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 March 31, 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 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 April 30, 1999
(Class) (Outstanding)
<PAGE>
HURON NATIONAL BANCORP, INC.
CONTENTS
================================================================================
PART I FINANCIAL INFORMATION
ITEM 1 Consolidated Balance Sheet (Unaudited)
March 31, 1999................................................. 2
Consolidated Statements of Income and Comprehensive Income (Unaudited)
Three months ended March 31,1999 and 1998...................... 3
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 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>
March 31,
ASSETS 1999
----
<S> <C>
Cash and due from banks $ 2,291,385
Federal funds sold 1,800,000
--------------
Cash and cash equivalents 4,091,385
Securities available for sale 3,155,296
Securities held to maturity 3,176,463
--------------
Total investment securities 6,331,759
Loans
Commercial 3,122,388
Real Estate 13,305,659
Installment 7,146,730
--------------
Total Loans 23,574,777
Allowance for loan losses (183,969)
--------------
Net loans 23,390,808
Bank premises and equipment - net 462,079
Accrued interest receivable 308,298
Other assets 100,046
--------------
Total Assets $ 34,684,375
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest-bearing transaction accounts $ 3,413,757
Interest-bearing transaction accounts 4,519,026
Savings 6,916,960
Time 16,494,566
--------------
Total deposits 31,344,309
--------------
Accrued interest payable 75,720
Other liabilities 220,152
--------------
Total liabilities 31,640,181
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 1,796,113
Net unrealized gain on securities
available for sale, net of income tax (1,919)
--------------
Total shareholders' equity 3,044,194
--------------
Total liabilities and shareholders' equity $ 34,684,375
==============
</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
March 31, March 31,
Interest Income 1999 1998
---- ----
<S> <C> <C>
Loans, including fees $ 526,432 $ 460,576
Federal funds sold 24,857 35,343
Securities:
Taxable 73,658 53,994
Tax exempt 14,082 40,432
Other 563 563
----------- -----------
Total interest income 639,592 590,908
Interest Expense
Deposits 292,226 278,624
----------- -----------
Net Interest Income 347,366 312,284
Provision for Loan Losses 3,000 9,000
----------- -----------
Net Interest Income After
Provision for Loan Losses 344,366 303,284
Non-Interest Income
Service charges 22,556 19,444
Other 8,696 9,962
----------- -----------
Total non-interest income 31,252 29,406
----------- -----------
Non-Interest Expense
Salaries and benefits 112,938 105,284
Premises and equipment 33,864 32,249
Legal and accounting fees 16,386 11,018
Other operating expense 59,813 57,644
----------- -----------
Total non-interest expense 223,001 206,195
----------- -----------
Income Before Income Tax 152,617 126,495
Provision for Income Tax 47,802 36,467
----------- -----------
Net Income $ 104,815 $ 90,028
=========== ===========
Comprehensive Income $ 90,997 $ 91,329
=========== ===========
Basic Earnings Per Share $ 1.68 $ 1.44
=========== ===========
Dividends Per Share 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>
Three Months Ended
March 31, March 31,
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998
---- ----
<S> <C> <C>
Net income $ 104,815 $ 90,028
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 13,047 13,182
Net premium amortization and discount accretion on securities 48,478 35,184
Provision for loan losses 3,000 9,000
Increase/(decrease) in cash from change in assets and liabilities:
Other assets and interest receivable (13,187) 20,924
Other liabilities and interest payable (17,777) 42,828
------------ -----------
Net cash from operating activities 138,376 211,146
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-sale securities:
Purchases (1,150,875)
Maturities
Held-to-maturity securities:
Purchases (501,852)
Maturities 312,000 240,000
Net increase in loans (15,082) (228,586)
Purchase of property and equipment (3,231) (4,380)
------------ -----------
Net cash from (used in) investing activities (857,188) (494,818)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase/(decrease) in deposit accounts (110,406) 863,378
------------ -----------
Net cash from financing activities (110,406) 863,378
------------ -----------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS (829,218) 579,706
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF PERIOD 4,920,603 4,391,051
------------ -----------
END OF PERIOD $ 4,091,385 $ 4,970,757
============ ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 290,235 $ 273,959
Federal income tax $ 72,369 $ 15,044
</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 March 31, 1999, and
the results of operations for the three month periods ended March 31, 1999
and 1998.
3. During the three month period ended March 31, 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 $13,818. 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 March 31, 1999 was $3,220,448.
4. Loans past due ninety days or more, nonaccruals and restructured loans
increased by approximately $500 during the three months ended March 31,
1999 to $29,782. These loans have adequate levels of collateral and/or are
guaranteed such that the Bank does not expect significant loss. As of March
31, 1999, the Bank had outstanding commitments to make loans totaling
$729,393 and outstanding letters of credit of $291,991.
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.
5
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 March 31, 1999 decreased from December 31, 1998 by 0.13%,
or $44,304. This decrease primarily was the result of an decrease in deposits of
$110,405 and cash and due from banks of $929,218 offset by an increase in
securities available for sale of $769,461 from December 31, 1998. Since loans
increased the net loan to deposit ratio increased from 74.33% at December 31,
1998 to 74.63% at March 31, 1999. The allowance for loan losses was increased by
$4,722.
During the first three months of 1999, the Bank has seen an decrease in
total deposits of 0.35% or $110,405, primarily in non interest-bearing
transaction accounts. This decrease was offset by increases in time 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 three months ended March 31, 1999 totaled $104,815
compared to $90,028 for the three months ended March 31, 1998, an increase of
$14,787. The increase is primarily the result of an increase in interest income
of $48,684 offset by an increase in noninterest expense of $16,806.
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 March 31, 1999 and 1998, total comprehensive income
was $90,997 and $91,329, respectively.
The provision for loan losses for the three month periods ended March 31,
1999, and 1998 was $3,000 and $9,000, 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.
6
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 three months ended March 31, 1999 totaled
$31,252 compared to $29,406 in 1998. The increase was primarily related to
service charges on returned checks, early redemption penalties and coin and
currency fees.
Non-interest expense for the three months ended March 31, 1999 totaled
$223,001 compared to $206,195 at March 31, 1998. There was an increase of $7,654
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 31.3% and 28.8% for the
three month periods ended March 31, 1999 and 1998, respectively. This increase
between periods is primarily the result of higher net income and a decrease in
the porporation 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 $35,082 for
the three months ended March 31, 1999 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 14 basis
points over the three months ended March 31, 1999 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 30 basis point. The net yield on interest earning assets
remained steady from 3.99% for the three months ended March 31, 1998 and for the
same period in 1999. The increased volume combined with the increase in margin
increased the net interest income by $44,736 on a fully tax equivalent basis.
7
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 March 31,1999
Huron National Bank had capital ratios well above the minimum regulatory
guidelines.
As of March 31,1999, 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) $3,228 14.63% $1,766 8.00% $2,207 10.00%
Tier 1 capital (to risk weighted assets) 3,044 13.80% 883 4.00% 1,324 6.00%
Tier 1 capital (to average assets) 3,044 8.67% 1,404 4.00% 1,755 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.
8
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 ($12,756,000)
at December 31, 1998 to ($13,979,573) at March 31, 1999 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 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 three months of 1999, the Bank has formulated a
plan and is taking action with the goal that all impacted systems will be
compliant.
9
Continued
<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 sytems 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.
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 three months ended March 31, 1999.
ITEM 2 - CHANGES IN SECURITIES
No changes in securities relevant to the requirements of this section occurred
during the three months ended March 31,1999.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
There have been no defaults upon senior securities relevant to the requirements
of this section during the three months ended March 31, 1999.
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 three months ended March 31, 1999.
ITEM 5 - OTHER INFORMATION
No other information to report during the three months ended March 31, 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 three months
ended March 31, 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: 5/9/99
By: /s/ Paulette D. Kierzek
Paulette D. Kierzek
Chief Financial Officer
Dated: 5/9/99
13
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,291,385
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,155,296
<INVESTMENTS-CARRYING> 3,176,463
<INVESTMENTS-MARKET> 3,220,448
<LOANS> 23,574,777
<ALLOWANCE> 183,969
<TOTAL-ASSETS> 34,684,375
<DEPOSITS> 31,344,309
<SHORT-TERM> 0
<LIABILITIES-OTHER> 295,872
<LONG-TERM> 0
0
0
<COMMON> 625,000
<OTHER-SE> 2,421,113
<TOTAL-LIABILITIES-AND-EQUITY> 34,684,375
<INTEREST-LOAN> 526,432
<INTEREST-INVEST> 87,740
<INTEREST-OTHER> 25,420
<INTEREST-TOTAL> 639,591
<INTEREST-DEPOSIT> 292,226
<INTEREST-EXPENSE> 292,226
<INTEREST-INCOME-NET> 347,365
<LOAN-LOSSES> 3,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 223,001
<INCOME-PRETAX> 152,616
<INCOME-PRE-EXTRAORDINARY> 152,616
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104,815
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 4.48
<LOANS-NON> 29,782
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 179,247
<CHARGE-OFFS> 478
<RECOVERIES> 2,200
<ALLOWANCE-CLOSE> 183,969
<ALLOWANCE-DOMESTIC> 183,969
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 138,852
</TABLE>
