SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN
PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
HURON NATIONAL BANCORP, INC.
(Name of registrant as specified in its charter)
(Name of person(s) filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee Paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule, or registration statement no.:
(3) Filing party:
(4) Date filed:
<PAGE>
HURON NATIONAL BANCORP, INC.
April 7, 2000
To our Shareholders:
You are cordially invited to attend the 2000 Annual Meeting of Shareholders
of Huron National Bancorp, Inc. This year's meeting will be held at 200 East
Erie Street, Rogers City, Michigan on Wednesday, April 26, 2000 at 10:00 a.m.
The business items to be acted on during the Annual Meeting are listed in the
Notice of Annual Meeting and are described more fully in the Proxy Statement.
Whether or not you plan to attend, you can be sure your shares are
represented at the meeting by promptly completing, signing, dating and returning
your proxy card in the enclosed postage-paid envelope.
Along with the other members of the Board of Directors, I look forward to
the opportunity of greeting personally those shareholders who are able to attend
the Annual Meeting.
Sincerely,
/s/ Michael L. Cahoon
Michael L. Cahoon
President and Chief Executive Officer
200 East Erie Street, Rogers City, MI 49779
Phone (517) 734-4734 Fax (517) 734-4737 Email [email protected]
<PAGE>
NOTICE OF 2000 ANNUAL MEETING OF SHAREHOLDERS OF
HURON NATIONAL BANCORP, INC.
- --------------------------------------------------------------------------------
10:00 a.m., April 26, 2000
Huron National Bank Meeting Room
200 East Erie Street
Rogers City, MI 49779
- --------------------------------------------------------------------------------
April 7, 2000
To our Shareholders:
The 2000 Annual Meeting of Shareholders of Huron National Bancorp, Inc.
will be held at Huron National Bank's Meeting Room, 200 East Erie Street, Rogers
City, Michigan on Wednesday, April 26, 2000 at 10:00 a.m. Shareholders will act
on the following matters:
(1) Election of three directors to serve for terms of three years;
(2) Transaction of such other business as may properly come before
the Annual Meeting, or any adjournments.
Shareholders of record at the close of business on March 17, 2000 are
entitled to receive notice of and to vote at the Annual Meeting.
You are invited to attend the Annual Meeting in person. Regardless of
whether you expect to attend the Annual Meeting in person, your Board of
Directors urges you to vote, sign, date and return the accompanying proxy card
in the enclosed postage-paid envelope.
By Order of the Board of Directors,
/s/ Paulette D. Kierzek
Paulette D. Kierzek
Secretary
<PAGE>
Huron National Bancorp, Inc.
PROXY STATEMENT
The Board of Directors of Huron National Bancorp, Inc., (the "Corporation")
solicits your proxy for use at the Annual Meeting of Shareholders to be held on
Wednesday, April 26, 2000 at 10:00 a.m., and at any adjournments. This Proxy
Statement and a proxy card are scheduled to be mailed to shareholders beginning
April 7, 2000.
In the following pages, you will find information on your Board of Directors,
both the candidates proposed for election and continuing Directors. The
information in this Proxy Statement has been supplied to you to help you decide
how to vote.
As of March 17, 2000, the record date for determination of shareholders
entitled to notice of and to vote at the Annual Meeting, there were 62,500
outstanding shares of Common Stock of the Corporation. Each outstanding share is
entitled to one vote on all matters, which may come before the Annual Meeting.
You can ensure that your shares are voted at the Annual Meeting by
completing, signing, dating and returning the accompanying proxy card in the
enclosed postage-paid envelope. Sending in a signed proxy will not affect your
right to attend the Annual Meeting and vote. A shareholder who gives a proxy may
revoke it at any time before it is exercised by notifying the Secretary of the
Corporation in writing before the proxy is exercised, by delivering to the
Secretary a proxy bearing a later date, or by attending the Annual Meeting and
voting in person.
PROPOSAL 1 - ELECTION OF DIRECTORS
The Articles of Incorporation of the Corporation provide that the Board of
Directors, which currently consists of nine members, be divided into three
classes, as equal in number as possible, with the classes to hold office for
staggered terms of three years each. The Board has nominated incumbent directors
Ervin Nowak, Marvin Beatty and Eugene McLean for reelection as directors for
three-year terms expiring at the 2003 annual meeting.
The persons named as proxy holders in the accompanying proxy will vote for
the above-named nominees, unless directed otherwise on the Proxy Card. If a
nominee is not available for election as a director at the time of the annual
meeting (a situation which is not now anticipated), the Board may designate a
substitute nominee, in which case the accompanying proxy will be voted for the
substituted nominee.
A vote of the shareholders holding a plurality of the shares present in
person or represented by proxy is required to elect directors. Accordingly, the
three individuals who receive the greatest number of votes cast at the meeting
will be elected as directors. For purposes of counting votes on the election of
directors, abstentions, broker nonvoters, and shares otherwise withheld from
voting will not be counted as shares voted and will not have a bearing on the
outcome of the election.
The Board of Directors recommends a vote FOR the election of all persons
nominated by the Board.
Information concerning the three nominees and the six continuing Board
members is set forth below.
<PAGE>
Nominees for Election as Directors for three-year Terms to Expire in 2003
- --------------------------------------------------------------------------------
Ervin Nowak, 68, Director since 1980
Mr. Nowak is currently President of Builders Mart, Inc., a window, glass and
wood Retail Company and President of Nautical City Enterprises, Inc., a
commercial real estate rental. Mr. Nowak also serves as Chairman of the Board of
Directors of Huron National Bancorp, Inc. and the Bank.
Marvin Beatty, 65, Director since 1980
Mr. Beatty is a Real Estate Broker and Appraiser and owns and operates State
Wide Realty of Onaway. Mr. Beatty also serves as Vice-Chairman of Huron National
Bancorp, Inc. and the Bank.
Eugene McLean, 74, Director since 1980
Mr. McLean is a retired Great Lakes Shipping Captain.
Continuing Directors Whose Terms Expire in 2001
- --------------------------------------------------------------------------------
Michael L. Cahoon, 66, Director since 1984
Mr. Cahoon has been President and Chief Executive Officer since the acquisition
of Huron National Bank as a wholly owned subsidiary in May of 1990.
Donald A. Hampton, 59, Director since 1982
Mr. Hampton owns and operates Hampton's IGA, Inc. Supermarkets with locations in
Rogers City, Harrisville and Ossineke. In addition, he is a partner and
President of the Buoy, Inc. Restaurant located in Rogers City.
John S. Tierney, 51, Director since 1997
Mr. Tierney owns Tierney & Williams, Inc. He is President of 211 Bar &
Restaurant, a partner of Knost Cottages Resort on Black Lake for approximately
25 years and is a co-founder of Aurora Gas, a public utility. Mr. Tierney has
served as Secretary and Treasurer of Aurora Gas since 1984.
Continuing Directors Whose Terms Expire in 2002
- --------------------------------------------------------------------------------
Leon Delekta, 73, Director since 1980
Mr. Delekta is a retired owner and operator of Delekta & Sons, a Potato Farm and
Truck Transportation Company.
Lynwood Lamb, 64, Director since 1981
Mr. Lamb is a retired President of a pharmaceutical company. He is currently
serving in the capacity of an Investment Advisor.
Louis D. Dehring, 68, Director since 1980
Mr. Dehring is a retired Marine Engineer and currently owner and operator of
Paull's Investments, a real estate firm.
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The same individuals serve on the Board of Directors of the Corporation and the
Bank. The Corporation's Board of Directors had six meetings in 1999. Each
Director attended at least 75% of all Board of Directors' and Committee Meetings
of the Corporation for which they were eligible to attend.
The Board of Directors has established the following committees, the member of
which are appointed annually by the Board of Directors: 1) an Audit Committee;
2) an Executive Committee; and 3) Compensation Committee.
The Executive Committee meets on an "as needed" basis and exercises the power of
the Board of Directors on such matters as loans and investment securities and
approvals between regular Board Meetings. All actions of this Committee are
reviewed and ratified by the full Board of Directors. This Committee consists of
Messrs. Nowak, McLean, Beatty, Hampton and Delekta. There were two meetings held
in 1999.
The Audit or Examination Committee in 1999 was composed of the entire Board.
This Committee met thirteen times and recommends the selection of the Company's
independent auditors; reviews the scope of audit procedures, the results of the
respective audits and audit recommendations to management.
The Compensation Committee in 1999 was also composed of the entire Board. This
Committee meets annually to review compensation of staff and executive officers
and all employee benefit programs. It met twice in 1999.
The Board of Directors held one Organizational Meeting in 1999, at which these
committees were established. The regular Bank Board meetings were held on the
third Monday of each month except in April of 1999 when the Annual Meeting,
Organizational Meeting and monthly Meeting were held the last Wednesday of the
month.
VOTING SECURITIES AND BENEFICIAL OWNERSHIP OF DIRECTORS AND OFFICERS
At March 17, 2000, the Corporation had outstanding 62,500 shares of common
stock, par value $10.00 p er share. Shareholders are entitled to one vote for
each full share of common stock registered in their names at the close of
business on March 17, 2000, the record date fixed by the Board of Directors. The
inspectors of the meeting, who are appointed by the Corporation, count votes
cast at the meeting and submitted by proxy.
The information in the following table sets forth the beneficial ownership of
the Corporation's common stock, as of March 17, 2000, owned by each director of
the Corporation and by all directors and executive officers of the Corporation
as a group.
<TABLE>
Amount and Nature of Percent of
Name and Beneficial Owner Beneficial Ownership (1) Class
- ----------------------------------- --------------------- -----
<S> <C> <C>
Marvin Beatty 2,040 3.26%
Michael L. Cahoon 1,075(2) 1.72%
Louis D. Dehring 2,933(3) 4.69%
Leon Delekta 308 0.49%
Donald A. Hampton 923(4) 1.48%
Lynwood Lamb 5,183(5) 8.29%
Eugene McLean 3,849(6) 6.16%
Ervin Nowak 1,472(7) 2.36%
John S. Tierney 125 0.20%
-------- --------
All directors and executive officers of the
Corporation as a group (eleven persons) 18,113 28.98%
======== =========
</TABLE>
(1) Unless otherwise indicated in the following footnotes, each director or
officer has sole voting and investment power or shares voting and
investment power with his spouse under joint ownership.
(2) Michael L. Cahoon Trust with Michael L. Cahoon as Trustee owns all of the
shares except for 75 shares owned by Mr. Cahoon's spouse.
(3) Louis D. Dehring Trust with Louis D. Dehring as Trustee owns all of the
shares.
(4) All of the shares are owned by Donald and Mary Lou Hampton Trust with
Donald Hampton as a Trustee.
(5) Of the shares owned by Lynwood Lamb, 1,650 shares are held by the Lamb
Retirement Trust and 3,533 by the Lamb Trust, both of which Mr. Lamb is
Trustee and the former of which Mr. Lamb disclaims beneficial ownership.
(6) The McLean Trust with Eugene McLean as Trustee owns all of the shares.
(7) Ervin Nowak Trust with Ervin Nowak as Trustee owns all of the shares except
for 736 shares owned by Mr. Nowak's spouse.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of March 17, 2000, no person was known by Management of the Corporation to be
the beneficial owner of more than 5 percent of the outstanding common stock of
the Corporation except as follows:
<TABLE>
- ------------------------------------------------------------------------------------------------------
Amount and Nature of Percent of
Title of Class Name and Address of Beneficial Owner Beneficial Ownership Class
- -------------- ------------------------------------ -------------------- -----
<S> <C> <C> <C>
Common Stock Lynwood Lamb 5,183(1) 8.29%
P.O. Box 777
Bay City, MI 49706
Common Stock Eugene McLean 3,849(2) 6.16%
255 S. Third Street
Rogers City, MI 49779
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Lamb, a director of the Corporation, disclaims beneficial ownership of
1,650 shares, which are held by the Lamb Retirement Trust of which Mr. Lamb
is the Trustee.
(2) The McLean Trust with Eugene McLean as Trustee own all of the shares.
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation received by the Corporation's
Chief Executive Officer for each of the three years ended December 31, all of
which were paid by the Bank.
<TABLE>
Annual Compensation All Other
Name & Principal Position Year Salary Bonus Compensation (1)
------------------------- ---- ------ ----- ----------------
<S> <C> <C> <C> <C>
Michael L. Cahoon 1999 $61,668 $10,976 $8,579
President and 1998 $59,668 $10,080 $8,072
Chief Executive Officer 1997 $58,168 $ 8,845 $8,038
</TABLE>
(1) Includes Board Fees, and Company contribution to the SEP Plan on behalf of
the employee.
The aggregate compensation paid to the three executive officers as a group, was
$199,068, for the year ended December 31, 1999. The other two executives are
Dale L. Bauer and Paulette D. Kierzek. Mr. Bauer, 49, has served as
Vice-President of Huron National Bank since 1980. Mrs. Kierzek, 50, is Chief
Financial Officer of Huron National Bancorp, Inc., and for more than five years
prior hereto, served as Secretary to the Board of Directors and Cashier of Huron
National Bank.
Each director and officer is paid a monthly board fee of $450. No additional
fees are paid for serving as a director or officer of the Corporation.
OTHER TRANSACTIONS
During 1999, the subsidiary Bank of the Corporation had outstanding and entered
into credit relationships and other transactions with directors and executive
officers of the Corporation and their associates in the ordinary course of
business. The loans and extensions of credit included in such transactions: (1)
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other; (2) did not involve more than the normal risk of collectibility or
present other unfavorable features; and (3) were repaid as scheduled or, to the
extent still outstanding, remain current in their respective repayment
schedules.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Crowe, Chizek and Company LLP, independent public accountants for the year ended
December 31, 1999, have examined the financial statements of the Corporation.
Representatives of Crowe, Chizek and Company, LLP are not expected to be present
at the Annual Meeting to respond to questions, although such representatives
have the opportunity to be present and make a statement if they desire to do so.
The Board of Directors has reappointed Crowe, Chizek and Company LLP, as the
independent public accountants of the Corporation for the year ending December
31, 2000.
<PAGE>
LITIGATION
The Corporation is not involved in any material legal proceedings. The Bank is
involved in routine proceedings in the ordinary course of its business; however,
no such proceedings are expected to result in any material adverse effect on the
operations or earnings of the Bank.
SHAREHOLDER PROPOSALS
Any shareholder proposal to be considered by the Corporation for inclusion in
the 2001 Annual Meeting of Shareholders proxy material must be received by the
Corporation no later than December 15, 2000.
EXPENSES OF SOLICITATION
The costs of the solicitation of proxies, including the cost of reimbursing
expenses for forwarding proxy statements and proxies to their principals and
obtaining their proxies will be borne by the Corporation. In addition to the use
of the mails, proxies may be solicited personally, or by telephone or telegraph,
by a few regular employees of the Corporation without additional compensation.
OTHER BUSINESS
The Board of Directors is not aware of any matter to be presented for action at
the meeting, other than the matters set forth herein. If any other business
should come before the meeting, the proxy will be voted in respect thereof in
accordance with the best judgement of the persons authorized therein, and
discretionary authority to do so is included in the proxy. If the Corporation
receives notice of a shareholder proposal after February 22, 2001, the persons
named as proxies for the 2001 Annual Meeting of Shareholders will have
discretionary voting authority to vote on that proposal at the meeting.
The Annual Report of the Corporation for 1999 is included with this Proxy
Statement. Copies of the report will also be available for all shareholders
attending the Annual Meeting.
Shareholders are urged to sign and return the enclosed proxy in the enclosed
postage-paid envelope. A prompt response will be helpful and appreciated.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Paulette D. Kierzek
Paulette D. Kierzek
Secretary
April 7, 2000
FORM 10-K ANNUAL REPORT
The Corporation will provide (without charge) to any shareholders solicited
hereby a copy of its 1999 Annual Report on Form 10-K filed with the Securities
and Exchange Commission upon the written request of such shareholder. Requests
should be directed to the Corporation's Secretary, Paulette D. Kierzek, 200 E.
Erie Street, P.O. Box 240, Rogers City, MI. 49779.
<PAGE>
PRESIDENT'S MESSAGE
HURON NATIONAL BANCORP, INC.
April 7, 2000
To Our Shareholders and Customers:
Our financial performance in 1999 demonstrated that building on our core
strengths, relying on our employees and maintaining our focus on our customers
is generating increased value for our shareholders. This strategy addresses the
new challenges of the financial services business: changes in the marketplace,
competition and the introduction of new technologies to serve our customers.
This year's financial highlights our success. Net income rose to $419,519 up
10.34% over the previous year. Return on common shareholders' equity was 8.89%;
and earnings per share climbed from $6.08 to $6.71. Dividends paid per common
share increased for the 10th consecutive year to $2.00 per share. Deposits grew
to $33,447,000 and loans, net of provision for possible loan losses totaled
$26,522,000 an increase of $3,143,000 over 1998. Total assets increased to
$36,879,000, an increase of 6.19% over 1998.
Our core strengths-productivity, diversification, customer satisfaction and our
employees-provide us with continuity and a sense of direction. Although each of
these strengths is important to our success, it is our people who set the Bank
apart from other financial institutions. We built our business on the strength
of our employees, and relationships between our employees and customers.
We expect our financial performance to continue largely because the building
blocks are in place to maintain our momentum and achieve our goals. For our
customers, we will continue to focus on their needs, delivering the highest
quality service. For our employees, we will continue to be a great place to
work. For the communities we serve, we will continue our tradition of support.
And for our shareholders, we will continue to generate strong returns and build
long-term value.
The Anuual Meeting date is April 26, 2000 and we look forward to having you
attend.
Sincerely,
/s/ M.L. Cahoon
M.L. Cahoon
President & CEO
<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 1999 1998 1997 1996 1995
- --------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total interest income $ 2,595,526 $ 2,445,180 $ 2,308,579 $ 2,195,890 $ 1,990,838
Total interest expense 1,189,450 1,151,318 1,117,854 1,075,226 870,052
----------- ------------ ------------ ------------ ------------
Net interest income 1,406,076 1,293,862 1,190,725 1,120,664 1,120,786
Provision for loan losses 12,000 21,000 36,000 36,000 33,500
----------- ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 1,394,076 1,272,862 1,154,725 1,084,664 1,087,286
Noninterest income 119,945 132,034 135,432 147,347 181,258
Noninterest expense 905,009 865,599 818,870 786,566 823,719
----------- ------------ ------------ ------------ ------------
Income before income tax 609,012 539,297 471,287 445,445 444,825
Provision for income tax 189,493 159,097 133,356 138,507 138,618
----------- ------------ ------------ ------------ ------------
NET INCOME $ 419,519 $ 380,200 $ 337,931 $ 306,938 $ 306,207
=========== ============ ============ ============ ============
AVERAGE SHARES OUTSTANDING 62,500 62,500 62,500 62,500 62,500
- --------------------------
PER SHARE DATA
- --------------
Basic and diluted earnings $ 6.71 $ 6.08 $ 5.41 $ 4.91 $ 4.90
Cash dividends 2.00 1.80 1.60 1.50 1.25
Book value, end of year 51.00 47.25 42.85 39.03 35.76
TOTAL AVERAGE EQUITY (000's) $ 3,148 $ 2,864 $ 2,493 $ 2,363 $ 2,141
- ----------------------------
TOTAL AVERAGE ASSETS (000's) $ 35,418 $ 33,061 $ 31,238 $ 29,661 $ 26,395
- ----------------------------
RATIOS
- ------
Return on average total assets 1.18% 1.15% 1.08% 1.03% 1.16%
Average shareholders' equity to average
total assets* 8.89% 8.66% 7.98% 7.97% 8.11%
Return on average shareholders' equity* 13.32% 13.28% 13.56% 12.99% 14.30%
Dividend payout ratio (dividends divided
by net income) 29.80% 29.59% 29.59% 30.54% 25.51%
PERIOD END TOTALS (000's)
- -------------------------
Total assets $ 36,879 $ 34,729 $ 31,615 $ 30,292 $ 27,752
Total loans 26,704 23,558 19,854 19,186 17,721
Total deposits 33,447 31,455 28,712 27,594 25,277
Shareholders' equity 3,188 2,953 2,678 2,440 2,235
</TABLE>
* Average shareholders' equity includes net average unrealized gain/loss on
securities available for sale.
1
<PAGE>
TWO YEAR SUMMARY OF COMMON STOCK DATA BY QUARTER
There is no established trading market in the Company's common stock. Such sales
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>
1999 1998
---- ----
Number of Average Price Number of Average Price
Shares Per Share Shares Per Share
------ --------- ------ ---------
<S> <C> <C> <C> <C>
First Quarter 75 $40.00 50 Price Unknown
Second Quarter 100 $40.00 25 $40.00
180 $38.00 150 $39.00
Third Quarter 56 $38.00 50 $38.00
20 $42.00
Fourth Quarter 10 Price Unknown 10 $40.00
1 $38.00
</TABLE>
As of December 31, 1999, the Company's shareholder list reflected approximately
622 shareholders of record and there were 62,500 shares of common stock issued
and outstanding.
Dividends declared per share were $2.00 and $1.80 during 1999 and 1998,
respectively.
2
<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 $419,519 was reported in 1999 compared to net income of $380,200
in 1998 and $337,931 in 1997. Basic and diluted earnings per share was $6.71 in
1999 compared to $6.08 in 1998 and $5.41 in 1997. For 1999, return on average
assets and average equity equaled 1.18% and 13.32%, respectively. This compares
to 1.15% and 13.28% in 1998 and 1.08% and 13.56% in 1997.
As of year-end, total assets were $36,879,034, an increase of $2,150,355 or
6.19% over December 31, 1998. Total loans increased $3,145,845 at December 31,
1999 when compared to December 31, 1998, while securities decreased $260,616 and
cash and cash equivalents decreased by $685,846 for the same period. These
increases were funded by growth in customer deposits. In total, the Bank's
deposits increased from $31,454,714 in 1998 to $33,447,444 in 1999, with time
deposits growth of $726,084 and interest bearing transaction accounts of
$643,613. Customers are now committing funds for extended periods of time.
Shareholders' equity as a percent of assets increased to 8.64% at December 31,
1999 compared to 8.50% for December 31, 1998. 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) 1999 1998 1997
------------------------------------------------ ---- ---- ----
<S> <C> <C> <C>
Interest Income $ 2,595 $ 2,487 $ 2,354
Interest Expense 1,189 1,151 1,118
--------- --------- ----------
Net Interest Income $ 1,406 $ 1,336 $ 1,236
========= ========= ==========
Increase in Net Interest Income $ 70 $ 100 $ 90
Percent Increase of Net Interest Income 5.24% 8.00% 7.88%
</TABLE>
3
<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 1999 Over 1998 1998 Over 1997
Interest Income (1) Change Due to: Change Due to:
(In thousands; fully taxable equivalent basis) Volumes Rate Total Volume Rate Total
------------------------------------------------- ------- ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans $ 259 $ (50) $ 209 $ 177 $ (31) $ 146
Taxable securities $ 31 (9) $ 22 (28) 2 (26)
Tax-exempt securities (46) 0 (46) (16) 4 (12)
Federal funds sold and other (39) (12) (51) 25 0 25
------- ----- ----- ----- ----- -----
Total Interest Income 205 (71) 134 158 (25) 133
------- ----- ----- ----- ----- -----
Interest Expense
Interest bearing DDA 7 (21) (14) (1) (5) (6)
Savings 12 (16) (4) 4 (5) (1)
Time deposits 64 (48) 16 70 (30) 40
------- ----- ----- ----- -----
Total Interest Expense 83 (85) (2) 73 (40) 33
------- ----- ----- ----- ----- -----
Net Interest Income $ 122 $ 14 $ 136 $ 85 $ 15 100
======= ===== ===== ===== =====
</TABLE>
(1) 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.
4
<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 1999 1998 1997
(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 $ 24,538 $ 2,200 8.97% $ 21,662 $ 1,991 9.19% $ 19,744 $ 1,845 9.35%
Taxable securities 4,903 292 5.96% 4,384 270 6.15% 4,837 296 6.12%
Tax-exempt securities (fully
taxable equivalent basis) 1,099 77 7.03% 1,750 123 7.02% 1,974 135 6.84%
Federal funds sold and other 1,090 52 4.77% 1,891 103 5.45% 1,425 78 5.47%
-------- ------- ---- ------- ------- ----- ------- ------ -----
Total interest earning 31,630 2,621 8.29% 29,687 2,487 8.38% 27,980 2,354 8.41%
-------- ------- ----- ------- ------- ----- ------- ------ -----
Cash and due from banks 2,996 2,725 2,635
Other assets, net 792 649 623
---------- ---------- ----------
Total Assets $ 35,418 $ 33,061 $ 31,238
========== ========== ==========
Liabilities
Interest bearing DDA's $ 4,227 93 2.20% $ 3,968 107 2.70% $ 4,021 113 2.80%
Savings 7,220 162 2.24% 6,706 166 2.48% 6,546 167 2.56%
Time deposits 16,491 894 5.42% 15,329 878 5.73% 14,124 838 5.93%
--------- --------- ------- --------- --------- ------- --------- --------- -------
Total interest bearing 27,938 1,149 4.11% 26,003 1,151 4.43% 24,691 1,118 4.53%
--------- --------- ------- --------- --------- ------- --------- --------- -------
DDA's 4,053 3,911 3,684
Other liabilities 279 283 370
Shareholders' equity 3,148 2,864 2,493
--------- --------- ---------
Total liabilities
and equity $ 35,418 $ 33,061 $ 31,238
========= ========= =========
Net Interest Income (fully $ 1,472 $ 1,336 $ 1,236
taxable equivalent basis) ======= ======= =======
Net yield on interest
earning assets 4.65% 4.50% 4.42%
===== ===== =====
Net interest spread 4.18% 3.95% 3.88%
===== ===== =====
Interest earning assets/
interest bearing liabilities 1.13x 1.14x 1.13x
</TABLE>
5
<PAGE>
Non-Interest Income
The Company recorded noninterest income of $119,945, a decrease of $12,089 or
(9.16)% from $132,034 in 1998. This decrease was attributable to a reduction in
service charges on returned checks, non-sufficient funds and other service fees
in 1999.
Non-Interest Expense
During 1999, noninterest expense increased by $39,410 or 4.55% from $865,599 in
1998 to $905,009 in 1999. The increases included $33,299 in salaries & benefits
which included contributions to the SEP Plan and the normal increase in
salaries. The other increases include $4,134 in Premises & Equipment and $2,323
in Legal and Accounting Fees.
Provision for Income Taxes
The provision for income taxes was $189,493 in 1999 compared to $159,097 in
1998, an increase of $30,396 or 19.11%. The effective tax rate, derived by
dividing applicable income tax expense by income before taxes, was 31% in 1999
and 30% in 1998.
FINANCIAL CONDITION
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.
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
rate-sensitive assets to rate-sensitive liabilities. Management believes that
the Bank's rate sensitive position is adequate in a normal interest rate
movement environment.
6
<PAGE>
GAP Analysis
The following table as of December 31, 1999 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 $ 1,938,000 $ 2,268,000 $ 4,190,000 $ 9,725,000 $ 8,583,000 $ 26,704,000
Investments 90,000 1,404,000 1,818,000 742,000 1,248,000 5,302,000
Federal Funds 600,000 0 0 0 0 600,000
------------- -------------- --------------- -------------- ------------- ---------------
Total 2,628,000 3,672,000 6,008,000 10,467,000 9,831,000 32,606,000
------------- -------------- -------------- -------------- ------------- ---------------
Liabilities
Interest-bearing
transaction accounts 5,178,000 5,178,000
Savings 7,367,000 7,367,000
Certificates of Deposit 4,640,000 3,610,000 6,668,000 2,016,000 16,934,000
------------- -------------- -------------- -------------- ------------- ---------------
Total 17,185,000 3,610,000 6,668,000 2,016,000 0 29,479,000
Asset/(Liabilities) GAP (14,557,000) 62,000 (660,000) 8,451,000 9,831,000 3,127,000
============= ============== ============== ============== ============= ===============
Cumulative GAP $ (14,557,000) $ (14,495,000) $ (15,155,000) $ (6,704,000) $ 3,127,000
============= ============== ============== ============== =============
</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 ($12,756,000) at
December 31, 1998 to ($14,495,000) at December 31, 1999 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 2000 the Bank could pay additional dividends of
approximately $562,000 plus 2000 net income to the Holding Company.
7
<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 $79,000 or 0.29% of
total loans at December 31, 1999 compared to approximately $29,000 or 0.12% a
year earlier.
The provision for loan losses was $12,000 in 1999, $21,000 in 1998 and $36,000
in 1997. For the same years, charge-offs, net of recoveries, were $9,296,
$22,384 and $30,324, respectively.
The allowance for loan losses is at $181,951 or 0.68% of total loans at December
31, 1999 compared to $179,247 or 0.76% of total loans at year-end 1998. 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.
8
<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 $2,318,500 and
$2,308,200 as of December 31, 1999 and 1998 in outstanding lines of credit and
commitments to make loans of which $827,922 and $1,041,940 were still available
to the respective borrower. Furthermore, the Bank had issued letters of credit
totaling $288,248 as of December 31, 1999.
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, 1999, 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, 1999.
The Bank does not offer commercial, consumer, international, trust, or municipal
trading services.
9
<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
10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Huron National Bancorp, Inc.
Rogers City, Michigan
We have audited the accompanying consolidated balance sheets of Huron National
Bancorp, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Huron National
Bancorp, Inc. as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
As disclosed in Note 1 to the consolidated financial statements, on July 1, 1999
the Company changed its method of accounting for derivative instruments and
hedging activities to comply with new accounting guidance.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
11
<PAGE>
HURON NATIONAL BANCORP, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
---- ----
<S> <C> <C>
Cash and due from banks $3,634,757 $3,220,603
Federal funds sold 600,000 1,700,000
Total Cash and cash equivalents 4,234,757 4,920,603
Securities available for sale 4,814,098 2,054,141
Securities held to maturity
(Fair value of $490,000 in 1999
and $3,577,000 in 1998) 487,584 3,508,157
Loans 26,703,817 23,557,972
Allowance for loan losses (181,951) (179,247)
Net loans 26,521,866 23,378,725
Bank premises and equipment - net 442,326 471,895
Accrued interest receivable 265,011 267,182
Other real estate owned 0 21,448
Other assets 113,392 106,528
============ ============
Total Assets $ 36,879,034 $ 34,728,679
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest-bearing transaction accounts $3,968,819 $3,856,217
Interest-bearing transaction accounts 5,177,940 4,534,327
Savings 7,366,913 6,856,482
Time 16,933,772 16,207,688
Total deposits 33,447,444 31,454,714
Accrued interest payable 70,036 73,729
Other liabilities 173,760 247,039
Total liabilities 33,691,240 31,775,482
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 1,985,816 1,691,297
Accumulated other comprehensive income (loss), net
of tax of $24,738 in 1999 and ($6,129) in 1998 (48,022) 11,900
Total shareholders' equity 3,187,794 2,953,197
============= ============
Total liabilities and shareholders' equity $ 36,879,034 $ 34,728,679
============= ============
</TABLE>
See accompanying notes
12
<PAGE>
HURON NATIONAL BANCORP, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1999, 1998, and 1997
1999 1998 1997
Interest Income ---- ---- ----
<S> <C> <C> <C>
Loans, including fees $ 2,200,281 $ 1,990,859 $ 1,845,367
Federal funds sold 49,530 101,184 75,557
Securities:
Taxable 292,201 269,853 296,320
Tax exempt 51,264 81,034 89,085
Other 2,250 2,250 2,250
------------- ------------- ----------
Total interest income 2,595,526 2,445,180 2,308,579
Interest Expense
Deposits 1,189,450 1,151,318 1,117,854
------------- ------------- ----------
Net Interest Income 1,406,076 1,293,862 1,190,725
Provision for Loan Losses 12,000 21,000 36,000
------------- ------------- ----------
Net Interest Income After
Provision for Loan Losses 1,394,076 1,272,862 1,154,725
Non-Interest Income
Service charges 78,789 87,855 89,426
Other 41,156 44,179 46,006
------------- ------------- ----------
Total non-interest income 119,945 132,034 135,432
Non-Interest Expense
Salaries and benefits 468,777 435,478 408,008
Premises and equipment 137,094 132,960 126,685
Legal and accounting fees 59,049 56,726 57,915
Other operating expense 240,089 240,435 226,262
------------- ------------- ----------
Total non-interest expense 905,009 865,599 818,870
Income Before Income Tax 609,012 539,297 471,287
Provision for Income Tax 189,493 159,097 133,356
------------- ------------- ----------
Net Income $ 419,519 $ 380,200 $ 337,931
============= ============= ==========
Basic and diluted Earnings Per Share $ 6.71 $ 6.08 $ 5.41
============= ============= ==========
</TABLE>
See accompanying notes
13
<PAGE>
HURON NATIONAL BANCORP, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years
ended December 31, 1999, 1998, and 1997
Other
Comprehensive
Additional Income (loss), Total
Common Paid In Retained Net Shareholders'
Stock Capital Earnings Of Tax Equity
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 $ 625,000 $ 625,000 $ 1,185,666 $ 4,007 $ 2,439,673
Net income for the year 337,931 337,931
Other comprehensive income:
Net change in unrealized gains (losses)
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:
Net change in unrealized gains (losses)
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
Net income for the year 419,519 419,519
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale, net of (59,922) (59,922)
reclassification adjustments and tax effects
Net cumulative effect of adopting
SFAS No. 133
Total other comprehensive income (loss)
Total comprehensive income 359,597
Cash dividends ($2.00 per share) (125,000) (125,000)
------------- ------------- --------------- -------------- ---------------
BALANCE AT DECEMBER 31, 1999 $ 625,000 $ 625,000 $ 1,985,816 $ (48,022) $ 3,187,794
============= ============= =============== ============== ===============
</TABLE>
14
<PAGE>
HURON NATIONAL BANCORP, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998, and 1997
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998 1997
<S> <C> <C> <C>
Net income $ 419,519 $ 380,200 $ 337,931
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 57,443 54,291 45,815
Net premium amortization and discount accretion on securities 218,911 144,832 133,489
Provision for loan losses 12,000 21,000 36,000
Increase/(decrease) in cash from change in assets and liabilities:
Interest receivable 2,171 3,480 (36,030)
Other assets and other real estate 14,584 24,294 (36,968)
Interest payable (3,693) 11,440 (927)
Other liabilities (42,412) 80,150 (32,548)
--------------- --------------- ---------------
Net cash from operating activities 678,523 719,687 446,762
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-sale securities:
Purchases (1,997,513) (1,070,932) (988,751)
Maturities 1,281,429 1,000,000 750,000
Held-to-maturity securities:
Purchases 0 (501,852) (1,216,735)
Maturities 667,000 1,510,000 1,839,000
Net increase in loans (3,155,141) (3,748,103) (721,289)
Purchases of property and equipment, net (27,874) (9,413) (73,990)
--------------- --------------- ---------------
Net cash used in investing activities (3,232,099) (2,820,300) (411,765)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 1,992,730 2,742,665 1,118,039
Dividends paid (125,000) (112,500) (100,000)
--------------- --------------- ---------------
Net cash from financing activities 1,867,730 2,630,165 1,018,039
--------------- --------------- ---------------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS (685,846) 529,552 1,053,036
CASH AND CASH EQUIVALENTS AT:
BEGINNING OF PERIOD 4,920,603 4,391,051 3,338,015
--------------- --------------- ---------------
END OF PERIOD $ 4,234,757 $ 4,920,603 $ 4,391,051
=============== =============== ===============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,193,143 $ 1,137,543 $ 1,118,781
Federal income tax 241,169 79,304 169,413
</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.
Transferred from held-to-maturity securities to available-for-sale $ 2,294,050
See accompanying notes
15
<PAGE>
HURON NATIONAL BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 1 - 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.
As of July 1, 1999, the Company adopted Statements of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 requires all derivatives to be recorded at fair value.
Unless designated as hedges, change 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 hedged item if not otherwise recorded. As
permitted in SFAS No. 133, the Company transferred securities with an amortized
cost of $xxxxxxxxxxx and a fair value of $xxxxxxxx from the held to maturity
portfolio to the available for sale portfolio. None of these securities were
sold during the third quarter of 1999. The Company does not have any derivative
instruments nor does the Company have any hedging activities.
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.
16
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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 oustanding. 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, 1999, 1998, or 1997.
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.
RECLASSIFICATIONS ~ Some items in prior financial statements have been
reclassified to conform with the current presentation.
17
<PAGE>
NOTE 2 - CASH AND DUE FROM BANKS
As of December 31, 1999, 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
1999 Amortized Unrealized Unrealized
Securities Available for Sale: Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 298,944 $ (2,506) $ 296,438
U.S. Agency 1,645,647 (39,444) 1,606,203
Mortgage-backed 427,862 (15,252) 412,610
State and Municipal 1,784,804 (14,660) 1,770,144
Corporate 729,601 (898) 728,703
-------------- ------------ ------------ -------------
$ 4,886,858 $ - $ (72,760) $ 4,814,098
============== ============ ============ =============
Securities Held to Maturity:
State and Municipal $ 487,584 $ 2,726 $ $ 490,310
-------------- ------------ ------------ -------------
$ 487,584 $ 2,726 $ - $ 490,310
============== ============ ============ =============
</TABLE>
<TABLE>
Gross Gross
1998 Amortized Unrealized Unrealized Fair
Securities Available for Sale: Cost Gains Losses Value
<S> <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
============ ============ =========== ============
</TABLE>
There were no sales of securities during 1999, 1998 or 1997. There were no
transfers of securities classified as held to maturity during 1999, 1998 or
1997.
The amortized cost and estimated fair value of securities at December 31, 1999,
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.
18
<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 $ 1,327,769 $ 1,325,730 $ 168,280 $ 168,500
Due after one year through five years 1,851,959 1,827,320 319,304 321,810
Due after five years through ten years 1,279,267 1,248,438 0 0
------------- ------------ ------------ ------------
Subtotal 4,458,995 4,401,488 487,584 490,310
Mortgage-backed 427,862 412,610 0 0
------------- ------------- ------------ ------------
Totals $ 4,886,857 $ 4,814,098 $ 487,584 $ 490,310
============= ============= ============ ============
</TABLE>
Securities available for sale with a carrying value of $298,944 at December 31,
1999 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>
1999 1998
<S> <C> <C>
Commercial $ 3,381,098 $ 3,135,530
Real estate 15,435,985 13,333,405
Installment 7,886,734 7,089,037
-------------- --------------
Total loans $26,703,817 $23,557,972
============== ==============
</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>
1999
<S> <C>
Balance - January 1 $ 600,442
New loans 226,088
Repayments (69,065)
------------
Balance - December 31 $ 757,465
============
</TABLE>
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year $ 179,247 $ 180,631 $ 174,955
Additions (Deductions)
Provision for loan losses 12,000 21,000 36,000
Recoveries credited to allowance 4,155 2,332 4,905
Loans charged-off (13,451) (24,716) (35,229)
----------- ----------- -----------
Balance at end of year $ 181,951 $ 179,247 $ 180,631
=========== =========== ===========
</TABLE>
During the years 1999 and 1998, the balance of impaired loans was considered to
be immaterial.
19
<PAGE>
NOTE 6 - BANK PREMISES AND EQUIPMENT - NET
Bank premises and equipment consist of the following at December 31:
<TABLE>
Accumulated Carrying
1999 Cost Depreciation Value
<S> <C> <C> <C>
Land $ 60,000 $ 60,000
Bank building and improvements 483,260 $ (226,430) 256,830
Furniture and equipment 468,427 (342,931) 125,496
--------------- ---------------- ------------
Total $ 1,011,687 $ (569,361) $ 442,326
=============== ================ ============
1998
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
=============== ================ ============
</TABLE>
Provisions for depreciation of $57,443, $54,291, and $45,815, were included in
non-interest expense in 1999, 1998 and 1997, respectively.
NOTE 7 - DEPOSITS
The Bank had approximately $2,582,000 and $1,989,000 in time deposits issued in
denominations of $100,000 or more as of December 31, 1999 and 1998,
respectively. Interest expense on time deposits issued in denominations of
$100,000 or more was approximately $95,000, $103,000, and $103,000 in 1999, 1998
and 1997, respectively.
At year-end 1999, stated maturities of time deposits were:
<TABLE>
<S> <C>
2000 $8,249,963
2001 5,281,166
2002 1,386,594
2003 1,223,671
2004 792,378
----------------
$ 16,933,772
================
</TABLE>
Related party deposits totaled $359,614 and $534,135 at year-end 1999 and 1998.
20
<PAGE>
NOTE 8 - INCOME TAX
The provision for federal income tax for the years ended December 31 consists of
the following:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Current expense $ 180,187 $ 186,242 $ 109,543
Deferred expense (benefit) 9,306 (27,145) 23,813
------------ ------------ ------------
Provision for income tax $ 189,493 $ 159,097 $ 133,356
============ ============ ============
</TABLE>
Included in other liabilities are deferred tax balances arising from the
following items:
<TABLE>
December 31,
Deferred tax liabilities: 1999 1998
<S> <C> <C>
Effects of preparing tax return on a cash basis $ (60,582) $ (48,122)
Property and equipment (101,392) (105,165)
Unrealized gain on securities available for sale (6,130)
Other (4,687) (2,876)
----------- -----------
(166,661) (162,293)
Deferred tax assets:
Allowance for loan losses 39,966 39,046
Unrealized loss on securities available for sale 24,738
Other 754 482
----------- -----------
65,458 39,528
----------- -----------
Net deferred tax liability $ (101,203) $ (122,765)
=========== ===========
</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>
1999 1998 1997
<S> <C> <C> <C>
Statutory rate applied to income before taxes $ 207,064 $ 183,361 $ 160,238
Add (deduct)
Tax-exempt interest income (21,495) (27,478) (20,165)
Other 3,924 3,214 (6,717)
------------ ------------ -----------
Provision for income tax $ 189,493 $ 159,097 $ 133,356
============ ============ ===========
</TABLE>
NOTE 9 - OTHER OPERATING EXPENSE
Other operating expenses for the years ended December 31 consist of the
following:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Office supplies $ 27,793 $ 25,660 $ 28,827
Directors fees 57,200 52,800 50,400
Legal and examination fees 59,049 56,726 57,915
General insurance 19,065 19,282 19,560
ATM fees 25,406 23,929 22,137
Other expense 51,576 62,038 47,423
------------ ------------ ------------
Total other operating expenses $ 240,089 $ 240,435 $ 226,262
============ ============ ============
</TABLE>
21
<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>
1999 1998
<S> <C> <C>
Outstanding letters of credit $ 288,248 $ 199,571
Commitments to make loans
and unused lines of credit $ 827,922 $ 1,041,940
</TABLE>
All commitments above are at fixed rates and carry rates of interest from 8% to
11% and generally expire within one 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, 1999.
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 Bank One,
amounted to $2,684,855 and $3,787,817 at December 31, 1999 and 1998,
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 2000 the Bank is limited to paying additional
dividends of approximately $562,000 plus 2000 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, 1999, 1998 and 1997 was $7,106, $6,653 and $7,348,
respectively.
22
<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 and 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 offered 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>
1999 1998
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 4,235 $ 4,235 $ 4,921 $ 4,921
Securities 5,302 5,304 5,562 5,631
Loans, net 26,522 26,680 23,379 23,563
Federal Reserve stock 38 38 38 38
Accrued interest receivable 265 265 267 267
Financial liabilities
Deposits (33,447) (33,313) (31,455) (31,539)
Accrued interest payable (70) (70) (74) (74)
</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.
23
<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
1999 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $3.4 14.4% $1.9 8.0% $2.4 10.0%
Tier 1 capital (to risk weighted assets) $3.2 13.6% $1.0 4.0% $1.4 6.0%
Tier 1 capital (to average assets) $3.2 8.9% $1.4 4.0% $1.8 5.0%
1998
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%
</TABLE>
The Bank at year end 1999 and 1998 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 1999 1998
<S> <C> <C>
Cash and cash equivalents $ 2,613 $ 1,372
Investment in Huron National Bank 3,185,181 2,951,825
------------ ----------
Total Assets $3,187,794 $2,953,197
============ ==========
LIABILITIES $ - $ -
SHAREHOLDERS' EQUITY $ 3,187,794 $ 2,953,197
------------ -----------
Total liabilities and shareholders' equity $3,187,794 $2,953,197
============ ===========
</TABLE>
24
<PAGE>
NOTE 15 - HURON NATIONAL BANCORP, INC. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
OPERATING INCOME
Dividends from Huron National Bank $ 135,000 $ 122,500 $ 100,000
OPERATING EXPENSES
Other expenses 8,759 10,719 9,848
----------- ---------- -----------
Income before equity in undistributed
net income of subsidiary 126,241 111,781 90,152
Equity in undistributed net income of subsidiary 293,278 268,419 247,779
----------- ---------- -----------
NET INCOME $ 419,519 $ 380,200 $ 337,931
=========== ========== ===========
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 419,519 $ 380,200 $ 337,931
Adjustments to reconcile net income to
cash from operating activities:
Equity in undistributed net income
of subsidiary (293,278) (268,419) (247,779)
Net Cash From Operating Activities 126,241 111,781 90,152
----------- ----------- ------------
Cash Flows from Financing Activities
Dividends paid (125,000) (112,500) (100,000)
----------- ----------- ------------
Net Cash from Financing Activities (125,000) (112,500) (100,000)
----------- ------------ ------------
Net Change in Cash and Cash Equivalents 1,241 (719) (9,848)
Cash and Cash Equivalents
Beginning of the Period 1,372 2,091 11,939
----------- ------------ ------------
End of the Period $ 2,613 $ 1,372 $ 2,091
</TABLE>
25
