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, 1999
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 17, 2000, was approximately $1,775,680, based on market
price of $40.00 per share.
As of March 17, 2000, 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 26, 2000, 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, 1999 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 1999 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
1
<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 $26,703,817 at December 31, 1999. This represents 72.41% of
its total assets. At that date, 57.81% consisted of real estate mortgage loans,
29.53% consisted of installment loans and 12.66% 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").
2
<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 on 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 only remaining community bank located in Rogers City. In
addition, the Bank also competes with a total of four other banks that operate
branches in Presque Isle County and various money market funds 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 insititutions. 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 1999 Annual Report to Shareholders incorporated herein
by reference.
3
<PAGE>
PART-I ITEM 1 - BUSINESS (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 6 under Analysis of Net Interest Income in the
1999 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,
1999 and 1998 is set forth in Note 3 on pages 18 and 19 of the 1999
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, 1999:
<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 $ 504,781 5.37% $ 1,189,810 5.58% $250,000 6.96%
States and Municipals (1) 766,449 6.33% 1,505,939 6.58%
Mortgage-backed 427,862 5.48%
Corporate 729,601 6.21%
----------- ----- ----------- ----- -------- -----
Totals $ 2,000,831 6.04% $ 3,123,611 6.05% $250,000 6.96%
=========== ===== =========== ===== ======== =====
</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, 1999
and 1998 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 1999 Annual Report to Shareholders, incorporated herein by
reference.
(B) The following table sets forth the remaining maturity of commercial
loans at December 31, 1999 according to scheduled repayments of
principal.
<TABLE>
1 Year or Less 1 - 3 Years Total
<S> <C> <C> <C>
Commercial loans(1) $3,284,678 $96,420 $3,381,098
</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.
4
<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>
1999 1998
---- ----
<S> <C> <C>
Loans accounted for on a nonaccrual basis $78,643 $28,855
Aggregate amount of loans ninety days or more past due
(excludes loans on nonaccrual status above) 479
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) 2,965 135,484
------- --------
Total non-performing loans $81,608 $164,818
======= ========
Ratio for allowance for loan losses to non-performing loans 2.23x 1.09x
</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, 1999
and 1998.
(4) There are no concentrations of loans exceeding 10% of total loans
which are not already disclosed as a category at December 31,
1999.
(D) As of December 31, 1999, 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>
1999 1998
---- ----
<S> <C> <C>
Balance of allowance for loan losses at the beginning of year: $179,247 $180,631
Charge-offs: Commercial loans 16,873
Real estate loans
Installment loans 13,451 7,843
--------- ---------
Total charge-offs 13,451 24,716
Recoveries: Commercial loans 1,582 1,208
Real estate loans
Installment loans 2,573 1,124
--------- ---------
Total recoveries 4,155 2,332
</TABLE>
5
<PAGE>
PART-I ITEM 1 - BUSINESS (continued)
IV. SUMMARY OF LOAN LOSS EXPERIENCE (continued)
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Net loans charged-off 9,296 22,384
Additions to allowance charged to operating expense 12,000 21,000
----------- -----------
Balance at end of year $ 181,951 $ 179,247
=========== ===========
Average gross loans outstanding 24,734,000 21,680,000
Percent of net charge-offs during the period
to average gross loans outstanding 0.04% 0.10%
</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 1999 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>
1999 1998
---- ----
Allowance % of Loans to Allowance % of Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Commercial $ 14,854 12.66% $ 22,975 13.31%
Real estate 14,765 57.81% 25,949 56.60%
Installment 15,814 29.53% 11,295 30.09%
Unallocated 136,518 119,028
--------- -------- --------- -------
Total $ 181,951 100.00% $ 179,247 100.00%
========= ======== ========= =======
</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>
1999 1998
Average Average
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Demand Deposits $ 4,058,765 0.00% $ 3,936,969 0.00%
Interest-bearing
demand deposits 4,138,297 2.24% 3,968,654 2.84%
Savings 7,219,987 2.25% 6,705,744 2.50%
Time deposits under $100,000 14,714,172 5.70% 13,375,154 5.49%
Time deposits over $100,000 1,879,102 5.06% 1,927,264 5.33%
------------ ------- ------------ ------
Total $ 32,010,323 3.72% $ 29,913,785 3.74%
============ ======= ============ ======
</TABLE>
6
<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, 1999:
<TABLE>
<S> <C>
Three months or less $ 1,745,000
Over three months through twelve months 737,000
Over one year 100,000
-----------
Total $ 2,582,000
===========
</TABLE>
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Net Income to average assets 1.18% 1.15%
Net Income to average shareholders' equity 13.32% 13.28%
Cash dividend payout ratio 29.80% 29.59%
Average shareholders' equity to average total assets 8.89% 8.66%
</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 Directors 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, 1999:
<TABLE>
First Elected
Name (age) Position with Registrant Officer of the Registrant
---------- ------------------------ -------------------------
<S> <C> <C>
Ervin Nowak (68) Chairman 1990
Michael L. Cahoon (66) President and Chief Executive Officer 1990
Paulette D. Kierzek (50) 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.
7
<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, 1999.
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information for this item appears on page 2 of the 1999 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 1999 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, 1999 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
8
<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 2000 Proxy Statement as 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 2000 Proxy Statement as 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 2000 Proxy Statement as 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 2000 Proxy Statement as 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.
9
<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 17, 2000.
HURON NATIONAL BANCORP, INC.
/s/ Michael L. Cahoon /s/ Paulette D. Kierzek
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 17, 2000.
/s/ Ervin Nowak /s/ Lynwood Lamb
Ervin Nowak Lynwood Lamb
Chairman of the Board Director
__________________________________ /s/ Leon Delekta
Marvin Beatty Leon Delekta
Vice Chairman of the Board Director
__________________________________ /s/ Michael L. Cahoon
Eugene McLean Michael L. Cahoon
Director Director, President and CEO
/s/ Donald Hampton ____________________________
Donald Hampton Louis Dehring
Director Director
/s/ John Tierney
John Tierney
Director
/s/ Dale L. Bauer
Dale L. Bauer Paulette D. Kierzek
Vice President Cashier
10
<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, 1999.
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, 1999, 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.
11
<PAGE>
EXHIBIT 13
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
<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
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARY
------------------
NAME INCORPORATED
---- ------------
1. Huron National Bank Michigan
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,634,757
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,814,098
<INVESTMENTS-CARRYING> 487,584
<INVESTMENTS-MARKET> 490,310
<LOANS> 26,703,817
<ALLOWANCE> 181,951
<TOTAL-ASSETS> 36,879,034
<DEPOSITS> 33,447,444
<SHORT-TERM> 0
<LIABILITIES-OTHER> 243,697
<LONG-TERM> 0
0
0
<COMMON> 625,000
<OTHER-SE> 2,610,816
<TOTAL-LIABILITIES-AND-EQUITY> 36,879,034
<INTEREST-LOAN> 2,200,281
<INTEREST-INVEST> 343,465
<INTEREST-OTHER> 51,780
<INTEREST-TOTAL> 2,595,526
<INTEREST-DEPOSIT> 1,189,450
<INTEREST-EXPENSE> 1,189,450
<INTEREST-INCOME-NET> 1,406,076
<LOAN-LOSSES> 12,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 905,009
<INCOME-PRETAX> 609,012
<INCOME-PRE-EXTRAORDINARY> 609,012
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 419,519
<EPS-BASIC> 6.71
<EPS-DILUTED> 6.71
<YIELD-ACTUAL> 4.53
<LOANS-NON> 79,643
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,965
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 179,247
<CHARGE-OFFS> 13,451
<RECOVERIES> 4,155
<ALLOWANCE-CLOSE> 181,951
<ALLOWANCE-DOMESTIC> 181,951
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 136,581
</TABLE>
