SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 10549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (fee required) for the fiscal year ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (no fee required) for the transition period from _____ to _____
Commission File Number 0-19181
HURON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN
(State or other jurisdiction of incorporation or organization)
38-2855012
(IRS Employer Identification No.)
200 East Erie Street, Rogers City, Michigan 49779
(Address of principal executive offices including zip code)
(517) 734-4734
(Registrant's telephone number, including area code)
Securities registered pursuant to 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $10.00 per share
(Title of Class)
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 such shorter period 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The aggregate market value of the voting stock held by "non-affiliates" of the
Registrant (for this purpose only, the affiliates of the Registrant have been
assumed to be the executive officers and directors of the Registrant and their
associates) as of March 12, 1999, was approximately $1,790,160, based on market
price of $40.00 per share.
As of March 12, 1999, there were outstanding 62,500 shares of the registrant's
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held April 28, 1999 which shall be filed with the Commission
no later than April 30, 1999 (the "1999 Proxy Statement"), are incorporated by
reference into Part III of this Form 10-KSB Report.
<PAGE>
PART-I
ITEM 1 - BUSINESS
GENERAL
The Registrant, Huron National Bancorp, Inc. (hereinafter referred to as the
"Registrant"), is a one-bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Registrant was formed for the purpose of
enabling Huron National Bank (hereinafter referred to as the "Bank") to form a
one-bank holding company. The Bank became a wholly-owned subsidiary of the
Registrant on May 8, 1990. The Registrant's only subsidiary and significant
asset as of December 31, 1998 is the Bank. The Registrant and its subsidiary
operate in the Banking industry, which accounts for substantially all of their
assets, revenues and operating income.
The Bank was organized in 1980 under the laws of the United States. Its
deposits, to the extent allowed by law, are insured by the Federal Deposit
Insurance Corporation. The Bank's main office is located at 200 East Erie
Street, Rogers City, Michigan.
Further discussion of the Registrant's business is presented in the Business
section on page 9 in the 1998 Annual Report to Shareholders, incorporated herein
by reference.
REGULATION
The Registrant is subject to supervision by the Board of Governors of the
Federal Reserve System. The Board of Governors must grant prior approval for the
acquisition by a banking holding company of more than 5% of the voting stock or
substantially all the assets of any bank or bank holding company or non-bank
company.
In approving proposed acquisitions by the Registrant, the Board of Governors
considers a number of factors including expected benefits to the public such as
greater convenience, increased competition or gains in efficiency, weighed
against the risk of possible adverse effects such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. The Board of Governors is empowered to give these factors
different weight in the case of activities commenced de novo than it does in
considering the acquisition of a going concern.
The Bank is subject to regulation, supervision and regular examination by the
Officer of the Comptroller of the Currency. The regulations of this agency
affect most aspects of the Bank's business and prescribed permissible types of
loans and investments, requirements for branch offices, the permissible scope of
the Bank's activities and impose various other requirements.
A holding company, and any of its subsidiary banks, are also prohibited from
engaging in certain tie-in arrangements in connection with the extension of
credit or supplying of property or services. For example, the Bank generally may
not extend credit on the condition that the customer obtain some additional
service from the Bank or the Registrant or refrain from obtaining such service
from a competitor.
The Bank is subject to certain restrictions imposed by the Federal Reserve Act
on "covered transactions" with the Registrant or a subsidiary. The "covered
transactions" that an insured bank and its subsidiaries are permitted to engage
in with their nonbank affiliates are limited to the following amounts: (i) in
the case of any one such affiliate, the aggregate amount of "covered
transactions" of the insured bank and its subsidiaries cannot exceed 10% of the
capital stock and surplus of the insured bank; and (ii) in the case of all
affiliates, the aggregate amount of all "covered transactions" of the insured
bank and its subsidiaries cannot exceed 20% of the capital stock and surplus of
the insured bank. "Covered transactions" are defined by statute to include a
loan or extension of credit to the affiliate, a purchase of securities issued by
an affiliate, a purchase of assets from the affiliate (unless otherwise exempted
by the Federal Reserve), the acceptance of securities issued by the affiliate as
collateral for a loan, and the issuance of a guaranty, acceptance, or letter of
credit for the benefit of an affiliate. Covered transactions must also be
collateralized. The Federal Reserve Act
<PAGE>
PART-I ITEM 1 - BUSINESS
REGULATION (continued)
further requires that (i) "covered transactions" with affiliates; (ii) asset
sales to affiliates; (iii) contractual arrangements with affiliates; (iv)
transactions in which an affiliate acts as an agent or broker; and (v) any
transaction in which an affiliate has a financial interest or is a participant,
must be made: (x) on terms and under circumstances, including credit standards,
that are substantially the same as those prevailing at the time for comparable
transactions with or involving other nonaffiliated companies; or (y) in the
absence of comparable transactions, on terms and under circumstances, including
credit standards, that in good faith would be offered to, or would apply to,
nonaffiliated companies. Certain limitations and reporting requirements are also
placed on extensions of credit by the Bank to its directors and officers, to
directors and officers of the Registrant, to principal shareholders of the
Registrant, and to "related interests" of such directors, officers and principal
shareholders. In addition, such legislation and regulations may affect the terms
upon which any person becoming a director or officer of the Registrant or the
Bank or a principal shareholder of the Registrant may obtain credit from banks
with which the Bank maintains a correspondent relationship.
On July 10, 1995, the FDIC, the Office of Thrift Supervision, the Federal
Reserve and the Office of the Comptroller of the Currency published final
guidelines implementing the Federal Deposit Insurance Corporation Improvement
Act (FDICIA) requirement that the federal banking agencies establish operational
and managerial standards to promote the safety and soundness of federally
insured depository institutions. The guidelines, which took effect on August 9,
1995, establish standards for internal controls, information systems, internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth, and compensation, fees and benefits. In general, the guidelines
prescribe the goals to be achieved in each area, and each institution is
responsible for establishing its own procedures to achieve those goals. If an
institution fails to comply with any of the standards set forth in the
guidelines, the institution's primary federal regulator may require the
institution to submit a plan for achieving and maintaining compliance. The
preamble to the guidelines states that the agencies expect to require a
compliance plan from an institution whose failure to meet one or more of the
standards is of such severity that it could threaten the safe and sound
operation of the institution. Failure to submit an acceptable compliance plan,
or failure to adhere to a compliance plan that has been accepted by the
appropriate regulator, would constitute grounds for further enforcement action.
The federal banking agencies have also published for comment proposed asset
quality and earnings standards which, if adopted, would be added to the safety
and soundness guidelines. This proposal, like the final guidelines, would make
each depository institution responsible for establishing its own procedures to
meet such goals.
The Registrant and the Bank are currently in compliance with the minimum capital
requirements applicable to such institutions. Prompted by the enactment of
FDICIA, the FDIC has established a system of risk-based deposit insurance
premiums. Based on the Bank's prevailing capital ratios, the Bank has been
paying the minimum rate of FDIC insurance since the assessment period that began
January 1, 1996.
LENDING ACTIVITIES
The Bank is actively engaged in originating within the Bank's market area real
estate mortgage loans, commercial loans and installment loans. The Bank's loan
portfolio totaled $23,557,972 at December 31, 1998. This represents 67.83% of
its total assets. At that date, 56.60% consisted of real estate mortgage loans,
30.09% consisted of installment loans and 13.31 % consisted of commercial loans.
Residential Mortgage Loans: The Bank offers residential mortgage loans with
fixed rates of interest and loans with provision for periodic adjustments to the
interest rate with three-year balloon provisions. The Bank policy is to invest
in residential mortgage loans in an original principal amount not to exceed 80%
of the market value of the mortgaged real estate (referred to as the
"loan-to-value ratio").
<PAGE>
PART-I ITEM 1 - BUSINESS (continued)
In the appraisal process, the Bank assesses both the borrower's ability to repay
the loan and the adequacy of the proposed security. In connection therewith, the
Bank obtains an appraisal of the secured property and information concerning the
income, financial condition, employment and credit history of the applicant. The
Bank requires title insurance insuring the priority of its lien and fire and
extended coverage casualty insurance in order to protect the property securing
its real estate loans.
Commercial Mortgage Loans: The Bank makes mortgage loans on commercial real
estate properties such as office buildings, vacant land and industrial
buildings, most of which are located in Presque Isle County.
In its underwriting of commercial property real estate loans, the Bank may lend
up to 80% of the securing property's appraised value, although the Bank's
loan-to-value ratio on income producing property real estate loans is generally
75% or less.
Commercial real estate lending is generally considered to involve a higher risk
than single family residential lending due to the financial sensitivity of real
estate projects and developers to general economic conditions. In originating
such real estate loans, the Bank endeavors to reduce the risk by considering the
credit of the borrower, the location of the real estate, and the quality of the
management, construction and administration of the property.
Installment Loans: The Bank makes various types of installment loans, including
automobile loans, marine loans, recreational vehicle loans, home equity loans,
loans to depositors secured by their deposit accounts, and secured and unsecured
personal loans. The maturity of installment loans varies depending on the type
of loan. Home equity, marine and recreational vehicle maturities can be up to 15
years. Most other types of installment loans have maturities of less than eight
years. The interest rate o the majority of installment loans is fixed.
Commercial Loans: The Bank makes commercial loans (other than commercial
mortgage loans) to manufacturers, retailers, and farmers for the purchase of
equipment, for working capital and for renovations. Commercial loans generally
have a higher degree of risk than do mortgage loans. While mortgage loans are
secured by real estate property the value of which tends to be readily
ascertainable, commercial loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the business and are
either unsecured or secured by business assets, such as accounts receivable,
equipment and inventory. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent upon the success of
the business itself.
COMPETITION
The Bank's primary market area consists of Presque Isle County, Michigan where
its sole office is located. The Bank encounters strong competition both in the
attraction of deposits and the making of real estate and other loans. Huron
National Bank is the smaller of two banks located in Rogers City. The other was
purchased by a bank holding company and converted into a branch office. The Bank
also competes for loans and deposits with a savings and loan institution and two
credit unions. In addition, a total of three other Banks operate branches in
Presque Isle County. Money market funds also compete for deposits in the Bank's
service area. The principal methods used by the Bank to attract deposit accounts
include the variety of services offered, the interest rate offered and the
convenience of office location. The Bank's competition for real estate and other
loans comes from these same financial institutions. The Bank competes for loans
through interest rates, loan maturities, loan fees and the quality of service
extended to borrowers.
In addition to the financial institutions which have offices in Presque Isle
County, the Bank competes with several commercial banks and savings and loans
institutions in surrounding counties, many of which are larger than the Bank.
Further discussion of the Registrant's business is presented in the Business
section on page 9 in the 1998 Annual Report to Shareholders incorporated herein
by reference.
<PAGE>
PART-I ITEM 1 - BUSINESS (continued)
COMPETITION (continued)
I. STATISTICAL DISCLOSURE
(A) Distribution of Assets, Liabilities and Shareholders' Equity;
(B) Interest Rates and Interest Differential
A table and discussion of the Distribution of Assets, Liabilities and
Shareholders' Equity and Interest Rates and Interest Differential is in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 3 through 5 under Analysis of Net Interest Income in the
1998 Annual Report to Shareholders. Such information is incorporated herein by
reference.
II. INVESTMENT PORTFOLIO
(A) A table of book values of the investment portfolio as of December 31,
1998 and 1997 is set forth in Note 3 on pages 18 and 19 of the 1998
Annual Report to Shareholders. Such information is incorporated herein
by reference.
(B) The following table shows the relative maturities and weighted yields
of investments in debt securities at December 31, 1998:
<TABLE>
1 Year or Less 1 Year - 5 Years 5 Years - 10 Years
Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government, Corporations and Agencies $501,457 6.13% 300,103 5.75% $ 511,771 5.19%
States and Municipals (1) 644,851 6.93% 2,019,439 8.59% 291,307 6.31%
Mortgage-backed 88,620 6.21%
Corporate 450,566 6.66% 736,155 6.21%
Totals 1,685,494 6.59% 3,055,697 7.74% $ 803,078 5.60%
</TABLE>
(1) Weighted average yield adjusted to a taxable equivalent basis using a
federal income tax rate of 34%.
III. LOAN PORTFOLIO
(A) A table and discussion of the loan portfolio as of December 31, 1998
and 1997 is in Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 8 under Loans and Loan
Review Process and in Notes 1 and 4 on pages 17 and 19, respectively,
in the 1998 Annual Report to Shareholders, incorporated herein by
reference.
(B) The following table sets forth the remaining maturity of commercial
loans at December 31, 1998 according to scheduled repayments of
principal.
<TABLE>
1 Year or Less 1 - 3 Years Total
<S> <C> <C> <C>
Commercial loans(l) $3,056,110 $79,420 $3,135,530
</TABLE>
(1) These loans are disclosed at their contractual maturity,
however, a significant number of loans are rolled over at
maturity. These rollovers occur because contractual maturity is
short-term and provides management the ability to frequently
review the customers' credit worthiness.
<PAGE>
PART-I ITEM 1 - BUSINESS (continued)
III. LOAN PORTFOLIO (continued)
(C) (1) Nonaccrual, Past Due and Restructured Loans
The following table sets forth non-performing loans at December 31:
<TABLE>
1998 1997
<S> <C> <C>
Loans accounted for on a nonaccrual basis $28,855 $9,500
Aggregate amount of loans ninety days or more past due
(excludes loans on nonaccrual status above) 479 23,518
Troubled debt restructuring where terms have been
renegotiated to provide a reduction or deferral of interest
or principal because of a deterioration in the financial
position of the borrower (excludes nonaccrual and loans
past due ninety days or more above) 135,484 18,333
-------- -------
Total non-performing loans $164,818 $51,351
======== =======
Ratio for allowance for loan losses to non-performing loans 1.09x 3.52x
</TABLE>
The accrual of interest is discontinued at the point in time at which serious
doubt exists as to the collectibility of loan principal or interest. Each loan
is evaluated on its own merits; therefore, loans are not automatically
classified as nonaccrual based upon standardized criteria.
(2) There are no material loans that are current as to which
management has serious doubts as to the ability of the borrower to
comply with the loan repayment terms, or which are expected to need
adjustments in their repayment terms, or which are believed to require
additional provisions for loan losses.
(3) There were no foreign loans outstanding as of December 31, 1998
and 1997.
(4) There are no concentrations of loans exceeding 10% of total loans
which are not already disclosed as a category at December 31, 1998.
(D) As of December 31, 1998, there were no other interest-bearing assets
that would be required to be disclosed under Item III, Parts (C)(1) or
(C)(2) of the Loan Portfolio listing if such assets were loans.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
(A) The following table sets forth balances and summarizes the changes in
the allowance for loan losses for each of the years ended December 31:
<TABLE>
1998 1997
<S> <C> <C>
Balance of allowance for loan losses at the beginning of year: $180,631 $174,955
Charge-offs: Commercial loans 16,873 27,428
Real estate loans 0 3,000
Installment loans 7,843 4,801
-------- --------
Total charge-offs 24,716 35,229
Recoveries: Commercial loans 1,208 1,974
Real estate loans 0 0
Installment loans 1,124 2,931
-------- --------
Total recoveries 2,332 4,905
</TABLE>
<PAGE>
PART-I ITEM 1 - BUSINESS (continued)
IV. SUMMARY OF LOAN LOSS EXPERIENCE (continued)
<TABLE>
1998 1997
<S> <C> <C>
Net loans charged-off 22,384 30,324
Additions to allowance charged to operating expense 21,000 36,000
--------- ---------
Balance at end of year $179,247 $180,631
========== ==========
Average gross loans outstanding 21,680,000 19,744,000
Percent of net charge-offs during the period to average
gross loans outstanding 0.10% 0.15%
</TABLE>
Further discussion of the provision and allowance for loan losses as well as
non-performing loans is presented in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 8 under Loans and Loan
Review Process and in Notes 1, 4 and 5 on pages 16, 19 and 20 in the 1998 Annual
Report to Shareholders, incorporated herein by reference.
(B) The following table presents an allocation of the allowance for loan
losses to the various loan categories for each year ended December 31:
<TABLE>
1998 1997
Allowance % of Loans to Allowance % of Loans to
Amount Total Loans Amount Total Loans
<S> <C> <C> <C> <C>
Commercial $22,975 13.31% $17,932 13.96%
Real estate 25,949 56.60% 18,637 53.32%
Installment 11,295 30.09% 18,618 32.72%
Unallocated 119,028 125,444
-------- ------- --------- -------
Total $179,247 100.00% $180,631 100.00%
======== ======= ========= =======
</TABLE>
V. DEPOSITS
(A) The following table sets forth average deposit balances and the
weighted average rate paid for the years ended December 31:
<TABLE>
1998 1997
Average Average
Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Demand Deposits $3,936,969 0.00% $3,684,452 0.00%
Interest-bearing
demand deposits 3,968,654 2.84% 4,021,178 2.80%
Savings 6,705,744 2.50% 6,545,513 2.56%
Time deposits under $100,000 13,375,154 5.49% 12,311,297 5.51%
Time deposits over $100,000 1,927,264 5.33% 1,812,760 5.79%
------------ ----- ----------- -----
Total $29,913,785 3.74% $28,375,200 3.75%
============ ===== =========== =====
</TABLE>
<PAGE>
PART-I ITEM 1 - BUSINESS (continued)
(B) The following table summarizes carrying balances of time deposits in
amounts of $100,000 or more by time remaining until maturity as of
December 31, 1998:
<TABLE>
<S> <C>
Three months or less $ 1,550,000
Over three months through six months 339,000
Six months through one year 0
Over one year 100,000
------------
Total 1,989,000
============
</TABLE>
<TABLE>
1998 1997
<S> <C> <C>
Net Income to average assets 1.15% 1.08%
Net Income to average shareholders' equity 13.28% 13.56%
Cash dividend payout ratio 29.59% 29.59%
Average shareholders' equity to average total assets 8.66% 7.98%
</TABLE>
VII. SHORT TERM BORROWING
NONE
VIII. ADDITIONAL ITEM - EXECUTIVE OFFICERS
Executive officers of the Registrant are appointed annually by the Board of
Directors at the meeting of Director following the Annual Meeting of
Shareholders. There are no family relationships among these officers and/or
Directors of the Registrant nor any arrangement or understanding between
any officer and any other person pursuant to which the officer was elected.
The following sets forth certain information with respect to the
Registrant's executive officers as of December 31, 1998:
<TABLE>
First Elected
Name (age) Position with Registrant Officer of the Registrant
<S> <C> <C>
Ervin Nowak (67) Chairman 1990
Michael L. Cahoon (65) President and Chief Executive Officer 1990
Paulette D. Kierzek (49) Chief Financial Officer 1990
</TABLE>
Mr. Nowak is a Director of the Registrant and Chairman of the Board of Directors
of Huron National Bank, a position he has held for more than five years.
Mr. Cahoon is a Director of the Registrant, President and Chief Executive
Officer. He is also and has been a Director, President and Chief Executive
Officer of the Bank since 1984.
Mrs. Kierzek is the Chief Financial Officer of the Registrant and Cashier and
Secretary to the Board of Directors of Huron National Bank, a position she has
held for more than five years.
<PAGE>
ITEM 2 - DESCRIPTION OF PROPERTY
The Bank owns the land and building on which the Bank's office is located,
200 East Erie Street, Rogers City. Michigan. There are no liens or
mortgages on the above property.
The Registrant operates its business at the same address as the Bank's
office. No other properties are owned by the Registrant.
ITEM 3 - PENDING LEGAL PROCEEDINGS
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1998.
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information for this item appears on page 2 of the 1998 Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information for this item appears on pages 3 through 9 of the 1998 Annual
Report to Shareholders and is incorporated herein by reference.
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements appear on pages 11 to 25 in the
Annual Report to Shareholders for the year ended December 31, 1998 and are
incorporated herein by reference:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NONE
<PAGE>
PART-III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information for this item appears under the headings "Election of Directors";
"List of Directors and Nominees for Election as Directors"; and "Committees of
the Board of Directors" in the Registrant's 1999 Proxy Statement to be filed
with the Commission, incorporated herein by reference. In addition, reference is
made to "Additional Item" under Part I of this Form 10-KSB Report on page 6.
ITEM 10 - EXECUTIVE COMPENSATION
Information for this item appears under the heading of "Summary Compensation
Table" in the Registrant's 1999 Proxy Statement to be filed with the Commission,
incorporated herein by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information for this item appears under the headings of "Principal Holders of
Securities"; and "Voting Securities and Beneficial Ownership of Directors and
Officers" in the Registrant's 1999 Proxy Statement to be filed with the
Commission, incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information for this item appears under the heading of "Other Transactions" in
the Registrant's 1999 Proxy Statement to be filed with the Commission,
incorporated herein by reference. In addition, reference is made to Note 4 of
the Companys' Financial Statements filed under Item 7 of this Report.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
3. Exhibits
Reference is made to the Exhibit Index on page 10 of this report.
(b) Report on Form 8-K
No reports on Form 8-K were filed during the last quarter of the year
covered by this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 15, 1999.
HURON NATIONAL BANCORP, INC.
Michael L. Cahoon Paulette D. Kierzek
President and Chief Executive Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed by the following persons in the capacities indicated on
March 15, 1999.
Ervin Nowak Lynwood Lamb
Chairman of the Board Director
Marvin Beatty Leon Delekta
Vice Chairman of the Board Director
Eugene McLean Michael L. Cahoon
Director Director, President and CEO
Donald Hampton Louis Dehring
Director Director
John Tierney
Director
Dale L. Bauer Paulette D. Kierzek
Vice President Cashier
<PAGE>
INDEX TO EXHIBITS
The following exhibits are filed or incorporated by reference as part of this
report:
3(i) Articles of Incorporation of the Registrant as currently in
effect and any amendments thereto (incorporated herein by
reference to exhibit 3(A) of the Registrant's Form S-4
Registration Statement dated March 13, 1990, No. 33-33874).
3(ii) Bylaws of the Registrant as currently in effect and any
amendments thereto (incorporated herein by reference to exhibit
3(B) of the Registrant's Form S-4 Registration Statement dated
March 13, 1990, No. 33-33874).
13 Annual Report for the year ended December 31, 1998.
The consolidated financial statements and notes related thereto
appear on pages 11 - 25, and the other financial information on
page 1 in the Annual Report to Shareholders are incorporated by
reference in this Form 10-KSB Report. With the exception of these
statements and information, the Annual Report to Shareholders for
the year ended December 31, 1998, is not deemed filed as part of
this Form 10-KSB Report.
21 List of Subsidiary on page 11.
27 Financial Data Schedule on page 12.
<PAGE>
EXHIBIT 13
HNB
Huron National Bancorp, Inc.
ANNUAL REPORT
1998
<PAGE>
HURON NATIONAL BANCORP, INC.
CONTENTS
SELECTED FINANCIAL DATA.................................................. 1
TWO YEAR SUMMARY OF COMMON STOCK DATA BY QUARTER ........................ 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................... 3
BUSINESS................................................................. 9
DIRECTORS AND EXECUTIVE OFFICERS......................................... 10
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors...................................... 11
Consolidated Balance Sheets......................................... 12
Consolidated Statements of Income................................... 13
Consolidated Statements of Changes in Shareholders' Equity.......... 14
Consolidated Statements of Cash Flows............................... 15
Notes to the Consolidated Financial Statements...................... 16-25
<PAGE>
HURON NATIONAL BANCORP, INC.
SELECTED FINANCIAL DATA
<TABLE>
For the Year Ended December 31,
SUMMARY OF OPERATIONS 1998 1997 1996 1995
<S> <C> <C> <C> <C>
Total interest income $ 2,445,180 $ 2,308,579 $ 2,195,890 $ 1,990,838 $1,823,975
Total interest expense 1,151,318 1,117,854 1,075,226 870,052 713,398
Net interest income 1,293,862 1,190,725 1,120,664 1,120,786 1,110,577
Provision for loan losses 21,000 36,000 36,000 33,500 30,000
Net interest income after provision
for loan losses 1,272,862 1,154,725 1,084,664 1,087,286 1,080,577
Noninterest income 132,034 135,432 147,347 181,258 119,869
Noninterest expense 865,599 818,870 786,566 823,719 793,527
Income before income tax 539,297 471,287 445,445 444,825 406,919
Provision for income tax 159,097 133,356 138,507 138,618 135,375
NET INCOME $380,200 $337,931 $306,938 $306,207 $271,544
AVERAGE SHARES OUTSTANDING 62,500 62,500 62,500 62,500 62,500
PER SHARE DATA
Basic earnings $6.08 $5.41 $4.91 $4.90 $4.34
Cash dividends 1.80 1.60 1.50 1.25 1.00
Book value, end of year 47.25 42.85 39.03 35.76 31.81
TOTAL AVERAGE EQUITY (000's) $2,864 $2,493 $2,363 $2,141 $1,909
TOTAL AVERAGE ASSETS (000's) $33,061 $31,238 $29,661 $26,395 $25,431
RATIOS
Return on average total assets 1.15% 1.08% 1.03% 1.16% 1.07%
Average shareholders' equity to average
total assets* 8.66% 7.98% 7.97% 8.11% 7.51%
Return on average shareholders' equity* 13.28% 13.56% 12.99% 14.30% 14.22%
Dividend payout ratio (dividends divided
by net income) 29.59% 29.59% 30.54% 25.51% 23.02%
PERIOD END TOTALS (000's)
Total assets $34,729 $31,615 $30,292 $27,752 $25,549
Total loans 23,558 19,854 19,186 17,721 17,031
Total deposits 31,455 28,712 27,594 25,277 23,280
Shareholders' equity 2,953 2,678 2,440 2,235 1,988
</TABLE>
Average shareholders' equity includes net average unrealized gain/loss on
securities available for sale.
<PAGE>
TWO YEAR SUMMARY OF COMMON STOCK DATA BY QUARTER
There is no established trading market in the Company's common stock. Such sales
as there are generally occur in Presque Isle County, Michigan. The following
table summarizes sales the Company has knowledge of occurring during the last
two years. Where known, the average sales price is given. Because the shares are
sold infrequently and not on any exchange, the numbers shown cannot necessarily
be considered to be an accurate reflection of true market value.
<TABLE>
1998 1997
Number of Average Price Number of Average Price
Shares Per Share Shares Per Share
<S> <C> <C> <C> <C>
First Quarter 50 Price Unknown 100 $32.00
Second Quarter 25 $40.00 26 $32.00
150 $39.00
Third Quarter 12 $38.00 50 $34.00
150 $36.00
Fourth Quarter 10 $40.00 None
</TABLE>
As of December 31, 1998, the Company's shareholder list reflected approximately
631 shareholders of record and there were 62,500 shares of common stock issued
and outstanding.
Dividends declared per share were $1.80 and $1.60 during 1998 and 1997,
respectively.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section presents information relevant to understanding and assessing the
consolidated financial condition and results of operations of Huron National
Bancorp, Inc. and its wholly-owned subsidiary, Huron National Bank. This
discussion should be read in conjunction with the consolidated financial
statements and related footnotes contained elsewhere in this report.
SUMMARY Net income of $380,200 was reported in 1998 compared to net income of
$337,931 in 1997 and $306,938 in 1996. Basic earnings per share was $6.08 in
1998 compared to $5.41 in 1997 and $4.91 in 1996. For 1998, return on average
assets and average equity equaled 1.15% and 13.28%, respectively. This compares
to 1.08% and 13.56% in 1997 and 1.03% and 12.99% in 1996.
As of year-end, total assets were $34,728,679, an increase of $3,113,541 or
9.85% over December 31, 1997. This increase followed an increase of $1,322,868
in 1997's total assets over 1996's. Total loans increased $3,704,271 at December
31, 1998 when compared to December 31, 1997, while securities decreased
$1,070,462 and cash and cash equivalents increased by $529,552 for the same
period. These increases were funded by growth in customer deposits. In total,
the Bank's deposits increased from $28,712,049 in 1997 to $31,454,714 in 1998,
with time deposits growth of $1,892,983 and interest bearing transaction
accounts of $661,871. Customers are now committing funds for extended periods of
time.
Shareholders' equity as a percent of assets increased to 8.50% at December 31,
1998 compared to 8.47% for December 31, 1997. This is the result of the
Company's earnings keeping pace with asset growth.
RESULTS OF OPERATIONS
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. In 1998, net interest income, on a
fully tax equivalent basis increased by $100,000 compared to 1997. The increase
in the level of deposits partially offset the positive impact on net interest
income from the increase in interest earning assets.
The following table summarizes the increases in net interest income.
<TABLE>
Net Interest Income
(in thousands; fully taxable equivalent basis) 1998 1997 1996
<S> <C> <C> <C>
Interest Income $2,487 $2,354 $2,222
Interest Expense 1,151 1,118 1,076
Net Interest Income $1,336 $1,236 $1,146
Increase in Net Interest Income $100 $90 $13
Percent Increase of Net Interest Income 8.00% 7.88% 1.16%
</TABLE>
<PAGE>
The two variables that have the most significant effect on the change in the net
interest income are volume and rate. Below is a chart which illustrates the
impact of changes in these two important variables for 1998 and 1997.
<TABLE>
Change in Net 1998 Over 1997 1997 Over 1996
Interest Income (1) Change Due to: Change Due to:
(In thousands; fully taxable equivalent basis Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans $177 $(31) $146 $126 $(6) $120
Taxable securities (28) 2 (26) (47) (5) (52)
Tax-exempt securities (15) 3 (12) 60 0 60
Federal funds sold and other 25 0 25 2 2 4
Total Interest Income 159 (26) 133 141 (9) 132
Interest Expense
Interest bearing DDA (2) (4) (6) 3 (8) (5)
Savings 4 (5) (1) 4 (12) (8)
Time deposits 69 (29) 40 38 17 55
Total Interest Expense 71 (38) 33 45 (3) 42
Net Interest Income $88 $12 $100 96 $(6) 90
</TABLE>
(i) For purposes of these tables, changes in interest due to volume
and rate were determined as follows:
Volume Variance-change in volume multiplied by the previous
year's rate.
Rate Variance-change in rate multiplied by the previous year's
volume.
Rate/Volume Variance-change in volume multiplied by the change in
rate. This variance was allocated to volume variance and rate
variance in proportion to the relationship of the absolute dollar
amount of the change in each.
Analysis of the Bank's net yield on earning assets is also used to evaluate
changes in net interest income. The net yield on earning assets employs an
effective cost of funds by recognizing interest-free liabilities and
shareholders' equity which fund earning assets, and is computed by dividing net
interest income by earning assets.
<PAGE>
The table below summarizes the Company's average balances, interest
income/expense, interest rates, net yield on earning assets, and interest rate
spread.
<TABLE>
Interest Rate Spread and Net
Yield on Earning Assets 1998 1997 1996
(In Thousands) Average Average Average
Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans 21,662 $1,991 9.19% $19,744 $1,845 9.35% $18,386 $1,725 9.38%
Taxable securities 4,384 270 6.15% 4,837 296 6.13% 5,602 348 6.22%
Tax-exempt securities (fully
taxable equivalent basis) 1,750 123 7.02% 1,974 135 6.84% 1,101 75 6.85%
Federal funds sold 1,853 101 5.46% 1,387 76 5.44% 1,342 72 5.27%
Other 38 2 6.00% 38 2 6.00% 38 2 6.00%
Total interest earning 29,687 2,487 8.38% 27,980 2,354 8.41% 26,469 2,222 8.39%
Cash and due from banks 2,725 2,635 2,642
Other assets, net 649 623 550
Total Assets $33,061 $ 31,238 $ 29,661
======= ======== ========
Liabilities
Interest bearing DDA's $3,968 107 2.70% $4,021 113 2.80% $3,930 118 2.99%
Savings 6,706 166 2.48% 6,546 167 2.56% 6,368 175 2.75%
Time deposits 15,329 878 5.73% 14,124 838 5.93% 13,472 783 5.81%
Total interest bearing 26,003 1,151 4.43% 24,691 1,118 4.53% 23,770 1,076 4.52%
DDA's 3,911 3,684 3,260
Other liabilities 283 370 268
Shareholders' equity 2,864 2,493 2,363
Total liabilities and equity $33,061 31,238 $ 29,661
======= ====== ========
Net Interest Income (fully $ 1,336 $ 1,236 $ 1,146
taxable equivalent basis) ======= ======= =======
Net yield on interest earning assets 4.50% 4.42% 4.33%
===== ===== =====
Net interest spread 3.95% 3.89% 3.87%
===== ===== =====
Interest earning assets/
interest bearing liabilities 1.14x 1.13x 1.11x
</TABLE>
<PAGE>
Non-Interest Income
The Company recorded noninterest income of $132,034, a decrease of $3,398 or
(2.51)% from $135,432 in 1997. This decrease was attributable to a reduction in
service charges on returned checks, non-sufficient funds and other service fees
in 1998.
Non-Interest Expense
During 1998, noninterest expense increased by $46,729 or 5.71 % from $818,870 in
1997 to $865,599 in 1998. The increases included $27,470 in salaries & benefits
which included contributions to the SEP Plan and the normal increase in
salaries. The other increases include $6,275 in Premises & Equipment and $14,173
in Other Operating Expenses.
Provision for Income Taxes
The provision for income taxes was $159,097 in 1998 compared to $133,356 in
1997, an increase of $25,741 or 19.30%. The effective tax rate, derived by
dividing applicable income tax expense by income before taxes, was 30% in 1998
and 28% in 1997.
FINANCIAL CONDITION
Liquidity and Interest Rate Sensi
The Bank's principal asset/liability management objectives include the
maintenance of adequate liquidity and appropriate interest rate sensitivity
while maximizing net interest income.
Liquidity is generally defined as the ability to meet cash flow requirements.
For a bank, meeting cash flow requirements means having funds available to
satisfy customer credit needs as well as having funds available to meet
depositor withdrawal requests. For the parent company, liquidity means having
funds available to pay cash dividends and other operating expenses.
The Bank's primary sources of short-term liquidity are its securities available
for sale and ability to raise money through federal funds purchased. Its longer
term sources of liquidity are maturities of securities, loan repayments, 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.
Management believes the Bank has adequate sources of liquidity to meet its
anticipated requirements.
As previously noted, interest income and interest expense are also dependent on
changing interest rates. The relative impact of changing interest rates on 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 ratesensitive
assets to rate-sensitive liabilities. Management believes that the Bank's rate
sensitive position is adequate in a normal interest rate movement environment.
<PAGE>
GAP Analysis
The following table as of December 31, 1998 reflects how management has matched
assets to liabilities that mature or have the ability to reprice in the
following time frame:
<TABLE>
Assets 0-90 Days 91-365 Days 1 - 3 Years 3 - 5 Years 5 Years + Total
<S> <C> <C> <C> <C> <C> <C>
Loans $1,674,000 $3,007,000 $4,284,000 $ 8,317,000 $6,276,000 $ 23,558,000
Investments 296,000 1,410,000 2,473,000 573,000 810,000 5,562,000
Federal Funds 1,700,000 0 0 0 0 1,700,000
Total 3,670,000 4,417,000 6,757,000 8,890,000 7,086,000 30,820,000
Liabilities
Interest-bearing
transaction accounts 4,534,000 4,534,000
Savings 6,856,000 6,856,000
Certificates of Deposit 4,881,000 4,572,000 4,408,000 2,347,000 16,208,000
Total 16,271,000 4,572,000 4,408,000 2,347,000 0 27,598,000
Asset/(Liabilities) GAP (12,601,000) (155,000) 2,349,000 6,543,000 7,086,000 3,222,000
============ ============= ============== =========== ========== ===========
Cumulative GAP $(12,601,000) $ (12,756,000) $ (10,407,000) $(3,864,000) $3,222,000
============ ============= ============= =========== ==========
</TABLE>
Interest-bearing transaction and savings accounts are classified as repricing in
0-90 days as these instruments provide management with the discretion to adjust
their rates. Further, because this category has no maturity schedule or early
withdrawal penalty, depositors are free to move their funds based on rate alone.
Therefore, management recognizes that these categories, although generally lower
costing funds, are rate sensitive to the extent of interest rate movements.
The Bank's cumulative 1 year GAP position increased from ($11,137,000) at
December 31, 1997 to ($12,756,000) at December 31, 1998 as a result of a
decrease of asset maturities in the investment area. Management believes that
the GAP overstates true interest sensitivity. Interest exposure is not as
significant as expressed in the above schedule as rates on interest-bearing
transaction and savings accounts may not reprice on an "instant basis".
Management believes liabilities do not need to be repriced as soon as rates
begin to move which gives them a "lag time" in the market and for the assets to
reprice. It is also their belief that they are in a sufficient position to
minimize any adverse effect to the Bank's financial position due to interest
rate changes.
Capital
Management attempts to maintain sufficient capital to take advantage of market
opportunities, yet provide a fair return to its shareholders.
The National Bank Act places limitations on the ability of the Bank to declare
and pay dividends. As a general matter, the Bank may not pay dividends greater
than the total of the Bank's net profits for that year combined with its
retained net profits of the two preceding years. Further, the Comptroller of the
Currency may prohibit the payment of cash dividends where it deems the payment
to be an unsafe and unsound banking practice. Under the most restrictive of the
dividend restrictions, in 1999 the Bank could pay additional dividends of
approximately $516,000 plus 1999 net income to the Holding Company.
<PAGE>
Management believes that a strong capital position is paramount to its continued
profitability and continued depositor and investor confidence. It also provides
Huron National Bank flexibility to take advantage of growth opportunities and to
accommodate larger Bank loan customers. Regulators have established "risk-based"
capital guidelines for banks and bank holding companies. Because of the
Company's and Bank's size, regulatory capital requirements apply only to the
Bank.
Under the guidelines, minimum capital levels are established for risk based and
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 December 31, 1998,
Huron National Bank had capital ratios well above the minimum regulatory
guidelines as noted within footnote 14 of the Consolidated Financial Statements.
Loans and Loan Review Process
Maintaining high asset quality is a key determinant of the Bank's success.
Therefore, Management continually monitors impaired, non-performing and
delinquent loans and reports them monthly to the Board of Directors.
Non-accrual and loans past due 90 days or more approximated $29,334 or 0.12% of
total loans at December 31, 1998 compared to approximately $33,018 or 0.17% a
year earlier.
The provision for loan losses was $21,000 in 1998 and $36,000 in 1997 and 1996.
For the same years, charge-offs, net of recoveries, were $22,384, $30,324 and
$5,145, respectively.
The allowance for loan losses is at $179,247 or 0.76% of total loans at December
31, 1998 compared to $180,631 or 0.91 % of total loans at year-end 1997. The
allowance is consistent with Management's recognition of problem loans along
with Management's strategy to emphasize the quality of the loan portfolio. The
allowance is considered adequate by Management. (See also Note 1 to the
Consolidated Financial Statements)
Effects of Inflation
Inflation can have a significant affect on the reported financial operating
results of all industries. This is especially true in industries with a high
proportion of fixed assets and inventory. Inflation has an impact on the growth
of total assets in the banking industry and the need to maintain a proper level
of equity capital.
Interest rates are significantly affected by inflation, but it is difficult to
assess the impact since neither the timing nor the magnitude of the changes in
the consumer price index coincide with changes in interest rates. There is, of
course, an impact on longer-term earning assets; however, this effect continues
to diminish as investment maturities are shortened and interest-earning assets
and interest-bearing liabilities shift from fixed-rate long-term to
rate-sensitive short-term.
<PAGE>
BUSINESS
Huron National Bancorp, Inc., along with its wholly-owned subsidiary, Huron
National Bank, provides its customers with a full line of commercial banking
services with its only office located in Rogers City, Michigan. The Bank's
customer base consists of individuals, agricultural concerns, resort and related
businesses and small to medium-sized manufacturing companies. The Bank's service
area consists primarily of Presque Isle County in the northeastern portion of
Michigan's lower peninsula.
Huron National Bank is the largest of two banks located in Rogers City. The
other was purchased by a bank holding company and converted into a branch
office. The Bank also competes for loans and deposits with a savings and loan
institution, and two credit unions. In addition, a total of three other Banks
operate branches in Presque Isle County, and money market funds also compete for
deposits in the Bank's service area.
The Bank regularly makes commitments for secured term loans and commitments for
lines of credit. These lines of credit are reviewed on an annual basis by the
Bank's Board of Directors. However, these commitments are firm only to the
extent that the respective borrower maintains a satisfactory credit history and
does not represent any unusual credit risk. The Bank had $2,308,200 and
$1,832,000 as of December 31, 1998 and 1997 in outstanding lines of credit and
commitments to make loans of which $1,041,940 and $770,142 were still available
to the respective borrower. Furthermore, the Bank had issued letters of credit
totaling $199,571 as of December 31, 1998.
A portion of the Bank's deposits are obtained from and loans made to
agricultural concerns and resort and related businesses. There are no other
material concentrations of credit to, nor have other material portions of the
deposits been received from, a single person, persons, industry or group.
The economy of the market area served by the Bank is significantly influenced by
the seasonal effects of the tourist and agricultural industries. The business of
the Bank has been only mildly affected by the seasonal aspects of these
components of the local economy.
As of December 31, 1998, the Bank did not have any foreign sources or
applications of funds.
Compliance with federal, state, and local statutes and/or ordinances relating to
the protection of the environment is not expected to have any material effect
upon the Bank's capital expenditures, earnings, or competitive position.
The Bank employed 14 full-time employees and 4 part-time employees at December
31, 1998. The Bank does not offer commercial, consumer, international, trust, or
municipal trading services.
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
ERVIN R. NOWAK EUGENE MCLEAN
Chairman of the Board of: Director of:
Huron National Bancorp, Inc. and Huron National Bancorp, Inc.
Huron National Bank Huron National Bank
President of Builders Mart, Inc. Retired Shipping Captain
MARVIN C. BEATTY LYNWOOD LAMB
Vice-Chairman of: Director of:
Huron National Bancorp, Inc. Huron National Bancorp, Inc.
Huron National Bank Huron National Bank
Owner StateWide Real Estate Investment Advisor
LOUIS DEHRING MICHAEL L. CAHOON
Director of: President and Chief Executive Officer
Huron National Bancorp, Inc. and Director of:
Huron National Bank Huron National Bancorp, Inc.
Owner Paull Investments Huron National Bank
DONALD A. HAMPTON LEON DELEKTA
Director of: Director of:
Huron National Bancorp, Inc. Huron National Bancorp, Inc.
Huron National Bank Huron National Bank
President of The Buoy, Inc. and Retired Potato Farmer and
Hampton IGA, Inc. Truck Transportation
JOHN A. TIERNEY PAULETTE D. KIERZEK
Director of: Cashier of Huron National Bank
Huron National Bancorp, Inc. Chief Financial Officer of:
Huron National Bank Huron National Bancorp, Inc.
Owner of Tierney & Williams, Inc., Secretary to the Board of:
President of 211 Bar & Restaurant; Huron National Bancorp, Inc.
Partner of Knost Cottages; and Secretary- Huron National Bank
Treasurer of Aurora Gas Company
DALE L. BAUER
Vice-President of:
Huron National Bank
<PAGE>
HURON NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
ASSETS 1998 1997
<S> <C> <C>
Cash and due from banks $ 3,220,603 $ 2,391,051
Federal funds sold 1,700,000 2,000,000
Total Cash and cash equivalents 4,920,603 4,391,051
Securities available for sale 2,054,141 1,979,375
Securities held to maturity
(Fair value of $3,577,000 in 1998
and $4,693,000 in 1997) 3,508,157 4,653,385
Loans 23,557,972 19,853,701
Allowance for loan losses (179,247) (180,631)
Net loans 23,378,725 19,673,070
Bank premises and equipment - net 471,895 516,773
Accrued interest receivable 267,182 270,662
Other real estate owned 21,448 23,448
Other assets 106,528 107,374
Total Assets $34,728,679 $ 31,615,138
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest-bearing transaction accounts $ 3,856,217 $ 3,865,667
Interest-bearing transaction accounts 4,534,327 3,872,456
Savings 6,856,482 6,659,221
Time 16,207,688 14,314,705
Total deposits 31,454,714 28,712,049
Accrued interest payable 73,729 62,289
Other liabilities 247,039 162,950
Total liabilities 31,775,482 28,937,288
Shareholders' Equity
Common stock, $10 par value: 100,000 shares
authorized and 62,500 outstanding 625,000 625,000
Additional paid in capital 625,000 625,000
Retained earnings 1,691,297 1,423,597
Other comprehensive income, net of tax
of ($6,129) in 1998 and ($2,190) in 1997 11,900 4,253
Total shareholders' equity 2,953,197 2,677,850
Total liabilities and shareholders' equity $ 34,728,679 $ 31,615,138
============ ============
</TABLE>
See accompanying notes
<PAGE>
HURON NATIONAL BANCORP, INC.
STATEMENTS OF INCOME
December 31, 1998, 1997, and 1996
<TABLE>
1998 1997 1996
Interest Income
<S> <C> <C> <C>
Loans, including fees $1,990,859 $1,845,367 $1,724,683
Federal funds sold 101,184 75,557 70,650
Securities:
Taxable 269,853 296,320 348,479
Tax exempt 81,034 89,085 49,828
Other 2,250 2,250 2,250
Total interest income 2,445,180 2,308,579 2,195,890
Interest Expense
Deposits 1,151,318 1,117,854 1,075,226
Net Interest Income 1,293,862 1,190,725 1,120,664
Provision for Loan Losses 21,000 36,000 36,000
Net Interest Income After
Provision for Loan Losses 1,272,862 1,154,725 1,084,664
Non-Interest Income
Service charges 87,855 89,426 101,577
Other 44,179 46,006 45,770
Total non-interest income 132,034 135,432 147,347
Non-Interest Expense
Salaries and benefits 435,478 408,008 387,299
Premises and equipment 132,960 126,685 118,462
Legal and accounting fees 56,726 57,915 49,752
Other operating expense 240,435 226,262 231,053
Total non-interest expense 865,599 818,870 786,566
Income Before Income Tax 539,297 471,287 445,445
Provision for Income Tax 159,097 133,356 138,507
Net Income $ 380,200 $ 337,931 $ 306,938
========== ========= =========
Basic Earnings Per Share $6.08 $5.41 $4.91
========== ========= =========
</TABLE>
<PAGE>
HURON NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
Other
Comprehensive
Additional Income, Total
Common Paid In Retained Net Shareholders'
Stock Capital Earnings Of Tax Equity
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $ 625,000 $ 625,000 972,478 $ 12,444 $ 2,234,922
Net income for the year 306,938 306,938
Other comprehensive income:
Unrealized gain (loss) on securities
available for sale, net of tax (8,437) (8,437)
Total comprehensive income 298,501
Cash dividends ($1.50 per share) (93,750) (93,750)
BALANCE AT DECEMBER 31, 1996 625,000 625,000 1,185,666 4,007 2,439,673
Net income for the year 337,931 337,931
Other comprehensive income:
Unrealized gain (loss) on securities
available for sale, net of tax 246 246
Total comprehensive income 338,177
Cash dividends ($1.60 per share) (100,000) (100,000)
BALANCE AT DECEMBER 31, 1997 625,000 625,000 1,423,597 4,253 2,677,850
Net income for the year 380,200 380,200
Other comprehensive income:
Unrealized gain (loss) on securities
available for sale, net of tax 7,647 7,647
Total comprehensive income 387,847
Cash dividends ($1.80 per share) (112,500) (112,500)
BALANCE AT DECEMBER 31, 1998 $ 625,000 $ 625,000 $ 1,691,297 11,900 $ 2,953,197
========= ========= =========== ====== ==========
</TABLE>
See accompanying notes
<PAGE>
HURON NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the
years ended December 31, 1998, 1997, and 1996
<TABLE>
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997 1996
<S> <C> <C> <C>
Net income $ 380,200 $337,931 $ 306,938
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 54,291 45,815 40,233
Net premium amortization and discount accretion on securities 144,832 133,489 50,399
Provision for loan losses 21,000 36,000 36,000
Increase/(decrease) in cash from change in assets and liabilities:
Interest receivable 3,480 (36,030) (7,355)
Other assets and other real estate 24,294 (36,968) 39,187
Interest payable 11,440 (927) 7,648
Other liabilities 80,150 (32,548) 15,654
Net cash from operating activities 719,687 446,762 488,704
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-sale securities:
Purchases (1,070,932) (988,751) (989,086)
Maturities 1,000,000 750,000 1,000,000
Held-to-maturity securities:
Purchases (501,852) (1,216,735) (3,437,776)
Maturities 1,510,000 1,839,000 1,783,000
Net increase in loans (3,748,103) (721,289) (1,470,426)
Purchases of property and equipment (9,413) (73,990) (107,323)
Net cash used in investing activities (2,820,300) (411,765) (3,221,611)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 2,742,665 1,118,039 2,316,945
Dividends paid (112,500) (100,000) (93,750)
Net cash from financing activities 2,630,165 1,018,039 2,223,195
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 529,552 1,053,036 (509,712)
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF PERIOD 4,391,051 3,338,015 3,847,727
END OF PERIOD $ 4,920,603 $ 4,391,051 $ 3,338,015
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,137,543 $ 1,118,781 $ 1,067,578
Federal income tax 79,304 169,413 91,025
</TABLE>
Non cash investing activities
Loans in the amount of $21,448 and $23,448 were transferred to other real estate
in 1998 and 1997.
See accompanying notes
<PAGE>
HURON NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
NOTE I - SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
NATURE OF OPERATIONS - The consolidated financial statements include the
accounts of Huron National Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Huron National Bank (the "Bank"). All material intercompany balances
and transactions are eliminated in consolidation.
The Company is engaged in the business of commercial and retail banking,
with operations conducted through its office located in Rogers City, Michigan.
The surrounding communities are the source of substantially all of the Company's
deposit and loan activities. The majority of the Company's income is derived
from commercial and retail lending activities. Primarily all installment and
residential loans are secured by real and personal property. Approximately 90%
of commercial loans are secured by real estate.
USE OF ESTIMATES - To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The allowance for loan losses and the
fair value of financial instruments are particularly subject to change.
SECURITIES - Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported net of tax, as a component of
other comprehensive income. Securities are classified as trading when held for
short term periods in anticipation of market gains, and are carried at fair
value. Securities are written down to fair value when a decline in fair value is
not temporary.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
ALLOWANCE FOR LOAN LOSSES - Because some loans may not be repaid in full,
an allowance for loan losses is recorded. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the risk
of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and other
factors and estimates which are subject to change over time. While management
may periodically allocate portions of the allowance for specific problem loan
situations, the whole allowance is available for any charge-offs that occur. A
loan is charged-off against the allowance by management as a loss when deemed
uncollectible, although collection efforts may continue and future recoveries
may occur.
Loans are considered impaired if full principal or interest payments are not
anticipated. Impaired loans are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses may be allocated to impaired loans.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, home equity and
second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. When analysis of borrower
operating results and financial condition indicates that underlying cash flows
of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment.
Often this is associated with a delay or shortfall in payments of 30 days or
more. Loans are generally moved to nonaccrual status when 90 days or more past
due. These loans are often also considered impaired. Impaired loans, or portions
thereof, are charged off when deemed uncollectable. This typically occurs when
the loan is 120 days or more past due.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOANS - Loans are reported at the principal balance outstanding, net of
deferred loan fees and costs, the allowance for loan losses, and charge-offs,
net of recoveries. Interest income is reported on the interest method and
includes amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 120 days. Payments received on such loans are
reported as principal reductions.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed using both
straight-line and accelerated methods over their estimated useful lives.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur, and major improvements are capitalized. These assets are
reviewed for impairment when events indicate the carrying amount may not be
recoverable.
OTHER REAL ESTATE - Real estate acquired in settlement of loans is
initially reported at estimated fair value at acquisition. After acquisition, a
valuation allowance reduces the reported amount to the lower of the initial
amount or fair value less costs to sell. Expenses, gains and losses on
disposition, and changes in the valuation allowance are reported in net loss on
other real estate.
INCOME TAXES - Income tax expense is the sum of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
STATEMENT OF CASH FLOWS - Cash and cash equivalents is defined to include
cash on hand, demand deposits in other institutions and federal funds sold.
Federal funds are generally sold for one day periods. The Company reports
customer loan transactions and deposit transactions on a net cash flow basis.
EARNINGS PER SHARE - Basic earnings per share is computed using the
weighted average number of shares outstanding. The number of shares used in the
computation of basic earnings per share was 62,500 for all years presented. The
Bank did not have any dilutive shares at December 31, 1998, 1997, or 1996.
SEGMENTS - Huron National Bancorp, Inc. and its subsidiary, Huron National
Bank, provide a broad range of financial services to individuals and companies
in northern Michigan. These services include demand, time and savings deposits;
lending; ATM processing; and cash management. While the Company's chief decision
makers monitor the revenue streams of the various Company products and services,
operations are managed and financial performance is evaluated on a Company-wide
basis. Accordingly, all of the Company's banking operations are considered by
management to be aggregated in one reportable operating segment.
COMPREHENSIVE INCOME - Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized gains
and losses on securities available for sale, net of taxes, which is recognized
as a separate component of equity. The accounting standard that requires
reporting comprehensive income first applies for 1998, with prior information
restated to be comparable.
NEW ACCOUNTING PRONOUNCEMENTS - Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
RECLASSIFICATIONS - Some items in prior financial statements have been
reclassified to conform with the current presentation.
<PAGE>
NOTE 2 - CASH AND DUE FROM BANKS
As of December 31, 1998, the Bank was required to maintain cash balances
with the Federal Reserve Bank in the amount of $75,000.
NOTE 3 - SECURITIES
Securities have been classified in the Consolidated Balance Sheets
according to management's intent. The amortized cost of securities and their
estimated fair values at December 31 were as follows:
<TABLE>
Gross Gross
1998 Amortized Unrealized Unrealized
Securities Available for Sale; cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury $501,457 $4,559 $ $506,016
U.S. Agency 811,874 1,312 (170) 813,016
State and Municipal 249,187 6,188 255,375
Corporate 473,594 6,140 479,734
$2,036,112 $18,199 $ (170) $2,054,141
========== ======== ========= ==========
Securities Held to Maturity:
Mortgage-backed $88,620 $ 369 $ $88,989
State and Municipal 2,706,410 60,638 (246) 2,766,802
Corporate 713,127 7,670 720,797
$3,508,157 $68,677 $ (246) $3,576,588
========== ======== ======== ==========
Gross Gross
1997 Amortized Unrealized Unrealized Fair
Securities Available for Sale: cost Gains Losses Value
U.S. Treasury $1,249,810 $4,877 $ $1,254,687
U.S. Agency 250,343 282 250,625
Corporate 472,779 1,284 474,063
$1,972,932 $6,443 $ $1,979,375
Securities Held To Maturity:
U.S. Agency $297,005 $ 745 $ $297,750
Mortgage-backed 209,713 889 210,602
State and Municipal 2,799,246 34,272 2,833,518
Corporate 1,347,421 4,443 (1,192) 1,350,672
$4,653,385 $40,349 $(1,192) $4,692,542
========== ======== ========== ===========
</TABLE>
There were no sales of securities during 1998, 1997 or 1996. There were no
transfers of securities classified as held to maturity during 1998, 1997 or
1996.
The amortized cost and estimated fair value of securities at December 31, 1998,
by contractual maturity, are shown below. 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.
<PAGE>
NOTE 3 - SECURITIES (continued)
<TABLE>
Available for Sale Held to Maturity
Amortized Cost Fair Value Amortized Cost Fair Value
<S> <C> <C> <C> <C>
Due in one year or less $501,457 $506,016 $1,095,416 $ 1,101,025
Due after one year through five years 773,697 780,485 2,282,001 2,342,144
Due after five years through ten years 760,958 767,640 42,120 44,430
Subtotal 2,036,112 2,054,141 3,419,537 3,487,599
Mortgage-backed securities 88,620 88,989
Totals $ 2,036,112 $2,054,141 $3,508,157 $3,576,588
========== ========== =========== ===========
</TABLE>
Securities available for sale with a carrying value of $253,672 at December 31,
1998 were pledged to secure public deposits and for other purposes required or
permitted by law.
NOTE 4 - LOANS
Loans consist of the following at December 31:
<TABLE>
1998 1997
<S> <C> <C>
Commercial loans $3,135,530 $2,772,794
Real estate loans 13,333,405 10,585,218
Installment loans 7,089,037 6,495,689
Total loans $23,557,972 $19,853,701
=========== ===========
</TABLE>
Certain directors and executive officers of the Company, including associates of
such persons, were also loan customers. The following is a summary of the
balance and activity of loans to such parties.
<TABLE>
1998
<S> <C>
Balance - January 1 $260,054
New loans 441,670
Repayments (101,282)
Balance - December 31 $600,442
========
</TABLE>
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $180,631 $174,955 $144,100
Additions (Deductions)
Provision for loan losses 21,000 36,000 36,000
Recoveries credited to allowance 2,332 4,905 1,381
Loans charged-off (24,716) (35,229) (6,526)
Balance at end of year $179,247 $180,631 $174,955
========= ========= ========
</TABLE>
During the years 1998 and 1997, the balance of impaired loans was considered to
be immaterial.
<PAGE>
NOTE 6 - BANK PREMISES AND EQUIPMENT - NET
Bank premises and equipment consist of the following at December 31:
<TABLE>
Accumulated Carrying
1998 Cost Depreciation Value
<S> <C> <C> <C>
Land $60,000 $60,000
Bank building and improvements 483,260 $(212,595) 270,665
Furniture and equipment 446,004 (304,774) 141,230
Total $989,264 $(517,369) $471,895
========== ========== =========
1997
Land $60,000 $60,000
Bank building and improvements 481,509 $(198,915) 282,594
Furniture and equipment 502,417 (328,238) 174,179
Total $1,043,926 $(527,153) $516,773
========== ========== =========
</TABLE>
Provisions for depreciation of $54,291, $45,815, and $40,233, were included in
non-interest expense in 1998, 1997 and 1996, respectively.
NOTE 7 - DEPOSITS
The Bank had approximately $1,989,000 and $2,039,000 in time deposits issued in
denominations of $100,000 or more as of December 31, 1998 and 1997,
respectively. Interest expense on time deposits issued in denominations of
$100,000 or more was approximately $103,000, $103,000, and $105,000 in 1998,
1997 and 1996, respectively.
At year-end 1998, stated maturities of time deposits were:
<TABLE>
<S> <C>
1999 $ 9,452,753
2000 2,993,048
2001 1,415,293
2002 1,123,639
2003 1,222,955
$ 16,207,688
============
</TABLE>
Related party deposits totaled $534,135 and $411,365 at year-end 1998 and 1997.
<PAGE>
NOTE 8 - INCOME TAX
The provision for federal income tax for the years ended December 31 consists of
the following:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Current expense $186,242 $109,543 $171,073
Deferred expense (benefit) (27,145) 23,813 (32,566)
Provision for income tax $159,097 $133,356 $138,507
</TABLE>
Included in other liabilities are deferred tax balances arising from the
following items:
<TABLE>
December 31,
1998 1997
<S> <C> <C>
Deferred tax liabilities:
Effects of preparing tax return on a cash basis $(48,122) $ (67,752)
Property and equipment (105,165) (108,183)
Unrealized gain on securities available for sale (6,130) (2,191)
Other (2,876) (7,416)
(162,293) (185,542)
Deferred tax assets:
Allowance for loan losses 39,046 39,517
Other 482 54
39,528 39,517
Net deferred tax liability $ (122,765) $ (145,971)
========== ===========
</TABLE>
The difference between the financial statement tax expense and amounts computed
by applying the statutory federal tax rate of 34% to pretax income is reconciled
as follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Statutory rate applied to income before taxes $ 183,361 $160,238 $151,451
Add (deduct)
Tax-exempt interest income (27,478) (20,165) (12,988)
Surtax exemption and other 3,214 (6,717) 44
Provision for income tax $159,097 $133,356 $138,507
========== ======== ========
</TABLE>
NOTE 9 - OTHER OPERATING EXPENSE
Other operating expenses for the years ended December 31 consist of the
following:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Office supplies $25,660 $28,827 $28,369
Directors fees 52,800 50,400 48,000
General insurance 19,282 19,560 18,374
ATM fees 23,929 22,137 22,475
Other expense 118,764 105,338 113,835
Total other operating expenses $240,435 $226,262 $231,053
========= ======== =========
</TABLE>
<PAGE>
NOTE 10 - COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet financing needs of its customers. These
financial instruments include letters of credit and unused lines of credit. The
Bank's exposure to credit loss in the event of nonperformance by the other
parties to the financial instruments is presented by the contractual amount of
those instruments. The Bank follows the same credit policy to make such
financial instruments as is followed for those loans recorded in the financial
statements.
As of December 31, the Bank had outstanding letters of credit, commitments to
make loans and unused lines of credit as follows:
<TABLE>
1998 1997
<S> <C> <C>
Outstanding letters of credit $199,571 $244,901
Commitments to make loans
and unused lines of credit $ 1,041,940 $770,142
</TABLE>
All commitments above are at fixed rates and carry rates of interest from 8% to
1% and generally expire within 1 year.
Since certain commitments to make loans and fund lines of credit expire without
being used, the amount does not necessarily represent future cash commitments.
From time to time claims are made against the Company in the normal course of
business. There were no material outstanding claims at December 31, 1998.
The Company's loan and deposit relationships are not concentrated in any
particular industry, nor is there significant dependence on any one employer.
Noninterest-bearing deposits and federal funds sold and held by NBD Bank,
amounted to $3,787,817 and $3,500,591 at December 31, 1998 and 1997,
respectively.
NOTE 11 - DIVIDENDS
Guidelines with respect to maintenance of capital adopted by federal banking law
limits the amount of cash dividends the Bank can pay to the Holding Company to
the extent of net retained profits (as defined by the regulatory agencies) for
the current and two preceding years, and is further limited by the requirement
that the Bank maintain positive retained earnings. Under the most restrictive of
the above regulations, in 1999 the Bank is limited to paying additional
dividends of approximately $516,000 plus 1999 net income.
NOTE 12 - PENSION PLAN
The Bank has a Simplified Employee Pension (SEP) Plan that is a defined
contribution plan. Employees become eligible to participate in the SEP Plan
after two years of service in the immediately preceding five plan years and
after attaining the age of 21. In each plan year the Bank may contribute to the
Plan the lesser of $30,000 or a percentage of each participant's compensation as
reported on Form W-2. The contribution is determined annually by the Bank's
Board of Directors. Also, participants may make contributions to the Plan
subject to certain requirements and limitations. In all cases, Bank and
participant contributions may not exceed limitations established by the Internal
Revenue Service. Expense recognized by the Bank in relation to the SEP Plan for
the year ended December 31, 1998, 1997 and 1996 was $6,653, $7,348 and $7,314,
respectively.
<PAGE>
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Carrying amount is a reasonable estimate of fair value for cash equivalents,
Federal Reserve stock, accrued interest receivable and payable, demand deposits,
savings accounts and money market deposits.
Fair value of other financial instruments is estimated as follows:
Fair values for securities are based on quoted market prices or dealer quotes.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar instruments.
Fair value of fixed and variable rate loans is principally estimated by
discounting future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
The fair value of fixed-maturity certificates of deposit is estimated by
discounting cash flows using the rates currently offer for deposits of similar
remaining maturities.
The fair value of commitments is estimated using the fees currently charged to
enter similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar agreements or
on the estimated cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date. The fair value of commitments to
extend credit and standby letters of credit were immaterial at the reporting
date presented.
The carrying values and fair values of the Company's financial instruments (in
thousands) are as follows as of year-end.
<TABLE>
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,921 $4,921 $ 4,391 $ 4,391
Securities 5,562 5,631 6,632 6,672
Loans, net 23,379 23,563 19,673 19,743
Federal Reserve Stock 38 38 38 38
Interest receivable 267 267 271 271
Financial liabilities
Deposits (31,455) (31,539) (28,712) (28,718)
Interest payable (74) (74) (62) (62)
</TABLE>
NOTE 14 - REGULATORY MATTERS
The Company and Bank are subject to regulatory capital requirements administered
by federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weighting, and other factors, and
the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
<PAGE>
NOTE 14 - REGULATORY MATTERS (continued)
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year-end, the Bank's actual capital levels (in millions) and minimum required
levels were:
<TABLE>
Minimum Required To
Minimum Required Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
1998 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $3.1 14.2% $1.8 8.0% $2.2 10.0%
Tier 1 capital (to risk weighted assets) $2.9 13.4% $0.9 4.0% $1.3 6.0%
Tier 1 capital (to average assets) $2.9 8.6% $1.4 4.0% $1.7 5.0%
1997
Total capital (to risk weighted assets) $2.9 14.4% $1.6 8.0% $2.0 10.0%
Tier 1 capital (to risk weighted assets) $2.7 13.5% $0.8 4.0% $1.2 6.0%
Tier 1 capital (to average assets) $2.7 8.6% $1.2 4.0% $1.6 5.0%
</TABLE>
The Bank at year end 1998 and 1997 was categorized as well capitalized.
Management knows of no events which would change the Bank's classification.
NOTE 15 - HURON NATIONAL BANCORP, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION Presented below are condensed financial statements for the parent
company:
<TABLE>
CONDENSED BALANCE SHEETS
December 31,
ASSETS 1998 1997
<S> <C> <C>
Cash and cash equivalents $1,372 $2,091
Investment in Huron National Bank 2,951,825 2,675,759
Total Assets $2,953,197 $2,677,850
========== ==========
LIABILITIES $ - $ -
SHAREHOLDERS' EQUITY 2,953,197 $2,677,850
Total liabilities and shareholders' equity $2,953,197 $2,677,850
========== ==========
</TABLE>
<PAGE>
NOTE 15 - HURON NATIONAL BANCORP, INC. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
OPERATING INCOME
Dividends from Huron National Bank $122,500 $100,000 $ 103,750
OPERATING EXPENSES
Other expenses 10,719 9,848 15,590
Income before equity in undistributed
net income of subsidiary 111,781 90,152 88,160
Equity in undistributed net income of subsidiary 268,419 247,779 218,778
NET INCOME $380,200 $337,931 $306,938
=========== ========= ==========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $380,200 $337,931 $ 306,938
Adjustments to reconcile net income to
cash from operating activities:
Equity in undistributed net income
of subsidiary (268,419) (247,779) (218,778)
Change in other assets 0 0 28,442
Change in other liabilities 0 0 (15,537)
Net Cash From Operating Activities 111,781 90,152 101,065
Cash Flows from Financing Activities
Dividends paid (112,500) (100,000) (93,750)
Net Cash from Financing Activities (112,500) (100,000) (93,750)
Net Change in Cash and Cash Equivalents (719) (9,848) 7,315
Cash and Cash Equivalents
Beginning of the Period 2,091 11,939 4,624
End of the Period $1,372 $2,091 $11,939
======== ======== =======
</TABLE>
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARY
NAME INCORPORATED
1. Huron National Bank Michigan
<PAGE>
YEAR 2000 COMPLIANCE
Because many computerized systems use only two digits to record the year in date
fields (for example, the year 1998 is recorded as 98), such systems may not be
able to accurately process dates ending in the year 2000 and after. The effects
of the issue will vary from system to system and may adversely affect the
ability of a financial institution's operations as well as its ability to
prepare financial statements.
Corporation management has developed and the Board of Directors has approved a
comprehensive Year 2000 Compliance Plan. The plan consists of five phases:
awareness, assessment, renovation, validation and implementation. The
Corporation has an internal task force to assess Year 2000 compliance by the
Corporation, its vendors, and major deposit and loan customers. In addition, the
Bank has been contacting commercial borrowers about Year 2000 compliance to
avoid any negative impact on the quality of the loan portfolio.
To date, the Corporation has spent approximately $10,000 on Year 2000 compliance
and expect to spend an additional $12,000 to complete this work.
The Corporation presently anticipates that it will complete its Year 2000
assessment and remediation by April of 1999. However, there can be no assurance
that the Corporation will be successful in implementing its Year 2000
remediation plan according to the anticipated schedule. In addition, the
Corporation may be adversely affected by the inability of other companies whose
systems interact with the Corporation to become Year 2000 compliant.
The Bank's core processing applications are provided by a third party vendor,
Kirchman Corporation. The Corporation receives regular correspondence from
Kirchman which documents the status of their Year 2000 compliance. The
Corporation has been advised that Kirchman software has been successfully tested
for Year 2000 compliance.
Although the Corporation expects its internal systems to be Year 2000 compliant
as described above, the Corporation has prepared a contingency plan that
specifies what it plans to do if important internal or external systems are not
Year 2000 compliant in a timely manner.
Management does not anticipate that the Corporation will incur material
operating expenses or be required to invest heavily in additional computer
system improvements to be Year 2000 compliant. Nevertheless, the inability of
the Corporation to successfully address year 2000 issues could result in
interruptions in the Corporation's business and have a material effect on the
Corporation's results of operations.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,220,603
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,700,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,054,141
<INVESTMENTS-CARRYING> 3,508,157
<INVESTMENTS-MARKET> 3,576,588
<LOANS> 23,557,972
<ALLOWANCE> 179,247
<TOTAL-ASSETS> 34,728,679
<DEPOSITS> 31,454,714
<SHORT-TERM> 0
<LIABILITIES-OTHER> 320,768
<LONG-TERM> 0
0
0
<COMMON> 625,000
<OTHER-SE> 2,316,297
<TOTAL-LIABILITIES-AND-EQUITY> 34,728,679
<INTEREST-LOAN> 1,990,859
<INTEREST-INVEST> 350,887
<INTEREST-OTHER> 103,434
<INTEREST-TOTAL> 2,445,180
<INTEREST-DEPOSIT> 1,151,318
<INTEREST-EXPENSE> 1,151,318
<INTEREST-INCOME-NET> 1,293,862
<LOAN-LOSSES> 21,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 865,599
<INCOME-PRETAX> 539,297
<INCOME-PRE-EXTRAORDINARY> 539,297
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 380,200
<EPS-PRIMARY> 6.08
<EPS-DILUTED> 6.08
<YIELD-ACTUAL> 4.50
<LOANS-NON> 28,855
<LOANS-PAST> 479
<LOANS-TROUBLED> 135,484
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 180,631
<CHARGE-OFFS> 24,716
<RECOVERIES> 2,332
<ALLOWANCE-CLOSE> 179,247
<ALLOWANCE-DOMESTIC> 179,247
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 119,028
</TABLE>
