently, the net yield on interest earning
assets increased from 2.90% for the nine months ended September 30, 1997 to
2.96% for the same period in 1998. The increased volume combined with the
increase in margin increased the net interest income by $74,475 on a fully tax
equivalent basis.
Continued
<PAGE>
HURON NATIONAL BANCORP, INC.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
Capital Management
Regulators have established "risk-based" capital guidelines for banks and
bank holding companies. Because of the Corporation's and Bank's size, regulatory
capital requirements apply only to the Bank.
Under the guidelines, minimum capital levels are established for risk based
on total assets. For the risk based computation, the ratio is based on the
perceived risk in asset categories and certain off-balance sheet items, such as
standby letters of credit. The guidelines define Tier 1 capital and Tier 2
capital. Tier 1 capital includes common shareholders' equity, while Tier 2
capital adds the allowance for loan losses. Tier 1 capital cannot exceed Tier 2
capital. Banks are required to have ratios of Tier 1 capital to risk weighted
assets of 4% and total capital (Tier 1 plus Tier 2) of 8%. At September 30, 1998
Huron National Bank had capital ratios well above the minimum regulatory
guidelines.
As of September 30, 1998, the Bank's consolidated actual capital levels and
minimum required levels are:
<TABLE>
Minimum Required To
Minimum Required Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
(In Thousands) Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $3,164 15.12% $1,673 8.00% $2,092 10.00%
Tier 1 capital (to risk weighted assets) 2,964 14.17% 837 4.00% 1,255 6.00%
Tier 1 capital (to average assets) 2,964 8.91% 1,330 4.00% 1,663 5.00%
</TABLE>
Liquidity and Interest Rate Sensitivity
The Bank's principal asset/liability management objectives include the
maintenance of adequate liquidity and appropriate interest rate sensitivity
while maximizing net interest income.
The Bank's primary sources of short term liquidity are short-term
investments and the ability to raise money through federal funds purchased.
Longer term sources of liquidity are through longer term investment security
maturities and loan repayments, as well as through normal deposit growth and
negotiable certificates of deposit. The primary source of funds for the parent
company is the upstream of dividends from the Bank.
Continued
<PAGE>
HURON NATIONAL BANCORP, INC.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
Liquidity and Interest Rate Sensitivity (continued)
Management believes that the sources of liquidity are sufficient for the
Bank and parent company to continue with their current business plans.
As previously noted, interest income and interest expense are also
dependent on changing interest rates. The relative impact of changing interest
rates on the net interest income depends on the rate sensitivity to such
changes. Rate sensitivity generally depends on maturity structures, call
provisions, repayment penalties etc. of the respective financial instruments.
The Bank's exposure or sensitivity to changing interest rates is measured by the
ratio of rate-sensitive assets to rate-sensitive liabilities. The Bank feels
that its rate sensitive position is adequate in a normal interest rate movement
environment.
The Bank's cumulative 1 year GAP position has increased from ($11,137,000)
at December 31, 1997 to ($11,874,000) at September 30, 1998 primarily due to the
increase in longer term loans and a decrease in investments and federal funds
maturing within one year. Also, an increase in certificates of deposits maturing
within one year has increased the cumulative GAP position.
The Bank has recently invested funds in short-term securities to offset the
interest rate risk associated with customers investing their funds in short-term
certificates of deposit with the Bank. The increase in loans due within one year
is primarily the result of fixed rate loans transitioning from the greater than
one year category to the less than one year category. Real estate loan trends
continue to focus on long-term fixed rate loans that are continuously maturing
or being refinanced.
Year 2000 Issue
The Bank has identified the Year 2000 issue as a priority item. The Bank
has dedicated significant resources, mainly manpower, to the resolution of this
issue. During 1997 and the first nine months of 1998, the Bank has formulated a
plan and is taking action with the goal that all impacted systems will be
compliant by the end of 1998.
<PAGE>
HURON NATIONAL BANCORP, INC.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
The Year 2000 Issue (continued)
The Bank has outsourced a portion of its data processing. Management has
begun the process of contacting all related vendors and requesting written
confirmation that their respective products are Year 2000 compliant. Management
has also begun the process of evaluating and testing the internal data
processing systems to ensure compliance. Testing of these systems will occur
during 1998 so that the Bank should have time to react to any problems.
The Bank has also begun contacting significant commercial customers
regarding their status on the Year 2000 issue in an effort to avoid any negative
impact on the quality of the loan portfolio.
Addressing the Year 2000 issue is not expected to materially impact the
Bank's results of operations and capital resources. Nevertheless, the inability
of the Bank to address Year 2000 issures could result in interruption in the
Bank's business and have a material adverse impact on the Bank's results of
operations.
<PAGE>
HURON NATIONAL BANCORP, INC.
PART II
OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
No changes in legal proceedings relevant to the requirements of this
section occurred during the nine months ended September 30, 1998.
ITEM 2 - CHANGES IN SECURITIES
No changes in securities relevant to the requirements of this section occurred
during the nine months ended September 30, 1998.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
There have been no defaults upon senior securities relevant to the requirements
of this section during the nine months ended September 30, 1998.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of the Registrant's security
holders during the nine months ended September 30, 1998.
ITEM 5 - OTHER INFORMATION
No other information to report during the nine months ended September 30, 1998.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits required by Item 601 of Regulation S-K. See Index to Exhibits on
page 16.
2. Reports on Form 8-K. No reports on Form 8-K were filed for the nine months
ended September 30, 1998.
<PAGE>
HURON NATIONAL BANCORP, INC.
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
The following exhibits are filed or incorporated by reference as part of this
report:
27 Financial data schedule.
<PAGE>
HURON NATIONAL BANCORP, INC.
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HURON NATIONAL BANCORP, INC.
By: ________________________________
Michael L. Cahoon
President and Chief Executive Officer
Dated:
By: ________________________________
Paulette D. Kierzek
Chief Financial Officer
Dated:
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 2,595,321
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,546,252
<INVESTMENTS-CARRYING> 4,247,554
<INVESTMENTS-MARKET> 4,320,814
<LOANS> 22,966,013
<ALLOWANCE> 200,267
<TOTAL-ASSETS> 32,836,523
<DEPOSITS> 29,564,647
<SHORT-TERM> 0
<LIABILITIES-OTHER> 305,180
<LONG-TERM> 0
0
0
<COMMON> 625,000
<OTHER-SE> 2,341,696
<TOTAL-LIABILITIES-AND-EQUITY> 32,836,523
<INTEREST-LOAN> 1,455,553
<INTEREST-INVEST> 277,224
<INTEREST-OTHER> 76,165
<INTEREST-TOTAL> 1,808,942
<INTEREST-DEPOSIT> 853,158
<INTEREST-EXPENSE> 853,158
<INTEREST-INCOME-NET> 955,784
<LOAN-LOSSES> 18,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 641,188
<INCOME-PRETAX> 394,557
<INCOME-PRE-EXTRAORDINARY> 394,557
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 278,938
<EPS-PRIMARY> 4.08
<EPS-DILUTED> 4.08
<YIELD-ACTUAL> 4.49
<LOANS-NON> 36,184
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 180,631
<CHARGE-OFFS> 540
<RECOVERIES> 2,176
<ALLOWANCE-CLOSE> 200,267
<ALLOWANCE-DOMESTIC> 200,267
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 134,211
</TABLE>
