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 June 30, 1999
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
incorporation or organization) Identification No.)
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 August 4, 1999
(Class) (Outstanding)
<PAGE>
HURON NATIONAL BANCORP, INC.
CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 Consolidated Balance Sheet (Unaudited)
June 30, 1999. . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income and Comprehensive Income
(Unaudited) Six months ended June 30,1999 and 1998 . . . . . 3
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1999 and 1998 . . . . . . . . . . . 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>
HURON NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
================================================================================
<TABLE>
June 30,
ASSETS 1999
<S> <C>
Cash and due from banks $ 3,026,124
Federal funds sold 1,000,000
--------------
Cash and cash equivalents 4,026,124
Securities available for sale 3,299,087
Securities held to maturity 2,886,914
--------------
Total investment securities 6,186,001
Loans
Commercial 3,569,904
Real Estate 13,400,484
Installment 7,368,177
--------------
Total Loans 24,338,565
Allowance for loan losses (187,044)
--------------
Net loans 24,151,521
Bank premises and equipment - net 449,919
Accrued interest receivable 332,018
Other assets 88,146
--------------
Total Assets $ 35,233,729
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest-bearing transaction accounts $ 3,970,844
Interest-bearing transaction accounts 3,735,434
Savings 7,456,769
Time 16,683,770
--------------
Total deposits 31,846,817
--------------
Accrued interest payable 66,581
Other liabilities 199,907
--------------
Total liabilities 32,113,305
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 1,896,020
Net unrealized gain on securities
available for sale, net of income tax (25,596)
--------------
Total shareholders' equity 3,120,424
--------------
Total liabilities and shareholders' equity $ 35,233,729
==============
</TABLE>
See notes to the interim consolidated financial statements
2
<PAGE>
HURON NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
================================================================================
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
Interest Income 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Loans, including fees $ 531,574 $ 481,635 $1,058,006 $ 942,211
Federal funds sold 17,722 24,347 42,579 59,690
Securities:
Taxable 76,055 73,159 149,826 146,598
Tax exempt 13,514 21,238 27,483 42,224
Other 562 562 1,125 1,125
----------- ----------- ---------- ---------
Total interest income 639,427 600,941 1,279,019 1,191,848
Interest Expense
Deposits 295,998 284,393 588,224 563,017
----------- ----------- ---------- ---------
Net Interest Income 343,429 316,548 690,795 628,831
Provision for Loan Losses 3,000 6,000 6,000 15,000
----------- ----------- ---------- ---------
Net Interest Income After
Provision for Loan Losses 340,429 310,548 684,795 613,831
Non-Interest Income
Service charges 19,380 24,546 41,936 43,990
Other 9,628 8,070 18,324 18,032
----------- ----------- ---------- ---------
Total non-interest income 29,008 32,616 60,260 62,022
----------- ----------- ---------- ---------
Non-Interest Expense
Salaries and benefits 116,668 110,117 229,606 215,401
Premises and equipment 33,112 33,572 66,976 65,821
Legal and accounting fees 16,848 17,158 33,234 28,176
Other operating expense 57,817 56,283 117,630 113,927
----------- ----------- ---------- ---------
Total non-interest expense 224,445 217,130 447,446 423,325
----------- ----------- ---------- ---------
Income Before Income Tax 144,992 126,034 297,609 252,528
Provision for Income Tax 45,084 36,908 92,886 73,375
----------- ----------- ---------- ---------
Net Income $ 99,908 $ 89,126 $ 204,723 $ 179,153
=========== =========== ========== =========
Other Comprehensive Income $ (23,678) $ (1,447) $ (37,496) $ (146)
=========== =========== ========== =========
Comprehensive Income $ 76,230 $ 87,679 $ 167,227 $ 179,007
=========== =========== ========== =========
Basic Earnings Per Share $ 1.60 $ 1.43 $ 3.28 $ 2.87
=========== =========== ========== =========
Dividends Per Share N/A N/A N/A N/A
=========== =========== ========== =========
</TABLE>
See notes to the interim consolidated financial statements
3
<PAGE>
HURON NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
================================================================================
<TABLE>
Six Months Ended
June 30, June 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998
<S> <C> <C>
Net income $ 204,723 $ 179,153
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 26,376 26,364
Net premium amortization and discount accretion on securities 134,445 64,356
Provision for loan losses 6,000 15,000
Increase/(decrease) in cash from change in assets and liabilities:
Other assets and interest receivable (25,006) 20,575
Other liabilities and interest payable (34,965) 57,093
----------- -----------
Net cash from operating activities 311,573 362,541
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-sale securities:
Purchases (1,696,959)
Maturities 300,000 500,000
Held-to-maturity securities:
Purchases (501,852)
Maturities 582,000 510,000
Net increase in loans (778,796) (1,867,658)
Purchase of property and equipment (4,400) (10,220)
----------- -----------
Net cash from (used in) investing activities (1,598,155) (1,369,730)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in deposit accounts 392,103 1,488,922
----------- -----------
Net cash from financing activities 392,103 1,488,922
----------- -----------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS (894,479) 481,733
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF PERIOD 4,920,603 4,391,051
----------- -----------
END OF PERIOD $ 4,026,124 $ 4,872,784
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 595,372 $ 561,753
Federal income tax $ 156,769 $ 47,174
</TABLE>
See notes to the interim consolidated financial statements
4
<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, 1998.
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 June 30, 1999, and
the results of operations for the six month periods ended June 30, 1999 and
1998.
3. During the six month period ended June 30, 1999, 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 a
decrease of $56,811. 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 June 30, 1999 was $2,903,276.
4. Loans past due ninety days or more, nonaccruals and restructured loans
increased by approximately $21,415 during the six months ended June 30,
1999 to $50,697. These loans have adequate levels of collateral and/or are
guaranteed such that the Bank does not expect significant loss. As of June
30, 1999, the Bank had outstanding commitments to make loans totaling
$2,289,964 and outstanding letters of credit of $183,413.
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 1999 and 1998.
Continued
5
<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 June 30, 1999 increased from December 31, 1998 by 1.43%, or
$495,050. This increase primarily was the result of an increase in deposits of
$392,103 and loans of $772,796 offset by a decrease in cash and due from banks
of $894,479 from December 31, 1998. Since loans increased the net loan to
deposit ratio increased from 74.33% at December 31, 1998 to 75.84% at June 30,
1999. The allowance for loan losses was increased by $7,797.
During the first six months of 1999, the Bank has seen an increase in total
deposits of 1.25% or $392,103, primarily in savings and time accounts. This
increase has offset a decrease in interest-bearing transaction accounts as
depositors are committing funds for an extended period of time impacted by
changing deposit rate and service charge pricing by financial insitutions in
Presque Isle County.
Results of Operations
Net income for the six months ended June 30, 1999 totaled $204,723 compared
to $179,153 for the six months ended June 30, 1998, an increase of $25,570. The
increase is primarily the result of an increase in interest income of $87,171
offset by an increase in noninterest expense of $24,122.
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 June 30, 1999 and 1998, total comprehensive income
was $167,227 and $179,007, respectively.
The provision for loan losses for the six month periods ended June 30,
1999, and 1998 was $6,000 and $15,000, 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
6
<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 six months ended June 30, 1999 totaled $60,260
compared to $62,022 in 1998. The decrease was primarily related to service
charges on returned checks, early redemption penalties and coin and currency
fees.
Non-interest expense for the six months ended June 30, 1999 totaled
$447,447 compared to $423,325 at June 30, 1998. There was an increase of $14,206
in salaries and benefits due to the hiring of additional employee.
The effective Federal income tax rate, derived by dividing Federal income
tax expense by income before taxes, was approximately 31.2% and 29.1% for the
six month periods ended June 30, 1999 and 1998, respectively. This increase
between periods is primarily the result of higher net income and a decrease in
the proportion 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 $61,964 for
the six months ended June 30, 1999 over the comparable prior year period mainly
due to increased volume in interest earning assets and interest bearing
liabilities. The rate earned on interest earning assets and the rate paid on
interest bearing liabilities both decreased 17 basis points over the six months
ended June 30, 1999. Asset rates have declined overall, and liability growth was
centered in lower yielding, short-term certificates of deposits and rates on
transaction, savings and time accounts have continued to decline. However, loan
volume continues to increase, accounting for the most significant portion of
growth to interest income. The net yield on interest earning assets declined
only slightly from 4.50% to 4.49% for the six month periods. The increased
overall volume offset by a decline in non-taxable securities increased the net
interest income by $54,427 on a fully tax equivalent basis.
Continued
7
<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 March 31,1999
Huron National Bank had capital ratios well above the minimum regulatory
guidelines.
As of June 30, 1999, the Bank's 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) $3,328 14.78% $1,802 8.00% $2,252 10.00%
Tier 1 capital (to risk weighted assets) 3,116 13.84% 901 4.00% 1,351 6.00%
Tier 1 capital (to average assets) 3,116 8.89% 1,402 4.00% 1,752 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
8
<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 (rate sensitive assets less rate
sensitive liabilities) has increased from ($12,756,000) at December 31, 1998 to
($16,350,592) at June 30, 1999 primarily due to the increase in longer terms
loans and a decrease in investments and federal funds maturing with 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 theYear 2000 issue as a priority item. The Bank has
dedicated significant resources, mainly manpower, to the resolution of this
issue. During 1998 and the first six months of 1999, the Bank hasformulated a
plan and is taking action with the goal that all impacted systems will be
compliant.
Continued
9
<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
contacted all related vendors and requested written confirmation that their
respective products are Year 2000 compliant. Management evaluated and tested the
internal data processing systems to ensure compliance. Testing of these systems
has been completed with the results of these testings and monthly updates
presented to the Board.
The Bank has contacted significant commercial customers regarding their
status on the Year 2000 issue in an attempt 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.
10
<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 six months ended June 30, 1999.
ITEM 2 - CHANGES IN SECURITIES
No changes in securities relevant to the requirements of this section occurred
during the six months ended June 30, 1999.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
There have been no defaults upon senior securities relevant to the requirements
of this section during the six months ended June 30, 1999.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Huron National Bancorp, Inc. was held on
April 28, 1999. Elected as Directors for terms to expire in 2002 were Leon
Delekta, Lynwood Lamb and Louis Dehring. Continuing Directors include Ervin
Nowak, Marvin Beatty, Eugene McLean, Michael Cahoon, Donald Hampton and John
Tierney. There were no other matters submitted to vote.
ITEM 5 - OTHER INFORMATION
No other information to report during the six months ended June 30, 1999.
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 six months
ended June 30, 1999.
11
<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.
12
<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: /s/ Michael L. Cahoon
Michael L. Cahoon
President and Chief Executive Officer
Dated: 8/11/99
By: /s/ Paulette D. Kierzek
Paulette D. Kierzek
Chief Financial Officer
Dated: 8/11/99
13
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,026,124
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,299,087
<INVESTMENTS-CARRYING> 2,886,914
<INVESTMENTS-MARKET> 2,903,276
<LOANS> 24,338,565
<ALLOWANCE> 187,044
<TOTAL-ASSETS> 35,233,729
<DEPOSITS> 31,846,817
<SHORT-TERM> 0
<LIABILITIES-OTHER> 266,488
<LONG-TERM> 0
0
0
<COMMON> 625,000
<OTHER-SE> 2,495,424
<TOTAL-LIABILITIES-AND-EQUITY> 35,233,729
<INTEREST-LOAN> 1,058,006
<INTEREST-INVEST> 177,309
<INTEREST-OTHER> 43,704
<INTEREST-TOTAL> 1,279,019
<INTEREST-DEPOSIT> 588,224
<INTEREST-EXPENSE> 588,224
<INTEREST-INCOME-NET> 690,795
<LOAN-LOSSES> 6,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 447,447
<INCOME-PRETAX> 297,608
<INCOME-PRE-EXTRAORDINARY> 297,608
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204,722
<EPS-BASIC> 3.28
<EPS-DILUTED> 3.28
<YIELD-ACTUAL> 4.49
<LOANS-NON> 50,697
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 179,247
<CHARGE-OFFS> 478
<RECOVERIES> 2,275
<ALLOWANCE-CLOSE> 187,044
<ALLOWANCE-DOMESTIC> 187,044
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 140,451
</TABLE>
